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MMT - Introducing Bartonland, and its modern monetary system; Explaining modern monetary theory, and the difference between gross and net private debt
Topic Started: 7 Sep 2011, 03:17 PM (1,830 Views)
b_b
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This thread is in response to Shadow’s question re net private debt vs Gross private debt. As I wrote it, it also gave a pretty good summary of MMT too. I have introduced some familiar characters to make it interesting. It is very simplistic, but gives a good picture of our monetary system.

First the players

Country: Bartonland (a fictitious Country named in honour of our moderator)
Currency: Barts (although no Barts are in existence day 1)
Private citizens: 2 (Shadow & b_b)
Central banker & Bank regulator: Governor Stindberg
Politician: President Raveswei
Commercial Bank: AK4 (and fellow MMTer).
Foreign Country and trading partner: Earthsta-land
Bartonland’s total Housing Supply: 1 thatched hut, owned by b_b

Story
Shadow approaches b_b to buy his house. b_b demands 100 Barts.

Shadow applies for a loan at AK4 for 100 Barts and offers up 1 thatched hut as security.

AK4 Bank grants Shadow the loan (its first), and simultaneously creates a new loan account and deposit account in the name of Shadow. Both accounts reflect 100 Barts.

Shadow and b_b transact. Shadow now has a 100 Bart mortgage, and b_b has a 100 Bart deposit. Ak4 Bank has 100 Barts of assets and 100 Barts of liabilities and the balance sheet balances.

GROSS DEBT 100, NET PRIVATE DEBT IS ZERO.

Governor Stindberg chastises AK4 Bank because it is not adequately capitalised. Ak4 needs a minimum of 8 Barts of equity to support to 100 Bart Mortgage to Shadow. AK4 announces a public offer for 8 new shares costing 1 Bart each. As the sole deposit owner in Bartland, b_b subscribes for the new capital. Bank assets are 100, deposits 92, and equity 8.

GROSS DEBT 100, NET PRIVATE DEBT IS ZERO.

Governor Stindberg has a second problem. In the absence of any new Barts, if he sets interest rates at any level other than zero, he knows Shadow’s loan account will grow unsustainably and jeopardise the Banking System.

Governor Stindberg announces rates will be set at zero.

Meanwhile, President Raveswei announces a new trading agreement with Earthsta-land. In preparation for this trade, Bartonland needs a new Port.

President Raveswei approaches the citizens of Bartonland (Shadow and b-b) to construct a new port. The citizens agree, but for a cost of 100 Barts (50 Barts each).
Using his legislative authority, President Raveswei issue newly created Barts to b-b and Shadow and a new port is built.

Shadow reduces his mortgage from 100 Barts to 50 Barts. b_b increases his deposit from 92 Barts to 142 Barts (plus 8 Barts of equity in Ak4 Bank).

To absorb the new funding and to keep the banking sector balanced, President Raveswei issues 100 new Bart Bonds.

AK4 Bank now looks like this;
Assets:
Mortgage to Shadow 50
Bartonland Bonds 100
Total Assets 150

Liabilities / Equity
Deposit to b_b 142
Equity 8
TOTAL 150

The economy now looks like this

GROSS PRIVATE DEBT 50 (Shadow's mortgage)
GROSS GOVERNMENT DEBT: 100 (reflecting Bartonlands deficit spending and total bonds on issue)
NET PRIVATE SAVINGS: 100 (deposit 142 + equity8 – mortgage 50)

(Notice net private savings equal Government Debt? This is important)

President Raveswei receives a call from S&P who notes Government spending is out of control, and if the deficit is not addressed, Bartonland will be downgraded. President Raveswei responds “I don give a fuck” since the President knows the Government is a sole monopoly issuer of its own currency, and can therefore never “run out” of Barts.

Life goes on.

President Raveswei employs its citizens (Shadow and b_b) to run the Port at a cost of 10 Barts per year (5 Barts Each). President Raveswei issues 10 Barts of Bonds per year to absorb to newly created money. GDP is now 10 Barts per annum.

Since there is now net Government spending, Governor Stindberg can lift rates to 10% and Shadow can meet his annual mortgage payment of 5 Barts (10% x 50), with his Job at the Port.

After 1 year, Ak4 Bank looks like this;
Assets
Mortgage to Shadow 50 (income lost to interest)
Bonds 120 (up 10 from deficit spending by running of the Port, and 10 for interest)
Total 170

Liabilities
Deposit to BB 161.2 (up 5 for job, up 14.2 from interest)
Equity 8.8 (10% return on equity)
Total 170

GROSS PRIVATE DEBT 50 (mortgage to Shadow)
GROSS GOVERNMENT DEBT: 120 (reflects by Bonds)
NET PRIVATE SAVINGS: 120 (Deposit 161.2 + equity 8.8 – mortgage 50)

Meanwhile, b_b want to buy himself a bike from Earthsta-land. The cost of the Bike is 11.2 Barts.

Ak4 Bank now looks like this;
Assets
Mortgage to Shadow 50
Bonds 120
Total 170

Liabilities
Deposit to BB 150
Deposit to Citizen of Earthsta-Land 11.2
Equity 8.8
Total 170

GROSS PRIVATE DEBT 50
GROSS GOVERNMENT DEBT: 120
NET PRIVATE SAVINGS: 108.8 (150 + 8.8 – 50)
NET FOREIGN DEBT 11.2 (deposit held by the citizens of Earthsta-land)

Now b_b realises its not much fun without a house (especially when it rains). He approaches Shadow to buy is house back.

Shadow has been a property bull for some time (limited supply you know). He asks for 5,000 Barts.

b_b is desperate. He approaches AK4 bank for a loan. Ak4 bank is privately owned and wants to maximise profits. The economy has been running well, so they grant the loan, and two new accounts have been created for b_b. A new deposit account of 5000 Barts and a new mortgage account of 5000 Barts.

After to the sale of the House Ak4 Bank now looks like this.
Assets
Mortgage to Shadow 0
Loan account to b-b 4850 (5000 net of 150 deposit)
Bonds 120
Total 4970

Liabilities
Deposit to b-b 0
Deposit to Shadow 4950 (net of 50 mortgage)
Deposit to Citizen of Earthsta-Land 11.2
Equity 8.8
Total 4970

GROSS PRIVATE DEBT 4850
GROSS GOVERNMENT DEBT: 120
NET PRIVATE SAVINGS: 108.8 (4950 + 8.8 – 4850)
NET FOREIGN DEBT 11.2

After an emergency meeting, Governor Stindberg slashes interest rates to 0. Gross private debt (4850) dwarfs GDP (10). Governor Stindberg also issues notice to AK4 Bank to recapitalise since its mortgage book (4850) to too high relative to its equity.

AK4 Bank announces a public off to raise 380 Barts of new equity to support its new mortgage book.

Shadow (the only citizen with any deposit of note) could easily fund this capital with his newly acquired deposit. But after hearing of Ak4 bank’s troubles decides not to participate.

AK4 Bank turns to Governor Stindberg and President Raveswei for Government support. Although AK4 Bank can be easily saved with newly issued Barts from either the Central Bank or Government, the issue of “moral hazard” prevents them from intervening.

Meanwhile, under enormous pressure from S&P and the citizens of Bartland, President Raveswei decides to reign in the deficit. He fires b_b and Shadow from the Ports.

Ak4 Bank files for bankruptcy and Shadow’s deposit now becomes b_b’s house. Everyone now knows why the Bank was called AK”4” – it has also become clear what happened to the last “3” AK banks.

GROSS PRIVE DEBT 4850
GROSS GOVERNMENT DEBT: 120
NET PRIVATE SAVINGS: 108.8 (4950 + 8.8 – 4850)
NET FOREIGN DEBT 11.2
BARTLAND IN DISSARAY
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Shadow
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Evil Mouzealot Specufestor

Haha, thanks b_b. Kudos for putting that all together. I think I'll have to read it a few more times to get my head around it...

Quick question though... Australian banks source about 30% of their funding from offshore. How does this play into Australia's net vs gross debt position. If net debt isn't important, then is a country whose banking sector sources all its funds offshore in just as strong a position as one that sources all funds domestically?

Posted Image
1 - Debunking Demographia. Demographia Survey Debunked. Australian housing is not particularly unaffordable by global standards.
2 - USA, Ireland, UK, Spain and Japan Property Bubbles versus Australia. All property bubbles had one thing in common...
3 - Banks can't margin call on residential property unless borrower defaults, because residential property loans regulated by NCCP Act 2009.
4 - Housing is second highest taxed sector of Australian Economy. Renters subsidised by high taxes incurred by homeowners.
5 - Epic Fail! Steve Keen's Bad Calls and Predictions.
6 - Australian household formation rate faster than population growth rate since 1960s = ongoing improvement in housing affordability.
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b_b
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Shadow
7 Sep 2011, 03:47 PM
Haha, thanks b_b. Kudos for putting that all together. I think I'll have to read it a few more times to get my head around it...

Quick question though... Australian banks source about 30% of their funding from offshore. How does this play into Australia's net vs gross debt position. If net debt isn't important, then is a country whose banking sector sources all its funds offshore in just as strong a position as one that sources all funds domestically?

Posted Image
Thanks Shadow.

I created Bartonland for a reason and I have been meaning to do it for some time. It is a very simplistic way of introducing private, government and foreign debt. I can now use Bartonland to answer MMT related questions.

To your question, Australian Banks technically do not source their funding from offshore at all. Foreign funding of Australian banks simply reflects movements in the current account.

To put is another way, if you decide to buy a Japanese car, you would sell AUD and buy Yen, and you would then own the car.

The seller of the Yen (Buyer of the AUD) has to put the AUD somewhere. It ends up in the banking system. The ownership of the deposit has changed. No foreign funding required.

Remember, in Bartonland, b_b bought a bike from earthsa-land. For 11.4. b-b got a bike, and the citizens of earthsta-land acquired part of b_b’s deposit at AK4 Bank.

Now an outsider may suggest AK4 bank had to source “foreign capital” to fund itself. But the reality is the bank was funded before b_b bought the bike, and was funded after b_b bought the bike. Only part of b_b’s deposit changed hands.

So long as earthstar-lands deposit at Ak4 is recorded in Barts, the financial system of Bartonland is safe and secure since AK4 deposits can always be backed by the Government – which is the sole monopoly issuer of Barts.

When you have time, re-read my original post. It will click.
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Alex Barton
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b_b
7 Sep 2011, 03:17 PM
Country: Bartonland (a fictitious Country named in honour of our moderator)
Currency: Barts (although no Barts are in existence day 1)
Private citizens: 2 (Shadow & b_b)
Central banker & Bank regulator: Governor Stindberg
Politician: President Raveswei
Commercial Bank: AK4 (and fellow MMTer).
Foreign Country and trading partner: Earthsta-land
Bartonland’s total Housing Supply: 1 thatched hut, owned by b_b
I like the sound of "Bartonland" but won't try to understand it all (I wouldn't get far). Carry on. :)
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peter fraser
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b_b
7 Sep 2011, 03:17 PM
This thread is in response to Shadow’s question re net private debt vs Gross private debt. As I wrote it, it also gave a pretty good summary of MMT too. I have introduced some familiar characters to make it interesting. It is very simplistic, but gives a good picture of our monetary system.

First the players

Country: Bartonland (a fictitious Country named in honour of our moderator)
Currency: Barts (although no Barts are in existence day 1)
Private citizens: 2 (Shadow & b_b)
Central banker & Bank regulator: Governor Stindberg
Politician: President Raveswei
Commercial Bank: AK4 (and fellow MMTer).
Foreign Country and trading partner: Earthsta-land
Bartonland’s total Housing Supply: 1 thatched hut, owned by b_b

.

Well done - like shadow I will also have to read it a few times, but it's great to see someone having a go at trying to explain what is a mystical maze for most of us.

PS when does Strindberg get his bankers bonuses?

Edited by peter fraser, 7 Sep 2011, 05:27 PM.

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newjez
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I like this lots - I'll have to read it a few times though - have you thought about turning it into an online game? Sort of like a financial Farmville (I've never played Farmville).

One question - who buys the govt bonds?
My nan ran into an old friend at the doctor's the other day. 'How's your husband Fred doing?' My nan asked. 'Sadly he's been taken by the big C', her friend confided. My nan sighed and said with sympathy, 'he always was a rubbish swimmer'.

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b_b
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newjez
7 Sep 2011, 06:44 PM
I like this lots - I'll have to read it a few times though - have you thought about turning it into an online game? Sort of like a financial Farmville (I've never played Farmville).

One question - who buys the govt bonds?
Thanks.

In this instance, AK4 Bank.

b_b could have bought the bonds - it would have reduced b_b's deposit balance say by 100 Barts, and the issue of bonds acquired by the bank would have been 100 Barts less.

Ak4 Bank would still have a balance sheet that balances.
Edited by b_b, 7 Sep 2011, 07:12 PM.
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b_b
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peter fraser
7 Sep 2011, 05:24 PM
Well done - like shadow I will also have to read it a few times, but it's great to see someone having a go at trying to explain what is a mystical maze for most of us.

PS when does Strindberg get his bankers bonuses?
Thanks Peter.

In hindsight, I should have named the foreign trading country "Fraser". That way it would have been "Fraser Island".

Never mind.
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raveswei
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I was planing to read but that I saw that I'm President so I don't have - somebody should read and advise me.

I like this the most:

Quote:
 
President Raveswei decides to reign in the deficit. He fires b_b and Shadow


anyway thanks b_b (I'll read it when my term expires)
http://popping-bubble.blogspot.com/

Thinking of an Australian property speculator (PI):
Inaction = missing opportunities.
Missing opportunities = losing.
Too much thinking = inaction.
Thinking = missing opportunities.
Therefore thinking = losing.

disgraceful little man Frank Castle owes a house to Salvation Army

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Trojan
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Thanks b_b for taking the time to write that example.
Edited by Trojan, 7 Sep 2011, 08:36 PM.
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