Sovereign Spending and Public Goods

By J. D. Alt

Based on my new understanding of Fiat Money, I’ve concluded that it is both logical and desirable for the U.S. sovereign government to issue and spend MORE dollars than it collects back in taxes. Doing so accomplishes two fundamental goals:

  1. It enables the sovereign government to purchase from the Private Sector goods and services which will benefit society as a whole; and
  2. It enables the businesses and households in the Private Sector to build up a reserve of fiat dollars which can be used to expand the goods and services available in the Private Sector economy.

Issuing and spending MORE fiat dollars than it collects back in taxes means the U.S. sovereign government, itself, will build up what is commonly—but misleadingly—called a federal “deficit”. This terminology is misleading because it strongly infers that the “excess” sovereign spending must somehow be “paid back.” The average citizen is made to fear that his or her national government is making the same grave mistake that a household makes when it “spends” more dollars than in “takes in”—creating a household budget deficit, and requiring the household to borrow dollars that will eventually have to be repaid. This fear is both logical and powerful, and it is invoked each time the words “federal deficit” are heard or read. Because of this, it is very easy to convince normal, intelligent people that spending by the U.S. sovereign government must be CONSTRAINED, or the nation will become insolvent and bankrupt.

I now understand, however, that excess sovereign spending does NOT have to be “paid back”—EVER! This, in fact, is the whole point of “sovereign” spending. Sovereign spending is the SOURCE of fiat dollars—it is the PROCESS by which the fiat dollars we all use, every day, are issued INTO the Private Sector economy. The fact that this process can ALSO, at the same time, create goods and services that will greatly benefit our American society as a whole is the astonishingly GOOD NEWS—news that we must now convince ourselves is actually true.

To assist in that convincing I would like to suggest that some “vocabulary adjustment” is desperately needed and long overdue. Specifically, we need a more accurate term to replace the misleading phrase “federal budget deficit”. My proposal is “National Asset Expansion” (NASSEX for short). Sovereign spending over and above what is collected back in taxes generates a National Asset Expansion. Furthermore, I propose that the the specific goal of NASSEX should be to generate the growth of REAL “Public Goods” (as opposed to simply pumping “cash” into the financial industry with the dubious assumption the financial industry will do something useful with it.)

Since I’m an architect instead of an economist, I’ll define “Public Goods” in my own peculiar (but I think practical) way: A Public Good is anything that (a) can be demonstrated to significantly benefit society as a whole (even though it may be privately consumed) and (b) is UNLIKELY to be produced by the profit motive of the private market. This is a broader definition than what most economists would allow, but from my perspective the only IMPORTANT issues are whether a thing is desirable and, if so, is it likely the private market—on its own initiative—will produce it? If the answers to this two-part question are respectively “Yes” and “No,” then the thing in question, from my perspective, qualifies as a “Public Good” that can justifiably be paid for with sovereign spending.

My first NASSEX proposal for this year (2013.1) meets the above definition in spades:  $1.4 billion to hire the 2000 new food inspectors the U.S. Food and Drug Administration (FDA) recently announced would be required to implement the Food Safety Modernization Act passed by Congress two years ago. (“FDA begins implementing sweeping food-safety law,” The Washington Post, January 04, 2013.) The new safety standards seek to insure that lettuce, for example, isn’t irrigated with water that flows from fields of cow manure, or that workers processing and packaging chicken parts are cleanly dressed and have hand-washing sinks convenient to their work tables, etc.

“The CDC estimates that each year roughly 1 in 6 Americans (or 48 million people) gets sick, 128,000 are hospitalized, and 3,000 die of foodborne diseases.” (Quote from the Center for Disease Control website.)

In spite of the above statistic, austerity-obsessed leaders in the U.S. Congress are positioning to PREVENT the hiring of these new food inspectors as being something the American nation—with its huge “federal budget deficit”—simply cannot afford. Representative Jack Kingston (R-Ga.) is quoted in the Washington Post as saying “No one wants anybody to get sick, and we should always strive to make sure food is safe. But the case for a $1.4 billion expenditure isn’t there.”

But now we can help him make the case! Preventing the illness of 49 million Americans seems to meet the standard of benefiting society as a whole; furthermore, it would be difficult to argue that the profit-motivated food industry, itself, would be likely—by any stretch of the imagination—to provide these inspection services. Food inspections, therefore, qualify for NASSEX spending.

NASSEX #2013.1 shall therefore issue and spend $1.4 billion to pay the salaries, benefits and expenses of 2000 new food inspectors. NO TAXES need to be collected to cover this expenditure. Nor does the sovereign government need to borrow fiat dollars from anybody to hire these new inspectors. This expenditure shall simply be sovereign spending over and above what will be collected back in taxes. It is not $1.4 billion that, by any logic, will ever have to be “paid back” to ANYONE. Best of all, it no longer increases a thing called the “federal deficit”—terrifying the masses into believing their national government is going broke—because what this spending is now doing INSTEAD is creating a National Asset Expansion which we are all going to greatly benefit from.

Will NASSEX #2013.1 create inflation? This is unlikely since the fiat dollars will be spent to pay 2000 men and women who were previously unemployed. Also, in order to pass the inspections, food growers and processors will have to hire people themselves to clean up the irrigation systems, install hand-washing sinks, and wash and dry processing uniforms etc. In other words, lots of new goods and services will be generated in the Private Sector economy to “absorb” the new fiat dollars the NASSEX will issue.

And what (in addition to preventing 3,000 deaths each year) will those 2000 new food inspectors do with the fiat dollars they’re paid for their services? Let’s see, they’ll probably buy cars and houses and lawnmowers, and flowers for their wives or barbeque grills for their husbands, and toys for their children. In other words, it sounds like a very good start to a REAL economic recovery.

So if Jack Kingston happens to be YOUR congressman, please send him a link to this essay and ask him to take a few moments to understand how fiat money and sovereign spending actually work. America CAN afford to have safe, healthy food—and much, much more as well.

76 Responses to Sovereign Spending and Public Goods

  1. Nice work if you can get it.
    And you can get it.
    But you don’t have it.

    Somewhere between here:
    ” excess sovereign spending does NOT have to be “paid back”—EVER!”
    and here:
    ” Sovereign spending is the SOURCE of fiat dollars”.
    You lose the causality.
    From what doesn’t have to be, to what is.
    You’re describing that which a sovereign fiat money system could do.
    If you want all those things to be true, then you need something to establish the causality of government deficit spending actually creating fiat dollars, and that something is called the Kucinich Bill.

    The Kucinich Bill authorizes the federal government to create the nation’s money, and to spend all new money into existence as part of its budget-creating process, which is in the nature of all that you propose doing here. GUVUS says what it is doing (full employment) and how it is paying for it.
    Of course, the Bill also ends money creation by the private bankers and the bond vigilantes, by putting them on what people think of as a fully-reserved lending basis. Banks could only lend real money that they have.

    I’m not sure if you fully grasp the meaning of these words: “.. excess sovereign spending(new money) does NOT have to be “paid back”—EVER!” (my emphasis)
    If you do, then you are saying something even more comprehensive and more dramatic in terms of monetary science than pointing out that there is no need for the federal government to issue debt – which is already a mind-shaker.
    The money that is created directly and purposefully by government spending is NEVER removed from the national economy. We will have achieved that remarkable measure of monetary, financial and economic stability – that of a permanent money system.
    Bond-vigilantes was.
    For the Money System Common

    • JD, your on the right track. Joe is pointing you to the solution with the HR2990. We know many good things are possible from deficit spending, but as long as deficit spending is done by issuing debt, we will never get there.
      HR2990 is the blueprint to achieving a true sovereign currency that benefits the people.

    • Derryl Hermanutz

      You have identified the gaping chasm between “could” and “does”. Kucinich recognizes this critical distinction, as did Benjamin Franklin, Thomas Jefferson and Andrew Jackson, Abraham Lincoln (and the Confederates too), Irving Fisher, and the IMF’s Kumhof and Benes who resurrect Fisher with “The Chicago Plan Revisited”, Hyman Minsky, and JFK, just to name a short list. Today many monetary realists like Michael Hudson and Steve Keen also understand the difference between banker money and government money.

      At issue is the question of who is the ACTUAL monetary sovereign: the government or the bankers. Yes, a monetarily sovereign government “could” issue its own money and “spend” a permanent money supply into circulation, but the US government does NOT issue any money (except coins, a pittance of the total money supply). Governments “borrow” the money they deficit spend. Banks “create” the money they lend to governments and to private sector borrowers. Banks, not governments, EXERCISE monetary sovereignty, the power to “issue” money.

      The fact of the current operation of the money system is that banks create and issue the money as loans of newly created bank deposit money, and government and private sector “deficit spenders” borrow that money and spend it into circulation. Treasury Secretaries sign “bonds” promising to pay interest and to repay the loan principal when the bonds mature. Private borrowers sign “promissory notes”. Bonds and promissory notes are legal admissions by the borrowers that they “owe” repayment money to the lenders of the money, the bankers. The lending bank signs no such note. The bank owes nothing to anyone. The bank “issues” the money as its sovereign privilege. I Dream of Genie “could” conjur up non-bank, non-debt money for the government. But she doesn’t. And the government doesn’t do it for itself either. “Could” is meaningless. Banks create and issue our money. That is real. That is meaningful. That is the starting point for any realistic monetary reform proposals.

      So all of the “money” in circulation is always owed to banks as debt repayments. Bankers require that borrowers pledge “security” against bank loans of new credit money, so borrowers pledge as “collateral” the real wealth that is produced by the economic efforts of the nation. When the borrowers fail to repay their loans, an outcome that is arithmetically inevitable, then the bankers foreclose and gain ownership of the real wealth of the nation.

      Private bond merchants -cum – bankers have enjoyed a spectaculary lucrative monopoly on the creation and issuance of credit money over the past 600 years, beginning with the Medicis in 14th century Florence. Today there hundreds of trillions of dollars of “money” in the world (over a quadrillion if you count shadow bank derivatives money). That quantity of money did not exist in the 14th century. It has been “created” by bankers, who “own” the credit money that they create and lend. They create, we borrow, we owe. The private power to create money has produced the structures of ownership of the world’s real wealth that we see today. The money issuing power is the overarching power of the human world. It is currently in the hands of private bankers.

      Advocates of government money issuance blithely assume that the current holders of the greatest power on Earth will meekly hand that power over to democratic control. Monetary history demonstrates that this is not the case. The British massively counterfieted and discredited America’s government issued colonial scrip money and restored the bankers’ ‘gold backed’ credit money. Lincoln and his government-issued greenbacks suffered a similar fate, and the Long Depression after 1873 was the result of the bankers’ deliberate contraction of the US money supply, which motivated the populist but futile bimetalist movement and WJ Bryan’s pathetic “cross of gold” speech. Inflation then deflation, transferring the real wealth of the nation into the hands of the money creators, just as Jefferson warned would happen if bankers ever got control of the issuance of US money. In 1913 the US government formally handed over the money issuing power to the bankers, just in time for the greatest financial undertaking the world had ever seen: WWI. WWII further enriched banker money and entrenched banker hegemony.

      The fact that the US government has not taxed its borrowed spending back out of the economy and paid off the national debt since Andrew Jackson in 1835 does not mean, as MMT assumes, that government deficit spending and the maintenance of a large accumulated government debt add a permanent supply of “money” into the economy. The private sector as a whole also deficit spends and maintains a large accumulated debt, much larger than the government’s debt as a matter of fact. So the private sector as a whole adds even more money into the economy than does the government. ALL of our money enters the economy as deficit spending, the spending of borrowed money, and the money that makes this spending possible is issued by “banks”, not by “governments”, which is why we have collectively accumulated our trillions of dollars of “debt”.

      Borrowers spend new money into the economy. Other people earn that new money and accumulate it as their savings. Money that is “saved” is money that is not “spent”. If the earners of the borrowed – and – spent money do not spend it back into the economy, then the debtors cannot earn it back to repay their bank loans. So they default, and the bank gets ownership of the collateral. Arithmetic inevitability.

      MMT observes that the government never in fact pays off its debt, so the money it borrowed and spent remains in circulation in the economy. But exactly the same is true of the private sector. The government pays out old bond issues when they mature, and gets the payout money by issuing new bonds that are purchased with even more new credit money that is created by the “primary dealer” banks who are authorized to bid on new Treasury debt issues. Some private sector debtors pay out their mortgages and other bank debts, but other borrowers are always taking out new bank loans and adding new spending into the economy. Both the government and the private sector as a whole “roll over” old debt and pay it with new debt. The have to, because new debt is the only way to get new money to pay old debt.

      MMT arbitrarily treats government spending of borrowed money as a special case, as if the government doesn’t “have to” get money by taxing or borrowing to repay its debts when they mature. Private debtors “have to” earn or borrow money to repay their debts, and so does the government. That’s what the debt ceiling and deficit hawk debate is all about: the threat of government “defaulting” on its debt payment obligations. If governments “issued” their own money then they wouldn’t HAVE TO add to their debt BEFORE they can deficit spend. And they wouldn’t “have to” tax or borrow new money in order to repay their maturing debts. But in fact the government DOES have to borrow the deficit spending and debt repayment money.

      The government does not spend money and “then” issue debt, as if issuing new Treasury securities is “optional”. Under the current system the government acts just like you and me and anyone else who want to spend more money than we have: FIRST the government “borrows” money from banks, who “create” a new bank deposit and thereby add newly issued credit money to the government’s bank account at the lending bank, then the government transfers that money to its Federal Reserve Bank checking account, THEN the government spends the new bank deposit money from its debt-replenished bank account. JD Alt recognizes the ancient fact that banks lend money that they don’t have, that banks “create” the money that they lend. But then he assumes, with MMT, that because governments technically “could” issue their own money that they in fact “do” issue their own money and “spend money into existence”.

      But this is false. Banks “lend” money into existence. Trillion dollar coins and greenbacks are “government issued money”. Treasury securities are “debts”, not “money”. The bank deposit credits that purchase those securities are money. We can confidently believe the government “can” issue money as soon as we see the government actually “do” it.

      • Thanks for that is so little to say.
        Still taking it all in.
        Thanks to NEP for posting the dialogue.

        If there is truth in your second paragraph, then this is all that’s needed to focus the monetary discussion so that we can begin to put together solutions to what everyone here agrees needs to be done.

        Either we have a monetarily sovereign, monopoly currency-issuing government in this country, or we don’t. People need to study and understand the mechanics and the arithmetic of the money system. Once they do, I am sure we are on our way to changing the equation.

        The truth is that monetary reformers – my word the public-monetarists – want exactly what the monetary theorists say we already have – that monopoly currency-issuing government. That is the description of a money system that is designed to, and does, operate for the benefit of all. It is part of our national commons.

        Our study of the science and history of money and money systems draws us to the only logical conclusion about our present money system. It basic structure is not at issue, we seem fully agreed with the theorists. We have an endogenous money system – one that operates in perennial response to market and commercial demands. The monopoly currency-issuing governmental money system would work openly for the needs of the national economy, as determined by the people’s representatives, acting through statutory rules that prevent political intrusion.

        The money system is the fulcrum for determining all national financial and economic outcomes. It’s been a hundred years operating in favor of the issuers of monetary assets that we all pay for. Its time to move the fulcrum point to advantage the people.

        That is precisely what the Kucinich Bill proposes to do.
        For the Money System Common.

      • Could someone with more MMT background than I respond to this interesting post from Mr. Hermanutz? I understand that a sovereign Government “does” actually issue currency… not only “can” it. Straight from the MMT primer on NEP: “Government spends (purchasing goods and services or making “transfer” payments such as social security and welfare) by crediting bank accounts of recipients; this also leads to a credit to their bank’s reserves at the central bank.” I further understand that a sovereign Government only “borrows” to drain excess reserves as part of an interest rate targeting exercise. Do Governments issue most money into existence or do Banks lend it into existence?

        • It depends on what your definition of “money” is. See MMP blogs 14 and 15, where Randy lays out the hierarchy of money. Government money is at the top, then bank money, then various other non-bank businesses, on down to the marker you give to your bookie. Generally, each lower layer has value in that it represents a promise to deliver a higher layer, right up to the bank’s liability to deliver government money. Since the pyramid tends to expand at the lower levels, probably banks do issue more of their money than the government does of its money, except when government is doing QE.

          • That’s a pretty good exposition on the MMT’s theoretical construct of the “hierarchy” of money.
            It’s a self-defined construct that has little no meaning to the term.

            The real hierarchy of money goes like this.
            The privileged money creators make the money.
            The Restofus borrow it.
            That’s the hierarchy.

            The money creators get richer.
            The Restofus get the shaft.
            Thus, maintaining the money power hierarchy.
            It’s the system that we have.
            The Status Quo.
            Either create the Monetary Assets, or get in the payment line.

            Or, we can change the hierarchy, so that the people are at the top, and not only in theory.
            The Status Is Not Quo.
            The Money System Common.

            • I guess I need some more economics and less bluster, because my personal experience and that of many others doesn’t match your theory. I started with nothing, and got money for my labor, saved some of it, borrowed some more from time to time, paid it back, and now I have some left and no debt. I don’t see why it has to be the other way around in the aggregate. Maybe you can explain that with logic instead of rhetoric.

              • Alex Seferian

                I think that the key question is ‘who creates money’? MMT states that a government like that of the US does. Joe and Derryl, on the other hand, have started what for me is a new line of thought… one that I at least had never thought of before and after following NEP for over a year; the thought that its the banks that create the money, and the US Government actually is a “user” of the currency. Perhaps a way to settle this is to divide the money creating concept into two parts: 1. Money created by the US government up to the amount that could be said to be covered by taxes, and 2. Money that actually is created by banks, not the US Government (even if it technically “could”). Regarding the first type of money, there is a piramide i take it, and refrencing Wray’s primer. Regarding the second type of money, the US government, given existing rules and customs is indeed a “user”, not an “issuer”. I am not sure if in addition a third point is being made. Hence a question for Joe: are you suggesting that even the money under 1. above is created by banks?

              • Derryl Hermanutz

                golfer wrote, “I guess I need some more economics and less bluster, because my personal experience and that of many others doesn’t match your theory. I started with nothing, and got money for my labor, saved some of it, borrowed some more from time to time, paid it back, and now I have some left and no debt. I don’t see why it has to be the other way around in the aggregate. Maybe you can explain that with logic instead of rhetoric.”

                I’ll take a stab at answering this. You’re essentially asking about what Keynes popularized as “the paradox of thrift”, also known as “fallacies of composition”. It’s where behavior that is beneficial for individuals is harmful to the system as a whole. In a zero sum system such as “money”, saving the money you earn is good for you personally, but saving starves the system of spending. Your spending becomes someone else’s earning, just as their spending became your earning. It’s a problem of stocks and flows, an “accounting” problem. It’s not economics. It’s basic arithmetic. It’s exchanges and accumulations of numbers with a $ sign in front of them.

                Money is numbers, a system of positive and negative numbers. Positive numbers are “savings” (money that you have), negative numbers are “debts” (money that you owe). In a system like ours where all of the “money” is issued by banks as loans of bank deposits, “borrowers” spend the system’s stock of money (the money supply) into circulation where other people earn that money and either spend it again or hold it as their savings. One party’s borrowing and spending becomes other parties’ earnings and savings. But all of the money that is “earned” by the recipients of the spending is the same money that is “owed” by the borrowers of the spending. So one person’s debt is another persons’s income and savings. The system is “zero sum” because the positive numbers of money = the negative numbers of debt, so if all the debt was repaid (including government and private sector debt) there would be no money. There would be zero debt and zero money, because money is a zero sum system. (it’s actually negative sum because banks issue “money” as loan principal but they charge “debt” as principal + interest: the money to pay the interest was never created and doesn’t exist, but it is nonetheless “owed”; so the system creates more debt than it creates money)

                Each individual bank and the banking system as a whole has a zero sum balance sheet where, like any corporate balance sheet, assets = liabilities. A bank’s assets are its interest bearing loans. It’s liabilitites are its customers’ bank deposit balances + the bank’s “capital”, its retained earnings and shareholder equity. Assets are the outstanding loan balances (which are the government’s and private sectors’ debts), liabilities are the outstanding money which is held by depositors (in the form of bank deposit balances and pocket cash) and the bank’s owners. A “balance sheet” balances to $zero. The positive number in the left side assets column MUST = the negative numbers on the right side liabilities column, so that the two sides of the balance sheet sum to zero.

                If we ignore the interest problem for the sake of simplicity, our bank-debt money system is a zero sum system. If one person has a positive sum of savings, then by “accounting identity” some other person has an equal amount of unpaid debt. If the saver NEVER spends his savings, then the debtor CANNOT earn his money back and repay his debt, because saving money removes that money from the spending-earning-spending cycle.

                Banks do not lend out their customers’ deposit balances (investment banks do that, but investment banks are not “depository institutions”). “Banks” are depository institutions, which means they are legally authorized to “create deposits” by “purchasing assets”. The “asset” is the borrower’s signed promissory note, promising to pay interest and repay loan principal, though banks usually also require that the borrower pledge some real asset of saleable value, such as a house or car, as “collateral”. The government’s future tax receipts are the collateral on government bond debt. Or, as Greece is discovering, if the indebted government can’t get the repayment money from taxes then the nation’s public assets and infrastructure like islands and ports have to be sold to get money to repay bond debt. Banks “create” the money that they lend, so every new loan is the creation of new bank deposits, which you can spend as “money”. Banks create our money by lending it to us. It is a zero sum system where all money (positive numbers) is issued as debt (negative numbers).

                So that’s the basics of monetary accounting. You say that you personally now have more money than you started with, and we’ll call this money your “savings”. Aside from the money you borrowed, you got all your money by “earning” it. For you to earn money, someone else (your employer or customers) has to “spend” that money. When you borrowed money, you then spent that money. Spending more than you earn is “deficit spending”, because your personal stock of money is now in “deficit”, which means it is negative. You have “negative money”, which means you “owe” money, which means you are “in debt”. To get out of debt you have to earn more than you spend, and use your “surplus” money to repay your debt. You did that and now have no debt. So far so good.

                But what if the person who earned the money that you borrowed and spent decided to “save” that money rather than spending it back into the economy? Your spending became his earnings, and now you need him to spend so you can earn back the money to repay your debt. But if he spends less than he earns, and saves the balance, and if people in general start saving their income rather than spending it all, and they do this right after you and millions of other people have spent a whole lot of borrowed money on, for e.g., bubble priced real estate, then you will all find that not enough money is being spent for you all to earn your borrowed money back, and you will not be able to repay your debts. So you will get mass mortgage defaults and banking system crisis, because your “debts” are the banking system’s “assets”, and if you can’t make your interest payments bank income declines. And if you all start defaulting and your loans become delinquent so that the banks have to foreclose and sell the collateral to get their money back, and if the real estate that was pledged as collateral against the mortgages deflates in price, then the banks won’t be able to sell the real estate for the amount still owing against it, and will have to cover the loan losses out of their loan loss reserves (which they don’t have), then out of their capital (which they don’t have nearly enough of). If the banks can’t cover the loan losses then the delinquent loans and the deflated assets render the banking system “insolvent”, which is exactly what happened in 2007-2008.

                Banks are private for profit businesses who are licensed by the government to create and allocate money, to manage the “financial credit” of the nation. Insolvent banks who bet heavy on Ponzi real estate loans are not competently “managing” the nations’ financial credit, and are supposed to be taken into receivership by government accountants and either restructured or broken up and their assets sold to competent bankers.

                But we all know that’s not what really happens. Banker bonuses are based on quarterly profits that are engineered by what Bill Black calls “accounting control fraud”. Competent bankers know a bubble when they see it, and refuse to lend into it because they KNOW their borrowers will default en masse once the borrowing and spending bubble pops, which will render the lenders insolvent and out of the banking business in ignonimous failure. But “too big to fail” bankers know the Fed and Treasury Secretary (remember Hank Paulson?) and bank regulators have their backs, so they gorge on bonuses generated by phony ‘profits’ that would actually be “losses” if they properly added to their loan loss reserves to prepare for the coming wave of defaults. And mid level bankers, who also know they’re lending into a bubble but can’t resist the 6 and 7 figure bonuses, tell each other, “IBG, YBG”. When the shit hits the fan, I’ll Be Gone, You’ll Be Gone” from this bank, and we get to keep all the money we are getting paid.

                So there’s the paradox of thrift. One person’s savings is another person’s loan default. It’s arithmetically inevitable in a zero sum money system like we have. The platinum coin would have made the system positive sum by adding non-debt money into the equation. The coin is an “asset” that is minted by the government, and the Fed (like any other bank) is allowed to create bank deposit money to purchase assets, so the government could have sold the asset to the Fed in exchange for a big fat new deposit in the government’s checking account at the Fed. The government does not owe repayment of the money to anyone because it didn’t get the money by issuing “debt”. It got the money by creating an “asset”, the coin. So when the government spends the new money into circulation without adding to its debt, it adds a positive number of new money that is NOT offset by a negative number of new debt. Suddenly there is more money in the system than there is debt, and the system becomes “positive sum”.

                But bankers and billionaires want to buy Greek ports and islands at firesale prices, so they like zero sum money systems. And because the US government serves the interests of bankers and billionaires, not the interests of its citizens, it will not reform the bank-debt money system. So hang on to your money and wait to buy some firesale US assets for yourself, because austerity budgets cause economic recession and asset price deflation by reducing total spending which reduces total income which reduces debtors’ ability to pay their debts which means banks foreclose on the collateral and sell it off to the highest of the bargain hunter bidders. Or more likely, they sell off the good stuff to themselves and their buddies, and let us peasants snap up some bargains, and let the crappy assets like mortgaged Detroit crack houses sit and rot. If you can’t beat em join em in exploiting the coming deflation. Unless you’re not already rich, in which case you’re f____d.

                • Alex Seferian

                  I am still digesting the contents of your post but allow me to clarify one point in the meantime: are you suggesting that in the US, ALL the money is non-government (ie not including the FED) bank generated money, except for the relatively small amounts of coins and paper bills in circulation? If so, I would be able to close the loop when you wrote before that the US Gov is a “user” of the currency, like the rest of us. That simple statement contradicts one of the core pillars of MMT, so I further ask: is it not a combination? The US Gov creates the currency up until the limit imposed by taxes in any given year, and the private banks create all the rest of the money, including what makes up the public deficit and what turns out to be negative money (debt) for the public sector.

                  • When the Fed buys a treasury bond (or a MBS, now), where does it get the money? Not from taxes, and not, like he says the Treasury does, from borrowing. Bernanke says it is from keystrokes. It is government-created money. Unless you make the silly argument that the Fed, created by Congress, is not part of the government.

                  • Thank you golfer1john for helping uncover what was separating some of Derryl’s and Joe’s writings from what MMT states. The paradox of thrift I know is extensively covered in MMT literature. So are the manner in which banks work and double-entry accounting.

                    However, both sides seemed to be at odds when it came to the question of ‘who is the issuer of the currency?’. As you point out, it must be the result of considering the FED just as another (private) bank. In fact, Dan Kervick just posted a piece today (The Coin Abides) that hits this nail on the head I believe. I quote: “The platinum coin is a big shiny, reminder that in some way, somehow, the monetary authority of the United States rests with the American people, even if the plutocratic architects of our financial system and the owners of our country have succeeded over time in burying that authority under many layers of convoluted technocracy and confusing delegations. The current system of public finance that we have evolved in the US treats the US Treasury operationally as though it were just another commercial enterprise that depends for its financing on the Federal Reserve, that Bank of All Banks that rules us all, and at which even the US government itself must stand behind the rope line as a mere depositor… a consequence of this deeply-ingrained perception is that the government is seen as monetarily subordinate to a mysterious, external financial power…Given that subordinate status, it must either acquire dollar assets by taxation, or compete for borrowed dollar assets in the credit markets with other borrowers. But this is absurd. The Fed is itself a branch of the US government, established by congressional legislation to act as the agent of Congress’s inherent monetary power – despite the Fed’s pretentious “independent within the government” self-description… And we can change the structure and hierarchy of accounts whenever we want to by reforming the very acts of legislation that created the current system in the first place.”

                    Reading the above, I think that everybody is saying the same thing in this post, although there is merit in the “can” versus “does” debate that was initiated above. In THEORY, MMT correctly describes what “can” happen. In PRACTICE, however, things currently “do” work differently. I stand to be corrected if this is not a fair summary to close this debate… helpful debate I will add… at least for me. Thank you all!

                  • Derryl Hermanutz

                    golfer wrote, “When the Fed buys a treasury bond (or a MBS, now), where does it get the money? Not from taxes, and not, like he says the Treasury does, from borrowing. Bernanke says it is from keystrokes. It is government-created money. Unless you make the silly argument that the Fed, created by Congress, is not part of the government.”

                    The Fed, like any bank, is authorized to purchase assets and pay for them by creating new bank deposit money. Banks don’t “get” the money they lend from anywhere. Banks create this money with “keystrokes”. That is what “banks” do: they create, allocate and manage the nation’s financial credit, its “money”. The Fed is not unique in this regard. All banks create new money every time they make a loan or purchase a government security. They do it as a balance sheet equation, creating a new asset (the unpaid loan balance) and a new liability (the new bank deposit money). Banks lend by “expanding their balance sheet”, adding new money and new debt. The Fed’s balance sheet has recently expanded to around $3 trillion, but the private commercial banking system’s balance sheet is around $70 trillion. Before QE the Fed’s balance sheet was always under $1 trillion. So even if you want to count Fed money creation as part of the money supply (which it isn’t, because the money that the Fed creates cannot be “spent” into the economy), it is clear that private banks create at least 70 times more of the total money than does the Fed. In fact private banks create ALL the money that gets spent into the economy, including the money they lend to the government by purchasing Treasury securities.

                    But the Fed is legally prohibited from directly purchasing Treasury securities. The government auctions the new debt, and one of the 21 primary dealer banks (21 private US and international banks, plus the Chinese government) buys that debt and pays for it by creating a new deposit in Treasury’s account at that bank (China buys the Treasuries with its US$ cash, just like a pension fund buys Treasuries as a way to put their US$ savings into a safe interest bearing investment). Then Treasury transfers the funds to its checking account at the Fed, out of which the government spends the new money. The money was “created” by the private bank that bought the new security.

                    The Fed can then buy these bonds (or bills or notes) from the primary dealer bank who is now holding them on its balance sheet. These purchases are made in the “secondary” market. A “primary” dealer bank has ALREADY created new bank deposit money to purchase the new Treasury debt, and the government has already deposited that money in its Fed checking account and spent it. The borrowed money that the government deficit spends is created by private banks, not by the Fed. The Fed is not allowed to buy Treasury securities from the government, and the Fed is not allowed to grant overdraft privileges to the government. The government MUST have money in its Fed account BEFORE the government can spend money, no different than you or me if we have a checking account with no overdraft: if we try to overdraw our account, our check is not honored by our bank and is returned NSF. The Fed is not allowed to create money for the government. Private banks ARE allowed to create money for the government, and they do. That is the normal way the government gets the money that it deficit spends. The money is created by private banks, not by the Fed.

                    Normally the Fed only buys and sells Treasury debt to influence the interest rate as part of its interest rate targeting approach to monetary policy. But normally the Fed’s balance sheet is under a trillion dollars. It is only recently that the Fed has engaged in “unconventional” monetary operations called “quantitative easing”, trying to stimulate the economy by adding to the “quantity” of bank reserve money in the system. In this case a primary dealer bank buys new Treasury debt in the usual way, but then shortly afterwards the Fed buys that debt from the primary dealer, transferring the asset onto its own balance sheet. This is not done to influence interest rates. It is done to increase the quantity of bank reserves in the monetary system.

                    The Fed “pays” for the Treasuries with newly created bank reserve money that it credits to the account of the bank who sold the Treasury security to the Fed. Banks cannot lend out their reserve balances (reserves, just like Treasury securities, are “assets” on a bank balance sheet, and Treasury securities and reserve balances are equivalent to cash because the Fed will trade them for newly printed cash at any time). Banks can lend “against” their reserves, holding a “fractional reserve” of reserves at the Fed and creating loans of new credit money “backed” by those reserves. But QE didn’t work. It was “pushing on a string”, because there are not enough creditworthy borrowers asking for new bank loans, so adding to reserves did not generate new bank lending.

                    When a bank lends newly created bank deposit money, the borrower “spends” that money into the economy, where the spending “stimulates” the economy. QE was supposed to help increase bank lending to stimulate the economy, but it didn’t happen. Now the Fed is buying MBS from the banks. The MBS are “impaired assets”, full of late and delinquent mortgages, and secured by real estate that has lost up to 40 – 50% of its market value. But the Fed is paying face value for the MBS, rather than “marking them to market” and paying maybe 60 cents on the dollar. So the banks are selling impaired assets to the Fed, and they are getting paid in “cash” which is the most liquid and “unimpaired” asset possible.

                    The Fed pays .25% interest on cash (reserve balances), and cash is by definition worth 100 cents on the dollar, so the Fed’s purchase of impaired MBS from the banks is restoring those banks to solvency by adding 40 cents on the dollar to the market value of the banks’ asset portfolio (i.e. tha banks were holding MBS as assets that are worth 60 cents, which the Fed buys from them for 100 cents, adding 40 cents of real value to the banks’ assets).

                    But the point is that the Fed does not create the money that the government deficit spends, and the Fed is not allowed to let the government spend more than the government has acquired from taxes and borrowing to deposit in its Fed checking account. The government “spends money into existence” in the same way you spend money into existence when you purchase a car or house with a bank loan. The bank created the money as a new bank deposit in your account, and you spent the money by transferring that bank deposit to the seller of the car or house. Now the sellers have the “money”, and you have a “debt” to your banker. Just like the governemnt, $16 trillion of debt and counting.

                • Alex Seferian

                  Derryl wrote: “…private banks create ALL the money that gets spent into the economy…” and I have three sets of questions:

                  1. Does the above statement imply that in a first instance, the private sector obtains money by necessarily borrowing initially from banks, and then spends that money and also pays taxes with it? If so, then indeed 100% of money in circulation would be private bank money, considering that the current rules clearly oblige the US government to borrow from private banks any “deficit” spending (spending in excess of its tax receipts). However, what about a hypothetical case where a government spends first? Is this technically feasible under the current settings, i.e., can the US Treasury order the FED to credit bank reserves to the private sector without first having funds in its TGA? I am not asking about what “could” be possible, as much as what “is” actually done today or how the current system really works.

                  2. It seems that the above depiction of how money is created is irrespective of whether the FED is considered a private, or a public entity. There is out there quite a bit of disagreement regarding who actually owns and/or controls the FED, but the analysis presented above seems to sidestep that debate entirely the minute the FED’s actions are so curtailed: 1) The FED is not allowed to directly buy Treasury securities from the government, so the Treasury cannot directly obtain from the FED money created by the FED, and 2) The FED is not allowed to grant overdraft privileges to the government. Moreover, FED money is not really ‘money’ as it cannot be spent into the economy (it is reserves). Depending on the answer to the first set of questions (under 1. above), the FED cannot “create” any money whatsoever for the Treasury. Therefore, whether the FED is, or acts like, a private or public entity is a mute point. Private banks create all the money in an economy (except for the relatively small amounts of coins, etc.). Correct? Again, the question relates to how the system actually works today in the US.

                  3. The zero-sum (if not negative sum) money creation system and its underlying (borrow/spend/earn-and-spend-again-to-repay-loan) dynamic, implies (given the “100% of money in circulation is debt money” statement) that defaults are ultimately highly likely when there are savings in an economy. The minute there are savers, the debts linked to those savings cannot be repaid unless new debt is issued to replace the old debts. The system is prone to eventually breaking down, not only because of interest payments (hence the negative sum inference), but because the more savers there are, the less people will be able to repay the loans. Whether borrowed money is put to productive use or not, following this train of thought, is to a degree irrelevant in terms of the ability of the system to avoid defaults. Yes, spending money on an efficient factory, for example, will help an individual borrower repay his debts, but in the aggregate what matters is the amount of savings and the willingness of banks to roll over debt. The more savers there are, and the more banks there are that demand collateral, instead of agreeing to refinance, the more defaults there will inevitably be. Can any one poke a hole through this logic? At least in terms of double-entry accounting, it seems to make sense.

                  Appreciate in advance any feedback to these questions.

                  • Derryl Hermanutz

                    Everything you wrote is an accurate description of the way the money system currently functions. You have completely grasped the arithmetic relations of money (savings) and debt accumulations and the inevitable consequences for a “money economy” whose economic powers are only activated by the spending of money. As long as ever increasing new debt is adding ever increasing new spending into the economy, the money system appears to work. But when money growth goes flat or negative the “Ponzi arithmetic” of our bank-debt money system becomes visible when we SEE the consequences: systemic default on mortgages and all other kinds of consumer loans is the first effect, and the other consequences of reduced spending (which is reduced income to the recipients of the spending) all fall into logical sequence. When you understand this arithmetic, then you are able to see the “driver” of financial history, and that history becomes comprehensible.

                  • On #3, if someone invents a better mousetrap, takes out a loan and builds a factory and sells his product and makes a profit and pays back the loan, and his workers have income that they didn’t have before, and they spend some and save some … the people who bought those mousetraps didn’t buy something else, so total spending in the economy was unchanged, and the workers who made the other products that weren’t bought got laid off and couldn’t repay their loans.

                    Instead, if Boeing invents a better fighter plane, and the government “takes out a loan” to buy it, Boeing hires more workers and they spend into the economy, but nobody’s income is reduced because the planes are new production funded by a new loan by the government. A loan that will never need to be repaid, because the Fed on that same day bought up Treasury bonds in an equal amount to what the Treasury sold in order to fund the plane. All the bond operations are a wash, Treasury sells, the Fed buys, everything in the bond world looks exactly as before.

                    So now there’s more money in the private sector, but not any more bonds. The “national debt” is larger, but the extra is owed by the left pocket to the right pocket of the same government. Private banks have no more bonds than they used to have, and the private sector in the aggregate owes or is owed no more than before, but those Boeing workers are now able to pay off loans that they could not pay off before, because now they have incomes that they didn’t have before.

                    I think that is a situation of government creating money, not banks creating money.

                    If the laws were different, and Treasury could deficit spend without first issuing bonds, the result would be the same. Money created by spending. So even with the laws in place, and government forced to do these “wash sales” in the bond market, isn’t the money still created by government deficit spending, and not by any private sector banks?

                  • Derryl Hermanutz

                    Yes, you are right. Debt that is never repaid leaves the new money that was created by the new debt permanently outstanding in the economy. When the Fed buys the bonds it is creating new money a second time. A primary dealer bank created the original money that the government then spent into the economy, but the government owes interest payments and principal repayment to the private sector bondholder–the bank. So the government has to tax the money back out of the economy to repay its loan principal, just as a private sector debtor has to earn his money back out of the economy to repay his bank loan. But then the Fed creates new money a second time to buy the bond from the PD. Now the PD has the cash as a new addition to its Fed reserve account balance, and the Fed is now the bondholder. If the government has to get new money to redeem its bond from the Fed when the bond matures, then the government has to tax money back out of the economy to make that payment, and the Fed gets back the money it created, and shrinks its balance sheet. This is the current reality. The Fed could continue to expand its balance sheet by buying ever increasing amounts of Treasury debt so the government can get the money to pay its old debts by issuing new debts that the Fed buys and holds. But that’s exactly what any bank does during a “credit expansion”.

                    Bank money creation is a balance sheet operation, where the new money is a “liability” of the money issuing bank, and the new debt is an “asset” of the bank. New loans or new bond purchases expand both sides of a bank balance sheet, adding an equal sum of new assets and new liabilities. Debt repayment shrinks the balance sheet, reducing debt and reducing money by the same amounts. When the debtor gets money out of the economy to pay his debt down to $zero, the economy has that much less “money” and the debtor no longer has any debt. Money remains in the economy as long as some borrower has debt “outstanding”. As long as total debt, public and private, keeps rising, there will always be new money added into the economy to repay old debt, even if people are “saving” some of the new money rather than respending it. New debt adds new money, additional money, that adds to the system’s total money supply.

                    The arithmetic does not care whether the new money came from government or private debt. All that counts is that additional new money is continuously added into the system. This is why money economics is “macro” economics. You cannot understand its causes and effects unless you look at the system as a whole. Distributions of money and debt “within” the system affect the “flows” of money: if savers have all the money, and spenders have all the debt, there will be no money flowing from the people who have it to the people who need to earn it to repay their debts, and you get “financial crisis”. Which we are in now.

                    “The US$” is a money system. The Cdn$ and the euro and the yen, etc are other money systems. The money in each of these systems is issued by banks, including central banks, who are authorized to create money denominated in those currencies. Cdn banks cannot create US$ loans, for e.g., just as US banks cannot create yuan loans. Only banks who are legally authorized by the presiding government can create new money in those currencies. The money is created within each currency system as a balance sheet equation of debt and money. So all of the money is always owed as debt by the party who borrowed and spent the money into the system’s economy.

                    The Fed can keep doing QE forever, keep expanding its balance sheet by creating new money to buy Treasury debt. The PD banks can keep creating new money to buy new issues of Treasuries, which Treasury will spend into the economy adding to the “outstanding” money supply, and the Fed can keep buying those Treasuries from the PDs, adding to the PDs’ excess reserves in their Fed accounts. The US remains a nominally “fractional reserve” system because banks who are allowed to create US$ are still required to hold “statutory” reserves of the Fed’s reserve balances and Federal Reserve banknotes. So the PDs can can create new bank loans as a multiple of thier reserves, but they can’t actually spend or lend the reserves. The reserves are an “asset” on the PDs’ balance sheets (the Treasury securities that they sold to the Fed were also assets, so selling Treasuries to the Fed in exchange for cash is an “asset swap”). According to Colin Lokey on a Seeking Alpha article today, the PD’s are using their excess reserves to buy new issues of Treasury debt, which transfers the reserves cash to Treasury’s bank account and let’s Treasury spend the money into the economy. Then the PDs are “rehypothecating” their Treasuries, pledging them as collateral against loans of new credits in the shadow banking system, where they are using the new credit money to bet in the financial economy trying to “earn” their way back to solvency. To keep their balance sheets balanced these banks will need to attract “deposits” of the new money that Treasury spends into the economy, as deposits are the banks’ “liabilities”. To balance its balance sheet, for a bank and for the system as a whole, assets must = liabilities. OR, because the bank’s “capital” is the other component of its liabilities, the banks can add the new money they ‘earn’ from their bets into their capital account, thus getting a head start on Basel III’s new capital requirement regime. In other words, the banks are manipulating the new money into bank “profits” with will be retained in their capital account to raise their capital to Basel III levels. Bank deposits are “the economy’s” savings, but bank capital is a “bank’s” savings.

                    Money is a tangled web of obfuscation. In his 1975 book, “Money”, John Kenneth Galbraith wrote, “The process by which banks create money is so simple that the mind is repulsed.” Galbraith knew that banks create money by lending it to us and to our governments. The mind is repulsed by the sheer fraudulent audacity of allowing private businesses to create money and to charge rent (interest) on ‘loans’ of something that the banks do not actually have. We build up the real wealth of nations with our labor and resources, then we pledge the fruits of that labor–the houses, cars, national infrastructure, etc–to the banks as “collateral” on their loans of money to us so that we can have money to facilitate our economic exchanges. The loans cannot all be repaid, so slowly and surely the banks end up foreclosing and owning the real wealth of nations. Which is what Thomas Jefferson meant in 1802 when he wrote,

                    Quotation: “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…I believe that banking institutions are more dangerous to our liberties than standing armies… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

                    Millions of foreclosed Americans are today homeless on the continent their Fathers conquered. Jefferson’s fear has come true. This is not because “the government creates the money”. It is because private banks create the money. Jefferson and a stream of monetary “reformers” have and are “advocating” that the government create money. But it HAS NOT HAPPENED, and defeat of the platinum coin is just another in the long line of defeats of the defenders of liberty at the hands of the bankers. Banks issue money. The rest of us issue debt. We owe debts to the bankers. This is not an accident. It is the outcome of an ancient political battle, that we have consistently LOST and the bankers have won. It is not a comforting prospect, but as Galbraith knew, it is the simple truth.

                  • Alex Seferian

                    Derryl wrote: “But then the Fed creates new money a second time to buy the bond from the PD.”

                    From that moment onwards, if the Fed ends up buying the treasuries in golfer’s Boeing example from the primary dealers that initially participated in the bond sale, then it seems to me that it would be as if the Fed funded the Treasury in the first place; clearly, the Treasury has to pay interest and principal to the Fed, as it is the Fed that holds the securities created by the private banks. The Fed is the “banker” in this example… a banker that even if it did not create the initial credit money, is the beneficiary of the asset linked to that credit money. The Fed bought the government securities with keystrokes, with money created a second time by crediting the private bank accounts with reserves. Expanding its balance sheet as you state. However, regarding the key question (‘who creates the currency?), indirectly, THEREFORE, it is the Fed who would have created the money in golfer’s Boeing example… under current laws. Hence, if you believe that the Fed is a government entity, then the Boeing example would indicate that the Government has the power to create fiat currency. If you believe that the Fed de facto acts as a private entity, or protects the interests of a private group, then one would conclude that the Government does not really have the power to issue fiat currency in the Boeing example. Derryl: do you agree?

                  • Thank you Derryl and golfer for the feedback. I did some further research and came across a note in a separate web that states: “By law, bank deposits are convertible into the central bank’s banknotes, dollar bills and $5s and $20s. But commercial banks must borrow banknotes from their central bank, so even the “cash” that is printed by a credit money system comes into circulation as a debt, because the commercial bank owes the cash to its central bank as repayment of the banknotes it borrowed.” Two comments follow:

                    A. From the above (if read correctly) one can infer that when the Primary Dealers create money out of thin air to buy debt from the Treasury, they must in parallel borrow from the Fed. THEREFORE, it is the Fed that is ultimately creating the money.

                    B. The above is separate from the concept that after credit money is created by the private banks to buy Treasuries from the government, the Fed can then buy those same securities in OMOs, which the Fed would do by creating reserves out of thin air.

                    If point A above is technically correct, then the debate as to who is the sovereign issuer may indeed boil down to whether the FED is or not part of the government.

                    If this is not asking for too much, Derryl your feedback would be most appreciated on this question: is the statement made in A. above correct?

                    Also, could you please address a question in the earlier post. Can the US Treasury order the Fed to credit bank reserves to the private sector without first having funds in its TGA?

                    Thank you again.

                  • Derryl Hermanutz

                    Alex wrote,
                    “If point A above is technically correct, then the debate as to who is the sovereign issuer may indeed boil down to whether the FED is or not part of the government.

                    If this is not asking for too much, Derryl your feedback would be most appreciated on this question: is the statement made in A. above correct?

                    Also, could you please address a question in the earlier post. Can the US Treasury order the Fed to credit bank reserves to the private sector without first having funds in its TGA?”

                    Firstly, on the last question, No, under current law Treasury (the executive branch) cannot order the Fed to credit its accounts. Congress, the legislative branch which had authority to pass the 1913 Federal Reserve Act and subsequent Bank Acts, has the authority to “change” the legislation. But until the legislation is changed, the Fed is not allowed to create money for the government to spend, and the government has no power to create money except for coins and United States Notes (greenbacks), but the few hundred million of authorized US Note issuance is a pittance in today’s world of $trillions. US Notes were taken out of circulation in 1996. The platinum coin would have been a game changer, breaking the back of the bankers’ virtual monopoly of money issuance, because the coin is “currency” whose value is “created” by government fiat, and the Fed would have to accept the coin as a deposit and credit Treasury’s TGA account with the $trillion “deposit”. The Fed would essentially be “making change” for the government’s trillion dollar coin, as the government does not spend money in trillion dollar chunks.

                    On the first question, it is true that the US maintains a nominally “fractional reserve” money system, where commercial banks are required to hold reserve balances as a fraction of the new credit money that they create. In bygone days monetary authorities practised the “quantity” approach to monetary policy by increasing or reducing the quantity of reserves they made available to commercial banks, which increased or reduced their ability to create new loans. This is essentially a throwback to gold standard days where paper money and credit money could only legally be created as some multiple of a bank’s (or a nation’s) holdings of actual gold. But in the 1990s this approach was abandoned and many nations abandoned “statutory” reserve requirments altogether.

                    Today the US requires banks to hold, I think, 10% reserves. But this is no constraint on new bank lending because banks create and lend new bank deposit money “first”, then the Fed provides as much reserves as the banks need to satisfy the reserve requirement. As collateral for the Fed’s “loan” of reserve balances, the Fed will accept whatever collateral the bank itself loaned against (real estate, Treasury securities, etc.). So banks create new money and the Fed creates new reserves, basically no questions asked. Monetary policy is now exercised by the “market” approach, where the Fed sets an interest rate target to “encourage or discourage” (rather than “permit or prevent”) borrowers and lenders from asking for and making new loans. Under the quantity approach a banker could honestly say “I can’t” make a new loan, because the Fed won’t give me any more reserves. Today banks say “I won’t” make a new loan, because I don’t think we can make a profit from lending to you.

                    It is true that all banks within a currency system are still required to convert their customers’ demand deposit balances into their central bank’s “cash” ($20s, $100s, etc) “on demand”. So banks have to carry a certain quantity of vault cash to satisfy their customers’ cash needs. The amount varies depending on technology. Debit cards directly access bank accounts, which reduces people’s use of cash. But ATMs make cash withdrawals convenient, which increases people’s use of cash. Canadian banks, who have no formal reserve requirements, have found that they need to keep cash on hand equal to about 4% of their customers’ total demand account balances.

                    But banks will not give you large sums of cash even if you have a large checking account balance. For large withdrawals you have to ask in advance to allow the bank time to bring in additional cash. Depending on whether you deal with a large bank at its main branch, or a small bank or a local branch, you may only be able to get as little as $5000 out of your checking account just by going up to the teller window and making an on the spot withdrawal. If the bank gives one customer too much of its vault cash, it may not be able to cash out even small sums for other customers that day. Vault cash earns no interest so it is a “non-performing asset”, so banks minimize their holding of vault cash. If you read the small print on your bank account agreement you will see that banks have no obligation to convert your savings account balances into cash “on demand”, and that there are limits to the magnitude of checking account balances they are obliged to convert to cash with no notice.

                    So to answer the first question, Yes, central banks “could” control commercial bank money creation by restricting access to reserve balances and to cash. But they don’t. So we come down to the question, “Who is really in control of monetary policy: bankers or the people’s representative government?” In fact the monetary system serves the interests of money creating bankers agaisnt the intersts of the people who would almost certainly be better served if the government issued some of its own debt-free money. So I say the proof is in the pudding. We “know” the technical reforms that would benefit the people, but we don’t “make” those reforms because they are contrary to the interests of the bankers. If the government is “captured” by the banking system that the government is supposed to legislate and regulate, then bankers, not the people, are the monetary sovereigns in the real world as it is today.

                  • Alex Seferian

                    Thank you Derryl. Very helpful.

                  • Derryl,

                    “The Fed could continue to expand its balance sheet by buying ever increasing amounts of Treasury debt so the government can get the money to pay its old debts by issuing new debts that the Fed buys and holds. But that’s exactly what any bank does during a “credit expansion”.”

                    And what the Fed has been doing since its inception, gradually (until 2008) growing its balance sheet.

                    “Bank money creation is a balance sheet operation, where the new money is a “liability” of the money issuing bank”

                    Not a liability of the United States, backed by the full faith and credit thereof. So if the bank were to fail, that money would be worthless, but for FDIC insurance. Not like government money. This, then, is the second stage of the hierarchy. Having $1M in your bank account is not the same as having 10,000 $100 bills.

                    When you buy a car, the auto manufacturer gives you a promise to deliver a rebate. That’s a third level of the hierarchy. His bank might not fail, but if his account goes overdrawn your rebate is toast.

                    I can give my bookie an IOU for $2 to bet on a horse. I might pay him, or not. Each of the 2nd, third, etc., levels are obligations to deliver a higher level. But they all stem from the highest level. Even though denominated in the unit of account, they are not all dollars. They are not money. They are promises to deliver money. Only government truly creates money. The rest create IOUs. Some IOUs are worth more than others, but none are e new money.

                    It is true that over time, without other intervention, creditors will acquire all the money and all the real wealth. Except that there is intervention. Government deficits create new money that goes ultimately to the savers (creditors). If that new money is enough to satisfy saving desires, there is no need, in the aggregate, for defaults and bankruptcies. If not, then as you say, the debtors can never catch up, in the aggregate, no matter how much real wealth they may create.

                  • Derryl Hermanutz

                    Currency, $20 and $100 bills, are liabilities of the Federal Reserve Bank. Read the money in your wallet. It does not say United States Note. It says Federal Reserve Note. Regardless of whose notes they are, the Fed is only “liable” to “redeem” your $100 Federal Reserve Note for a new $100 Federal Reserve Note, or for 5 $20s, etc. The Fed’s banknotes are now the “base”, most fundamental form of “money”. Paper bank notes used to be (theorietically) redeemable in gold. Gold was the “base” money. But now it’s just the banknotes. The Bureau of Printing and Engraving is part of the Treasury Department, which prints the banknotes and sells them to the Fed for the cost of printing (about 10 cents per banknote on average: $100s cost about 14 cents due to higher security features). The Fed lends banknotes to the commercial banks at face value, so the Fed gets the seigniorage on banknotes. But since the 1980s, after deducting its operating costs (and the dividends the Fed pays to its owners: the Fed is privately owned, after all) the Fed remits to Treasury all of its profits, including seignorage, so Treasury actually gets the seigniorage in the end. The Treasury also gets back most of the interest it pays on the Fed’s holdings of Treasury securities.

                    So US$ currency, which is printed by the Treasury but issued by the Fed, is not really backed by “full faith and credit” of the US. It is backed by the Fed’s obligation to give you US$ money in settlement of your holdings of US$ money. The Fed’s “liability” is circular and meaningless. But the commercial banks within the Fed’s domain do have a real liability of converting their customers’ bank deposit money into the Fed’s “cash” money. The banks create their own bank deposit money, but only the Fed can issue cash. A failing bank can be denied cash by the Fed, so a commercial bank can fail to honor its liability. The FDIC (the government) insures bank deposits up to $250k. So if you have more than $250k of bank deposits in a failed bank, you might not get all your money back.

                    But what I have been asserting remains true. The banking “system”, which includes the Fed and the commercial banks, creates all the money. Aside from coins, the government does not create any money of its own. In the roundabout manner of QE the Fed can monetize government debt, and remit its interest earnings from government debt back to the government. But it is still the case that the government CANNOT spend more money than it takes in from taxes unless the government first “borrows” that money from the banking system that enjoys a legal monopoly (except for coins) on the creation and issuance of US$ “money”. The government has legislated this system into existence and can legislate it out of existence. But under current law the government is a currency user and the banking system is the currency issuer.

                  • Alex Seferian

                    Golfer1john wrote: “It is true that over time, without other intervention, creditors will acquire all the money and all the real wealth. Except that there is intervention. Government deficits create new money that goes ultimately to the savers (creditors).”

                    I think that Golfer and Derryl you both still disagree fundamentally about whether or not the government can create fiat money. Derryl: no. Golfer: yes. Having had the benefit of participating in this debate, and for whatever this is worth, I am inclined to say that the answer is both ‘no’ and ‘yes’.

                    We all acknowledge that the Fed cannot directly purchase US debt securities. We also acknowledged that the Fed can purchase those same securities in OMO. When the Fed buys these securities, it credits the PDs with reserves. Therefore, the original “money” that is “in circulation” is indeed created by private banks. However, the Fed becomes the holder of the government debt asset with the OMO, and receives money interest and principal payments henceforth. So even though the Fed did not create the actually “credit money”, it did create a mechanism for the Treasury to obtain credit money, and the PDs bear no additional risk because the operation is coordinated in advance. Therefore, whilst it is true that all money in circulation is private bank money, it is only technically true that the government DOES NOT “create” money. It is like referencing the owner of a widget factory. The owner doesn’t produce the widgets himself, but that is only true in a very strict sense. In the same way that it would be acceptable to say that the factory owner does produce widgets, it is not misleading to say that the government DOES create money. The only way one could actually still not believe this to be the case is if one believed that the Fed is not part of the government; but that is a separate matter.

                    If one believes that the government can create fiat currency, or “vertical” money, (albeit indirectly), then the comments made by Derryl about a zero-sum money system are a bit diluted (because the “vertical” money begins to make the system partially positive sum). Even so, given the $70 trillion to $1 trillion (private-to-Fed-debt) proportion, I personally find Derryl’s bottom line conclusions about money very revealing. This thread has been very instructive so thank you again both! I will probably sign off from here.

                  • Some IOUs are worth more than others, but none are e new money.

                  • So, the essence of the difference between you and MMT is that MMT considers the Fed part of the government, and you consider it part of the “banking system”. It’s not about who creates the money, it’s about what label you put on the money-creator.

                  • Derryl Hermanutz

                    Yes, I disagree with MMT because MMT says “the government” creates US$ money and government deficit spending creates the US$ money supply by “marking up accounts” in the banking system. I say the government does no such thing because the government has no legal power to reach into the banking system and change numbers in bank accounts. I say banks enjoy a monopoly authority to mark up and mark down bank accounts, because banking and US$ money issuance is a privately owned for-profit business, not a public utility owned and operated by the government. Nor is money and banking a government function that the government “contracts” to private bankers. Congress has legislatively “transferred” the government’s money issuing power to a private banking system. The money and banking system is owned and operated privately, legally outside the realm of government.

                    I agree with MMT that this is not how the system “should” be legally structured. But this is how the system “is” structured, and will continue to be until Congress changes the relevant legislation. MMT began with Warren Mosler’s brilliant, “Soft Currency Economics”, which he wrote in 1995, describing what a monetarily sovereign government could do via its ownership and operation of a fiat money system unconstrained by a gold standard. But we don’t have that kind of system so the government can’t do those things. The US$ fiat money system is privately owned and operated, not government owned and operated.

                    The distinction between “the government” and “the Fed” is not ‘mere’ semantics and is not legally open to “interpretation”. Labels “count”, because labels have legal implications that grant powers to and impose limitations upon the parties whose actions are affected by the laws. “Congress” is not “the executive”. Treasury (and the other cabinet departments) and the President are the executive. Congress has told the executive that a privately owned banking system that is not part of the government will create all US$ money. The 1913 Federal Reserve Act, passed by Congress, formally and legally privatized the issuance of US$ money. All US$ money is issued by a privately owned for-profit banking system. The money is issued as bank deposits, which are convertible into central bank banknotes which function as the system’s cash money. Central bank banknotes are legally “money”, which is “final payment” for all debts and obligations. The executive is not allowed to issue money (except coins). Only “banks”, both the central bank which was created by Congressional legislation, and the “depository institutions” that are granted legal government charters to operate as “banks”, are allowed to issue money.

                    Treasury (the executive body, “the government”) collects taxes and spends money. Congress (the legislative body, purportedly representing “the people” of the USA) tells the government how much taxes it can collect and how much money it can spend. Congress tells the government what options it can exercise to get spending money beyond taxes in cases where Congress authorizes deficit budgets. Congress has told Treasury it must borrow the deficit spending money from primary dealer banks by selling Treasury securities, which are the government’s interest bearing “debts” to the money lenders. Primary dealer banks create the bank deposit money that they use to buy the Treasuries. This is the source of the money that the government deficit spends: it is “bank deposit money”, not “government” money.

                    The PDs can then sell those Treasuries to other parties, including other banks. The PD banks sell Treasuries into the global “secondary” markets. When another US chartered bank buys a Treasury security from a primary dealer bank, the other bank pays for it by creating another new bank deposit and taking possession of the security. The deposit is a new liability on the buying bank’s balance sheet, and the security is a new asset on its balance sheet. The buying bank has “expanded its balance sheet” by adding a new asset and an equal new liability. The PD bank had previously expanded its balance sheet by purchasing the newly issued Treasury debt, but now it shrinks its balance sheet by selling the security, which allows it to also reduce its liabilities. All US banks buy Treasury securities by creating new US$ bank deposit money.

                    Non-banks (and foreign banks) buy Treasury securities with money that is already in existence as their “savings”. Pension funds, foreign banks, and other institutional buyers of Treasury securities possess pools of US$ savings, which they “invest” in Treasury debt to collect the interest as their interest income. Foreign central banks act in the same way as institutional investors. China possesses about 2 trillion dollars of US$ savings that Chinese companies earned by selling stuff to Americans. But Chinese companies pay their workers and other expenses in yuan, not dollars, and earn their profits in yuan, so they need to convert their dollars to yuan. They deposit the dollars in their Chinese bank, the bank converts the dollar credit to a yuan credit, and China’s central bank takes possession of the dollar credits and credits the business’s bank in yuan.

                    This is how export earnings create new money in the exporter nation’s currency, a net addition to their money supply. Payments for imports, conversely, reduce the importer nation’s money supply. Goods flow in, money flows out. Or for net exporters, goods flow out, money flows in. Either way, one nation ends up with more goods, the other with more money.

                    Exporters benefit from a devalued home currency. If the dollar exchanges for 6 yuan, then for each dollar of export earnings the Chinese exporter deposits in his Chinese bank, he will be credited with 6 yuan. But if the yuan devalues to 7 yuan to one dollar, the exporter gets 7 yuan for each dollar of his export earnings. Eventually there may be price inflation in China which reduces the purchasing power of each yuan, but in the short term currency devaluation is a major money maker for exporters.

                    The “dollars” were not likely paid in the form of Federal Reserve banknotes, though Chinese banks and the central bank have pallets of these banknotes on hand for their customers’ “foreign currency” exchanges of their yuan into US$. The dollar payments were made electronically, or by check. So China’s central bank holds US$ as “numbers” in international banking system computers. Money numbers in computers earn no interest, so China “invests” the money numbers buying Treasury securities for the same reason as pension funds do it: to earn interest on their pools of US$ savings. Bank deposits are money numbers in banking system computers. These money numbers comprise almost all of the total “money supply” that exists in any currency system like US$ or Chinese yuan. Bank deposit money is our primary form of money.

                    The Chinese government and people “spend” some of China’s US dollar earnings buying US exports and buying real estate and businesses and other assets, and goods, in the US and in the many other countries around the world that use both US$ and their own national currencies. But China invests much of their US$ “savings” in interest bearing Treasury debt. The US$ still functions as the world’s reserve currency and the world’s primary settlement currency, so central banks need to hold US$ in reserve and when, for example, an importer in Paraguay has to pay an exporter in Argentina for a delivery of beef, the Argentinian wants to be paid in US “dollars”, not Paraguayan guarani. The dollar is still the internationally accepted settlement currency.

                    In the first instance nations earn dollars by exporting to the US and getting paid dollars. The US could earn those dollars back by exporting to the countries that the US imports from, but then those countries could not accumulate US$ reserves and US$ savings with which to pay other nations for imports. Nations get US$ by running trade surpluses with the US, and the US (from the macro perspective as the dollar-issuing “system”) gets to pay for imports with dollars created by keystrokes on US banking system computers. Charles de Gaulle rejected this “exorbitant privilege” in 1971 when he demanded that the US redeem France’s holdings of US dollars for US gold at $35 per ounce as per the 1946 Bretton Woods “gold-dollar” international payments system. Nixon, running short of gold-backed money-creating power to finance the Vietnam war, refused, and ended the US dollar’s link to gold.

                    US trade deficits provide the world with US$. US budget deficits provide the world with Treasury securities, “safe” interest bearing investments denominated in US$. US trade and budget deficits have produced the twin monetary pillars of the international money system since 1946. US chartered banks create the US$ money that nations hold as reserves. The US government creates the US$ debt that nations hold as investment vehicles for those US$ reserves. The international Treasury security market is highly liquid, which means it is quick and easy to sell Treasuries for US$ money in the world’s money markets. So nations can hold their US dollars in what amount to interest paying “savings” accounts (Treasuries) rather than non-interest paying checking accounts (cash).

                    Maybe the world is changing and the US$ is losing its global status, in which case nations will no longer support US trade and budget deficits by selling their goods for dollars and saving those dollars in the form of Treasury securities. In that case de Gaulle would be vindicated and the US really would have to learn to “live within its means”. Some countries have made bilateral or regional agreements to settle their import/export trades in their own currencies, bypassing the dollar. But no global alternative is on the horizon to replace the dollar, so US trade and budget deficits still have a role to play in the global financial system.

                    Nevertheless, the benefits that accrue to the issuer of the global reserve and settlement currency do not flow to the US government or the US people. The benefits flow to the parties who own and operate the US$ money system, the people who issue the money, which is bankers. The costs–the interest bearing debts–flow to the government and to the people. So we see today the bifurcation of America into a small class of very rich people, and a large class of very indebted people and governments. Government money issuance would be a remedy to this anti-republican state of affairs. Unless, as some suggest, the US constitution (which was written in secret congress while Jefferson was in France) was actually written by plutocrats for plutocrats. In which case the American republic is performing according to plan.

                  • Derryl wrote: “The US$ fiat money system is privately owned and operated, not government owned and operated.”

                    Is it conceivable that the Fed could unilaterally decide to not cooperate in the event that the US Government approved a deficit expenditure? I think this is the key question concerning the debate as to whether the US Government can or cannot create fiat money.

                    By “cooperate” I mean do whatever is needed to ensure that the expenditure gets funded within “the system”, which could include coordinating with the Treasury and the PDs, and executing a follow-on OMO. The PDs would play along as they would earn a profit and their balance sheet would be expanded, but then contracted. In terms of risk-return, this would be a no-brainer for them.

                    In terms of the Government, the end result would be that the Treasury securities would end up on the Fed’s balance sheet. The Fed would therefore be the owner of the related cash flows, and rights. Only if the Fed were able to “rebel” (when the time came to perform the original OMO, or when the time came to refinance), would it be the case that the Government cannot create fiat money.

                    Yes, the money “in circulation” would be private bank money, and yes, technically speaking the Government would not have itself created what is used to deficit spend. However, in the same way that the owner of a widget factory can be said to produce widgets (even though it is actually the labor he or she employs and the machines that were bought which do so), it could be said that the Government is creating “vertical” money. The bottom line is that unless the Fed can stop playing along, JD Alt’s point that deficit-spending-government-debt never has to be repaid tends to be valid.

                    Whether the people in power (the Treasury, the Fed, Congress, the President, etc.), would approve such a deficit expenditure is a separate point. A politician has certain powers, and he or she can use them or not. The same applies to the money system and its actors.

                    What prompted this thread was a comment about what “can” happen versus what “does” happen. I think MMT makes the point that under the current system, the Government “can” create fiat money. Whether it does or not, will depend on the actors in power at any given point of time. However, the point is that without minting a platinum coin, it seems to me that the current system, with no changes (although the debt ceiling is a limiting factor), allows for “vertical” money to be created, and as a result, the “zero-sum-money-system-dynamics” are partially diluted when this happens.

                    Until someone can explain that the Fed can one day wake up and JUST SAY NO, MMT’s stance on this fiat currency debate I think makes a lot of sense.

                  • Derryl Hermanutz

                    The Fed does not need to “help” the government fund its deficit spending. Each PD bank is required to “successfully” bid for a minimum quantity of new Treasury debt, so the PDs “have to” fund the deficit spending with new deposit money. Government debt has been deemed “zero risk” for capital adequacy purposes, so a PD is not capital constrained and can buy and hold an unlimited quantity of new Treasury debt. Treasuries do not “count” against the bank’s capital adequacy ratio. The Fed will provide any new reserves that are needed by the PDs in exchange for the PDs’ pledge of their “risk free assets” (Treasuries) as collateral.

                    The only issue with PDs holding unlimited quantities of Treasuries is that they have to balance their balance sheets. Which means if a PD creates $200 billion to buy new Treasuries, the PD then adds the new $200 billion to the asset side of its balance sheet. The PD simultaneously created a depsosit of $200 billion in Treasury’s bank account at that PD, so its balance sheet is expanded and remains in balance. But Treasury transfers the deposit to its TGA account at the Fed, so now the PD is short $200 billion of deposits on the liability side of its balance sheet. Treasury spends the new deposit money into the economy, and the recipients of the spending deposit the money in their bank accounts at various banks, and maybe some of it ends up deposited in the PD bank that bought the Treasuries. But the PD will have to attract or borrow other deposits to total the new $200 billion asset it has added to its balance sheet. As long as the PD can borrow deposits at an interest rate lower than it receives on the new Treasury asset, the bank makes money on the transaction.

                    But in fact the Fed has been taking these assets off the hands of the PDs so they don’t have to worry about attracting new deposits to equal their new asset purchases. Either way, Treasury is borrowing and spending commercial bank “bank deposit money”, not “Fed” money. And unless the Fed radically changed its monetary policy and resumed the “quantity” approach where the Fed prevents new bank loans by restricting its issuance of new reserves to cover the fractional reseve requirement, the Fed is not in a position to “block” the Treasury’s funding of its deficit spending by selling new debt to the PD banks and via them to the secondary markets.

                  • Alex Seferian

                    Derryl wrote: “But in fact the Fed has been taking these assets off the hands of the PDs so they don’t have to worry about attracting new deposits to equal their new asset purchases. Either way, Treasury is borrowing and spending commercial bank “bank deposit money”, not “Fed” money.”

                    It seems to me that what matters in a debate about whether the US government does or does not create sovereign money (i.e., money at the top of a “pyramid”, “vertical” money, or however one may want to define a money that represents a net positive injection of wealth into an economy), is the extent to which the Fed takes the Treasury securities off of the hands of the PDs, and does so by creating reserves out of thin air. It terms of this debate, and as long as the Fed takes the Treasuries on its books when there is deficit spending, it does not matter whether the Government actually spends “bank deposit money” or “Fed” money.

                    For example, if the Fed takes on its books 100% of those Treasuries sold to PDs in relation to any given government expenditure, then that expenditure can be said to be a net positive injection of wealth into the private sector; the “bank deposit money” received by the private sector when the Government spends, has no liability associated to it in so far as the private sector is concerned. The Government has a liability to itself which can in theory never repaid as JD Alt originally posted in this thread. This is “positive money”. In this case, MMT’s assertion that ‘Government deficits are the financial equivalent of the non-government’s financial wealth’ would be correct (although the “quality” and “quantity” of those deficits matter to avoid inflation). In this case too, other MMT statements would be equally valid, including: ‘the US government is not a currency user’, ‘the US government cannot voluntarily default on its own obligations’, and ‘the US government does not borrow its own currency’. Yes, one could poke some technical holes into part of this narrative given the “bank deposit money” versus “Fed money” concept, but in terms of core principles and end-results, the statements WOULD NOT be misleading or false in my opinion.

                    If on the other hand, the Fed does not take on any of the Treasuries in the above case, then there will be a private sector liability linked to the Government expenditure: the debt that the Government has with the PDs (or which ever entity ends up holding the securities within the private sector). In a hypothetical world where the Fed NEVER takes on its balance sheet Treasury securities (just to carry this example to a limit), when the time came to pay the Government debt (either when it initially matures, or when it eventually matures in the case of refinancing(s)), then the Government would have no other option but to use money it has collected in taxes. The end result is that the original government expenditure will NOT have been a net positive injection of wealth into the economy; yes, it would have been initially, but that wealth (plus interest) would have eventually been taken back through taxes, and in order to close the credit loop. In this case, MMT’s assertion that ‘Government deficits are the financial equivalent of the non-government’s financial wealth’ would not hold. In this case too, the US government WOULD BE a currency user, and it COULD default on its obligations (as these obligations would not be its “own” obligations).

                    So back to the “can” versus “does” debate. CAN the US Government create “vertical” money? I believe that the answer is YES, despite the technicalities mentioned above. DOES the US Government create “vertical” money? Well, let’s look at the facts. What percentage of total Treasury debt does the Fed hold? I think that is the key metric. The closer that figure is to zero, the more we are in a world with the sort of “zero-sum-money-system” dynamics that you have described. I think MMT followers have to be careful with this point. The experts when they write do tie it all together: for example, in yesterday’s movie posted in NEP, the point about the Government deficit being equivalent to the non-government’s financial wealth is indeed tied to the point about the Fed having to provide reserves to purchase the Treasuries. However, some followers that gloss over statements about deficit spending may form the wrong conclusions. I believe that the “can” versus “does” debate should come up more in MMT forums, and your contributions in this post have been very helpful.

                  • Derryl Hermanutz

                    Bottom line Alex: the government is $16 trillion in debt and Congress is threatening to stop the government from going further in debt. The government does not owe the money “to ourselves”. It owes the money to bondholders who loaned money to the government. The primary lender is the primary dealer banks who directly purchase new issues of Treasury debt at auction. They can sell that new debt to other lenders, the public or the Fed. But when the bonds mature the government has to redeem them in money, and the government can only get more money by taxing or borrowing, not by “creating” or ‘spending”. Banks do not “owe” the money they create to anyone. It is their property. When banks create and lend money, the money is owed “to banks”, which are not “the government” or “ourselves”. So banks don’t go “in debt” when they lend money. But the government goes “in debt” when it spends more than it taxes, and the government has to “borrow” the balance. A money issuer issues “money”. The US Treasury issues “debt”. If you cannot understand this simple distinction then you will never understand why the US is in the financial straightjacket it finds itself in today. The government “could” change the operation of the money system as take over the money issuing function that it transferred in 1913 to the banking system. But until the government in fact makes that legislative change, the government is just another “user” of money that is “issued” by banks. I’m not going to comment any more in this stream. Sound money advocates can never get past their false idea that we live in a barter system where money merely “represents” the real economic value that we produce and trade with each other. MMTers can never get past their false belief that because the government legislates the US money system and “could” issue money, that it “does” issue money. It’s a free country. Believe whatever makes you happy.

                  • Alex Seferian

                    I essentially agree with what you write, and you’ve been most instructive. The only minor difference is that I consider that when the Fed buys the Treasury securities from the PDs, the situation becomes one in which the Government owes money to itself, and in that case, the Government has created “positive” or “vertical” money (albeit indirectly). If the Fed is not part of the Government, then what I just wrote is wrong. In any event, I understand that the Fed tends to hold only about 10% of the outstanding government debt. Therefore, in actual practice the Government is actually not creating vertical money, and everything you have written makes perfect sense. Signing off too. Thank you!

                  • This is definitely not to you, Derryl. Thanks for your thoughtful work.
                    This comment is broad to the great dialogue that y’all have been having about whether the government ‘can’ or ‘does’ create any of our money NOW, and whether the mark of the PD-FRBNY transaction answers this question for the sake of discussing either the MMT construct, or macro-economy results in general.
                    Much detailed understanding can be, and has been, gained from this dialogue, to be sure.
                    But to me, ANYTIME the discussion of the macro-economic effects of the operations of the national money system turn on reserve accounting, that learning battle is lost.
                    Money is NOT the unit of account. The unit of account is but one attribute, and a minor one, of money.
                    Money is a national monetary system ‘media’ that we all use to exchange the goods and services produced and consumed in our national economy. At the political- and socio-economic level, Soddy identifies the national system of money as the ‘distributive’ mechanism of the real wealth that is created by our labor and energy inputs to production. He is obviously correct, and the distribution is flawed.
                    Anytime a macro-economic discussion turns on the substance, or lack thereof, of a theoretical construct – such as vertical money – only a theoretical answer will be provided.
                    Today’s macro-economy is marked by enormous negatives – unemployment, lack of wages, lack of services, the threat of further losses(austerity) and the need for some sort of reforms that can maintain today’s semblance of well-being.
                    The solutions to turning around these macro negatives CANNOT COME FROM reserve accounting and the actions of the Fed itself (FRBNY). The Fed is the bankers’ bank.
                    From the public ‘sector’ side, we need the kind of macro-economic “push” that can only come from government (Treasury) spending $$ directly, increasing demand.
                    The issue of whether the government or the private banks are the monopoly issuer of the nation’s money supply does NOT hinge on whether the Fed is public or private. Hanging out in the high-weeds of ‘independence within government’ does nothing to resolve those macro-economic negatives.
                    We need two things, in varying amounts.
                    One is that increase in aggregate demand.
                    The macro-economic monetary modeling of Yamaguchi and Benes-Kumhof show this can be achieved by eliminating the debt-association of all money that is created. So, either it does, or it doesn’t.
                    The other is real wealth redistribution. Progs tend to go the route of taxation to repatriate the gains of the initial maldistribution that comes from private money-creation.
                    But by removing the undeserved, near-aristocratic privilege of creating the nation’s “purchasing-power” in the first place, we can eliminate the vehicle for wealth concentration at its source.
                    The more ‘science’ we restore to the understanding of the money system, the better the solutions will be availed.

                  • Derryl Hermanutz

                    Hear hear! Good summary Joe. And thanks all for the lively debate.

                  • Alex Seferian

                    Likewise. Thank you!!

                  • Alex Seferian

                    golfer1john wrote: “So, the essence of the difference between you and MMT is that MMT considers the Fed part of the government, and you consider it part of the “banking system”. It’s not about who creates the money, it’s about what label you put on the money-creator.”

                    Personally I tend to side with MMT on the FED front, but I do believe that has been the essence of the above debate… that plus the use or not of a technical definition as to what money creation is.

        • Thanks for asking that question – better and more clear understanding is where we should be headed.
          What you wrote, ostensibly as the basis of understanding that the government creates (and issues) money when it spends:
          “Government spends (purchasing goods and services or making “transfer” payments such as social security and welfare) by crediting bank accounts of recipients; this also leads to a credit to their bank’s reserves at the central bank.”
          There is perhaps an inference that this is public money creation/issuance , but no statement is made that it is, because it is not. The reason it is not, is simple.
          Before that: “Government spends” part, there should be a part that says – “Provided there is a credit balance in its TGA Account..”
          Otherwise, government doesn’t spend.
          That’s what the shutdown is all about.
          The rest – about crediting bank accounts and increasing that bank’s reserves at the Fed – is the same for any payment made in the national payments system, and none of us create money when we write a check.
          The nature of reserve accounting is that it ultimately has no effect on the money supply.
          In an endogenous money system, the private banks create the money supply when they make loans.
          This is the proof that the government is the ‘user’ and not the issuer of the national currency.

          • Alex Seferian

            “The fact that the US government has not taxed its borrowed spending back out of the economy and paid off the national debt since Andrew Jackson in 1835 does not mean, as MMT assumes, that government deficit spending and the maintenance of a large accumulated government debt add a permanent supply of “money” into the economy.”

            Is this really the case? What follows does not seem to further expand on, or support, this point. It merely states that the Government creates even more money… sort of implying that the Government does as well, and therefore refuting the earlier comment. I quote again: “The private sector as a whole also deficit spends and maintains a large accumulated debt, much larger than the government’s debt as a matter of fact. So the private sector as a whole adds even more money into the economy than does the government.”

            Another interesting piece that your post generated: “MMT arbitrarily treats government spending of borrowed money as a special case, as if the government doesn’t “have to” get money by taxing or borrowing to repay its debts when they mature….The government does not spend money and “then” issue debt… JD Alt recognizes the ancient fact that banks lend money that they don’t have, that banks “create” the money that they lend. But then he assumes, with MMT, that because governments technically “could” issue their own money that they in fact “do” issue their own money and “spend money into existence”. But this is false. Banks “lend” money into existence.”

            This is quite powerful stuff. It makes me think about a Rothschild quote about controlling a nations money supply as being more important than making it’s laws. In fact, I find your joint comments (yours and Derryl’s) to be among the most thought provoking I’ve come across at NEP. I’d love to see what some of the MMT experts have to say. Thank you both!

  2. I’m not unemployed, but you can have my job if I can have one of these $700,000 food inspector jobs instead.

    More seriously, why is it that it costs $700,000 to hire each food inspector? If it’s not a misplaced decimal point, then instead we could pass a law that says the food producers must have their own inspectors on the payroll, and that they must pay people who get sick from their foods, and then we can hire 200 food inspector inspectors and use the other 90% of your NASSEX for other things that only government can do. Or a tax cut.

    • There would certainly be other expenses besides an inspector’s salary involved here. Offices, support personnel, travel, laboratories, who knows what else.

      We definitely do not want food processors to be in charge of inspectors for obvious reasons.

      Yes, we can cut or eliminate taxes on almost everyone through passing the Kucinich bill, like Joebhed says.

      • With 2000 of them in the country, about 40 per state on average (Rhode Island maybe could be done with one, maybe two to cover vacations), travel wouldn’t be very extensive. In the private sector, fully burdened cost runs about 130% of salary, not 1000%.

  3. So if printing and spending is so good then why don’t they just stop taxing us and print and spend more?
    What do they need of our taxes?

    • In the sense of true monetary sovereignty, whenever a government directly funds the balances we formerly called deficits the payment creates permanent money in the economy. Never a need for more debt in order to have money.
      But the amount of new permanent money creation in any year is limited by the amount of economic growth.
      An economy that grows by $500 Billion would have an additional ‘nominal’ $500 Billion in new money, and the budget balances in excess of whatever that nominal $500 Billion is would still need to be funded by taxation.
      The government’s money creation powers are not limitless, all agree.
      But right now, due to our GDP-potential deficit, the economy and the money could grow by much more.
      Of course, there a slightly different MMT construct on that issue.

    • It’s a matter of quantity. Another $500B or so this year would be a good thing, $2.4T more in one year would be too much, there is not enough productive capacity to make that much stuff, so prices would be driven up.

    • Read the ’7 Deadly Innocent Frauds’ … on Warren Mosler’s site.

    • The fact of the matter is that the US government does not need your money in order to spend into the economy. It could create money debt free as US Treasury bills, but the banker owned Federal Reserve has a stranglehold on money creation. If you have ever noticed, it says on all dollar bills ” Federal Reserve Note” and for good measure they state “In God We Trust.”

      Even though each note is signed by the Secretary of the US Treasury and the Treasury actually prints the notes on paper, the notes are handed over to the Federal Reserve Bank at their printing cost and not their face value. This perpetuates the illusion that the US government issues its own currency. It does not. The money supply of the US was privatized in 1913.

      The only purpose of taxation is to control the rate of inflation of the currency and distribute income somewhat more equitably, since otherwise wealth concentration will continue at an accelerated pace, until one man owns all the money and the rest of us are in debt to him.

  4. As it happens, I’ve just finished reading The Jungle, by Upton Sinclair. I gather it is considered one of the Great American Classic novels (I wasn’t an English major). Sinclair wrote it in 1904 to try to advance Socialism, but it wasn’t very convincing to me. It’s about a Lithuanian immigrant family in the meatpacking district of Chicago, and the abuses present in that industry, which produced products that often did not deserve the label “food”.

    What we call “Chicago politics” today hasn’t changed since then. There were US government inspectors in the plants even then. Their job was to not allow the practices that Sinclair described, but all the politicians were corrupt and the inspectors were bribed to ignore their duties.

    Maybe the $700,000 per inspector is to make them harder to bribe. Still, you would have to inspect the inspectors to keep them honest. Even then, if a bribe to the inspector of inspectors is cheaper than complying with the new regulations, these presumably corrupt food producers will take that course.

    If you want to influence a profit-motivated company, you simply have to make it more profitable for them to do what you want them to do. It doesn’t take lots of high-priced inspectors, just turn them over to the tort lawyers. At $700,000 per violation, you’d have lots more than 2000 volunteer inspectors at work making sure that the water is clean and the sinks are in the right places.

    In Adam Smith’s day, you knew your butcher and the local farmers, and if they sold you tainted food you wouldn’t buy from them anymore, and they would be out of business. Today, you don’t know them, and if they can sell “pink slime” and pass it off as meat, you have no way of knowing it. Government inspectors knew it, and did nothing to stop it. Information is the key, not bureaucracy.

  5. Alex Seferian

    I’ve recently wondered whether government deficits, or more specifically the underlying public spending, no matter what its nature, eventually does more good than harm when there is unemployment. Your post suggest so, as the initial expenditure which is for a worthy cause in your post, will in addition spark further activity (“…buy cars and houses and lawnmowers…”).

    I know Keynes went a step further and advocated digging holes as being better than nothing, even though he highlighted that there were likely better uses for public funds. The sparking of further activity with the digging of holes would provide a much needed boost of confidence to an economy.

    Beyond this spark/confidence effect, I am not convinced that it is always desirable for a sovereign government to issue and spend MORE dollars than it collects back in taxes. I do not believe that surpluses are the answer either, but I do think that it all depends on what the public expenditures are being used for, and it also depends on what is happening with the external sector.

    Just as a thought exercise, imagine if government expenditures ultimately led to allowing/incentivizing US households to buy increasing quantities of foreign goods. There may not initially be inflation, but it is likely that US jobs would be lost, and eventually when those foreigners decided to use their US dollars (assuming they had wanted to keep their US dollar holdings and had initially bought US bonds), there could be inflationary pressures down the road.

    My main point is that government deficits are a good thing, if and only if, the government in question diverts funds intelligently. That is a loose term on purpose, but governments that have been unintelligent about their expenditures, or have overdone things, have ended up suffering and falling back. There are a number of countries in recent history that support this point.

    • You seem to be assuming that the deficits must be the result of the government going on some wanton spending binge. While it could be beneficial to have a government spending program (the WPA/CCC during the New Deal, the GI Bill, etc.), the same could be said of simply lowering taxes which leaves more money for people to do what they want with, private sector or otherwise.

      It is not about running deficits for the sake of running deficits, it is about responding to the current economic environment to mitigate large swings in aggregate demand, such as the ’08 recession on the one hand, or some runaway inflation scenario on the other ( a pretty rare occurrence, historically).

      Regarding the thought exercise, changes in global trade positions take place over decades at a time, this doesn’t happen overnight. China has a trade surplus (and the corresponding dollars/tsy’s) with us because we are buying way more from them than they can or want to buy from us. As their domestic policies change, they may start to buy more of their own goods and rely less on the export model, but I doubt we would ever see a scenario where we are net exporters to China in our lifetimes, the inflationary pressures there seem to me to be a very distant concern.

      It’s certainly true that we could (and have) seen the loss of many jobs and industries due to higher levels of imports, free trade deals, globalization, etc. The JG would certainly contain this loss of employment to some degree, but I am concerned about more and more people having to accept low-paying, JG jobs in place of the higher-paying private sector jobs they once had.

      • Alex Seferian

        “…it is about responding to the current economic environment to mitigate large swings in aggregate demand…”.

        OK, but shouldn’t a “current economic environment” be analyzed and may it sometimes be the case (not always) that a Government should not step in to “mitigate large swings in aggregate demand”?

        I am not thinking the U.S.A. by the way. Assume that some random economy has for years allowed its private sector to truly “live beyond its means”, stocking up on fancy cars, second homes, etc. (I know this is a cliche but bear with me please… think maybe Greece where Porsche Cayenes were sold like there was no tomorrow). Say this random economy has allowed its banks to go unregulated and private sector debt levels have ballooned. One could argue that a period of “belt tightening” is called for… private sector de-leveraging or austerity. In fact, it could be healthy for an economy to take a breather and refocus and generate itself.

        If so, lowering taxes, or increasing government spending (including through some program similar to a WPA/CCC during the New Deal as you point out) could help the private sector net save (assuming no changes in the external sector – I am thinking financial balances).

        The point I am making from here is that this public sector boost to the economy, or more precisely the boost provided by the increased levels of Government spending (assume an infrastructure project), could be positive indeed, but not always and it will depend. The “quality” of that expenditure matters.

        The original post by JD Alt references a virtuous circle type effect brought about by some original government spending (“…buy cars and houses and lawnmowers…”). I can understand.

        However, beyond that, if a Government spends too much money on programs that are not worthy (too many bridges to nowhere), then the ultimate effect of that Government spending could be negative.

        Spain is an example. It was running government surpluses before the Great Crash, but that was in part because the real estate boom was generating massive amounts of income for the Government. It went on to create infrastructure projects that today are barely utilized (you have miles of unused highways, tram systems where the German vehicles have been purchased and are unused because of they are too expensive to operate, huge public amphitheaters that are empty 24/7, etc.). Money was badly spent and that I would argue is now contributing at least in part to the country’s problems.

        Think Latin America. Dozens of examples of Governments throughout recent decades that relied too heavily on public money, and did so inefficiently. The result: not only inflation but failed societies.

        So the only thing that I am saying is that it is not just about the quantity of some stimulus, but the quality as well. Otherwise the results can end up being counter-productive.

        Regarding the China point, I am not convinced about a point I think you make. I may be wrong (I am not an economist), but in my mind any net injection of money into an economy (via a public sector deficit) will ultimately lead to inflation unless the economy grows enough to absorb that extra money. That is why productivity and pursuing worthy investments is important when it comes to having a Government decide how and when to allocate its discretionary spending power. The dollars being accumulated by countries like China could trigger inflation the minute the Chinese decide to hold less US bonds. They’ll be switching their money from a savings to a checking account so to speak. When that happens, if they do not buy US products themselves they will sell their US currency dollar holdings. The savings could be unlocked, and eventually down the road someone will spend those dollars and inflationary pressure may arise.

        • ” They’ll be switching their money from a savings to a checking account so to speak. When that happens, if they do not buy US products themselves they will sell their US currency dollar holdings. The savings could be unlocked, and eventually down the road someone will spend those dollars and inflationary pressure may arise.”

          Yes, and there is nothing in MMT that says otherwise, except that other things will happen as they (the foreign sector) sell off their T-bonds and spend the money on US goods and services:

          US exports increase

          The US trade deficit drops, reducing the US government deficit. (See sectoral balances)

          US jobs and incomes rise, and US income taxes rise, also causing the US government deficit to drop, perhaps even to a surplus.

          If, despite these automatic stabilizers raising taxes (or if the US were already at full employment), aggregate demand becomes too high, then government would have to raise taxes in order to restore balance and avoid inflation.

          PS this will all happen, if it does, in relatively slow motion, not as a sudden shock that cannot be reacted to in time. And if the US economy were strong, what would be the reason for foreign holders of Treasuries to no longer want to hold them? If they sell them off while the US economy is weak, like now, that will only help our recovery, without causing inflation as long as unemployment is high.

          • Alex Seferian

            I think we agree on a number of things including the way the three sectors interact (sectoral balances). However, where I get confused is when it is implied that government spending can do only good when unemployment is high (please correct me if I am wrong in assuming this from your post).
            I know MMT singles out inflation as THE VARIABLE to monitor when it comes to government deficits. My concern is that the focus is too short term. Take a simple example. A government imports widgets that are only made overseas. Assume one widget is handed out to every citizen. On a first instance, there will be no inflation as a result of this government expenditure, no matter what the widget is, and irrespective of whether the economy is or not at full employment (there are no local producers of this widget, so there can be no local related inflation). However, when the foreign sector decides to use the cash received in exchange for the widgets, it will have to buy exports (US exports in our example above). There is no other way… someone eventually has to use the US dollars on US products or services. The net effect is that the original government expenditure (on the widgets), whilst not inflationary initially, may become so in the future… its like “pent-up inflation” being built up each time the government spends beyond a certain point relative to taxes. At the end of the day, inflation is caused not by deficits per se, but when an increase in demand cannot be met by an increase in quantity. The Quantity Theory of Money is incorrect because of the assumptions underlying the variables, but we probably agree that the equation MV = PQ holds.
            How to counter all of this? We agree that one way could be to raise taxes in the future (as you indicate above). Alternatively, one could just wait, as the effect is unlikely to occur as a shock (also as you indicate above). But wait for what? This is where I come back to my point. The “quality” of the government expenditure is as important as the “quantity”. If that widget was a total waste, something futile that contributed nothing to the long-term well being of a society and its productivity, then no matter how long one waits, all other things equal, inflation would ultimately creep up. If that widget was useful, then of course, time would do wonders… again, all other things equal.
            I hope I haven’t gotten too simplistic, but thanks for your reply and look forward to your reaction to this. You are always very thoughtful golfer1john.

            • I think of it this way: the trade deficit is the result of the foreign sector, primarily foreign governments, wanting to hoard US dollars, amplified by the fact that the dollar is the world reserve currency. The US government might buy a bunch of imported widgets, or not, and those governments will still hoard the same amount. If widgets are bought, and they find themselves with too many dollars, they will spend them immediately. If not, and they don’t have enough, they will export more or import less so as to get the dollars they desire. Governments like China will even manipulate their currency and their exporting companies’ prices so as to achieve the trade result they desire.

              Later on, when they desire to reduce their dollar holdings, it matters not whether widgets were bought earlier. They will adjust their dollar holdings as they desire, and that is what will drive the trade balance.

              The deficit this year, or in a future year, is endogenous. It depends on what the other sectors do in that year.

              It does matter what government buys, or whether it wastes its spending, but not in the way you are describing. Government spending consumes real resources, and it is important that those resources are put to their best possible use, or at least something close to it. The ditch-digging example and the bridge to nowhere are different, in that the ditch-digging consumes only people’s time and labor, which would otherwise go unused and cannot be saved for later. The bridge to nowhere consumes concrete and steel that could have been put to other uses, even if not immediately.

              When unemployment is high, government spending in the domestic economy can have only good first order effects on the economy, even if it is wasteful, and even if it is harmful or destructive in other ways (think ecology). If they blew up an interstate highway, the money spent on the bombs would raise incomes in the period in which it was spent, even though later incomes might fall for lack of the highway. We have to hope that they are good, though imperfect, judges of the public purpose. I would not say that imported widgets can only do good, although I don’t see any particular harm in them. One must trust that the widgets are useful for something, and imports are a real (vs. financial) benefit, and under those circumstances even imported widgets are helpful to people, if not to the economy.

              Reduction of unemployment reduces poverty and misery and increases output and real wealth. It is always a good thing, even if later on the economy reaches full employment and taxes must be raised. In that situation even raising taxes is a good thing. It is proper management of the economy under the conditions, and the alternative would be worse.

              • “… the trade deficit is the result of the foreign sector, primarily foreign governments, wanting to hoard US dollars…they will export more or import less so as to get the dollars they desire.”
                Interesting view although I have always considered that the trade deficit is more of a corporate/private-sector-driven phenomena… given a relevant framework, or set of parameters established by international trade agreements. For example, if a company in China can make a better and cheaper widget, and there are no trade barriers with the US, then related trade deficit pressures in America will result. If the Chinese company wants to hold its own local currency, and not US dollars, then when the sale is completed, the Chinese Central Bank will exchange the related funds. As a result, the Chinese government will hold US dollars in a first instance. If US interest, inflation and exchange rate expectations are favorable, then the Chinese Government will hold the US dollars in a savings account (i.e., buy US T-Bills). Its level of US holdings will ebb and flow depending on a myriad of factors (economical and geopolitical), but for me the core causation is the inverse of what you suggest: the trade deficit is not so much driven by the desire of foreign governments to hoard US dollars, as it is by US consumers wanting and being able to (in part thanks to leverage) buy goods that foreigners can produce, and that are generally offered at lower prices, and/or are of a higher quality than what can be sourced locally. The “cash hoards” that result at the government level are a consequence of these private sector realities. As long as the US continues to suck imports, and its government or Wall Street can offer attractive returns, then the cash hoarding dynamic will continue. I think….
                “When unemployment is high, government spending in the domestic economy can have only good first order effects on the economy, even if it is wasteful, and even if it is harmful or destructive in other ways (think ecology).”
                In my mind, this could be the case, but I would place a great deal of emphasis on the words “first order effects”. There is a saying in Spain which is: “pan para hoy, hambre para manana”. This translates to “bread for today, hunger for tomorrow”. One just has to take your example a little bit more to the limit to see this. Imagine if they blew up all interstate highways….
                My small critique of MMT, from what I have read (and I am a fan), is that more emphasis should be given to the long-term. In my simple example, replace the “widget” with “oil”. Assume Country A that imports oil and subsidizes it such that domestic consumers benefit from almost free gasoline. The MMT narrative would, I understand, highlight the positive effects of such a policy: the resulting government deficit (assuming no taxes) would not be a major concern given that inflation would not be created domestically (assume that there are no local oil or energy producers). Moreover, thanks to the cheap oil, factories would be humming and the economy could be reaching full employment. Now assume in contrast Country B, which to go to the other extreme is against government deficits. As a result, gasoline prices in Country B are much higher, and there is even unemployment as a result of the overall higher production costs. Who would be better off, Country A or Country B? In the short-term most probably Country A would be better off. However, what if you had in Country B a sophisticated population (political leaders and/or businessmen) that developed successful alternative wind or solar energy plants as a result of the harshness of reality? Chances are that Country B in the medium- to long-term would be much better off, at various levels. Country A would most probably be complacent during the period that Country B advanced and surpassed Country A, both in economical and societal/ecological terms.
                “Reduction of unemployment reduces poverty and misery and increases output and real wealth.”
                Agree with that even though my former example I think highlights that things are not simple. At the end of the day it all boils down to who is the better judge of “public purpose”, as you point out. I think it depends. In some countries the public sector is highly corrupt and self-serving. In other places it’s the private sector that is full of issues. I applaud MMT for highlighting that it is not immediately an issue of “affordability” when it comes to deciding how to allocate the real resources and manpower within a sovereign nation. Beyond that mental hurdle, I think conservatives are more inclined to believe that the private sector is a better judge of public purpose, while progressives are very skeptical, especially witnessing the fraud that led to the Great Crash. My take is that politicians or businessmen are all humans… some will be good, others not so much so. It all depends on the specific country and its society/moral values.

                • If China did not wish to hoard $US, they would not. They would sell them on the Forex market, in return for Yuan. The reason they don’t do that is because it would drive the dollar down, and the Yuan up, and cause their trade surplus to shrink, working against their mercantilist strategy. Yes, trade is mostly a thing of the private sector, but it does depend on exchange rates, and hoarding dollars is how the Chinese government goes about getting the exchange rate they want, and thus the trade balance they want.

                  If country B developed economical solar or wind power, how is country A to be prohibited from benefiting from the new technology? Country B has made a great sacrifice, and is reaping a benefit from that sacrifice, too, but I think country A would come out ahead in the long run, in your example. Not that I think it’s a good strategy. You didn’t mention the other distortions that result from prices above or below the free-market level.

                  Straying off into the political weeds, I don’t believe conservatives in the US leave the definition of public purpose to the private sector, they have a well-defined list of things that they believe to be public purpose, almost all of which are enshrined in our Constitution, or mentioned in other founding documents. One of the primary government responsibilities is to police the fraudsters so as to prevent them from causing things like the Great Crash. Conservatism is not anarchy.

                  One thing I hope will be added to the list, once MMT is well-understood, is that the government is the sponsor of the capitalist system, and it is that system which has as a fundamental characteristic a need for a labor buffer in order to prevent inflation. And that as sponsor of the system, it is government’s responsibility to mitigate as much as possible its undesirable effects, most specifically involuntary unemployment. Thus the Job Guarantee. When everyone has access to a job at a living wage, there will be no need for government to provide, universally, many of the things on the Progressive wish list, because the people will be fully able to provide for themselves.

        • “So the only thing that I am saying is that it is not just about the quantity of some stimulus, but the quality as well. Otherwise the results can end up being counter-productive.”

          Certainly, but even the worst government investment (I think JD did a piece along these same lines regarding Solyndra) will help the economy as the contractors get paid, spend this money elsewhere, etc.

          When an economy feeds off of a ponzi scheme for a decade and then the bubble crashes, someone has got to step in to keep things alive. In a global recession like we had, the private sector is obviously not going to stimulate demand on its own unless you start throwing loans out the doors of banks to unworthy borrowers (again), and the foreign sector is not going to make it happen either (especially when the US is the major importer for their goods). That only leaves one possible source of demand – deficits by the government either on the spending side or the revenue side.

          I don’t really know much about the specific government projects of Spain / Latin America, but I think the key point you make there is that this was done BEFORE the crash. When you have 25%+ unemployed, as they do now, I would imagine there isn’t many people going to the amphitheatre. NOW is the time for large deficit spending in Spain, something they have a lot harder time doing than the U.S.

          Bit confused by the last point I think, maybe you can restate. They can buy whatever they want with the money right now. Perhaps they will start accumulating less dollars as their economy changes, but a very gradual process.. I don’t think we’ll suddenly wake up wake up with a huge trade surplus one day. And if we did, can adjust fiscal policy accordingly to curb the higher demand.

          • Alex Seferian

            “When an economy feeds off of a ponzi scheme for a decade and then the bubble crashes, someone has got to step in to keep things alive.”

            Agreed but only if that “someone” (which I agree can only be the public sector given the state of affairs) keeps things alive in an intelligent manner. If a ponzi scheme let to everybody owning a house for example, then it would not be a good idea for the public sector to help with additional housing. In Spain, it probably makes no sense for any stimulus to include more infrastructure projects… there was somewhat of a bubble in that too. I guess my point is that when a private sector overspends for a decade, at least the segment of the population that did indeed live beyond it means should tighten its belt. I am not saying not “keep things alive”, but yes recognize that what goes up must come down. Does this imply austerity for the 99%? No… I am not arguing in favor of that.

    • The government deficit is mainly an ENDOGENOUS variable. The government can set the tax RATE and can specify the spending level, but it can’t predetermine the level of the deficit (though it can guestimate it). If the private sector went out and borrowed and spent enough money right now, without any changes in taxation or spending, the US government could move to surplus. By accounting identity the Surpluses and Deficits of all sectors of the economy must add to zero. The Clinton surpluses were paid for by the increasing indebtedness of the domestic private sector; had the private sector insisted on net saving instead of net borrowing, deficits (or a recession) would have been the out outcome and not surpluses.

      • If the US Treasury created its own money debt free in order to cover government spending, there would neither be a surplus nor a deficit. The only purpose of taxation would be to control the money supply and redress some of the inequities of capitalism.

        • Well, no, the surplus or deficit is the difference between spending and taxes. What you describe would mean that no new Treasuries would need to be issued, so the debt would not change except for bonds maturing. There would still be a deficit unless Congress changed the appropriations and tax laws.

          • Yes, the existing debt would still exist. But if the US Treasury also created non interest bearing Treasury notes and paid off the maturing US Treasury Bills with them the debt would be reduced to zero, when all T bills are paid off.

            The guys with the proceeds, essentially now cash, would have to decide what to do with it all ;-)

    • “digging of holes would provide a much needed boost of confidence to an economy.”

      No, it provides a real boost to incomes.

      If US households were to use all their extra income to buy foreign products, there would be no loss of US jobs. The mercantile argument is only that when US households use their existing income to switch from domestic products to foreign, US jobs are lost. Additional income spent on foreign products doesn’t change the spending on US products or US jobs, except maybe a boost to jobs in companies that import the new products.

      Inflationary pressures, either now or later, can occur only at or near full employment. In that case, proper policy would be a tax increase to stifle aggregate demand.

  6. A little historical background on the issues of food adulteration and food inspection:-

  7. If it costs $1.4B for inspectors, it must cost the producers more than that to comply with the regulations, else it would be better for the government to just buy the clean water and sinks and give them to the producers. So something like $2.8B plus (in an MMT world, with full employment) would have to be paid by consumers in taxes and increased prices.

    Yes, with an output gap even digging ditches and filling them in is better than doing nothing. I suppose these inspectors, under those conditions, might be slightly better than the ditches. But it is well-known in manufacturing that inspection is the least effective and most costly way to improve quality. Maybe instead of inspectors the government should be helping propagate the techniques that the safest food producers are using, to the rest of the producers.

    JD, I’m not happy to find all these faults, because compared to the professional economists here your writing style is refreshingly interesting and different. It helps non-economists understand the issues of economic theory involved in MMT. Maybe stick to that, and avoid specific policy recommendations.

  8. How about ‘Private Sector Surplus’? We could then discuss whether the ‘surplus’ was too large or too small. A very different discussion.

  9. J.D.Alt,

    Agree with your article basically, but for one phrase: “excess sovereign spending does NOT have to be “paid back”—EVER!”. (A phrase that bothered Joebhed above).

    Thanks to inflation and real economic growth, the economy can be expected to need a never ending increased supply of dollars. So basically the deficit will be never ending. But OCCASIONALLY we can expect outbursts of “irrational exuberance” leading to excess demand, and in that scenario it would make sense to government to put the deficit into reverse: i.e. run a surplus for a while.

    As to how to moderate irrational exuberance, stopping what Joebhed called “money creation by the private bankers” would greatly help. As the head of Britain’s Financial Services Authority, Adair Turner put it, “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money.”

    • “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money.”

      I don’t know that it has ever been constrained, before or since. Clearly there was something else involved that was unique to the crisis, because such crises don’t happen continuously. I think Mr Turner must have had something else in mind that is not revealed in this quote.

  10. I only have a couple on mins but just want to say I think JD is right.

  11. Can you identify the operational differences between a Treasury operating with a sovereign currency and one that is not? From a casual inspection they are identical. I understand the difference between a government using a sovereign currency and one that doesn’t, such as a currency-issuing government creating all money it spends, and using taxes to drain currency from the private sector – but the steps used by a currency-issuing government and a user are identical.

    For example, the State of Connecticut collects tax revenue, issues debt, and pays employees, suppliers and creditors from its general fund. The Federal Government collects tax revenue, issues debt, and pays employees, suppliers and creditors from its general fund.

    It’s difficult for me to explain to others how the Federal Government operates differently when the transactions are identical to a currency user like the State of Connecticut.

    The one weakness in my arguement is that I made no mention of the Federal Reserve. But the Federal Reserve is not the institution creating money – that is the Treasury. What have I missed?

    Thanks, Joel

    • The operations are the same, and the accounting is the same even though it doesn’t have to be. The difference is that when Connecticut sells bonds, they accept whatever interest rate the market demands, based on perceptions of their credit-worthiness, their ability to repay, their ability to continue collecting taxes without driving their citizens to Florida. The interest rate on US Treasuries is set by the Fed at whatever they decide. This is why when the ratings agencies downgraded the US last year, it had no adverse effect on the interest rate. If they downgrade Connecticut, Connecticut will have to pay higher interest.

      • Hello golfer1john,
        Thank you for your response. I agree with what you are saying. Where I am hung up is that an outside observer would not be able to differentiate between the currency-creating operations of the US Treasury and the currency-using operations of the Connecticut (or any dollar using) treasury. The two models (the issuer and the user) even issue bonds in the same method, as sales to the private sector.

        Where the two models diverge, as you state, is that the US Government has power of the Fed to set interest rates on its debt, while other currency-using entities enjoy no such priveledge. However, the Fed is not creating money when they buy bonds; when they buy bonds to drive down short-term interest rates, they are performing a portfolio swap of the Treasury bond for a non-interest-bearing Federal Reserve note. This changes the total reserves in the system, which influences short-term rates and has a diminishing influence on longer-dated interest rates.

        I find it difficult to grasp that the funding methods of a currency-issuing power of the US Treasury appear as identical to those of a currency user. In addition, the identical methods of the issuer- and user-models make debates with MMT disbelievers that much more difficult, because I cannot point to a step in the process and say, “here is where the Treasury creates dollars how no one else can.”

        Thank you for helping me through the logic,

        • Sorry, that response below should have been here.

          In addition, the US issues and spends coins, without first collecting taxes or issuing Treasuries. The amount is not large, relative to the budget, but it is done as a monetarily sovereign act. Connecticut can’t do it. And there have been times when the US issued and spent paper money without first taxing or borrowing. Probably the largest instance was the civil war, and that money was called “greenbacks”. Nothing (except our voluntary restrictions in the law) would prevent that from happening again.

          • Thank you golfer1john for the explanation. Your response helped to fill in some missing pieces in my understanding. -Joel

  12. The funding methods used by the Federal government are an anachronism, left over from the gold standard, under which it was essentially a currency user, limited by the amount of gold in Fort Knox. We ended the gold standard, but didn’t change the mechanics of funding. Connecticut must borrow, if it wishes to spend more than it taxes. The US government need not do so.