Raf Manji says we need to talk more about how our money system works because the outcomes of the decisions on its production, distribution, exchange and ownership are matters of interest to everyone

Raf Manji says we need to talk more about how our money system works because the outcomes of the decisions on its production, distribution, exchange and ownership are matters of interest to everyone

By Raf Manji*

I’ve just started reading Lionel Shriver’s 2016 book, The Mandibles: A Family, 2029-2047. Starting off in 2029, it portrays a family living through a post-crash time, where the US is in turmoil following a breakdown of the internet (pinned on China but not quite proven) in 2024 and a resetting of the international financial and economic system. The US dollar has just collapsed and the rest of the world wants to implement a new global currency, the Bancor. I’m only on Chapter 4.

Shriver is more well known for her seminal book, “We need to talk about Kevin”, a searing view of a family in crisis, as their son commits a school shooting. She is known to be razor sharp in her portrayal of human catastrophe and failing. With the recent week seeing major civil disorder in the USA and a legislative stripping of Hong Kong’s independent status, it is not far-fetched to imagine that we have started down the road envisaged by Shriver.

What is most fascinating about her story is how money is front and centre in the novel’s discourse. She writes with exceptional detail about the US Treasury market, debt to GDP ratios, and reserve currencies, and manages to shape a plausible human experience around it:

“After all that noise twenty years ago about the deficit, the melodramatic shutdowns of government over raising the debt ceiling, and what’s happened? Nothing. At 180 percent of GDP-which Japan proved was entirely doable-the debt has been sustained. It is therefore, ipso facto, sustainable.”

As people get to grips with our new lexicon of financial and economic policy, it’s clear that our policy makers have a bit of work to do in explaining clearly how our money system actually works. It’s been illuminating both listening and watching the various descriptions of the Reserve Bank’s Large Scale Asset Program (LSAP), Quantitative Easing (QE), Money Printing, Yield Curve Control (YCC), Negative Interest Rates (NIRP), Deficit Financing (OMF) and Debt Monetisation. It feels like we are having a very long and overdue conversation about some pretty important stuff. Previous attempts to discuss these issues have usually ended up with terms such as the ‘magic money tree’, ‘ no free lunch’ and ‘funny money’.

The truth is that there is nothing remotely funny about money, especially when you don’t have any. How it is created and how it makes it way through society is of high importance and relevance to all of us. The recent growth in digital and alternative currencies, whether Bitcoin or the Bristol Pound, demonetisation in India and talk of a Chinese backed digital Renminbi, all point to the need for an upgrade in both information, transparency and discussion.

The blame falls on a very orthodox and somewhat opaque view of monetary policy that has been embedded as part of the independent central bank framework of the last 30 years. There has simply been no room for any discussion as the role of money in the economy, as any conversation has been removed from the political space. This is primarily due to the possibility that politicians may use monetary levers to support short-term electoral goals, much as they often do with fiscal policy, which is a fair point. However, the answer to that is a transparent and understandable framework, which takes into account developments in financial architecture, especially concerns over the current monetary policy transmission.

Frankly, the vibe has been a bit priestly in that it’s all too complicated for people to really understand and that the inputs and models are carefully developed to produce clear decision making outputs. Of course, that line of thinking leads one to imagine a decision system run by AI, simply responding to inputs to a clearly defined model. Why bother with human intervention at all?

The answer to that is simple. Money is inherently political and the outcomes of the decisions on its production, distribution, exchange and ownership are matters of interest to all people. The recent economic financial shock has seen these issues thrust suddenly into the full glare of the public, with enormous sums of money being created by keystroke, making the mantra of ‘there is no money for…’ somewhat redundant.

The upside of that is we are starting to talk about these complex issues and people are starting to think more about the decisions being made on their behalf, and how they might be different. The Reserve Bank has recently made some major strides in their communication and the Governor Adrian Orr and his senior team have been very open about some of the more complex issues on the table. This is a crucial shift and paves the way for a broader conversation, allowing media in to probe, ask difficult questions and raise issues of public interest.

When one looks around the world today, it certainly seems like Shriver’s plot is almost unremarkable. In 2029 monetary policy is dinner table talk, the quantity theory of money is commonplace and water is in short supply. But, like it or not, it’s something we need to all start getting to grips with. Climate change, global pandemics, and financial instability are part and parcel of normal life. How we manage our response to it is the big challenge ahead and how our living standards change is something we have yet to really face up to. Anything could happen, so let’s be prepared. I’ll leave you with a passage from a 2029 US Presidential address, as foreseen by Shriver:

 “As of this evening, myself, the secretary of the Treasury, and the chairman of the United States Federal Reserve have declared a universal “reset”. In the interest of preserving the very nation that would meet its obligations of the future, we are compelled to put aside the obligations of the past. All Treasury bills, notes, and bonds are forthwith declared null and void”.

Couldn’t really happen, could it?


*Raf Manji is a strategy and risk consultant.

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47 Comments

11
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No you have it all wrong, on this site we only talk about the one thing that really matters - house prices.

Jest aside, I think houses have become "money like" and could well be included in a discussion about money.

When you look at our individual wealth through the lens of house prices we get a different picture of our changing wealth. E.G.
Start point 1 million in cash assets and a half million dollar house. Total wealth in dollar terms 1.5 million dollars. In terms of house wealth 3 houses.
House prices double
End point wealth 2 million in dollar terms. 2 houses in terms of houses.
So in term of buying significant capital assets like houses we have gone backwards quite significantly. Beyond a certain point, money is of limited value. You can buy so many colour tvs, cars and other baubles. So the house price inflation/bubble is part of a movement of wealth into the pockets of speculators who borrow huge amounts of depreciating money. This government and the previous government have chosen to support this ongoing impoverishing of new home buyers and the unclean caste by refusing to deal with our chronic under supply of affordable residential land, monopolistic building industry and un taxed capital gains. Jacinda Adern is no different to John Key. A very pleasant, smiling con artist.

https://en.wikipedia.org/wiki/Wealth,_Virtual_Wealth_and_Debt

A good read when you've finished that one.

Note the date - 1926 - and that he says real wealth is physical, but subject to entropy. Sounds like houses :)

How about land? does it have entropy in the context of average human lives?

10
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Absolutely. You run down the soil microbes and suck-down the aquifer, denude the place of biodiversity and planB resilience (other pollinators etc), while breeding for extremism, and entropy you shall have.

In less than a lifetime; I've already seen it in mine. I remember shelter-belts, clover, crop-rotation, clear rivers (that you could drink out of), enough biodiverse cover to slow erosion and provide corridors for bees..... All gone. And even that wasn't enough; the National/Key govt had to suspend democracy to push the process even further

I actually was thinking about land underneath a house. But you are right. Life supporting capacity of land must be an important property and as you correctly argue, it will diminish under human use (in almost all cases I think). We burn jungle and replace them with farms. We then dry out the water and make the farm a desert. It happens very quickly. And while I am supportive of knowledge and technology, this is one area that I have seen how equipping idiots with technology is like giving them atomic bombs. The use engines to extract water from ever deeper underground sources to grow watermelons that they then sell for a price less than the equivalent amount of water in a bottle is selling.

Well put

Modern Monetary Theory describes exactly how our monetary system works and the information is all readily available online through the work of economists such as Bill Mitchell, Stephanie Kelton and many others.

Well.. you have to know where to look first - and you obviously do. To be honest, I've learnt more about economics over the last month reading the comments section on this site than I ever did trying to understand the usual gobbledygook that is trotted off whenever economists open their mouths. Sure, most fields have jargon, but it's not what I would call an overly accesible field for the beginner or even a middle-aged penguin like me.

An easy to follow introductory university lecture here on YouTube by Stephanie Kelton.
https://www.youtube.com/watch?v=WS9nP-BKa3M&t=2372s

MMT seems to conveniently forget that money needs to be a store of value, and while often willingly overlooked, it happens to be of primary importance because people put their time and energy into earning money.
The usa have been able to get away with massive deficit spending because the usd is the reserve currency, so that the situation has been ongoing 100 yrs+ is no surprise. Yet the usd has lost 98% or more of it's purchasing power. That is to say, it sucks as a store of value.

MMT is a lens to observe how our monetary system operates here and now, it is not something that has to be introduced or adopted. NZ as a sovereign currency issuer already operates its monetary system just as MMT describes.
In normal times commercial banks will be creating far more money by making loans than the government does through its spending, something critics of MMT mostly don't understand. A Bank of England bulletin here explaining how banks create money.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creatio...

Put interesting into the quantity theory of money and see what happens. M.V=P.Q becomes (M.V)=i=P.Q. Based on that I made the prediction here in 2013 that interest rates would decline and eventually hit zero. Seems to be working out so far. Velocity will also drop, and money has to be printed in increasing quantities to pay the compounding interest.

All good and well when the resources of the plenty can be consumed at a rate that matches the growth in interest payments/money expansion. When the planet runs short of those resources then I expect the difference will simply be made up by more money printing. We'll eventually know when the surplus of money matches a shortage of goods. So far we've only seen that phase see money go into asset purchases, might be some more of that to go down yet.

I doubt the system will work backwards, as in shrink to match production, or energy as PDK points out. Ray Dalio is doing some pretty good, if overly lengthy, work in describing late empire behaviour in regards to the money supply. One thing I've picked up from Dalio is that assets will be inflated away, and the devaluation of those assets will see the holders of them desire to get rid of them. All very well to be holding government treasuries that are going up in value as yeilds decline, but if the yield all of a sudden becomes useless as a loaf of bread goes through the roof then the capital gain is meaningless. Is there a difference between private ownership of an asset and government ownership when they print/borrow the money to buy it?

Wouldn't be a bad time to keep Exter's Pyramid in mind, and which assets suffer from this process first.

Money doesn't exist in perpetuity, taxation destroys money as does repaying bank loans, savings also remove money from circulation.

Is MV=PQ a variation of the term MV=PY? If so, is this article. explaining the velocity drop valid?

I would think so. I'll have to take a closer look at that over a couple of days. I think it was Friedman that theorised in the 1950's velocity has two components, one that is static and one that moves. There is a bit in the encyclopedia set here about that. My suspicion, something I don't have proof for, is that the flow of money into assets is one way velocity is lowered. I worked out it simply had to get lower as a factor in the equation.

Good article. Albert Einstein stated that endless repeating an experiment because it gave a different result than expected is futile. Yet we continue to lower rates and flood the world with more printed cash hoping to avoid the inevitable asset reset.

Not sure that "The Reserve Bank has recently made some major strides in their communication and the Governor Adrian Orr and his senior team have been very open about some of the more complex issues on the table.". Michael Reddell's analysis of the FSR suggests otherwise, and asks the question why are interest rates so high, if RBNZ's machinations are in fact working? To which one can add, and FX rates?? And, finally, Talking about 'complex issues' does not amount to 'Doing something about it' - which leads Michael to review three suggestions which at least have the merit of 'doing something....' about the correlated cliff-dive we are experiencing. That something? State-sponsored/provided access to interest-free credit.....

Waymad, as a journalist who has engaged with the RBNZ for years I would say their communication is now the most open it has been. In the midst of this major global crisis the top brass have been very accessible as witnessed by the regular media interviews they're giving, including Adrian Orr and Geoff Bascand with us recently. The OCR releases and FSR have become more accessible to a broader audience in my view, and the Dashboard initiative is also useful. I'm not saying everything is perfect, and agreeing or disagreeing with their policy settings is another matter. But from a communications and accessibility perspective they are doing pretty well.

Point gracefully taken.

State sponsored free money...why stop there. Just give everyone a free house, car etc.

If money is about politics, the economy is about people. There lies the rub.

Marx would agree with you.

Fiat money isn’t money it’s currency - a medium of exchange that’s backed by nothing except confidence. Bring back the gold standard.

Why? People hoard anything without an inflation function built in, which defeats its purpose as a medium of exchange.

If you want a Gold standard again, just go and buy Gold.

I would also argue that much of gold's present value is also based on confidence. It's nothing like that useful as a commodity.

Disagree. Gold represents store of value free of manipulation by governments. It’s slso fungible, durable and divisible. Note: fiat currency is easy money because it’s easy to inflate, Gold is hard money because it’s hard to inflate.

Prof of economics Bill Mitchell has written a very good article here on his blog as to why the gold standard was discarded.
http://bilbo.economicoutlook.net/blog/?p=45106

Gold was discarded because it's a finite resource - which meant there wasn't enough to underwrite growing expectations.

So we replaced it with paper-held representations. Then digital. All the while, we were chewing through the other resources those digits were an expectation of. Of course the system was doomed.

So in hindsight, linking to gold might just have put the brakes on earlier (thus better). The best of all is a link to energy - so wealth is only linked to work actually done. But we liook like crashing before we get around to discussing that....

Just out of interest, in what manner would you link currency to energy? Thermodynamics? How would you account for inertia/decay? I'm other words, by what rubric would you measure your exchange?

Awesome introductory article - thanks!

Part two of the article is here if you didn't find it.
http://bilbo.economicoutlook.net/blog/?p=45108

Funny how no one mentions French monetary history these days. All these issues have been well explored, both before and after the French Revolution. It all seems to start off happily enuff, but then everything goes to custard and you get Napoleon.

Napoleon leads in time to Bismark and the conquest of Germany by Prussia and the Versailles Treaty of 1871, which leads to WW1, and the French and American drafted Versailles treaty leads to WW2. The Americans are just repeating French policy. Monetary policy has long and variable lags.

All Treasury bills, notes, and bonds are forthwith declared null and void”.... Certainly a plausible future to me.

money is no mystery...it is simply a method of rationing...manufacturing more of it does nothing to provide more of the real resources required (and diminishing)

Nixon removed the gold backing in 1971. It was purely in desperation as the usa was spending more than it was earning. Between 1950s and 1970s, the usa gold reserves were depleted by half. The popular idea that the gold standard was a complete failure was/is the story sold to not just justify fiat, but also to remove any alternative to fiat. (The gold and silver price are heavily manipulated, through the comex and the lbma, to attempt to ensure it is not seen as an alternative to the usd)
All fiat currencies resort to $0.
The fed is privately owned (fact) and printing money is a neat way to transfer wealth from the many, to the rich. Money should not be political, and central banks should not be allowed to devalue the money people worked hard for.
MMT is a complete illusion.
It's great to have an article focusing on money, and how it's created, a time of public educating itself about it, and then a much broader discussion would simply be fantastic, and given the present rate of trillions the stuff is being printed in, not before time.
Thanks Raf for the starting point.

I would think its better to talk about leverage
And how our financial system simply cant UN-leverage
Then you realise that money talk is a wasted conversation … money is limitless and ultimately worthless

Overshoot begets collapse
That's the way it has to be

So really, our efforts should be aimed at post-collapse society.

Local, sustainable, all that.

Hi Raf
The operational side of money is technical and has a technical language like every other specialist task - cleaning floors, human resources management, food transportation, etc, etc - and opacity comes from needing to have done the task to properly understand the language of doing the task. All of those activities can also have a political interpretation, but that political interpretation is usually tangential to the tasks themselves. Money included. Surely what we need is the other way round, that is, a better sense of which of our objectives, or combination of objectives, are not possible so we as citizens can vote understanding what to reasonably expect of political decision makers?
Tony

Tony (Welcome!) unfortunately "what to reasonably expect of political decision makers" amounts to How to Win the Next One....in our currently mightily degraded political environment.....

Hi Tony. Thanks for your comment/question. I think we need both. My position is that role of money is not treated with the transparency that is required for those objectives to be understood. Now, this could be resolved by better decision making frameworks, perhaps even looking at balanced economies rather than balanced budgets. Setting your main fiscal objective as a debt to GDP ratio, at the expense of crucial outcomes for society, and not really understanding the metric, is a serious problem...well, for me anyway. We are entering some very challenging times (as PDK and Waymad have been going in about for years!) and we are late to these challenges, having avoided the worst of the GFC. And, in some respects, conversations about the standard of living we might expect will lead to these more specific discussions. The book was an interesting way of raising the issue. It’s a startling read! Regards, Raf

whatever comes out the end of this correction, you are going to pay! Yes thats right , free lunch hah yeah hah aha.
Expect big tax increases, money skimming, hidden taxes,death duties, you name it. The smart bastads are all ready living in tax havens or have moved to show residency there.
Damnation, never had the cash .

I spent most of my adult life working hard for it, trying to save it & trying to make it work for me, to moderate success, unfortunately. Now that I've finally got some of it, nobody (banks) has any interest in it & even the stuff I bought with it is inflated beyond common sense, which many here tell me will deflate accordingly. Terrific - a pass with a push result at best. On the upside, at least we're in the first world. It can be brutal at the bottom.

A couple of points.Many folk seem v aggrieved at the possibility that politicians might gain access to money and use it for their designs. This is presumed to be a bad thing. However, politicians are elected. What we are really NOT speaking about here is the defined (and not talked about) idea that economic life and power should not be allowed to be interfered with, nor overtly directed, by people who have been elected, perhaps to do exactly that. What that means of course is that politicians (and those irrelevant folk who bother to vote) need not bother trying to change anything unless someone (powers that be) regard it as OK for them to have power in economic terms. Since about 1976 this policy, known as TINA or neo-liberalism, has been gaining more and more power. Then you wonder why folk mostly know b-all about economics and how money works. Look at how TV commentators like to pontificate re economic matters, despite having no qualifications in the subject and in fact being called the "political " correspondent.

Did something pretty similar in 1971 when stopped backing USD with Gold and also in 1933 when they confiscated gold and issued it at a lower value.