This was great. As someone who is trying to figure stuff out himself, what would be a list of optimal readings with the optimal sequence of reading that you would recommend?
During the post-covid years, I became more familiar with the balance sheet capacity concept and the MMT framework, but the way you described your synthesis here was really useful for me. Thank you for that.
Someday I would love to hear how do you use this framework to take trades, but of course, this is a topic for another day.
Anyhow, I have two questions if I may:
1) In the last part of the "Mechanics" paragraph, you wrote this: "Similarly for banks, who are forced out of duration assets into cash reserves which will not alter their lending intentions one bit. Money multiplier theory gone."
This means that if the market demands more loans, banks will create them, whether the Treasury supplies coupons or not. It will only create a system more dependent on riskier non-government bonds (similar to the period 00'-08').
On the other hand though, if the market "wants" more loans, and the Treasury does not supply the market with bonds as good collateral, aren't banks more constrained in their activity if they are not "capital strength" enough?
2) the other question is related to unlimited fiat system power.
In your "Futher Thoughts" paragraph, you said that: " I would argue disinflationary forces should diminish as the engrained trust in the political and constitutional system vanishes and gets damaged over time. The order of past events shows this clearly, as our esteemed fiscal leaders have discovered that fiat money empowers them pretty much limitlessly over their corresponding economies.".
But, how can another system emerge if the system is endowed with this level of "limitless power"?
Isn't it more probable to expect that institutions will do anything possible to save "our" system and give people the level of confidence that people need (via some efforts to rebalance the perceived capital/labor structure in our societies)?
Of course, it will not be smoothed and without pain.
But what can be the alternative?
I hope I'm giving some thoughts worth pondering, but I don't know.
What is clear to me is that you provide high-level content to the financial side of Twitter and Substack as well.
banks decisions on lending is in principle not constrained by money but by capital. They could in theory write unlimited loans were there no required capital to support it. The central bank would always have to supply reserves as they would otherwise move away from their interest rate targeting regime.
Yes, very good question and I, of course, have no idea how the system ends. Trust of course is at the centre of it and yes the rulers of the system will do anything possible to make it last. Any monetary system however, had to ultimately be replaced. There are many avenues this can take. My opinion is that its in decline.
How to construct a investable framework will be the centre stage of furthering this concept. So stay tuned!
Have you read this: https://famguardian.org/Publications/SilentWeaponsQuietWars/SilentWeaponsQuietWars.htm#anchor240582
Not sure if it's credible but sure is interesting. It kind of goes over my head because I still can't fully comprehend how the 'system' works.
You might appreciate it more, especially the economics as energy model.
There's also a bit of foreshadowing of blockchain
thank you ! Will check it out
This was great. As someone who is trying to figure stuff out himself, what would be a list of optimal readings with the optimal sequence of reading that you would recommend?
i will put a list together ...
WOw this was great Paper Alf.
During the post-covid years, I became more familiar with the balance sheet capacity concept and the MMT framework, but the way you described your synthesis here was really useful for me. Thank you for that.
Someday I would love to hear how do you use this framework to take trades, but of course, this is a topic for another day.
Anyhow, I have two questions if I may:
1) In the last part of the "Mechanics" paragraph, you wrote this: "Similarly for banks, who are forced out of duration assets into cash reserves which will not alter their lending intentions one bit. Money multiplier theory gone."
This means that if the market demands more loans, banks will create them, whether the Treasury supplies coupons or not. It will only create a system more dependent on riskier non-government bonds (similar to the period 00'-08').
On the other hand though, if the market "wants" more loans, and the Treasury does not supply the market with bonds as good collateral, aren't banks more constrained in their activity if they are not "capital strength" enough?
2) the other question is related to unlimited fiat system power.
In your "Futher Thoughts" paragraph, you said that: " I would argue disinflationary forces should diminish as the engrained trust in the political and constitutional system vanishes and gets damaged over time. The order of past events shows this clearly, as our esteemed fiscal leaders have discovered that fiat money empowers them pretty much limitlessly over their corresponding economies.".
But, how can another system emerge if the system is endowed with this level of "limitless power"?
Isn't it more probable to expect that institutions will do anything possible to save "our" system and give people the level of confidence that people need (via some efforts to rebalance the perceived capital/labor structure in our societies)?
Of course, it will not be smoothed and without pain.
But what can be the alternative?
I hope I'm giving some thoughts worth pondering, but I don't know.
What is clear to me is that you provide high-level content to the financial side of Twitter and Substack as well.
Thanks again Paper Alfa!
banks decisions on lending is in principle not constrained by money but by capital. They could in theory write unlimited loans were there no required capital to support it. The central bank would always have to supply reserves as they would otherwise move away from their interest rate targeting regime.
Yes, very good question and I, of course, have no idea how the system ends. Trust of course is at the centre of it and yes the rulers of the system will do anything possible to make it last. Any monetary system however, had to ultimately be replaced. There are many avenues this can take. My opinion is that its in decline.
How to construct a investable framework will be the centre stage of furthering this concept. So stay tuned!