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"There's a difference between macroeconomic forms of aggregation and treating a sector (banking for example) as if it were a simple monopoly, which is what you want to do. It's not a monopoly, so it doesn't make sense to describe it as one."

I'm NOT treating it like a monopoly! Even in a system with no reserve requirements, and JUST considering the banks' (in aggregate) role for clearing payments in the NON-BANK private sector... as the efficiency of this operation approaches unity, the role of CB funds diminished to zero. Not the role of the CB funds RATE! But the actual overnight holdings of CB funds by the banks... they'll still be banks that are net creditors to other banks of CB funds, and others that are net debtors... and that net borrowing and lending of CB funds will happen at the rate the CB targets, but the overnight non-cash bank-held liabilities on the CB's balance sheet can diminish almost to zero. Since you seem to like Fullwiler, let's see what he had to say on this:

"Consider, for instance Canada, which has no reserve requirements and where the central bank is so good at forecasting banks’ demand for reserve balances (due to how the interbank market functions there) that banks actually desire to hold no reserve balances overnight—reserve balances only exist on an intraday basis."

Are we there yet? NO! Is it a useful exercise to consider what happens as efficiencies in payment clearing increase? I think so. Fold in transactions with Tsy and this is no longer true (as I've stated previously) ... now the CB must have non-cash liabilities on it's BS. Is it necessary that the CB play along in all this... providing overdrafts during the day and targeting a CB funds rate? ABSOLUTELY! ... this all falls apart if that's not the case.

Rather than get caught up in all the details of net lenders and net creditors within the banking system, what's wrong with considering a banking system in aggregate that simply borrows from the CB at the CB funds rate when it has to, and leave it at that? I'm bringing into the discussion no monopolistic qualities.

"Your example with one monopoly bank which people are *forced* to used and *forbidden* from withdrawing their money from, has absolutely no similarities to the system as it exists in reality."

Are you proposing that most cash comes directly to the non-bank private sector without originating from a deposit? My point is that it's appropriate, for the most part, to view cash as originating from bank deposits and returning to them. Very little cash gets directly moved between the Fed or Tsy and the non-bank private sector. Since mostly cash originates from bank deposits, and is traded back and forth by the public for bank deposits, I think it's a useful exercise to eliminate this detail in some thought experiments. Yes, that affects the liabilities on the CB's balance sheet and the make up (not quantity) of liabilities on the banks' aggregated balance sheet.

Adding the cash back in makes little difference. Where does the public (in aggregate) get the cash? They withdraw it from their deposits. Where does all the public's cash go? Much of it goes right back to banks in exchange for deposits. Much of it doesn't... and it continues to circulate.

Thinking of a single efficient bank providing that service isn't outlandish. As I wrote to Nick above, considered in aggregate, the banks buy almost everything they want (including their main business: buying loans ...and including buying cash), from the private non-bank sector by crediting bank deposits. But do they really WANT the cash? In one respect no... for one it doesn't bear interest, and for another it's inconvenient and it causes other problems (having to have vaults, armored trucks, etc), ... HOWEVER from another perspective they do want to buy it because they can trade the extra back to the CB. When not at the ZLB this is a benefit because it allows them to replace more expensive CB funds borrowings (from other banks or the CB) with cheaper bank deposits. When at the ZLB they've been getting IOR. Thinking in an aggregate sense like this is fine when considering the macro flow of funds. There's no reason to bring the movement of reserves between banks into the picture here. Saying that banks in aggregate borrow at the CB funds rate is fine. I'm not bringing any monopolistic qualities into play here.

Likewise, in aggregate, banks sell almost everything they want by debiting bank deposits. Again, they don't really "want" to have to sell the cash, since that means replacing cheap deposits with more expensive CB funds borrowings, but they do it as a convenience for their customers. From a business perspective could you have a bank that didn't offer cash for sale? I think so, though Perhaps not from a LEGAL perspective.

Am I the only lunatic to want to aggregate the banks for these reasons? I hardly think so! Am I the only crazy that want's to consider a cashless society? Again, the answer is no:



And again, Fullwiler:

"What if the Canadian public decided also to stop using currency? (There was in fact a good deal of research on this possibility related to the so-called e-money revolution back in the late 1990s and early 2000s.) This would mean the monetary base was zero. Would this stop banks from lending? No. Now, add reserve requirements to this—which we’ve already shown above do not constrain banks—and a desire to hold currency by the public—which we’ve explained is met on demand by the central bank. Nothing’s changed. The size of the monetary base is a result or an outcome, not a cause."

"if they are targeting inflation, it is [endogenous]"

No it's not. The fact that the CB moves the interest rate up and down to try and control inflation doesn't mean that the interest rate is endogenous. The central bankers sit down and decide where to set the base rate. They choose where to set it. As such it is not endogenous.

It's a circular argument to say the rate is "endogenous" because "the rate changes as a function of what's required to keep inflation on target". You're starting with the assumption that rate changes are the right way to control inflation, and then reaching the conclusion that therefore rates have to change in a particular way to control inflation.

The fact that people often argue the base rate is "too low" or "too high" shows in itself that the base rate is a *policy choice*!

"the role of CB funds diminished to zero. Not the role of the CB funds RATE!"

That doesn't make sense. How can the CB funds rate be important but CB funds not important?

You seem to have this idea that the absolute quantity of a thing determines the relative importance of that thing. So in your view because banks usually don't hold many reserves but they have lots of deposits that makes deposits more "important".

"in Canada..reserve balances only exist on an intraday basis"

So what? Think back to a gold standard system again, as an example to help clarify things. If banks borrowed gold from the central bank intraday and didn't hold gold in their vaults overnight, swapping them instead for government bonds with the central bank, would that reduce the role of gold to zero? Of course not.

In systems like that in Canada, banks constantly borrow and buy reserves from the central bank. Reserves are money. They are what is used to settle payments. Money has to be borrowed or bought. Why is this complicated?

"My point is that it's appropriate, for the most part, to view cash as originating from bank deposits and returning to them."

Cash doesn't "originate from bank deposits". Physical cash originates from the government. Banks have to purchase it from the central bank in exchange for assets.

A bank deposit is a bank DEBT. If you have a "bank deposit" that means the bank owes you money. If everyone withdrew their money from a bank at the same time the bank would soon go bust! This is called a "bank run". Look it up.

"Where does the public (in aggregate) get the cash? They withdraw it from their deposits"

No they don't. They withdraw it from their bank *accounts*. Or they cash checks. You can deposit cash at a bank, and withdraw cash from a bank. You can't "withdraw cash from your deposit".

"Thinking of a single efficient bank providing that service isn't outlandish... I'm not bringing any monopolistic qualities into play here"

Complete self-contradiction. If there's only one bank that's a monopoly.

"There's no reason to bring the movement of reserves between banks into the picture here."

That's like saying "there's no reason to bring in money into the picture here". Reserves are money. They are what banks use to pay each other. Even in a system like that in Canada where banks don't hold reserve balances overnight, they still pay each other with reserves, reserves still move between bank reserve accounts. They are what banks use to pay each other.

"Am I the only lunatic to want to aggregate the banks for these reasons?"

You're not "aggregating" the banking sector in a reasonable way. You're trying to pretend it's a monopoly which people can't withdraw their money from. You don't seem to realize this is what you are doing.

"a cashless society?"

Cash as a physical thing is not the most important point here. The important point is that people can withdraw their money from banks in some way if they want to. They are not forced to hold a bank's liabilities as money. In your imaginary scenario the population as a whole is FORCED to use your monopoly bank's liabilities as money. They have no choice. That is nothing like a market economy. That's a fascistic monopoly system.

"The size of the monetary base is a result or an outcome, not a cause."

He means the size of the monetary base doesn't determine the amount of bank lending or the amount of cash held by the public. That is correct, the central bank sets the price, or cost, of reserves and the quantity demanded at that price fluctuates.

"An excess demand for the medium of exchange prevents people making the mutually advantageous exchanges that would be possible if barter were easy so we did not need monetary exchange. That's what we call a "recession"."

I would describe a recession as: real return on money is two high -> prices want to fall -> wage rigidity causes unemployment -> fewer goods & services are purchased/produced

Without the rigidity part, there is no recession, there's just falling prices.

Rigidity has to do with the "unit of account" part of money, not the "medium of exchange" part.

Therefore, in my view, the medium of exchange is not macroeconomically special and neither are banks.

The unit of account is special, specifically how the real return on assets denominated in the unit of account (nominal assets) compares to the natural real rate of return. And that's set by the central bank and the central bank alone.


"if they are targeting inflation, it is [endogenous]"

That was I direct quote from Rowe:

http://brown-blog-5.blogspot.com/p/links-to-remember.html (1st comment)

One I asked Sumner if he agreed with, and he did:


At first I didn't understand that, but I agree w/ both of them on this now.


If a central banker decides what the interest rate should be and sets it there, then it isn't endogenous. T

he fact that the central banker may believe that he has set the interest rate in the right way because of some economic theory does not mean that it is endogenous.

Rowe and Sumner conflate believing in a certain theory and setting rates in accordance with your beliefs with 'endogeneity'.

Again, it's a useful model. You can replace the CB board with a Taylor rule for analysis and voila! It's endogenous (and easy to analyze as such). And just because in real life people's brains happen to be in the feedback control loop (BTW, that's why it's "circular" ... the loop is closed), doesn't mean that it's not in fact a feedback control loop. If more than inflation is targeted then the loop is more complex, that's all. If peoples' decisions aren't optimal for what they're trying to accomplish... it's just a sub-optimal controller. It doesn't change the endogeneity of it. It's like a pilot landing a plane... he performs exactly the same role the autopilot does when he flies it manually. After all, brains are just machines too! I like Nick's take on "endogeneity" or "exogeneity" wrt something else. In this regard, you can think of the inflation targeting system as a box... the inflation target you put in is an exogenous input variable... and the actual targeting, whether done by human brains, machines, or by looking at the Taylor rule is all part of the endogenous solution. Nick explains it all here:


Is that overly simplified? Well, maybe, ... it depends on what you want to do with the model.. but again, it can be a useful model. I think most models of the economy involving "endogenous" variables are relying on simplified assumptions about human brains making decisions. Can you think of an exception? Why do you think this case is different? For example, I could state that with CB funds rate targeting, that the quantity of base money is endogenous. Someone might complain, and say "not it's NOT... those are people deciding how much base money they want to hold!"... I'd say, "so what?... they're part of they system. They're reacting to inputs (just like our central banker) and producing outputs (just like our central banker) with some goals in mind (just like our central banker). There's nothing special about those human brains."

... and BTW, you've called my perfectly legitimate thought experiment "fascist" twice now! I think I can invoke Godwin's Law or call Reductio ad Hitlerum on you!

And BTW, Sumner considers "cashless" just recently (see Case 7):


Thus he joins the long line of us who are apparently stuck on analyzing fascism (not giving people "choices" about holding their money as bank deposits): Beckworth, Rowe, Sumner, and yours truly.

I wonder if Canada and Sweden realized they were toying with fascism by considering such a move?

Or is it primarily the aggregated banks that's bothering you? Kind of like this nifty fascism analyzer?


... and why all this business about "deposits" vs "accounts?" Really?


Apparently you can withdraw from your "deposit account."

If there's no legal way for the population to withdraw its money from the banking system then the population is being forced by law to use the banking system. No one has an option to opt out because everyone needs to use money. There is no choice involved. You are no longer a voluntary customer of a bank, you are being forced by the government to be a customer of a bank. That's fascistic. They might as well make it law that everyone has to make a compulsory daily donation to JP Morgan.

"You can replace the CB board with a Taylor rule for analysis and voila! It's endogenous"

A Taylor rule isn't endogenous. It's a method devised by central bankers to respond to data. The fact that it's supposed to be automatic doesn't make it endogenous. The central bank still sets the interest rate exogenously, it just does so in accordance with a rule it made up for how to respond to data. Some economists believe that this is the best rule for a central bank to follow, others don't. The decision to adopt the rule is an exogenous choice, determined by many factors including politics and the dominance of particular ideologies within the field of economics.

The simple point to keep in mind is that even under a Taylor rule system the interest rate only changes when the central bank changes it. It doesn't change otherwise. It doesn't change automatically without a central banker actually changing it. It is changed exogenously by a central banker, not by anyone else.

Some crazy government could decide that the best way to regulate inflation is to shoot 10 people in the street every time CPI inflation goes up by one percentage point. They could build terminator robots to do the job automatically, their electronic brains directly linked to live-feed CPI data. Would that make the shooting of people in the street by robots 'endogenous'? No.

"Or is it primarily the aggregated banks that's bothering you?"

You can aggregate banks into one sector without pretending that they're one bank. A banking sector made up of lots of different banks is completely different to a single monopoly bank. You keep trying to argue that the banking sector is basically like a single monopoly bank because banks don't normally hold many reserves or some such bizarre argument.


"Is it a useful exercise to consider what happens as efficiencies in payment clearing increase?"

This is the crux of your error. The fact that in countries like Canada banks hold practically no reserve balances overnight and the payment system is very 'efficient' does not in any way mean that the commercial banking system is just like a single bank. It's a complete non-sequitur to say the latter follows from the former.

And the argument that the "role of CB funds diminished to zero" but "not the role of the CB funds RATE!" simply doesn't make sense.

You've appealed to "fascism" three times now! Still Gotta go with Nick and Scott on this one. Read Nick's article! I think it makes endogenous vs exogenous very clear. They are RELATIVE terms. Pay attention to his weather example.

"And the argument that the "role of CB funds diminished to zero" but "not the role of the CB funds RATE!" simply doesn't make sense."

OK, then how about the stock of CB funds diminishes to zero as payment clearing becomes more efficient, but the CB funds rate is still important (i.e. at the end of the day it can be determined that Bank A owes Bank B X many reserves, without the CB ever creating a single reserve liability)

However, stocks of CB funds remain non-zero for exchanges involving at least one counter party consisting of the CB or gov or other entity external to the private sector.

In terms of stocks of CB funds needed and the net aggregate debt/credit denominated in CB funds and held by the banks, the aggregate banks thus look, in the limit, as if they were a single bank.

"You've appealed to "fascism"

I haven't appealed to it, I have described a system in which people are *forced* by law to use bank liabilities as money as fascistic. Forced. That means not a voluntary customer. That means private companies using the power of the state to force the population to hand over their money against their will with no possibility to opt out. Don't you find that a bit of a disturbing scenario? It's not exactly free market is it?

Philippe, why do you think that Sumner, Rowe, Beckworth, and others have in the past, and continue to occasionally bring up a cashless society as a thought experiment and why Canada and Sweden actually considered implementing such a system? Do you think the former (economists doing thought experiments) are interested in analyzing fascism? Do you think the latter were interested in implementing fascism? I won't speak for the latter, but I'll take a stab at the former: No! Considering a cashless system is simply a useful tool to analyze the economy!

... ah, I forgot Fullwiler on that list of cashless thought experimenters!

I generally go with Tom on this one. Gotta say though, the cashless society does scare me a bit, because it would lend itself to excessive government control. Like Margaret Atwood's Handmaid's Tale, where they take away the women's credit and debit cards. But it's OK as a thought-experiment. Cool it a bit guys.

Hey Nick... Philippe and I have had many a debate. We don't let it get out of control too much. What's the problem, are you getting hits from people interested in fascism now? Hahaha

O/T again, but did you ever finish thinking about Sumner's "MOE vs MOA" post? I just checked... but I didn't see more from you. Did he change your mind?

Nick, also, what is your reply to DOB above?

A society in which cash is hardly used is not the same as a society in which money can not be withdrawn from the commercial banking system. Today you have the option to take your money out of commercial banks if you want to. You aren't forced by government to use commercial bank liabilities as money. In your scenario you would be forced. That's not a market, it's just government coercion for private profit (and government control as Nick points out). If the option remains to withdraw money from the banking system then a "cashless" society is ok. It's the idea of being forbidden - by the government - from withdrawing your money from the banking system which I find disturbing.

"Still Gotta go with Nick and Scott on this one"

Ok, so do you think that in my crazy example the number of people shot by programmed terminator robots is "endogenously determined"?

"without the CB ever creating a single reserve liability"

That's not how it works. Research how zero-official-reserve-requirement systems actually work.

"the aggregate banks thus look, in the limit, as if they were a single bank."

But they're not a single bank so there's no reason to pretend that they are, even if you think for some reason that they "look like that".

It's like saying "airplanes look a lot like insects in the sky from a long distance away, so rather than explain what airplanes are or how they work, it makes more sense to assume that airplanes are basically just like insects in every way!"

You argument seems to be that because it "looks like" banks don't use reserves much, reserves must be kinda unimportant so why don't we just pretend they don't really exist or are just some sort of silly thing going on in the background which we can ignore. Instead of explaining how the banking system works, why don't we just pretend it works in some other way, because it kind of "looks like" that.

If central bank reserves can be ignored, why is it that the central bank rate has any importance whatsoever? Why do you think the central bank rate is important?

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