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Lars P. Syll — The money ‘trick’

Summary:
"Modern money" is state money. Abba Lerner explains the "trick" by which a state creates its money.Imposing taxes and accepting its own liabilities in payment creates demand for the currency. In this sense, state money is "monopoly money" in the truest sense, since modern have a monopoly on the issuance of currency, regardless of whether or how they choose to exercise it. Monopolists are prices setters rather than price takers. Hence, the value of the currency is established based on what the state is willing to pay in markets to move private resources to public use.  Or the state can choose to fix the price for it to exchange a real resource for its currency, such as fixing the conversion rate for gold under a gold standard. A state can also choose to peg the value of its currency

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"Modern money" is state money. Abba Lerner explains the "trick" by which a state creates its money.

Imposing taxes and accepting its own liabilities in payment creates demand for the currency. In this sense, state money is "monopoly money" in the truest sense, since modern have a monopoly on the issuance of currency, regardless of whether or how they choose to exercise it.


Monopolists are prices setters rather than price takers. Hence, the value of the currency is established based on what the state is willing to pay in markets to move private resources to public use. 

Or the state can choose to fix the price for it to exchange a real resource for its currency, such as fixing the conversion rate for gold under a gold standard. A state can also choose to peg the value of its currency to another currency. If the state fixes the price, then it loses currency sovereignty, since it must obtain the good to meet demand for conversion.

A state is a currency sovereign if and only if it lets its currency float and doesn't create obligations that are out of its control, such as borrowing in a currency that it does not issue and must obtain to meet its obligations. Then the state becomes a currency user of that currency.

Presently, the one price that most  modern states that are currency sovereigns is the own rate of the currency (along with the discount rate) that is set by the central bank. MMT proposes setting the own rate to zero and providing liquidity as necessary for the payments system to clear. This obviates the ned for a discount rate. 

MMT proposes anchoring the price of the currency to the value of a unit of unskilled labor  (MMT JG). The price anchor sets the MMT JG proposal apart from other job guarantee proposals that do not anchor the currency, which risks inflation if the wage is indexed, for example.

Lars P. Syll’s Blog
The money ‘trick’
Lars P. Syll | Professor, Malmo University
Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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