Judge for yourself-
If I borrow money from you so as to take my g.f for a swanky meal and then work overtime to earn that money back to repay you, I might well feel aggrieved because I have already suffered by working overtime and now I'm also having to hand over cash as well! It isn't fair!
You may well reply 'You got paid for the overtime. That's the cash you are holding in your hand. You did the overtime so as to repay me. Now hand over the cash so we are even.'
I still feel unhappy. After all, that swanky meal your loan enabled me to pay for is now a distant memory whereas my feeling of exhaustion at having had to do overtime remains very vivid. Thus I feel ill-used and exploited and decide to declare myself a Sovereign Nation. I can now channel Bernard Schmitt's Quantum Macroeconomics to say, 'I paid for my meal by my working overtime. Food is real and so is the work I did. Money is simply an accounting convention. I've already paid for the real benefit I received with the real work that I did. I don't owe you anything'.
You may get angry and take me to Court and get a lien on my wages to repay your loan plus expenses. I will feel increasingly hard done by. In the end I will probably have to work harder and also gain a poorer credit score, so as to get rid of the debt. This will make me depressed and might cause me to hit the bottle with disastrous consequences for my employability. From skid row I shall rave against you for having ruined my life while muttering random snippets from the Quantum Macroeconomics site to myself.
Stuff like this-
Contrary to what is assumed in the majority of models purporting to explain exchange rate fluctuations, the new quantum theory of monetary economics shows that exchange rates are not exposed to national monetary disorders, interest rates, or commercial and financial imbalances. The fact is that, with the unique exception of external debt servicing, international transactions imply reciprocal transactions between countries, a condition necessary and sufficient to guarantee equilibrium on the foreign exchange market. For example, let us consider the case in which a given country, A, is a net commercial importer with respect to the rest of the world, R. Two situations are possible. If A is a key currency country, its net imports are paid by crediting the banking system of the rest of the world, R, with a bank deposit in money A. The net inflow of goods and services is thus balanced by an equivalent outflow of claims on A’s bank deposits. The demand for money R (MR) in terms of money A (MA), due to A’s net commercial imports, is matched by an equivalent demand for money A in terms of money R, which leaves the exchange rate unaltered.
Is this really true? If I sell some goods to an American, I don't get a bank balance in America. I get pounds in my Bank Account here in Britain. If America is a net importer, then there is an outflow from the American Banking system to the rest of the world. This means more dollars are being sold and so the dollar tends to fall. Only if the rest of the world, for some reason, wanted to build up balances in American banks would there be no outflow and no downward pressure on the dollar. However, in that case, America's debt increases and so more dollars will flow out to service that debt and this would renew downward pressure on the dollar.
If MA is not a key currency, country A pays its net imports in money R. This it can do either by drawing on its official reserves or by obtaining a loan from R. Since official reserves are actually used for other purposes (mainly to reassure foreign investors), it is through a loan that A gets the amount of MR necessary to pay for its commercial imports. Now, the loan is obtained by exporting an equivalent amount of financial claims. Because of the net credit obtained from R, A incurs a debt, which is precisely the result of its net sale of financial claims. As in the previous case, the net purchase of real goods and services is balanced by a net sale of financial bonds, so that no variation in exchange rates occurs between MA and MR.
Why would country R want to hold country A's debt? Presumably, it is because the real interest rate offered, currency risk having been discounted, is high. But this means a bigger debt servicing burden going forward. How to pay for it? Country R will have to lower the price of its exports or allow this to happen through devaluation of the currency. But this just increases the debt burden once again because the debt is denominated in the now rising currency of Country R. Country A now feels pretty miserable. It may hit the bottle or elect Syriza.
The payment of A’s net commercial and financial exports leads to the same result: the reciprocity of each transaction leaves exchange rates unaffected. This does not mean, however, that international payments are discharged in a purely logical way. The first case analysed above is clear evidence to the contrary. When paying for its net commercial imports, a key-currency country subjects its money to a process of duplication that leads to the creation of an international, speculative capital.
In the Sixties, the Americans were worried by 'Eurodollars'- dollars being borrowed and lent in Europe. Soon, it was not just dollars they were exporting but Banks as well. The OPEC countries started recycling their surpluses through the Eurodollar market. The British were particularly miffed when they had to devalue against the dollar. Harold Wilson blamed 'the gnomes of Zurich'.
Was Wilson right to do so? Is credit creation using a foreign country's currency some type of fraud or 'duplication'?
The short answer is- no. Smart Bankers lend to trustworthy people who repay them and build up their businesses and become even more valuable customers. Economic activity of a wholesome kind has increased. Yes, there were speculative attacks on over-valued currencies. But devaluation was a good thing for the productive classes of indebted countries. No doubt, some Lords and Ladies and pampered bureaucrats saw a decline in their relative entitlements, but the gnomes of Zurich had done a good thing by liberating productive forces. In the end, even those Lords and Ladies would be better off because of the restored dynamism of their countries.
First developed by Rueff (1963), this analysis of the so-called euro- (or xeno-) currencies is a key element in the explanation of exchange rate erratic fluctuations. Let us briefly summarise the main logical steps of the analysis. The payment by a reserve-currency country, A, of its net commercial imports implies the transfer to the exporting countries, R, of claims on A’s bank deposits. As shown by double-entry book-keeping, not a single unit of the income formed in A is transferred to R. The credit entered on the assets side of R’s banking system means that a part of A’s bank deposits are now owned by R. The deposits themselves, however, are still entirely present in A’s banking system. Hence, what R earns is the ownership of a deposit that remains available in A. Now, the fact is that the amount of money A entered on R’s banking system becomes autonomous with respect to its corresponding deposit in A. As stressed by Rueff, money A is subjected to a duplication since it is simultaneously available in A and abroad.
Why would the exporters of R keep their money in A? Don't they need it to pay their workers and suppliers? It is a different matter that an international banker may want to have those deposits in A so as to improve his own Creditworthiness and ability to act as the lead banker in new projects in other countries which use the currency of A as their means of international settlement. These international bankers aren't 'duplicating money'. They are creating Credit on the basis of the trustworthiness and commercial viability of the projects they finance. This is a real economic activity which eventually is beneficial to everyone.
Suppose, back in the Sixties, some little Korean guy came to some little Indian guy and said 'Hi! I'm from Samsung. I want to buy your pig iron for my smelter.'' Since back then the name Samsung was little known, the South Indian guy would need to a Letter of Credit with a name like Standard Chartered or Grindlays on it before shaking hands. Then, as now, the amount would be in dollars. This sort of deal, using Eurodollars, didn't represent any sort of chicanery or fraud. It was a good thing for all concerned. This was sound 'Credit Creation'. A genuine Economic activity of a mutually beneficial sort was enabled. Nowadays, of course, there are Korean and Indian and African Merchant Banks which can originate LC's and take the lead on syndicated loans and so forth. The fact that they use currencies different from that of their own nation is not a problem.
Yet, while the bank deposits in A define A’s current output, the duplicate invested abroad has no real content whatsoever.
America's GNP does not count Chinese money deposited in American Banks. That's not how National Income Accounts work. No doubt Chinese bankers and investors leverage their holdings of American debt so as to find profitable opportunities for themselves. Thus a shopping mall in Dubai or a factory in Vietnam may correspond to an American deposit which has been used as collateral by savvy Chinese investors.
By allowing the duplication to occur and the duplicate to become autonomous with respect to the initial bank deposits, the present structure of international payments allows the formation of a capital whose nature is essentially speculative. With no link to real production, this capital feeds a speculative market in which national currencies become objects of trade and their exchange rates are directly dependent upon supply and demand. As it happens with real goods, xeno-currencies are sold and purchased for their own sake; yet, contrary to what happens with real goods, their price is not related to their cost of production. Moreover, being mere duplicates, xeno-currencies do not contain any real production either. Despite this lack of objective relationship with national outputs, xeno-currencies are autonomous objects of trade on the foreign exchange market. Therefore, what makes up the speculative character of this market is not the kind of transaction it deals with (some of which are not speculative at all), but the fact that its very existence is due to the pathological process of duplication that transforms currencies from means into objects of payment. Speculation is the effect and not the cause of speculative capital, which is the direct consequence of currency duplications. As soon as currencies are transformed into objects of trade, their exchange rates vary according to their sales and purchases, and speculation arises with a view to making capital gains from these variations. It is not surprising, thus, that this kind of speculation becomes the main cause of exchange rate fluctuations, which, in turn, become the main incentive to speculation.
It is quite true that Bankers don't just finance things like factories. They are also arbitrageurs and market makers. In other words, they trade in currencies and options and derivatives and so forth. However, in doing so, they are contributing to the 'real' economy. How? They are taking on risk- for a price. Thus a small firm in Germany specialising in making a particular type of machine tool can fulfil an order from some distant country without having to worry about how and when they will get paid. All that risk can be taken on by the Banking system. Every risk can be insured against so that producers can get on with doing what they know best without having to worry about complicated questions regarding International financial flows.
Governments which have lied to voters and incurred unsustainable debt and thus face a falling exchange rate- or else a huge debt servicing burden under fixed exchange rates- like to blame the ''greedy speculators' whom they castigate with racialist epithets. However, their presence can act as a salutary countervailing pressure to maintain fiscal and monetary discipline. This isn't a perfect system by any means nor is it incapable of improved 'mechanism design'' - i.e. better regulation and oversight.
Is there no way of escaping this vicious circle? Can order eventually be established at the international level? Quantum monetary theory provides the foundation for a reform leading to this result. Foreshadowed by Keynes’s plan (Bretton Woods 1944), the reform proposed by Schmitt and his followers aims at transforming the present system of relative exchange rates into a system of absolute exchange rates. From a regime in which currencies are exchanged one against the other, we have to switch to a regime in which every currency is exchanged against itself, i.e. a system where each time money A is exchanged against money R, MR is immediately exchanged back against MA. Far from being odd, this principle is the only one that is consistent with the book-keeping nature of bank money and with its circular use. If explicitly applied to commercial and financial transactions between countries, it avoids duplication while it also guarantees exchange rate stability. Hence, the progress from disorder to order requires the creation of a structure allowing international transactions to take place through absolute exchanges. This may be done by following Keynes’s suggestion to let a ‘world bank’ issue a new, international currency and act both as a monetary intermediary and as a clearing house.
So, this is the equivalent of Exchange Controls. Foreigners won't be allowed to hold our currency and vice versa. Week to week Balance of Payments deficits or surpluses would dictate how much foreign currency one would be allowed for various purposes. Suppose there is an unusually cold winter and so fuel imports rise. The Chancellor starts to fret about our declining reserves of dollars and gold. So he puts a cash limit on how much we can take out of the country for our summer holiday. Fine! Margate is just as good as Phuket. Hang on a moment though... You say there will be a 'world bank' issuing an international currency. What is to stop that world bank sanctioning us if it doesn't like something we are doing? Take Brexit. The World Bank might say 'naughty Britain! How dare you break away from Europe?! We think it will hurt your Economy so we've decided to cut your drawing rights to reflect your parlous economic position.'
The effect of this sanction would be to reduce Britain's international liquidity. Imports would have to be rationed by some economic criteria. Distortions will develop. Ultimately, producers will pay the excess burden in terms of reduced allocative efficiency.
For example, let us consider the way the payment of country A’s net commercial imports would have to be carried out. The principle of reciprocal exchange being fundamental to ensure the circular use of money, it must be applied also by the new world bank, which, according to the rules of clearing, could carry out A’s payment only if A is the recipient of an equivalent payment from the rest of the world, R. In our example, the new world bank would carry out the payment of A’s net commercial purchase only when A sells an equivalent amount of financial securities to R. The world currency issued by the new world bank would therefore be used simultaneously to convey real goods and services from R to A, and financial claims from A to R. The reciprocal exchange of commercial and financial assets would take place through the circular use of the new world currency, which, as any other bank money, would flow instantaneously back to its point of emission. By allowing the new world currency to be used in a closed circle, the new system would also guarantee exchange rates stability between MA and MR. Each national currency, in fact, would be exchanged against itself through the intermediary of the new world money. After being changed into the new world money and spent to pay for A’s commercial imports, money A would immediately recover its initial form, given the perfect reciprocity of the exchange transactions. As a result, a substitution would take place between the real goods and services exported by R and the financial securities exported by A. Through absolute exchange, goods and services sold by R would become the content of money A, while the financial securities exported by A would take the form of money R. The new system of international settlements would thus guarantee the real payment of each transaction through the circular use of a currency – the new world money – which would never be transformed into a final good. By replacing today’s regime of relative exchange rates with one of absolute exchange rates, it would also prevent the duplication of national currencies and ensure monetary stability.
So, if we suddenly needed money, the World Bank wouldn't give it to us even if failure to get that money would lead to a much bigger disaster involving everybody. Great! Under this system, Hitler wouldn't have needed the Blitz. The World Bank would have forced Churchill out of office so that the Nazi beast could plunder France to his heart's content!
Money is nothing but Credit- Belief. Where there is good 'mechanism design' in financial markets, you have smart lenders backing trustworthy people with commercially viable ideas on a global basis. Producers are relieved of every sort of risk not directly related to the work they know best. The arbitrageurs connect up markets and diminish uncertainty by exploiting the 'law of large numbers'- i.e. the notion that things get more predictable on a big enough scale.
Destroying the global financial system because of some irrational phobia about 'duplicate money' is sheer lunacy. The next step would be instituting random checks to ensure that people weren't being duplicated by androids or extra terrestrials.
Capital flight has always been considered as a transfer of capital between countries, since agents are obviously free to ask their banks to transfer their deposits abroad. Is it possible, then, to maintain – as we do – that not a single penny can leave the banking system from which it originates? The answer is based on the nature of bank money. If money income is defined as a bank deposit, it is logically impossible to retrieve it from of a banking system and transfer it to another. What happens, then, when an agent asks his bank to transfer his capital abroad? Contrary to what is implied by the word ‘transfer’, no capital leaves its country of origin. The account of our agent is indeed debited by his bank, B1, which gives him in exchange the ownership over a bank deposit formed in another country. His initial capital remains entirely deposited with bank B1 and is exchanged against a claim upon a foreign capital deposited abroad. This is also what happens in the case of capital flight. Contrary to what the expression suggests, no national capital is lost by the country whose residents transfer their capitals to another country. This is not to say, of course, that no loss is incurred, for example by the fiscal authorities. If residents are successful in surreptitiously concealing their capitals from their taxman, they obviously cause damage to their country’s domestic budget. However, their capitals do not leave the banking system in which they are deposited. Lost to the State, these capitals are still available within the national banking system.
How does Bank B1 get ownership of a bank account in another country? I suppose it could sell its currency, buy the foreign currency and then set up a bank account in that currency in the foreign country and then give the customer a cheque payable on that bank account. In practice, nothing like this happens. When you close your account your Bank gives you a cheque which you deposit wherever you like. Your new Bank, in the foreign country, presents the cheque for clearance which is done through a 'Nostro' account. Ultiimately, after netting out, some genuine sale or purchase of foreign currency occurs.
Suppose you go back to Bank B1 and say, could I have my money from my account please? they will reply, you have no money deposited with us.
Money income is not defined as a Bank deposit. It is your pay cheque. It is logically impossible to withdraw your money from a Bank while still keeping that money as a deposit with it. Capital flight is quite real. Greece limits withdrawals from Banks to £1800 per month. Why? If they didn't a lot of Greeks would try to get their money out of the country at the same time. Greece doesn't have enough Euros to satisfy this demand.
What about a country with its own currency? Well, either it has Exchange Controls- in which case Capital flight is curbed because permission is not granted to transfer money out of the country- or else money does leave the domestic banking system to seek a safe harbour somewhere else. This is why China has been ramping up capital controls so as to defend its currency from capital flight.
Another line of research developed by the new quantum analysis of monetary economics deals with the servicing of foreign debt by non-reserve-currency countries. The main conclusion drawn in this respect by the theory is that indebted countries cannot help paying twice the amount of net interest due on their foreign debt. This is, admittedly, a rather unconventional assertion, and it cannot be explained in a few lines. Let us simply note here that the charge of interest payment would never double in a world in which national currencies were rendered homogeneous through a system akin to Keynes’s Plan for the Establishment of an International Clearing Union. The lack of a system of international payments conforming to the double-entry nature of bank money forces less developed countries (LDCs) to purchase the means of their external payments. The purchase of the mere means of payment has a net positive cost only when payments are unilateral, which is precisely the case with interest payments. By definition, interest payments are transfers that issue in a double charge since indebted countries have to face both a real and a monetary payment. In fact, they first transfer part of their national output to creditor countries. Additionally, they must give up an equivalent part of their reserves. Now, while the ‘real’ payment is perfectly legitimate (creditors being entitled to part of the income generated by their initial investment), the second payment is entirely superfetatory.
Put simply, the indebted country whose residents have to pay interests to foreign creditors gives up an equivalent amount of foreign exchange coming from its net commercial exports. Now, although it is true that part of the income generated within the indebted country, A, by the initial foreign investment is due to the creditor countries, R, it would be wrong to claim that A must pay R by giving away not only a part of its national output but also an equivalent amount of foreign currency.
Either country A got foreign exchange by selling to country R in which case it pays its debt with that foreign exchange or else it sold stuff to other countries and uses the money they paid to extinguish the debt to R. There is no double burden. The case is similar to my borrowing money from you to eat at a swanky restaurant. I earn money by working overtime and repay you. It is not the case that I have suffered twice- first by working overtime and then by handing over cash.
Having transferred to R a portion of its external gains derived from its exports, A should be quit. And so it is. If this is not the case, it is because today’s system of international payments does not allow the cost-free conversion of the payment made by the indebted residents of A into that carried out by their country. Sheer nonsense! It is at the macroeconomic level that things go wrong. Indebted residents pay once, as required, and their country is forced to pay a second time because the unilateral transfer of interest creates a ‘monetary hole’ in A’s economy. There is no 'monetary hole' -this is not a term known to Economics! The consequence of A’s unilateral transfer in favour of Ris that an equivalent part of A’s commercial exports is given free to R. Nothing is given free- a loan is repaid, that is all. Hence, the payment of interest by A’s indebted residents entails a non-payment of A’s commercial exports that must be matched by an equivalent decrease in A’s official reserves. Rubbish! An Indian Company lends money to its UK subsidiary. The UK subsidiary sells some luxury cars in India and repays the debt to the Indian Company. No 'monetary hole' is created for Britain. It does not have to pay the Indian Company all over again. Since its currency is floating Britain doesn't care much about its reserves. This second charge of external debt servicing immediately adds itself to the real payment of interest – the free transfer to R of part of A’s national output – thus doubling the total charge supported by country A and its residents. This is bizarre. When you repay your debt no further interest charges arise. It is never the case that the debtor tenders a payment without his debt being written down by that amount. No 'free transfers' occur in Economics save by way of Overseas Aid or Charity. Once again, while the real payment prevents exports from increasing A’s official reserves, the monetary payment of interest requires a second measure of exports that are not paid by R, and which causes a monetary deficit. This deficit is then covered through a decrease in A’s official reserves. Real payment- by transfer of goods- is always accompanied by money payment. That's how business works. In International trade there is a letter of credit which ensures that payment is made once the consignment has been accepted. If Country A has stringent Exchange Controls, the foreign currency payment may go directly to the Central Bank which authorises payment in local currency to the exporter. This immediately shows up on its reserves. They rise with the receipt of export earnings and fall with the payment of debt.
If the indebted residents’ payment were the only payment required by foreign debt servicing, country Awould act as a simple intermediary. It would receive the domestic income spent by its residents and transfer an equivalent foreign income to foreign creditors. Nonsense! No country 'receives the domestic income spent by its residents.' It gets tax revenue levied on that income or expenditure. Nor does any country undertake to pay its citizen's debts. It is only responsible for its own debt. The conversion of domestic money into foreign currency would take place at zero cost, and the only charge of interest payments would be the amount of commercial exports necessary to pay country R’s creditors. Yet, barring a reform implemented by each single country, interest payments would imply a unique charge for A only if a system of international clearing allowed countries to benefit from a free conversion of their domestic currencies. In other words, the payment of interest would be normal if it were inserted into a system of reciprocal transactions between countries. As already suggested by Keynes in 1944, such a system is not intended to restrict transactions. On the contrary, it aims to provide a monetary structure allowing international payments to be carried out without causing any monetary disturbance, that is, without provoking exchange rates fluctuations and without forcing indebted countries to pay twice the interest accruing on their foreign debt. The new, quantum monetary theory briefly presented here provides a detailed analysis of how the system of international payments should be structured in order to achieve this result. More important still, it offers a practical solution allowing each single country to protect itself from the second charge of external debt servicing. If adopted, this solution would reduce foreign debt servicing to a single payment, which would bring to the indebted countries a gain equivalent to the interest paid to their creditors. For example, in 1998, Mexico would have saved 12,589 millions dollars, Argentina 8,976 , and Brazil 12,465. Each of those countries would thus have kept a disposable sum that has actually been lost in the ‘black hole’ of external debt servicing. The unjustified decrease in official reserves suffered by indebted countries under the present ‘non-system’ of international payments is equivalent to their interest payments, and measures the loss incurred by their Treasuries. The reform proposed by Bernard Schmitt and his School would prevent this from happening ever again.
Wow! How did these guys get to be Professors of Econ? I suppose they grew up under Bretton Woods fixed exchange rates/stringent exchange controls and never bothered to find out how things evolved from the Seventies onward.
Elsewhere on the Web, I found this explanation- clearly some Marxist, or Sraffaist fuckwittery was at the bottom of this horrendous misology-
in quantum macroeconomics money is not a preexisting stock, as it is often presented in mainstream economics, nor is it an asset with a positive purchasing power created ex-nihilo by the banking system, as frequently read in post-Keynesian literature. Money is an asset and a liability at the same time and a pure unit of account without purchasing power per se. Only wages, the monetized face of the physical output of a national economy, acquire purchasing power. This intrinsic link between output and wages shows the monetary economy of production as a space of ‘absolute exchanges’. Contrary to the neoclassical theory where an economy is shown as a market of goods and services which are sold and purchased by relative exchanges, quantum macroeconomics assumes the central role played by money, wages and monetary payments. According to this approach, insofar as money creation cannot be dissociated from output, exchanges in an economy are ‘absolute’ and not ‘relative’. Therefore, since wages are monetized portions of total output payment, the use of wages in the payment of goods and services is, from a macroeconomic perspective, an absolute exchange of the two sides of production: the physical output and nominal wages.
Did you know that only horny handed labourers had purchasing power? Those Capitalists in their top hats and tailcoats don't have a single penny to rub together. They may run the Stock Exchange but no 'absolute exchanges' occur there so they don't get any purchasing power at all. No wonder Trump wanted to get into the White House. He didn't have any money for cheeseburgers. Poor fellow! Give him 4 more years! You can't be so cruel as to want that elderly man to go back to being a homeless bum do you?
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