The CentralBankopian perspective

Given quite a few articles we have been reading over the last few weeks, we have decided it is time for another little visit to CentralBankopia and get another perspective on things.

If you are not already aware of CentralBankopia we recommend you firstly read
this and this and this

Most traditionally educated economists and economic journalists tend to believe government deficits are totally wrong, are always a sign of a weak economy and should be avoided at all times. We are not exactly sure why, but what it does show is that they don’t seem to understand how money works in a modern economy with a FIAT currency where the government is the sovereign owner of fiscal and monetary policy. Australia is one of these countries, as is the UK, Japan and the US. Most members of the EU are not, however the way Germany controls the ECB it almost is.

It seems that most economists and the media are hell bent on talking about fiscal and monetary policy in the context domestic private budgeting. This is completely incorrect as the two have nothing to do with each other. We are not sure why this myth has been allowed to continue for so long; but it seems it is up to a few bloggers and a couple of “Crazy” economists to attempt to get the truth out there.

CentralBankopia is a concept we use on this blog to help explain what “money” actually means in a modern economy from a unique perspective, that of the monopolistic issuer. You need to be clear, this is not from the perspective of the people who work for the Central Bank, Treasury and/or other government institutions that set fiscal and monetary policy. It is from the functional perspective of the institutions themselves. From this perspective money is seen completely differently and has a very different use than it does to people, households, companies and other government entities that work outside this area.

So remember when we talk about “CentralBankopia” we mean these institutions. When we say “CentralBankopians” we mean the community of people who set fiscal, monetary and other economic policy that steers the macro-economy in the context of setting that policy.

CentralBankopian finance has a couple of concepts that are completely foreign to most people, but once you understand them you appreciate a very different perspective on economic topics.

  1. Money has no real value; it can be created or destroyed at any time.
  2. The real currency is GPEC , which is made up of sustainable Growth, Productivity, Employment and social Calm.
  3. GPEC is gained by using policy to manipulate the supply of money to and from the private sector ( via the banks ) to ensure that resources are mobilised in such a way to create sustainable growth , full employment and social well-being.

If you had this perspective on “money” then you would have a very different view of deficits, national debts and the supply of money. As a CentralBankopian can issue their own currency at anytime they can obviously spend money at will. Likewise, they can do the opposite, that is, raise taxes and simply destroy the money knowing full well they can create more next time it is required.

Now the first question you will be asking yourself is “how can they just create money out of thin air”. Well actually they do it everyday for a number of reasons. Here is one example; there are many.

In Australia at the moment the inflation rate is 2.8%. If the money supply needs to remain constant in real terms, (see point a. on this page) this means that the government will have to add an additional 2.8% to the money supply (or monetary base). That is several billion dollars added every year “out of thin air”.

However for everyone else in the economy, spending, savings and expenditure must be balanced otherwise they will get poorer and in extremes go bankrupt. CentralBankopians however have no reason at all to balance the books, there is in fact no book. The sole reason money is created and destroyed is to ensure the increase of GPEC, that is the sustainable productive growth of an economy while trying to ensure the maximum employment and social calm.

So what types of things would give greater GPEC? Well, in fact it is quite broad, but here are some good examples, maybe you can think of some others.

  • Management of inflation.
  • Ensuring investments provide productive improvements.
  • Lowering dependencies on foreign sourced inputs that are outside of the sovereign governments’ control ( Think oil in Australia )
  • Education of the workforce for higher productivity.
  • Managing systemic risk ( Asset bubbles )
  • Research and Development.

So if you look at the items in the list above you can see that there will be times when it is necessary to spend more than you take back (deficits), and at times it will be necessary to do the opposite (surplus).

But importantly what you will note is that the aim is to get GPEC not money. Money can be added to, or taken from the private entities as deemed appropriate. CentralBankopians do not tax the populace to get the money ( they can get as much as they want at anytime ) they do it to control the utilisation of resources, and to encourage investment that supports better economic and social outcomes for the country.

You will also importantly note that CentralBankopians do not need to borrow money to do something. They are the monopolist supplier; if they want money they create it. To borrow it from someone, they would first have to create it, give it to someone else and then ask for it back. This is obviously a pointless exercise that makes no sense. Yet on a daily basis people are told that the government must borrow money to fund programs. This is utter twaddle.

Now as soon as we mention Centralbankopia we are always asked 3 questions. So we will answer them here.

Q1 from People: How can you advocate this, Zimbabwe is proof if you just print money it creates hyper-inflation.

Answer from a CentralBankopian: Please think about GPEC, not money. Money is irrelevant. Zimbabwes’ government implemented policy that destroyed its productive capacity in farming and caused massive social unrest. They completely destroyed almost all of their GPEC in a very short amount of time and then attempted to compensate by increasing the money supply. Increasing the money supply can only give GPEC if it is used when the private sector desires it for productive and/or calming reasons or to balance inflation.

Q2 from People: If you can just create money from nowhere then why not just give everyone a million dollars so we can all be rich.

Answer from a CentralBankopian: Please again think about GPEC. Money is irrelevant. This would simply cause mass inflation, probably wouldn’t be implemented properly with some people missing out and causing social unrest and ultimately no one would be better off. I have no interest in everybody being instantly rich , how would I utilise resources if no one could be bothered working.

Q3 from People: If it was that easy why doesn’t every central bank just do this?

Answer from a CentralBankopian: Thank you for not mentioning money. Macro-economics is not very well understood, and highly politicised. Milton Friedman, someone who understood centralbankopia, once said that governments are so incompetent that even “moderately intelligent” behaviour is unlikely. He was correct. Have you seen that clown in the US pretending to be a CentralBankopian ?

So next time you are reviewing a piece of economic policy or are reading an article in the newspaper or on the net, please just have a think about it from a centralbankopians’ perspective. Forget about money and think GPEC. You might be surprised how much sense it makes.


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Comments

  1. Question 1: If money is irrelevant and can be created out of thin air then why is the Australian government borrowing from China and Japan and paying them interest?

    Question 2: What about savers? Should the government actively discourage people to save in the national currency and instead encourage them to buy gold?

  2. Economic Delusion

    Q1: Please see the answer to Q3 from the post.

    Q2: Not really sure what you are asking? Do you have any reason to sugggest they should. Saving is simply a desire to store wealth for a later date.

  3. The Swedes & the Danes might take offence at the suggestion that they aren't sovereign. Like the UK they are in the EU but not the euro.

  4. > Q2: Not really sure what you are asking? Do you have any reason to sugggest they should. Saving is simply a desire to store wealth for a later date.

    Doesn't creating money out of thin air destroy savings? Why would people store wealth in a currency that can be debased and devalued?

    If our house bubble bursts will the RBA try to devalue our dollar? Could the AUD fall to USD50c? Isn't that a massive loss of purchasing power by people who save in AUD?

    I have no problem with governments/central banks devaluing our currency to make us more competitive – but shouldn't they at least give the citizens clear warning so that savers can transfer all their savings to gold?

  5. I am interested in trying to understand the concept of CentralBankopia. I am not an economist, I am an engineer, so the concept seems somewhat abstract. With this model, what is the idea behind the need for taxation, or removing vouchers from people?

  6. Hi!

    Just to note that there are a small section of people, of which I am included, that are against the idea of fiat money and of deficit spending for different reasons than those discussed above.

    As someone who studies economics from a complex systems view, I don't believe that any single person (or group of people) can know even a fraction of what is required to properly implement these policies for the good of markets. Furthermore, those put in charge of the money supply must be given certain mandates, and even if they did have the knowledge, I don't believe they would have the willpower to correctly use is by doing sensible things such as; e.g. tightening monetary policy during a boom. Nobody wants to take away the punch bowl during the party. Ithink this is undeniable given what has happened over the last decade.

    Great blog by the way!

    Cheers,
    Tim

  7. Economic Delusion

    Hi Cyrusp .

    >Doesn't creating money out of thin air destroy savings? Why would people store wealth in a currency that can be debased and devalued?

    Ok, now we understand your question. Your question is similar to the Zimbabwe question in the post. The simple answer is No. Money is created and destroyed all the time. We however understand your concern about currency devaluation caused by government action. Creating money when it is required for growth in GPEC does not devalue the currency, in fact it does the opposite. However creating money when it does not create GPEC does. What you are referring to is a asset shock caused by a collapsing asset bubble. Again think about this in terms of GPEC.

    > If our house bubble bursts will the RBA try to devalue our dollar? Could the AUD fall to USD50c? Isn't that a massive loss of purchasing power by people who save in AUD

    Yes it is , and in this case you may want to purchase gold to try to hold the "value" of your AUD coconut shells. However you will note that if the AUS government was following the culture of CentralBankopia the problem would not exist in the first place. Ine of the points of our post was "to manage systematic risk".

    That means detecting asset bubbles ( or the build up of credit demand towards an unproductive asset ) and killing it off early.

    It also means not creating an environment where people are rewarded for this type of investment. You are obviously aware that the Australian Govt has done neither of these things. Which means they do not understand centralbankopian culture.

    We have talked about this problem before on this blog. See this post for example

    http://delusionaleconomics.blogspot.com/2010/06/real-problem.html

  8. Economic Delusion

    Tim

    >I am interested in trying to understand the concept of CentralBankopia. I am not an economist, I am an engineer, so the concept seems somewhat abstract. With this model, what is the idea behind the need for taxation, or removing vouchers from people?

    Wow, there is so much too say. But basically taxation is how you create resource utilisation. You demand money from people ( in the form of taxes ) which forces them to work. i.e they have to earn vouchers so they can pay some of them back to the centralbankopians.

    CentralBankopia is a concept that is unique to this blog, it is based on MMT ( Modern monetary theory ) but differs a little in some areas.

    However to understand the basics I recommend you start reading the billy blog ( available in the left hand menu ).

    However be warned. Some of the things you read there will probably change your concept of money for ever.

  9. Economic Delusion

    Tim

    Thanks for the post.. As you can tell from this blog, we too are interested in not so "normal" economics. We would be interested to find out more about your "non-FIAT" ideas. If you have any links of interest please post them in an additional comment, or send us an e-mail at the address at the top of the page.

  10. Economic Delusion

    Hi Vestan,

    Well you may have guessed that Centralbankopia is based on MMT. I started talking about it in this way because MMT is difficult to understand if you are not an economist and/or have an interest in economics. I developed these concepts to try to explain MMT in a different way, as if it was a different culture, because I find that most people don’t have even the most basic of understanding of what “money” is or what it is actually used for in a modern economy, but are far more willing to learn about other cultures rather than economic theory. I also find that MMT is so strange to most people that it really does seem like a different culture.

    For instance the concept, “money is simply a tool to control resource utiltisation, but has no value” is nearly an impossible concept to explain in an economic context. But if you explain it in the context of CentralBankopia it makes sense (Hopefully)

    I assume you know something about MMT you will realise it isn't a theory at all. It is simply the documentation of how a modern FIAT currency economy with a floating exchange rate works at a macro level.

    In my opinion it has one small downfall, which isn’t actually a downfall, it is just not the task of MMT to explain, and that is the interaction between illogical humans at a micro level and the logic of the macro economy. CentralBankopia attempts to extend MMT a little by adding social policy and human behavior into the mix, most which works at a micro level. This has some implications on economic thinking.

    For instance, according to MMT a foreign country producing a resource and handing it to you in return for a few of your coconut shells is a good thing, because it frees up internal resources to do other tasks.

    From a pure macro economy view this makes total sense. However many resources are used “strategically” by foreign countries, which has destabilizing effect on the social calm of the local population at a micro level.

    Oil is a good example, according to MMT the best economic outcome is gained by other countries like the UAE doing all the work and sending us oil in return for us changing a few bits in a computer somewhere in return. However because the resource is not controlled internally, its price and/or supply is not guaranteed or controllable. People like stability, so fluctuations in the price of oil, although fixable at a macro level by changes in economic policy, will cause social issues at a micro level. There is therefore a balance required between using foreign sourced resources and developing your own and/or alternatives to ensure you have some control over supply and price.

    This is just one example, but I think is something MMT misses; again not really its job.

    I hope this makes sense.

  11. Thanks Del,

    Yes, it took me (definitely NOT an economist) a few reads through Billy Blog to understand the implications of MMT, but it's amazingly enlightening.

    Interesting to see where you've added to that, and not something I'd considered, but know exactly where you're coming from in terms of MMT, and how that should help shape policy.

    One thing I don't see MMT mention in any depth (from what I've read anyway) is the effect of private debt and its dynamics at the macro level. But again, maybe that's not its job, although it would seem fairly important at this point in time!

    Cheers.