Reader Ellen in a comment writes: "I'm interested in MMT's definition of "money" primarily because I want to be able to identify, among other things, 1) the "money" supply at some time (t0) and 2) the change in the "money" supply from/to another time (t-1, t+1)."
I'm not an intellectual leader of MMT, though I would claim to be influenced by it. Hopefully, Scott Fulwiller would chime into the discussion at some point, and enlighten us with the real deal. Quick definitions here and here. As for my own interpretation, I view Money as a token that can equate to the value of a good or service you provide, that you can then use to purchase something else of equal value. I buy into the idea that its value as a token is greatly assisted by government fiat. If it's privately-issued, it can easily lose its acceptability as a token of value. So why does government issue money?
1. To pay for private services bought by the government - fiscal policy
2. To support private transactions that need the money/currency/reserves to facilitate trade - via Fed discount rate, and/or via explicitly backing the banking system's electronic creation of fiat money.
When the government injects money into the private economy via spending, or by printing money to support banking activities, it enables the private sector to function, to grow, and to create new income via productive ventures. So a better way to state one of my sentences in my previous post was probably: G creates the Y that enables both domestic and foreign investors of Treasuries, for whatever reason they are issued and sold. If you have no deficit spending, there's no new currency to go around, nothing to save, no money to use to spend, no money to buy Treasuries with.
This is a complete mirror image of the mainstream view of how money is created, which is that the private sector creates it via its private market activities, while government only taxes it later on to fund its own spending. While this view is easier to digest, and more intuitive, this view does bring up some thorny questions that could only be answered by looking at money creation backwards. After all, why is the belief that money should be existing first before government can borrow it more believable than the view that government has to issue money first by spending before people have the money to lend to government?
Some questions I could think of that pokes holes in the mainstream view are: Did a certain group of people at some point in history suddenly decide amongst themselves to create money first, and only years (decades?) later did government decide that all this one creation could be a lucrative way to fund its own consumption? So how did those first group of pioneering people decide to start using money instead of barter? How did this custom reach a network effect, such that everyone else opted into the monetary system and fully abandoned bartering?
And how did all these disparate market actors all agree (at a network effect level) to stop creating money via private spending? How did they all know (as a people) that they had created a sufficiently large pool for everyone that from then on, money could only be created by 'fractional reserve lending'? How did this massive private market coordination come about? By what mechanism, or event, was everyone made to stop creating new money altogether? And why would everyone agree to stop, when private money creation by citizen merchants (if it ever happened at any time at all) facilitated more spending (by these same creators) without having to earn it first? How was everyone suddenly forced to only spend more via the more painful method of borrowing?
These holes in logic makes it easier to just believe that a tribal chieftain, monarch, council of senate leaders, or early government body was the one who first created money by fiat, and everybody else had to follow. This process started with government using fit to pay for money that at the very start, no one had to begin with. After all, government paying you the income you never would have otherwise is like me renting you my lawnmower so that you can mow my lawn and every other house on the street for money. You never had money to pay this rent in the first place, so by yourself, you'll never ever find a way to make any money. But if someone lends you the mower in exchange for service, you get the money to pay for it as well as earn income for yourself. Same principle happens with government spending. The act of the government using private capacity, and paying for it with fiat money, can create the income that the private sector can use to buy government's borrowing that fund the spending.
So we can then conclude that money used to finance all those government borrowings came from income created by government spending. This private income creation, leading to aggregate money creation, is what enabled government rachet up its debt level to that amount and still people could not have enough of it. How else would you explain government borrowing rising to the current level it has, $15 Trillion and counting? Where did all that money come from, if not from itself? Can all of it really be private bank created? if so, then private people are in the hook to pay it all back to some private banks? How did private bankers ever have the balls to lend private people, who cannot after all manufacture money but have to earn it to pay the loan back, then only to see those trillions of money just end up being used to finance government borrowing?
In a world where government cannot create fiat money, all money has to be borrowed into existence. And we know that a loan is riskier, and eventually gets unprinted when it's paid back. Also, since it has to be paid back, it needs a creditworthy borrower that will have the income to pay it back. Government spending, meanwhile, never has to be paid back if it was paid for services rendered. If all government spending is just facilitated by borrowing from the private sector, then deficit spending does not solve the problem of balance sheet recession, as you would be merely exchanging one indebtedness with another. Such is not what I am espousing here, otherwise I would be joining the chorus of people shouting that deficit spending is not sustainable.
And while I agree that deficit spending doesn't change aggregate level of reserves when it is funded by an equal amount of government borrowing, I stress that if it is done by crediting new reserves to recipients in excess of borrowing, then it does increase reserves. (And if a greater amount is taxed than the excess credited, then it decreases reserves).
If our world were a world where every currency/money has to be borrowed into existence, then it would be a ticking time bomb one day bound to collapse, when the last person who borrows money decides not to pay the second last person to borrow, and so on. Everything in our world will come crashing down when that day comes, and all it takes is a few unscrupulous people to untangle that ponzi scheme.
How will it ever get back to work, if such were the case? if no one single person can start the money creation process again without having to borrow first, then it's game over. Because the law forbids any private person or entity from spending money he doesn't already have, he cannot spend first before borrowing it later when he has the money to pay it back. And even if some people do have all the money now, and are hoarding it for fear of not getting it back (because everybody else wants to hoard money), and if people are too afraid to borrow again, then money in our world will cease to exist (in the sense that it will stop being used to facilitate trading in the economy). It's not so much that I believe in a valueless dollar, but if nobody is spending, and nobody is earning, all the money in the world will not do anything for anyone.
46 comments:
The Modern Money Primer at New Economic Perspectives lays it out based on the concept of the "money of account". MMP articles #'s 6 to 15 gradually expand the nature and purpose of the sovereign currency as money of account.
http://neweconomicperspectives.blogspot.com/p/modern-money-primer.html
Yup, I also referred Ellen to NEP, particularly blog 11.
How do you extend this alternative formulation of money to governments that run persistent budget surpluses?
Jason, I see Billy blog today links to old posts 1, 2, 3 that might address your question.
Here are old posts, 1, 2, 3 from this site that might also address your question.
I disagree.
The U.S. government gives the USD value by backing it (accepting it for taxes; making it legal tender; preventing domestic and foreign bank bankruptcies via CB lender-of-last-resort; insuring deposits) but in the United States of America the USD is issued by banks in their capacity as lenders and not by the government.
While it is true that deficit spending can increase the stock of money, it does so by way of a multiplier effect acting in the real economy (that is, a real-world multiplier that has nothing to do with fractional banking -- that silly theory) -- an effect which is completely out of the hands of the government.
The government borrows existing money which is sitting idle in the accounts of firms and households and spends it into the economy. Short of a "helicopter drop" -- as far as I know still illegal in the good old U.S. of A. -- it doesn't create money.
N.B. Asking what gold depositories in Lombardy did in the fifteenth century isn't likely to tell us much about where money comes from today.
In a world where government cannot create fiat money, all money has to be borrowed into existence. Rogue Economist
You may not like the implications, but that's the way it is in the U.S. of A. The only question left to us 'Muricans is what level of leverage we should permit the banks.*
* "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place." Sen. Dick Durbin 4/27/2009
"The government borrows existing money which is sitting idle in the accounts of firms and households and spends it into the economy."
... You need to go back to the original question you posited - what is money? I think your confusion is in thinking that all the various IOU's issued in the private sector are "money". They may be "denominated" the national currency, but they are NOT one and the same with the gov't issued IOU (bank reserves or currency notes). Have a gander at NEP MMP #'s 14 & 15. Very well explained there. I'd take a stab at it, but it would end up being long winded and less effective.
Yes, Marley is right, Ellen. You aren't doing the accounting correctly. A big pitfall is that people make things more complicated than they really are. They don't do the necessary conflations. And they don't make the necessary distinctions, that Marley points out, between various kinds of money, money which is bank credit/debt & base money, which is state credit/debt.
The right way to think of deficit spending is that the government spends first. Prints a dollar bill. It gets into the banks. The banks then buy a bond, that the government prints a little later, with that dollar bill.
Then the government shreds the dollar bill it first printed & then got back from the bank.
Net result = just the same as if the government just printed a bond and used that to spend with, as Kalecki observed. It printed twice & shredded once. The private sector has a nice new bond, new NFA.
A bond is not really different from a dollar bill. Conflate them. That's what anybody would do in real life, but "economists" have managed to educate people into holding beliefs they would think insane if they applied them in real life. However, one should often not conflate bank money & government money. A check from a bank is only as good as a dollar bill for most purposes because the government says so.
To Marley:
When I sign a note and my banker puts $10,000 in my checking account, I assure you Jimmy Choo thinks it's money, and what's more so does his lender when it's time for Jimmy to pay up.
What do you call it?
N.B. I won't mention the fact that my borrowing increased the money supply and my purchase (I wouldn't have borrowed unless I intended to purchase something -- Jimmy Choo shoes in this case) lifted the economy.
A bond is not really different from a dollar bill. Calgacus
Sorry, Calgacus; Jimmy Choo doesn't accept bonds. He says he knows what a USD is worth; he says by the time he sells the bond, who knows what it will be worth not to mention the fee his broker demands he pay.
Investors buy bonds with "money" they have no present intention of spending. And the "money" vanishes out of their hands/accounts.
If we believe that increasing the "money" supply will get people spending, we have to know what it is and whether our policies accomplished our goal -- that is, the increase we wanted.
Saying it's anything that looks like a financial instrument isn't helpful.
Yes, Marley shouldn't have implied that bank money is not money. FDIC backed, commercial bank money is money for almost all intents and purposes. But it is not as moneyish as state money. Only state money can be used for final settlement of debts owed to the state. And the state must be involved in the creation of state money.
Jimmy Choo certainly does accept bonds, because a dollar bill is a kind of bond. Or Minsky, FDR, Lerner, Edison & many others past and present didn't understand what they were talking about when they said this.
Really think someone will prefer a dollar bill over a 100 dollar savings bond in their name, maturing in one day? If Jimmy Choo acts differently, then he has been driven insane by modern mainstream economics. The Fed and banks treat government bonds as money equivalents every minute, no matter what crazy beliefs their mismanagers may hold.
The important "money supply" is the national debt including reserves. All the government financial instruments glommed together.
Finally, Calgacus, your narrative concerning dollar bills, bonds, and government spending is a nice story but has nothing to do with defining "money" or the "money supply."
As you say the cash was issued and then, destroyed -- thus, no change in the money supply.
All you've really said is that the private sector has altered its investments -- lengthening the duration in your example.
Note: The government's purchases will increase economic activity -- that is, it trades a future liability for a current social benefit. But change the money supply? Pshaw!
To Calgacus:
Try paying for your next fill-up with a U.S. Savings Bond -- even one that's matured and who's value is clear to everyone. Good luck!
@Calgacus: I think I was trying to stay in the spirit of money vs money-thing vs money of account. Apologies to both you and Ellen, so let me try again. For the purposes of the discussion vis-a-vis government spending, let us call Gov't issued money, the MOC (money of account), and all other IOU's can be just money.
@Ellen: You've actually answered your own question: "N.B. I won't mention the fact that my borrowing increased the money supply" ... when I deferred against being long winded earlier on, I had been contemplating an example using a huge loan to show how the gov't makes money in order to clear Bank IOU's (money denominated in the national currency, but not a gov't IOU). Forget Jimmy Choo's, you're too good for that! :) How about a new Boeing Dreamliner - a cool $194M ... If you borrowed $194M from a bank to buy it, That bank would need about $19.4M in bank reserves to meet the Fed requirement. Banks reserves are essentially the equivalent of a bank having an account at the Fed. So even if your bank had its $19.4M need satisfied by another bank, it is still MOC that will be transferred from the Fed account of that other bank to the Fed account of your bank.
This argument can tend to break down to a chicken-and-egg one. Well which one came first, the gov't money (MOC) or private money (non gov't IOU). Since we are talking about the govt's MOC, it has to come from the Gov't first. Neither Jimmy Choo, nor your bank has their own MOC. They issue IOU's denominated in the govt's unit or currency and ultimately end up being covertible to the gov't IOU. They are competely worthless without this convertibility.
This discourse has made me realize how my view of money has changed since I joined the NEP blog. I really do see the world as a bunch or private IOU's (bank checks, stocks) at the base of that pyramid at the top of which sits the govt's MOC.
. . . commercial bank money . . . is not as moneyish as state money. Calgacus
As I said in another thread, my banker loaned me $10,000 to pay my back taxes. Strangely, the IRS thought it was sufficiently "moneyish" to close out my case. And the IRS didn't ask where I got it.
By the way -- what is "commercial bank money"? Do they have a picture of Martha Washington on the $1 bill?
Ellen, try using US coins from 1815 or pennies to pay a gas station. Does that make them "not money"? That's what banks are for, money-changing of different sorts of money. (And monetizing private debt = lending, which one can think of as money-changing.) The point is that in the retrogression of economic knowledge in the last 40 years, people have acquired bizarre economics-church beliefs that they do not follow in real life, which is described by MMT, no matter how they think they are behaving.
Of course interest bearing bonds & dollar bills are different. But their difference is more like the difference between dollar bills and pennies than the difference between a dollar bill & a bank check or a loan note.
I'm afraid I don't understand why you've decided to get into reserve accounting. No MMTer thinks reserves are money -- however he or she defines "money".
Where are you going with it?
Yes, quite right about the IRS. That bank money (see below) is accepted by the state for tax payments is the essential thing that makes "bank money" money.
But what happened behind the scenes? Your payment was not a final settlement of the tax debt. The bank removed $10,000 from your account. (You still have a debt to the bank :-( ) . AND - $10,000 is removed from the bank's reserve account. You paid the bank in bank money. The bank paid the IRS in reserve account money, state money, which is the only thing that is accepted in final settlements by the state.
Bank money is money which is a debt of a bank. In olden days, banknotes, which could have whatever picture on it the bank wanted. Nowadays, bank accounts.
???? ALL MMters thing bank reserves are money, liabilities of the state. You or I can't pay our debts with reserves, not because they are not money, but because we are not banks.
I'm also afraid we're talking past each other.
My question which leads off this blog of Rogue Economist is practical. I want to know whether there is some "money supply" -- however defined -- which we could look to to decide whether policies had their expected outcomes. That assumes that an increase in the money supply correlates with an increase in economic activity.
You both seem more interested in defining money as an abstract concept. Nothing wrong with that endeavor; it's just not mine.
Ellen, you understood my narrative. Good.
The government's purchases will increase economic activity -- that is, it trades a future liability for a current social benefit. But change the money supply? Pshaw!
Good. Yes, the government traded a future liability for a current social benefit. The government bought something. Economics should study economic transactions in the real world, not obscure & meaningless measures like a super-narrowly defined "money supply".
Such unimportant money supply figures were not even frequently calculated & widely distributed & available before the 1960s or so, when the government & academia actually had some understanding of economics.
Yes, there is such an aggregate. It is essentially the national debt. The NFA of the non-government sector.
Defining money abstractly in some way is a prerequisite for your endeavor.
Here is Scott Fullwiler:
“Interestingly, MMT is also a quantity-theoretic model of changes in the price level. The differences are (1) net financial assets of the non-government sector, rather than traditional monetary aggregates, are the MMT’ers preferred measure of “money,” and (2) desired leveraging of the non-government sector is akin to the inverse of what one might call “velocity.” In MMT, the two of those together (net financial assets of the non-government sector relative to leveraging of existing income) set aggregate demand and ultimately changes in the price level, at least the changes that are demand-driven.”
Scott Sumner Agrees that MMT Policy Proposals Are Not Inflationary
"I want to know whether there is some 'money supply' -- however defined -- which we could look to to decide whether policies had their expected outcomes. That assumes that an increase in the money supply correlates with an increase in economic activity."
Aha! :) Please read this, Ellen:
http://bilbo.economicoutlook.net/blog/?p=10733
Excerpt: "You will note that in Modern Monetary Theory (MMT) there is very little spoken about the money supply. In an endogenous money world there is very little meaning in the aggregate concept of the 'money supply'."
Let me know what you can glean from it. Basically, Bill Mitchell makes the case that mainstream economic thought, in an attempt (like you) to understand the effects of monetary policy, look toward the (idea of a) "money supply" (monetary base etc). To sum up as per Dr. Mitchell - "The essential idea is that the “money supply” in an “entrepreneurial economy” is demand-determined – as the demand for credit expands so does the money supply. As credit is repaid the money supply shrinks." ... and ... "So the supply of money is determined endogenously by the level of GDP, which means it is a dynamic (rather than a static) concept. Central banks clearly do not determine the volume of deposits held each day. These arise from decisions by commercial banks to make loans. The central bank can determine the price of “money” by setting the interest rate on bank reserves."
Trust this helps.
Ellen, I was wondering where you'd been. Okay, welcome back and let's get down to business.
Ellen: "While it is true that deficit spending can increase the stock of money, it does so by way of a multiplier effect acting in the real economy (that is, a real-world multiplier that has nothing to do with fractional banking -- that silly theory) -- an effect which is completely out of the hands of the government."
And what happens when everyone who earned income via the multiplier effect of the fiscal spending suddenly simultaneously decide to withdraw their money from the bank? The bank gives them their money. The money comes from their deposit holdings in the bank, and not as borrowings from the bank. So where does the bank get the money/reserves to pay those people who decide to withdraw into cash? It gets it from the government/Fed.
Because the fiscal multiplier effect gave people income, they do not have to borrow the money from the bank anymore to get cash. If you have income from selling to your service to the government, or by selling it to someone who sold his service to the government, neither one of you have to go and borrow the money from the bank to buy your Jimmy Choos. The money supply increased without further borrowing. Jimmy sold shoes without anyone going into debt.
"The government borrows existing money which is sitting idle in the accounts of firms and households and spends it into the economy."
Again, you have to answer my question: where did the money come from that the government was abkle to borrow? If it was already sitting idle in deposit accounts, what gave rise to that deposit? Somebody else borrowing to give that depositor his money? So how is that borrower then getting the money to be able to pay back his own loan? From a further third person borrowing it as well? And how is that 3rd person getting the money to pay back his own loan? And so on to infinity…
Also, I can't help wondering what the long debate was about Jimmy Choo not accepting your bonds. You don't use your your bonds to pay Jimmy Choo. You go to your bank and sell your bond to it. Now you have money to buy your Jimmy Choo.
Marley, Calgacus...getting exposed to MMT principles could really change your whole framework. It sure changed mine.
It seems to me that the cabal, here, has abandoned its former claim that the government of these United States creates money, an act I've argued is currently illegal.
You seem to have retreated to the security provided by the observation that the government creates financial assets. Indeed, it created over $1 trillion new financial assets last year alone.
Of course if you then take the position that "money" equals the federal government's debt, you're reduced to admitting that there's no practical use to be made of the term "money" in your analysis of how the economy operates or how it is is doing at any particular time.
What do you propose to use in its stead?
Thanks Rogue, I truly appreciate your work and the efforts of all the other MMT bloggers out there. I've learned a lot and hope to learn much more. Cheers!
Ellen, I strongly disagree with every statement you just made. The government certainly does create money, in the strictest sense of the word, bank reserves or currency, cash, every time it deficit-spends. As I wrote earlier, you are not using the correct definition of "deficit spending", but using the phrase "deficit spending" to mean what Abba Lerner called "borrowingandspending", which is two operations, not one. Deficit-spending proper creates the reserves which are what the private sector uses to buy the bonds in the act misnamed "borrowing". If the government didn't create these reserves, the private sector usually could not buy the bonds issued.
And even taking supernarrow definitions, how can one dispute that the Fed, part of the government, a creature of Congress, creates reserves when it buys government & non-government financial assets?
I certainly do not admit that there is no practical use of the term "money". IMHO MMT economists are right about everything, but they make a tremendous pedagogical, rhetorical, terminological and conceptual mistake -one that many of their predecessors did not make - by not using the word enough.
Obsessing about narrow and obscure money supply aggregates - wrong and not very useful ones - is a pretty recent phenomenon - and it has passed its heyday, with the Fed no longer publishing M3 etc.
Rogue:Also, I can't help wondering what the long debate was about Jimmy Choo not accepting your bonds. You don't use your your bonds to pay Jimmy Choo. You go to your bank and sell your bond to it. Now you have money to buy your Jimmy Choo.
My point was that anybody can do banking, monetary, money-changing operations, maybe not always, but often enough, and will, if they are able and get enough vig. What you can never do is do fiscal operations on somebody else's debt. (Except for governments imposing taxes). Only the government can create reserves or any other kind of government debt, and if one doesn't think that the government's debts are more important economically than anyone else's nowadays, one is plumb loco.
Ellen: "It seems to me that the cabal, here, has abandoned its former claim that the government of these United States creates money, an act I've argued is currently illegal"
perhaps it would be best that you explain to this cabal just what you mean by money, and how it is different from net financial assets, or from what i like to call income. What does the government use to pay income anyway? Isn't it money? So when they pay you money and you spend it, in my view it increases the money supply.
Time for you to start answering questions otherwise everything you're saying is just creative ducking. In your mind, what is money?
Calgacus, my point about Jimmy Choos and bonds was not directed at your point, but at Ellen, who said you can never use bonds to pay Jimmy Choos. Of course you and I could conceivably accept bonds as payments if we like. We can always go to our bank to sell it.
Sorry, RE; you're not using money; you're trading assets -- paper for leather, oops, designer leather.
P.S. Don't try that at Stop & Shop or Wawa or even, Pusatari's.
Let me see if I've got this right --
The Treasury sends me a check which I deposit in my bank account. My bank puts it in to the FRB's collection system for payment.
"Payment between FRB account holders (banks, foreign central banks, the United States Treasury)": The obligor's "balance with the FRB" is credited and the obligee's balance is debited.
What happens if the obligee doesn't have sufficient funds in its account with the central bank to cover the check? Ordinarily, the FRB loans the insolvent bank fed funds. But --
What happens if UST is insolvent -- that is, wouldn't have a positive balance with the FRB? The law proscribes FRB lending money to UST or honoring its NSF checks.
The UST must obtain the funds to bring its account positive. To do that it borrows money -- that is, it sells treasuries.
The sale merely transfers purchasers' deposits from their banks to the UST's account at the Fed. The money the government gave me is taken away from the buyer of the treasury instrument. The monetary transaction is a wash; no money -- the thing we use to purchase goods and services -- has been created.
Ellen, what is your definition of money? How does it differ from how I described it in the post? Your last comment did not make it any clearer. If paper we use to buy stuff is not money, what is? And why? And when you propose the government print a trillion dollars to give to households, what do you call it? If paper, why? And what is the significance of calling a trillion dollars the government gives to households paper and not money?
"... what happens if the obligee doesn't have sufficient funds in its account with the central bank to cover the check? Ordinarily, the FRB loans the insolvent bank fed funds. But --"
You are pretty much exactly where I was a month ago. When the Fed buys back Treasuries from banks, it adds net private sector reserves. And my question was, how does the Fed pay for this? I asked the question here on NEP #10:
"The way I've understood it (on one hand) is that when the gov't spends, it does so in a convoluted process which sees Treasury deposits acquired through the private issue of treasuries transferred to the Treasury's account at the Fed. I may stand corrected on this, but if the Fed then turns around and buys these Treasuries from the initial purchasing institution, this results in a net add to private sector reserves. My gap in understanding is this: the initial money used to buy the bonds (say) from the Treasury is already accounted for in the money supply. It has already been "spent into existence". However, is the money that the Fed conjures up to buy the Treasuries back that of the "clicking up the score" variety?? Seems to me it must be. The Fed doesn't buy back those treasuries with money from the Treasury account at the Fed, it merely credits the necessary reserves... right? ..."
The answer from Dr. Wray given here was:
"Fed credits private bank (selling the Treasuries) with Fed’s own IOU, bank reserves. Fed holds the bonds as assets, offset by reserves as liabilities. So in the end, although Fed cannot buy the bonds directly from the Treasury, it buys them from banks."
And there you have it. In order to net add reserves, the gov't buys back its debt. This buy-back is not funded by any Treasury money, but merely creates money equivalent to the now Gov't-held liability. These buy backs are part of the Fed's OMO (Open Market Operations), and I believe that this type in particular is called a POMO - P for permanent, since it permanently adds net private sector reserves.
The next question you will probably ask yourself is: "Wait a minute! Did the Treasury just sell a bond for $1M, spend that $1M on some stuff, and then did the Fed turn around and buy that same bond and in so doing credited reserves $1M in order to make sure that some bank had enough reserves to satisfy a liability?" The answer is yes... and this is why some in the MMT community believe that the value of that bond, which is now back in the hands of the gov't should NOT be counted as part of the deficit. Consider this: Ellen wants to buy Jimmy Choos so you sell an "Ellen Bond" to Rogue for $1500... you buy the Jimmy Choos. Later on, knowing that Rogue needs to buy a new iMac, you decide to "buy" the "Ellen Bond" back from Rogue and give him $1500. Are you in deficit??? I'll stop here... :) TGIF!
Marley; are you saying the Fed funds the UST -- by buying its issuance?
The Fed buys treasuries -- from banks and not from the UST -- to effectuate two goals:
A. To prevent the fed funds rate from rising above its intended rate; and
B. To lower long-term rates -- QEII and Operation Twist.
The fact that the purchases may increase banks' balances at the Fed shouldn't have any effect on the UST's balance sheet.
True?
Or am I misunderstanding your point?
An idea -- let me run it up the flagpole.
Let's ban the word "reserves."
Why not say what we mean -- a bank's working balance at the Fed, a bank's checking account balance at the Fed, the current cash assets a bank holds.
And in the same way we could be talking about the UST's cash balance.
After all, "bank reserves" aren't even reserves. As the Bank of England puts it, they're nothing but "rest" -- that is, an accounting entry to balance the balance sheet.
It seems to me such a ban would have the salutary effect of making us think and write more clearly.
Ellen, I am not saying that at all. I'm trying to get you down the MMT path of "how money is created". You have said that you believed that "... 'money' (USD) is issued by banks in their capacity as lenders and not by the government". In previous posts, I've provided links to explain the MMT position that banks do not lend based on what is (at any given instant) sitting in their "account at the Fed" (not going to use the 'r' word wherever I can avoid it). What I was describing is an operation reality of the Goverment sector (Treasury & Fed) adding 'money' to bank's accounts at the Fed by buying bonds back. Where does that money come from? I've shown that it does not come from the Treasury's account at the Fed. The Fed, in its position as the Government's CB, merely creates money and holds the gov't bond as a liability. The best thing, is that the gov't is left holding its OWN IOU, the bond (like Ellen in my last Jimmy Choo example). Now, does that suffice to refute your claim that 'money' is not issued by the Government?
If you can accept that, then we can start working on understanding why Rogue, Calgacus and myself believe that 'money' has to spent into existence by the Gov't before banks or households have it available in accounts or as cash. I need another post for that, unfortunately, as I have gone over the character limit apparently.
So, toward the end previously outlined, I have found a great paper by Scott Fullwiler who is widely accepted as an authority on Gov't Sector operations in the MMT Community. You will find it here.
The following is a summarizing excerpt to lay the claim, but I would advise you give the article a full reading.
" This all leads me to the often noted MMT point that “spending comes before tax revenues are received or bond sales.” If one expands this a bit to include loans from the Fed, then this statement is absolutely correct in terms of the operational realities of the monetary system. That is, according to both the tactical and accounting logics, taxes credited to the Treasury’s account and the settlement of Treasury bond auctions can only occur via bank reserve accounts, while the original source of banks’ balances in their reserve accounts can only be previous government deficits (which are net credits reserve accounts) or loans from the Fed (repos, loans, purchases of private securities, or overdrafts—note that an outright purchase of a Treasury security by the Fed to add reserve balances requires a previous government deficit). Therefore, it very much is the operational reality that for taxes to be paid or bonds to be settled, there has to have been previous government spending or loans from the Fed to the non-government sector, and this is true whether or not the Fed is legally prohibited from providing overdrafts.
However, the statement that “deficits or Fed lending logically precede tax payments and bond sales” should not be interpreted as “MMT’ers think there is no legal obligation that the Treasury have balances in its account before it spends or are otherwise ignoring the existing law prohibiting Fed overdrafts for the Treasury.” As I noted above, it is clear that the Fed cannot legally provide overdrafts to the Treasury, and every MMT’er does in fact understand this—the key is to understand what “deficits or Fed lending logically precede tax payments and bond sales” does and does not mean. That is, when MMT’ers say the latter, they are effectively saying “deficits or Fed loans logically precede taxation and bond sales as an operational reality of the monetary system” (the general case), and this and the statement “the Treasury must have positive balances in its account prior to spending under current law” (the specific case) are in fact not mutually exclusive. Both can be and are true—the government can and does require itself through its own self-imposed constraint to obtain credits to its own account at the Fed that were created via previous deficits or Fed lending before it spends again."
Marley -- you're comments are lengthy so permit me to do some fisking.
. . . the MMT position that banks do not lend based on what is (at any given instant) sitting in their "account at the Fed" . . . .
I agree; loan officers don't bother to check the balance in their bank's account with the Fed before making a loan. The compliance officers will find the money somewhere (interbank lending, discount window).
But please note -- that agreed upon fact has nothing whatever to do with the question of how/who creates money.
When the Fed buys a treasury from a bank, it makes an entry in that bank's account which increases the balance. But only orthodox economists think those accounts are "money." MMTers don't; those accounts are are nothing but vehicles to settle and clear transactions between banks. Again, they're not money, and changes to their balances don't increase or decrease the "money supply."
The types of transactions you're pointing to do not create money.
To conclude my response to your first comment --
1. Bank lending is never "reserve" constrained -- Agree.
2. The Fed adding numbers to a bank's "reserve" account creates money -- Disagree.
I have no idea what Scott Fullwiler thinks he's saying.
The government could run surpluses from now till the cows come home -- that is, it could destroy money year after year as it taxed it away. As long as bank lending was greater than the surplus (excluding the effects of export-import balances to simplify the example), the money supply would continue to grow, and the economy would have the money it needed to expand its activities.
Why? Because bank lending creates money -- the money I'm going to buy those Jimmy Choo shoes with if I ever get off this blog.
Note: Just so it isn't forgotten -- I agree that a sovereign government in control of its currency isn't required to fund its purchases with tax or bond receipts. My point has been that in the United States this freedom has been constrained by law . Thus, for every dollar the U.S. government spends which increases the money supply it subtracts a dollar from the money supply by taxing or borrowing it out of circulation. It's a wash.
Government deficits don't increase the money supply.
Damn -- I wish we had reply buttons.
We all agree -- we do, don't we -- that the U.S. government should be running a much larger deficit than it currently does.
Now, Warren Mosler thinks that's because the government needs to "create" much more money than it presently is doing. Poppycock.
Think about it. If the private side were spending an additional $1+ trillion dollars, we wouldn't need to increase the deficit. The demand would be there.
All the government is doing with its deficit is trading its money-good paper for all that locked up cash, pushing that cash out into the economy, and substituting its demand for the current absence of private demand.
No money is being created by the government; it was there, already.
Ellen, you are contradicting yourself... and perhaps, prodded by yours truly (after having Rogue ask), you can tell us what do you consider to be 'money'??
You declare in your first response: "When the Fed buys a treasury from a bank, it makes an entry in that bank's account which increases the balance. But only orthodox economists think those accounts are "money." MMTers don't..." (can you provide a link to a prominent MMT proponent who doesn't?)
But state in your second response: "As long as bank lending was greater than the surplus (excluding the effects of export-import balances to simplify the example), the money supply would continue to grow, and the economy would have the money it needed to expand its activities.
Why? Because bank lending creates money..."
Well, how is your "version" of bank lending creating money, if you do not believe that the MMT version of events does?
"those accounts are are nothing but vehicles to settle and clear transactions between banks. Again, they're not money, and changes to their balances don't increase or decrease the money supply"
Again. Define "money supply" ...
The ONLY ways a bank gets a non-zero tally in their account at the Fed (avoiding the 'r' word here) is when the government deficit spends or via cash deposits. And it is ONLY to/from a bank's account with the Fed that clearing occurs (unless banks have pre-determined agreements). Even if you want to say that Bank A has its reserve requirement met by Bank B on the overnight, and so there is not in that instant a net increase in the amount held in accounts at the Fed, how did Bank B get its account at the Fed populated. Loans from the discount window are also a form of deficit spending. Again, what funds that loan? Loans create demand deposits, which are convertible into the gov't IOU (cash/money).
I don't have any more links to provide to further explain my views. Like Rogue, I look forward to hearing you expand your views on what 'money' actually is. You opened by asking the question, but it seems you have a predetermined answer that seems to escape those of us who have attempted to explain what we believe to be the MMT position.
Cheers.
Ellen, you've read my version, you've read Scott Fulwiller's version, you've read Marley's version of the same concept. I guess in the end, if you're really convinced that people borrowed into existence all the money that the government then afterwards borrowed from them, you're entitled to your own view. Including accepting all its ramifications and limitations.
As we MMTers say “loans make deposits”. Randall Wray
I call demand deposits money; what do you call them.
No Ellen. That deposit is merely the liability side of the bank's IOU, the asset being the loan, which you or whoever took the loan out has to pay back with interest. That deposit only really becomes "money" when it causes an increase in the bank's account at the Fed later on. See Dr. Wray's answer to questions #7 and #9 here:
http://neweconomicperspectives.blogspot.com/2011/09/government-and-private-ious-denominated.html
The HPM (high powered money) comes from the Gov't. All else is really just an IOU. The reason this is so is because if you took out a loan for say, $1000, and you needed it in cash, the bank can only fulfill that need with the Fed's IOU which comes from their account at the Fed.
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