{"id":8192,"date":"2010-02-21T21:53:45","date_gmt":"2010-02-21T10:53:45","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=8192"},"modified":"2010-02-21T21:53:45","modified_gmt":"2010-02-21T10:53:45","slug":"questions-and-answers-2","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=8192","title":{"rendered":"Questions and answers 2"},"content":{"rendered":"

\t\t\t\tThis is the second Q&A blog where I try to catch up on all the E-mails (and contact form enquiries) I receive from readers who want to know more about modern monetary theory (MMT) or challenge a view expressed here. It is also a chance to address some of the comments that have been posted in more detail to clarify matters that seem to be causing confusion. So if you send me a query by any of the means above and don’t immediately see a response look out for the regular blogs under this category (Q&A) because it is likely it will be addressed in some form here. While I would like to be able to respond to queries immediately I run out of time each day and I am sorry for that.
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\nIt seems that a host of questions were spawned by the two simple teaching models (STMs) I have put up in recent weeks – Barnaby, better to walk before we run<\/a> and Some neighbours arrive<\/a>.<\/p>\n

These posts should be read in conjunction with the following blogs – A simple business card economy<\/a> and What causes mass unemployment?<\/a>.<\/p>\n

And then – to map the models into the real world I would recommend you read the following trilogy: Deficit spending 101 – Part 1<\/a> – Deficit spending 101 – Part 2<\/a> – Deficit spending 101 – Part 3<\/a>.<\/p>\n

Question 1:<\/strong><\/p>\n

\nI’m assuming cards are equivalent to currency. Is that correct?<\/p>\n

Let’s assume there is no gov’t other than currency and debt. That is G=0 and T=0. What would the model look like?\n<\/p><\/blockquote>\n

The cards are fiat currency.<\/p>\n

If G=0 and T=0 and there were no other central bank transactions with the non-government sector then there would be no fiat monetary system. There would be no transfer of private resources to the public sector. That is the purpose of the STMs – to show how these transfers work.<\/p>\n

Question 2:<\/strong><\/p>\n

\nWhat effect do bank loans and asset inflation have on this? For example, a bank gives someone a loan to buy a house, which they later sell for a profit and pay off the loan. Is that resulting profit ultimately only a product of government deficit spending, is it ‘funny money’ based purely on the perceived value of the house, or has ‘money’ actually been created by the non-government sector?\n<\/p><\/blockquote>\n

This question is covered in the trilogy of blogs noted above. In short, the STMs are designed to highlight the vertical<\/strong> transactions between the government and non-government sector and ignores what we call the horizontal transactions between entities in the non-government sector (which include bank loans and real asset purchases etc).<\/p>\n

Why do this? The reason is the vertical transactions are special and have characteristics not found in any of the horizontal transactions. Specifically, vertical transactions (such as government spending, taxation, foreign exchange interventions, gold sales) can create and destroy net financial assets in the currency of issue. That is the net position in the non-government sector is altered by the vertical transactions whereas the horizontal transactions within the non-government sector cannot alter the net position.<\/p>\n

They can redistribute assets and liabilities but all the horizontal transactions net to zero. The horizontal transactions are not uninteresting and important to study but I find that most commentators and interested parties do not understand the nature of the vertical transactions at all and they are at the basis of how the currency functions.<\/p>\n

The STMs are designed to highlight the exact nature of these vertical transactions and allow you to clearly understand two important features about the actual<\/strong> which are usually absent in mainstream debate:<\/p>\n