The Fed engineers a slow inflation every year via interest rate control and gives the benefit of the newly created money to banks, the loan borrowers, and asset holders as rates lower than keeping inflation at zero. Since the money supply increases anyway, might as well give the new money as basic income to ALL people. At least the money will be spent directly by the people for economic activities, instead of indirectly via the loans and asset inflation.
The Fed can raise interest rate to shrink the money supply for banks and borrowers while give more direct cash to expand the money supply via basic income. This can be in addition to the government's budget spending on basic income.
An interesting outcome is the deflation of the asset bubble as rate increases. The money supply expansion via direct cash counters the deflation in economy. This should reverse the trend of the great wealth transfer to the asset holders in the last 20 years.
The benefit is not given to the banks - the money is added through asset purchases on open market sales. The Fed owns more assets (usually Treasuries) and the bank has cash. If you want to get in on it, buy Treasuries.
Next, the Fed avoid targeting zero inflation, because it's currently impossible to hit that number so exactly, and they desire to avoid deflationary spirals. The past 150 years has shown across hundreds of countries that the current solution is vastly better than the boom and bust cycles previous, and has also demonstrated the benefit of fiat over commodity (like gold). There are ample papers showing this in the econ literature, and is the primary reason not a single country tries to use previous methods.
Next, new money is added through asset purchases, not giveaways, so it's erroneous to think this money can just be handed to individuals as cash, unless perhaps those individuals were selling assets to the Fed of equal value.
Next, the target is usually around 2%, and the money supply is around 2T, resulting in 400B a year, or, 2K a year per adult, which is nice, but hardly a basic income. It's more like a tax break. It's hardly going to change wealth transfers, since most people will just consume it, and the wealth would go back to companies, mostly the ones you decry above.
Finally, when the Fed targets low inflation, that would dry up the basic income, and I don't think giving people such a variable and uncertain income would do well for planning and stability. Soon people would clamor and elect politicians that guaranteed the Fed would pay X per year, defeating the entire mechanism the Fed uses to stabilize markets.
I've never really understood this. Dropping prices (see the recent changes in oil prices) are really good for the impoverished, at least in the short run. If we are really talking about a post-scarcity economy, wouldn't deflation indicate efficiency and be a good thing?
Debt is the problem. The majority of Americans have a large amount of debt and if income goes down, which is what will happen in a deflationary spiral, how are they going to afford to pay off their debt?
It also encourages hording of money and doing nothing with it as it becomes more valuable over time.
Debt is a good point, but I'm not sure it's the government's job to pay off all debts. If the original contracts are untenable, that seems to be the source of that problem.
As for hoarding, what's the argument? That people will make Scrooge McDuck bank vaults and take baths in their gold coins? People will still need to buy things eventually, right?
Deflation in the entire economy is bad. Deflation in asset is ok as long as there are more cash offsetting the asset deflation. Basic income is one way to get more cash into the economy.
Wouldn't across-the-board efficiency gains look like across-the-board deflation? That is, wouldn't automation in and of itself cause hoarding? Why buy a TV this year if the one next year will be better and cheaper?
Also, hoarding would theoretically only be a problem for the middle and upper classes since the working classes can't afford to save. But the middle and upper classes already hoard, more or less, when they buy and hold real estate.
Well, money is supposed to enable economic activities; hoarded money not used is money wasted.
Yes, increased productivity and efficiency are deflational in nature. You can create N more things now with the same cost. The extra N things push price down if the amount of money in the system stays the same. That's why central banks inject more money into the system to "soak" up the extra economic activities, to maintain a constant and slightly upper price pressure.
When people see the price is not decreasing despite increased efficiency, they will spend the money since it worth less tomorrow.
If a man walks up to a microphone in a crowded room, and everyone seems him up there, and he could say anything he wants, so that the whole room will hear it - and he says nothing -
has he said anything?
spending money is 'speaking in the formal language of money'
I agree with you at a personal level, but there's a difference between personal finance and money circulated at economy level. Money circulating in economy is money put in good use. Money not moving is useless for the economy.
Good point you raised about FOMC directly injecting money. That's another case how the Fed benefits the banks and the Have's directly. Fed buys and sells treasury to create and destroy money but with more money created over time to encourage inflation. The extra money created are given to the treasury sellers with better pricing over time. The people without treasury are left out of the new money created. Of course the banks benefited from the extra money; FOMC only deals with the 22 big banks and the primary bond traders.
Besides FOMC, loan is a bigger money creation mechanism. With 10% fractional reserve, the banks can lend out 10X of what they have. In that case interest rate dictates how much loan actually lent out and how much money actually created. By raising or lowering interest rate, the Fed increases or decreases the overall loan amount. Lowered interest rate encourages bigger loan amount, vastly increases the money supply for assets, leading to the current asset bubble.
Basic income can become another mechanism for the Fed to inject money. The Fed can buy less treasury, raise rate, and give out more in basic income.
People spending the extra money and companies earning them are good. Companies earning money via products and services are good. This encourages more products and services, and more employment. Instead the new money created now are given to the asset holders and locked up in assets.
Edit: QE was another money creation mechanism and it hugely benefited the banks. The Fed bought assets at inflated price from the banks with created money.
>The people without treasury are left out of the new money created
Everybody in the US has treasuries. SS is the biggest holder of them, so when their value goes up, everyone with a SS account benefits. Next, most pension/retirement plans give another large class of adults benefits (50%+ of adults hold such plans).
Remember, Fed buys from the Open Market (the "OM" in "FOMC"), which has an effect on pricing for all.
> With 10% fractional reserve, the banks can lend out 10X of what they have
And they also have an offsetting 10X in liabilities. It's not some free money giveaway any more than lending money to my friend does not create new money - it gives him more cash and an exact same amount of debt.
Plus, if you think fractional reserve creates money (in the sense that the gain is not balanced by a matching debt), then paying it back "destroys" the exact same amount. Fractional reserve is zero sum.
>Basic income can become another mechanism for the Fed to inject money.
All other Fed injection mechanisms swap assets. And the amount needed for even a tiny UBI is massive compared to any other amounts added. This is not even remotely plausible.
For fractional reserve, the 10X money is what's circulated in the system. The liability on the book is just accounting. The bank doesn't have 10X money to start with. It has 1X but it's allowed to lend out upto 10X. The extra 9X is created out of thin air. Of course the 10X is the theoretical max; ultimately what controls the nX (where 1 <= n < 10) is interest rate.
Lending out loan creates money circulated in the system. Paying off debt destroys money from the system. By controlling the interest rate, the Fed controls and levers the up and down of this huge money supply.
That's why the Fed went into the QE programs. The increasing bad loans at the banks was choking off the money circulating. By buying non-performing loans from the banks, the Fed removed the liability off the banks' books so they had more room in their fractional requirement and be able to lend again, thus restoring the money supply.
No, a bank cannot lend out 10X of it's deposits. That's simply wrong.
Say a person deposits $1. The bank owes the person $1. If the bank thinks this $1 is unlikely to be withdrawn soon, it can lend out $0.90 (assuming a 10% reserve rate). End of story. This bank having received $1 cannot turn around and lend $10. Note that this point the bank has $0.10 of the original persons assets, owes that person $1, and is owed $0.90 by the borrower. The net position of all this is zero for the bank.
Now, the borrower can deposit the borrowed 0.90 (assuming it's not spent somewhere else) into that bank, or some other bank. The process repeats.
The net value to society is zero. Liquidity is added, debts are added, they balance to zero.
If a bank lending money is creation of money, so is all lending. I lend Bob $10, he lends $10 to Fred, he lends $10 to Joe, and since we don't have fractional reserves, this is an infinite multiplier. However the chain of debts and assets still is zero sum. There is no difference between this and banks, except banks are required to hold some cash on hand to handle normal business transactions.
>By controlling the interest rate, the Fed controls and levers the up and down of this huge money supply.
Not quite - a bank will loan any money it has at the highest rate it thinks is profitable (as would any actor in the economy). No bank loans are at the target rate the Fed sets.
The Fed does not control the interest rate, they set the Federal Funds Target Rate, which is a target. They do not lend money at this rate [1]. Nor do banks, except to each other, and only overnight.
Banks lend money to each other overnight to meet reserves, and each pair of banks sets a rate it thinks is worthwhile, like any open market transaction. The weighted average of these loans is the "federal funds effective rate". The Fed wants this number to be the Federal Funds Target Rate, and they use FOMC to buy/sell assets to try and get banks to lend to each other at the target rate. This has almost no effect on the multiplier, since it does not change the reserve requirements, and the usual fluctuations are tiny.
Nowhere does the Fed set a rate and lend at that rate, or even force others to lend at that rate. It's a target.
And no where does this force banks to lend or not lend to others. Banks decide to do this at whatever rate borrowers will pay.
Fractional reserve plus debt do create money. The accounting cancels out on the book but there are money circulating in the system. If accounting balanced to 0 means no money is created, then FOMC buying and selling treasury creates no money at all since it's net zero on the book at the end. Yet FOMC has the stated purpose to create/destroy money for the Fed.
The debt among friends example doesn't create money because it's the same $10 passing from friend to friend while the IOU issued is not very liquid. It would work if you hand $10 to Bob for safe keeping and he gives you a deposit slip while lends $10 to Carl. Now you have the deposit slip valued at $10 and Carl has $10 in his pocket. The deposit slip is very liquid since you can get back the money at any time.
> If accounting balanced to 0 means no money is created
Accounting does balance to zero. Debt and money are added, and they sum to zero. Proof:
Let bank start at 0 (or pick any value).
Bank receives X dollars from entity A. Now bank has X dollars in reserves and owes entity A exactly X dollars, so net position of bank is zero (X dollars in reserves - X dollars owed = 0). A started with X, gave it to the bank, and the bank owes A X. So A has the same starting position.
Bank lends 0.9X = Y to B. Now B has Y, but owes Y, so B net position is 0. Bank lent Y, but is owed Y, so net change here is 0.
This happens every step. It's most certainly every single time a net 0 transaction.
If you care to continue to claim it's not net 0, please clearly demonstrate as I just did how it is not net 0.
>Ok, may be not quite 10X. It's 1+.9+.81+.72+... which ends up about 9.4X.
No, in the limit it is exactly 10X. Proof:
Let S = 1+0.9 + 0.9^2 + 0.9^3 + ....
Then 0.9S = 0.9 + 0.9^2 + 0.9^3 + ....,
Subtract (S-0.9S) and all terms cancel except the first 1, so (S-0.9S) = S/10 = 1, so S = 10.
>The debt among friends example doesn't create money because it's the same $10 passing from friend to friend while the IOU issued is not very liquid.
It's exactly the same thing. The bank lending is no different from any entity lending. The bank does not print up new money each time - it's the same money as you put it.
Bank IOUs are completely liquid either. All 10X money cannot be withdrawn at the same time - one is lent from someone else's assets, and this is only possible as long as everybody does not try to withdraw their assets at once. This is why there is a certain reserve needed - it allows normal withdrawals and deposits, which are around that fraction (10%) of needed assets.
If everybody in the 10X wanted to withdraw their money, there would not be enough money. All the banks would need to call in all loans, and that is chaos. It simply is money that sits in zero sum on balance sheets.
Ever wonder why there is a reserve? This is why. It's the expected amount of cash needed to let people with savings in the bank do day to day transactions. Bank runs used to happen (and still could) when reserves get too low, because all that 10X is not money that can be pulled out at once. The Fed provides a buffer against bank runs because it can provide liquidity as needed.
But the money multiplier is not some magic source of money any more than lending money from friend to friend is. It's exactly the same process.
Accounting does balance to zero. That doesn't negate the fact that money has been created in the system.
Let me pose the question again. Your statement is since accounting balanced to 0, no money has been created. In that case, FOMC's account balance is also net zero when buying treasury or selling treasury. Therefore FOMC doesn't create or destroy money. So what is the purpose of FOMC again?
>Your statement is since accounting balanced to 0, no money has been created
No. Nowhere have I written "no money". You have written it a few times. I have stated that the money is balanced by a matching debt. You also keep mixing fractional reserve and central bank purchases. These are entirely different things.
And FOMC is also zero sum - the dollars they inject are backed by debts they hold.
Yes, I am quite aware of this, even having been involved in many discussions and papers on exogenous vs endogenous money. If you want to really blow your mind search those terms and read academic papers on them.
What you seem to not understand is that the money is offset by matching debt. Your link states this in the first paragraph: "A central bank may introduce new money into the economy (termed "expansionary monetary policy", or "money printing" by detractors) by purchasing financial assets or lending money to financial institutions"
The Fed traditionally purchases debt to put more current into play. As more dollars are in the economy, the Fed carries more debt, the same as any bank when it loans out deposits. The difference is the Fed can purchase as much as it wants, but the sum is still zero.
Look: the fed has a balance sheet. Here are many snapshots of it [1]. It sums to zero. Take the last one from March, 2016 [2]. Look at page 6, Table 1. There is a line titled "Federal Reserve Notes in circulation". It is 1385B. There are other assets and debts. They are summed. The sum is zero.
Next - this has zero to do with fractional reserve, since you could have either without the other. We (and most of the world) had fractional reserve before we had a central bank.
So yes, there is more money. There is also matching debt. This is what I have stated since the beginning. You don't seem willing to note that the debt matches the money in every case, whether it's Joe loaning Bob, it's a bank and fractional reserve, or it's a central bank purchasing assets. The central bank has unlimited reserves, is the issuer of currency, and can take on unlimited debt.
If it helps you think clearly, assume the central bank has 20 quadrillion dollars. They decide to add X dollars to the economy, so they buy X in assets. Now they have 20Q - X in cash, X in assets, we have -X in assets, X in cash.
Where the economy increases is when the people buy goods (say Treasuries), and their value in dollars goes up through market pricing, then they get sold to the Fed. The Fed didn't add the value, market pricing did. The Fed simply traded some of it's (unlimited) reserves for assets.
This is also why the Fed traditionally purchases at open market prices - it helps them match inflation since the market, not the Fed, decides prices.
So - are you still claiming all these stages are not zero sum? If so, please detail which step is not zero sum.
>You were the one using the friend lending example to say there's no new money created when debt is created.
You keep saying I wrote no money is created. I did not. From every single post in this thread:
My first post in this thread: "new money is added through asset purchases, not giveaways,"
My second: "if you think fractional reserve creates money (in the sense that the gain is not balanced by a matching debt), then paying it back "destroys" the exact same amount. Fractional reserve is zero sum"
Third: "Accounting does balance to zero. Debt and money are added, and they sum to zero"
Fourth: "I have stated that the money is balanced by a matching debt"
Literally every single post I wrote in this thread stated that money is added, and a matching debt is added.
"The past 150 years has shown across hundreds of countries that the current solution is vastly better than the boom and bust cycles previous, and has also demonstrated the benefit of fiat over commodity (like gold)."
Uh, no. Quite the contrary. Since the abolition of the gold standard, our economies were prone to fluctuations like they haven't been in decades. Because then the (central) banks can meddle with the quantity of our money to their liking.
List of recessions in the US [1]. Tell me when they were longer and more frequent - before or after central banking.
The Great Moderation [2], a period of such low economic volatility that even economists find it amazing. Did this happen before or after the gold standard was removed?
IGM poll of around 100 of the top economists in the US the following [3] "If the US replaced its discretionary monetary policy regime with a gold standard, defining a "dollar" as a specific number of ounces of gold, the price-stability and employment outcomes would be better for the average American."
Every single one either disagreed or strongly disagreed. 100%. Not a single dissenter.
Want to really see what a gold standard would have done over the past few decades? Here [4] is gold prices for the past 100 years.
The price was 220 in 1970, 2000 in 1980, 369 in 2000, 1600 in 2010, and now has dropped to 1200, with a lot of intermediate fluctuations. It's all over the map. These fluctuations are far larger than any business cycle or inflation over the same time period.
If gold were the standard (i.e., the fixed value), then, since the dollar has fairly small fluctuations and more important quite stable predictability, this graph is what living costs would have done as the rest of value fluctuated this wildly.
Simply put, gold is vastly more volatile than almost any economy, and certainly more volatile than the US economy. The gold standard is terrible.
Finally, here [5] is a paper that follows the gold standard across 24 countries around the Great Depression, and pretty conclusive shows a strong divergence in economic health (employment, wages, growth) between those countries on the gold standard and those off it. Such effects, seen at the time, pretty much killed the gold standard as the deflationary effects became clear.
Now, present your fluctuation metric before and after a gold standard and demonstrate your claimed increase. It simply is wrong. These multiple methods conclusively show it.
I expect we would see a general price level increase if we used inflation to fund a basic income. But because it destroys household wealth in proportion to the wealth of the household and creates household wealth uniformly throughout the population, the net effect is not just higher numbers on the currency but also flatter distributions of wealth and income.
As for landlords specifically: the renters already have $x they are not using for rent, so why don't the landlords get that? If there is no good or service that absorbs all the money right now, there's no reason to think there would be one for the marginal money of a basic income scheme.
Because the world doesn't work like that? if it did, we would be paying the same proportional amount of income to rent today in 2016 as we did during 1970. We don't. Just because there is more money doesn't mean that you get proportional increase in construction, maintained demand for housing, or demand for land for which houses are built on. It doesn't change how government rezones in order to control rents in cities.
Rent is not some basic formula derived from the average income.
The problem is not inflation. It happens already. The problem is the new money created causing the inflation is given to the asset holders and banks, not to everyone.
Rent increases now, due to inflation. The general public have to give more despite not getting the created money. Landlords got the benefit of rising rent due to inflation and rising housing price due to lower interest rate to create more money.
Basic income just shifts the inflated money to everyone instead of just the asset holders.
"new money" is not, or ever, given to anyone. Banks included. The U.S. gov basically sells promissory notes (treasuries) to an independent, non governmental organization (The Federal reserve...which is not "federal" in the least bit..) on behalf of the American people. Although the fed is more or less offering a note at x price and the U.S. Treasury just buys it...
Anybody is allowed to buy bonds from the U.S. Treasury. In exchange, you get the "new money" as you call it. At no one point is anything given to the banks or asset holders.
The interest rate is determined by the rate the fed sets and buys these notes from the US T. This is the key and primary tool at which a PRIVATE, non-governmental organization, determines interest rates. However..you can also buy these notes directly from the Fed. China does all the time along with many other countries. Yes...other countries hold the "debt" of the American people... If that's not crazy enough...it gets better. This organization..the Fed...gets to tell banks how much to hold in required reserves. Another primary tool they use to control inflation.
OK, so then when you give more to the lower class, and landlords increase rent.... guess who gets the majority of that newly printed income? The asset holders once again!!
I don't see how basic income doesn't create more unforeseen problems than it solves unless there are some serious strings attached to that money.
At least the money has gone to encourage economic activities, i.e. housing service. Increased rent leads to more housing development as more people piled in to take advantage of the increased return, which can lower the rent as more housing capacity comes online.
The amount of wishful thinking in this thread makes me question how many of you have actually functioned in the real world. Have you ever met a group of landlords? Ever talk to any who deal with low income housing?
You honestly think they care about "losing business" in a market that they absolutely control and have extremely high demand?
But they won't have control. Not only does basic income allow you to tell your shitty boss to shove it while you live off the dole(I really don't care how lazy you are) but you also get to tell your landlord to shove it now that you have enough free cash to afford a security deposit on a different place.
> now that you have enough free cash to afford a security deposit on a different place
This leads me back to my original question - EVERYONE now has "enough free cash to afford a security deposit on a different place", so if EVERYONE goes and does that, we're right back to where we came from within 1 year -- the lowest class still has the lowest quality apartments with the lowest class slumlord landlords!!
Nothing changes except less people think they have to work (which causes society to further cave in on itself)!!
If anything, this damages the supply side, because now you have higher demand in the form of 20-somethings attempting to escape their parents/grandparents homes, as well as anyone who thinks they no longer have to live with roommates. Nothing but distorted perceptions.
And now, we also have the side effect of fewer people working and being economically productive in society, thanks to you telling your shitty boss to shove it. Meanwhile, anyone who was making something equivalent (or a bit more) than the new base salary can just say screw working altogether.
I don't see how any other outcome prevails. The cons continue to outweigh the pros, and you have no clue what other unforeseen side effects will unfold.
"we're right back to where we came from within 1 year -- the lowest class still has the lowest quality apartments with the lowest class slumlord landlords!!"
but the previous lowest class slumlords have been run out of business, because no everyone's trying to move out of their apartments and no one's trying to move in.
Where I live, there is no structural vacancies at the low end of the market. In markets like that, unless you believe that UBI will cause a net reduction in the number of households, those landlords will experience an increase in demand, not a reduction.
In markets with structural vacancies (more units available for rent than households wanting to rent them), you might see of the migration effect you describe due to increased mobility.
(To be clear, I believe that UBI will cause an increase in household formation, not a decrease.)
Letting apartments just sit around unrented isn't a very profitable strategy, even if you occasionally can extract more money out of someone than who is willing to pay an inflated rate.
In the short term, inflation does happen. This is because the economic allocations were done according to the old distribution of incomes, which is to say disproportionately benefiting the desires of the rich. Demand changes while supply remains the same.
So lower-income housing landlords do raise their rents. Grocery stores raise prices on their beef. Low-end used cars get more expensive. More dollars chase the same quantity of goods and services.
But basic income continues into the long run. It becomes a business opportunity to undercut those inflated prices, to capture more of the basic income flow for yourself. An entrepreneur builds lower-income housing and charges lower than the prevailing rents, immediately poaching business from the opportunist landlords, who now have to compete with one another to keep tenants.
As additional competitors enter the market, the economic allocations change to match the newer distribution of incomes. More businesses that serve lower-income people become viable, so more economic activity occurs to cater to that sector. Fewer businesses that serve higher-income people remain viable, because they are taxed more. It slowly becomes more expensive to be rich, and less expensive to be poor.
In the long run, wealth distribution flattens and is less self-reinforcing. More than a few people would be willing to walk a higher wire if they were given a stronger safety net, choosing risky entrepreneurship rather than safer employment. Prices only remain high if existing businesses are protected from competition.
This is easily the best response I've seen to all of my questions, but it is all extremely optimistic and untested. There are always unforseen side effects whenever you steer the market in new ways.
I would strongly urge that we carry out smaller scale experiments / split tests before anyone commits nationwide.
I envision a deepening of the social divide, as the uneducated and unskilled further separate from the educated. Within very few generations you would be left with an unrecognizable society.
Everyone here is looking at it from the lens of the intelligent hopeful tech entrepreneur. That's lovely, but we are the extreme minority.
I'd say it's overly optimistic. If all you do is drop cash from helicopters, it is entirely possible that there is never enough of a sense of economic security to encourage the increased small business starts needed to reach a new equilibrium. That's why I don't think that UBI would work unless some of the benefit were supplied as basic goods and services rather than cash.
At minimum, the UBI provider would have to supply food, water, housing, sanitation, electricity, and network, along with the cash. Otherwise, between those necessities, incumbent suppliers could capture all the excess cash and send it right back to the owners.
Because all money is the same; basic income dollars are indistinguishable from the rest of the dollars out there.
What would happen (if you funded this by printing money rather than taxation) is that the value of the dollar would fall by (monetary value of basic income payment) / (total number of circulating dollars), creating a redistribution effect similar to that of a taxation scheme, but less planned out.
If I understand correctly, the money isn't printed -- it's redistributed. The money supply isn't increasing, but it could be that money is more likely to be spent in the short term than sitting in a bank somewhere.
i agree with you, but am doubtful as to whether they'll do it. The gov't and its nearest banking buddies benefit enormously from the new money before it inflates outward across the economy and devalues.
The Fed can raise interest rate to shrink the money supply for banks and borrowers while give more direct cash to expand the money supply via basic income. This can be in addition to the government's budget spending on basic income.
An interesting outcome is the deflation of the asset bubble as rate increases. The money supply expansion via direct cash counters the deflation in economy. This should reverse the trend of the great wealth transfer to the asset holders in the last 20 years.