Drop It: You Can Call for Helicopter Money but Drop the Call for “Coordination”

By Scott Fullwiler

I suggested more than three years ago that helicopter drops are fiscal operations (printable version here), in contrast to the more traditional view that they were monetary policy operations (e.g., “Helicopter Ben”).  My argument was based almost entirely on accounting and, therefore, on the actual balance sheet effects of a money drop.  True helicopter drops of money raise the net financial assets (via income increases) of the non-government sector, which is exactly what fiscal policy does but not what monetary policy does.

MMTers have explained for years that fiscal policy provides income and net financial assets for the non-government sector, whereas monetary policy (whether it be lower interest rates or—for true believers in Monetarism and “hot potato effects”—more “money”) can only stimulate the economy via increased spending by the private sector out of existingincome. In other words, monetary policy only “works” when there is more spending out of current or existing income–i.e., you spend your money balances or you borrow at a lower rate.  Your income is the same but you’ve spent more.  But fiscal policy raises incomes first, so it enables more private sector spending out of increased income.  And, remember, this is just accounting, not “theory.”

And now we see virtually everywhere there are calls for helicopter drops of money, only this time the proposal is for the Treasury to deficit spend while the Fed buys government bonds in the secondary market equal to the deficit spending.  This is referred to as Treasury/Central Bank or Fiscal/Monetary “coordination.”

This is all fine as far as it goes, and I certainly don’t want to stand in the way of more fiscal policy, so my critique here is more about the details of operations as they are understood by those pushing “coordination” than it is of the overarching policy advice per se.  In my view, a more precise understanding of monetary operations helps to better understand available policy options, and therefore my own perception that there are shortcomings in using the “coordination” language to describe helicopter drop is more than just a semantic point.

Let’s think for a minute about what happens when the Treasury runs a deficit if the Fed then buys government bonds in the open market.  The answer is quite simple for anyone paying attention to the rounds of QE the past few years—the government debt is swapped for reserve balances that are earning 0.25%, or the rate the Fed pays on interest.  So, in essence, with helicopter drops via “coordination,” the Treasury ends up with new debt that it services at the Fed’s target rate.  (For those requiring more elaboration of this point—when the Fed pays interest on reserve balances, this reduces dollar for dollar the profits it returns to the Treasury, so Fed payment of interest has the same effect on the Treasury’s budget position as if the Treasury had paid the interest.)

Note that this would be the case whatever interest rate the Fed paid on reserve balances—if reserve balances are supplied in excess of what banks desire to hold to settle payments and meet reserve requirements, then the federal funds rate falls to the rate paid on reserve balances (or to zero if no interest paid on reserve balances).  This is just supply and demand—if quantity supplied exceeds all points on the demand curve, then the price falls either to zero or it falls to a price floor established above zero.  I explained this in more detail here.

Now, what happens if instead the Treasury runs a deficit but there is no “coordination” and instead the Treasury issues T-bills?  In that case, the Treasury ends up with new debt that it likewise services at essentially or roughly the Fed’s target rate—it’s well known that rates on T-bills essentially arbitrage with the fed funds rate.

In other words, there is no economically meaningful difference from the Treasury’s perspective—it can have “coordination” with the Fed and pay the Fed’s target rate, or it can ignore the Fed and pay what is essentially the Fed’s target rate.

If the two are essentially equivalent, then yet again, we have established that a helicopter drop is a fiscal operation that does not require “coordination” with monetary policy makers as long as the rate on newly issued debt mostly arbitrages with the interest rate target of monetary policy makers.

Now, neoclassical economists (by the way, this is not intended here as a pejorative term as some recently suggest; ever heard of the neoclassical synthesis, for instance?) often argue that deficits combined with “coordination” will be more stimulative than issuing T-bills because it raises the monetary base.  But let’s look at this more carefully.  First, from neoclassicals’ own perspective, this is not true, because they also believe that interest on reserve balances stops the stimulative effect of increases in the monetary base (since the monetary base would then earn the same as T-bills).  I covered this internal inconsistency in neoclassicals’ thinking here.

Second, non-neoclassicals like MMTers and others like us associated with various forms of endogenous money and Post Keynesianism already know that exogenously raising the monetary base via monetary policy does not stimulate the economy.  So much has been written on this that I won’t go into detail here, but the basic points are: (a) more reserve balances don’t stimulate bank lending because banks don’t lend reserve balances in the first place and don’t need them to make loans (witness asset price bubbles in housing (1980s, 2000s), equities (1990s), and commodities (2000s) that all occurred with minimal excess balances held by banks); (b) more “money” or deposits or whatever does not necessitate more spending or a “hot potato effect” (ever heard of converting your “excess” cash to deposits or your excess deposits into savings or time deposits?); and (c) more T-bills (or T-bonds, for that matter) does not stop anyone holding them from spending (ever heard of dealer markets?).

Finally, it’s interesting that some of the same people decrying the fact that rounds of QE threatened to reduce stability in financial markets by significantly reducing the stock of Treasury securities that provide liquidity via their use as collateral now also promote “coordination” that could further reduce the stock of Treasuries and liquidity benefits they provide via collateral.  (Stated differently, in the real world it is Treasuries, not the monetary base, that can enable multiple rounds of credit creation in financial markets.)  For this and other reasons, one could actually make the argument (as I have several times in the past already) that deficits with Treasuries could be more stimulative than deficits without Treasuries.

In conclusion and to summarize, the Treasury doesn’t need “coordination” with the Fed to carry out helicopter drops because helicopter drops are essentially fiscal operations already.  “Coordination” adds virtually nothing of macroeconomic significance compared to fiscal deficits accompanied by T-bills (and the result is only slightly different if the Treasury issuesT-notes and/or T-bonds) since “coordination” itself leaves the Treasury with new debt that is serviced via interest on reserve balances.

In other words, the Treasury already has the ability to carry out helicopter drops on its own—it does not need the Fed’s blessing nor does the federal government need to force the Fed to acquiesce as occurred during World War II or through new legislation.  For better or worse (depending on your perspective), this is a highly significant revelation for anyone trying to understand in theory or in practice how to design an appropriate monetary policy/fiscal policy mix.

An aside: There is a related point for those that do not completely understand MMT and erroneously believe that MMT describes the monetary system “as we want it to be” rather than “as it is.”  As explained here, the US Treasury has within its power right now (aside from the debt ceiling, obviously, though there are already various ways around this, too, if desired, that have been explained elsewhere) the ability to execute helicopter drops without overdrafts from the Fed and without “coordination” with the Fed.  That is, there are no changes required to the existing monetary system or existing laws to carry out MMT-favored policy options right now.

46 Responses to Drop It: You Can Call for Helicopter Money but Drop the Call for “Coordination”

  1. I wonder if an interest rate increase by the Fed qualify as a helicopter drop, because it would raise the net financial assets (via interest income channels) of the non-government sector.

    In 1994, the Fed sharply raised interest rates. Then, in 1996, Clinton easily won reelection because the economy was booming. Perhaps the Fed’s interest rate increase supported, rather than detracted from, the tech boom.

  2. There is a related point for those that do not completely understand MMT and erroneously believe that MMT describes the monetary system “as we want it to be” rather than “as it is.” … That is, there are no changes required to the existing monetary system or existing laws to carry out MMT-favored policy options right now.

    I can’t count the times I’ve tried to pound this into peoples’ heads all over the intertubes. SO many, probably a sizable majority of those who have heard of it, just don’t get this, and misunderstand MMT as a proposal, or as something it would be nice (or catastrophic) to have if we changed things. And so they implicitly file it into an attic of unrealistic wishful thinking about hypotheticals. Important and nice to have a forthright statement. (Not that there aren’t many in the literature already.) On reading your essay, I think this point in your aside is important enough that it deserves a name – how about:

    (Fullwiller’s) Fundamental Fact.

  3. Do you mean a Treasury deficit accompanied by T-bill issuance would be like a ‘helicopter drop’ in the current context, because the base interest rate is near zero, or that it would *always* be like a helicopter drop, even if the base interest rate was, say, 6%?

    • I higher interest rate would put more money in the private sector as opposed to QE. Might be better?

    • Sorry. A higher interest rate would put more money in the private sector as opposed to QE. Might be better?

  4. Scott Fullwiler

    Hi Y,

    Always.

    Helicopter drop with “coordination” means interest on debt = IOR = Fed’s target rate
    Helicopter drop w/o “coordination” means interest on debt = T-bill rate = roughly Fed’s target rate

  5. Sunflowerbio

    Please excuse me if I run outside whenever I hear the familiar whop, whop, whop sound. I have my bucket by the door.

  6. Detroit Dan

    The Fed always buys (or sells) bonds to hit its target interest rate for T-bills. That’s how the Fed does its job with or without “coordination”. The helicopter part implies a distributional component which gets us back to the MMT point that fiscal policy is required to spend government money and determine how it will be spent. Monetary “coordination” adds nothing, unless you believe that the central bank will actively try to foil the fiscal plans, and that advance coordination will help ensure that that doesn’t happen…

  7. Detroit Dan

    I’m signing up for follow up comments…

  8. Why/how is it that short-term treasury yields roughly follow the Fed funds rate?

    • I guess because those are the maturities the Fed buys/sells in open market operations?

  9. I think this analysis ignores what I would call “operating money”. Just as a small business needs a small amount of cash on hand at all times, an entire economy needs a minimum amount of cash to operate. The cash needs are basically a cushion to absorb the mismatch in timing between income and expenses. In the United States, the Federal Reserve manages “operating money” for the economy.

    How does this concept matter?

    Let’s assume that Treasury expects current bills to be larger than the expected balance in the checking account. Treasury will need to borrow Federal Reserve Notes (FRN) to meet the next pay period. Treasury has two basic sources of borrowed funds, the Federal Reserve and Private lenders. Both provide the identical service, a loan of FRN.

    Private lenders have restraints based on their relatively difficult path to acquire FRN. Private FRN must be first acquired from the Federal Government or other private parties. Private parties mostly like to spend their money but some private parties actually save and make their money available for longer term investments. The point here is that private lenders have only a relatively small amount of FRN uncommitted and available at any one point in time.

    The Federal Reserve, on the other hand, can print money at will. Either directly, or as a secondary purchaser, the Federal Reserve can provide all the FRN needed by Treasury. If the Federal Reserve does this, the one penalty easily observed is that the total measured money supply of the economy will increase.

    If Treasury expects a deficit larger than private lenders might be able to supply, then some coordination with the Federal Reserve is the only option to prevent drawing the nation’s “operating money” into negative.

    To me, the introduction of some minimum amount of operating funds for an economy and recognition of the resulting limits, restraints, or time sequences would contribute immensely to the logical continuity of MMT.

    • Detroit Dan

      Roger– I don’t think the Fed controls “operating money”. The Fed controls one thing, i.e. the supply of Treasury bonds in relation to the amount of reserves (high powered money). My understanding is that there is never a shortage of operating money because people hold Treasuries instead of cash. Treasury bonds can be converted to cash many times over by the private banking sector as Scott points out. And the Fed itself will accept Treasuries as collateral for cash reserves when needed. Bonds themselves, then, work perfectly fine for operating cash needs…

      • Dan–I think I would equate my “operating money” with your “reserves”, leaving unresolved the need for transferable Federal Reserve Notes. Yes, Treasury bonds can be converted to cash, and yes, Treasury bonds can be considered reserves, but Treasury bonds cannot be directly used to make cash payments. It is the need to have actual cash to make payments that prompts the need for “operating money” in excess of the amount needed for “reserves”.

        Another example: A run on a bank is everyone withdrawing their personal operating money nearly simultaneously as Federal Reserve Notes.

        Banks must plan before making big loans. The plan would detail the sequential steps of acquiring and dispersing a large quantity of Federal Reserve Notes, while protecting and meeting reserve requirements. A prior buildup of Federal Reserve Notes would be needed before the loan could be made.

    • Roger -

      “I think this analysis ignores what I would call “operating money”.”

      Just another part of savings of the private sector.

      JH

  10. already know that exogenously raising the monetary base via monetary policy does not stimulate the economy. Ms Kelton

    Excuse me, but send big enough “stimulus checks” to those with a high propensity to consume such as the poor and that WILL stimulate the economy. Sure, some will be consumed repaying the banks but the rest will be SPENT!

    • That’s fiscal policy, not monetary, F.

    • Oh, excuse me indeed. You said “raising the monetary base via monetary policy does not stimulate the economy.” I agree. It should be done with fiscal policy. My apologies.

      Btw, who needs banks anyway? Common stock is an ethical means of endogenous money creation; one that “shares” wealth and power rather than unjustly concentrate them as a government-backed cartel does.

  11. Scott,

    Good post and good core point. I think your original helicopter fiscal post was a benchmark of understanding. Recent internet discussion on this issue has been a predictable communication and comprehension disaster, so there is a need to remind people of how things actually work. I also think the term “helicopter drop” should be banned from good conversation everywhere.

    Regarding your “aside”:

    “There is a related point for those that do not completely understand MMT and erroneously believe that MMT describes the monetary system “as we want it to be” rather than “as it is.” As explained here, the US Treasury has within its power right now (aside from the debt ceiling, obviously, though there are already various ways around this, too, if desired, that have been explained elsewhere) the ability to execute helicopter drops without overdrafts from the Fed and without “coordination” with the Fed. That is, there are no changes required to the existing monetary system or existing laws to carry out MMT-favored policy options right now.”

    a) I don’t know who you want to designate in that set of “erroneous believers”, but that is obviously not the same as the more general set of “those that do not completely understand MMT” – for a few reasons. Regarding that more specific first group, my view is that there is a further subset of that whose criticism may not be understood fully by MMT. So I think this area may be a difficult thing to generalize.

    b) The US Treasury of course has the ability to execute helicopter drop equivalents as you define and describe them. And as an example perhaps of my point a) above, your point here, as well described as it is, is well understood by anybody who does understand MMT. But I would suggest that this is not exactly related to the nature of the criticism in your aside – at least that as coming from a select group that I can think of. The criticism in question relates to MMT’s framework of descriptive methodology – not to policy feasibility. Furthermore, different MMT principals have different modes of description.

    I make an observation only – definitely not to set anchor for a pissing match. It is more important that your post makes a solid point about mainstream barely treading water, if not still drowning, on the accounting foundations of monetary economics – and in denial about it. That in my view is the far more important issue and the one that is most universal in all of this. The other issue is up to MMT to ignore or reject. But I don’t think it can necessarily be disproved. Who understands whom can be never ending and rebounding. For my part, I don’t think it’s the case that anybody associated roughly with that class of criticism doesn’t understand MMT. Maybe some do and some don’t.

    • Scott Fullwiler

      Hi JKH,

      Yes, my “aside” was not intended for people fitting into (b) for sure. I was thinking more along the lines of the people Calgacus mentions above, or Murphy (in his debate with Mosler, he made this precise point that I describe in the aside). There is some overlap, but I certainly wouldn’t consider you as one for whom that is the case. Hope that clarifies.

      • Well JKH does say that the government has to get funds from taxation or borrowing to be able to spend, and that as such MMT describes the world “as they want it to be” rather than “as it is.”

        I’ve yet to see JKH acknowledge the fact that the “funds” the government gets through taxes and borrowing are simply its own liabilities being returned to it. That fact seems to blow a pretty big hole in JKH’s argument really.

        • Scott Fullwiler

          Hi Y

          I’m quite sure JKH knows that reserve balances settle Tsy auctions and tax pmts b/n banks and the Tsy. We have different views on the appropriate way to present that. Perhaps best to leave it there right now. At least in my case, I don’t see much point going further down that road, nor do I have the time.

  12. Scott,

    do you think it’s possible, at least in theory, that the spread between the interest rate paid on reserves and that paid on T-Bills could widen to such an extent that T-Bills cease to be cash equivalents?

    • Dan Kervick

      Just one suggestion: perhaps the Treasury doesn’t need the Fed’s blessing to execute a helicopter drop; but the Treasury doesn’t have the ability to carry out a helicopter drop on its own. Only Congress can do that. The Treasury just executes spending instructions that have been given to the executive branch by Congress.

      That’s why the monetarist zombies in the blogosphere never die, and why people are so in love with the vacuous seductions of central bank run monetary policy. The Fed is effectively run by one man, and if enough hectoring bloggers and pundits lean hard enough on him, they can sometimes get him to do what they want – ineffective as it is.

      But there is no point in hectoring, lecturing, berating or pleading with Jacob Lew, or his predecessor Geithner about helicopter drops or expansive fiscal policy – because they can’t do diddly on their own. Neither can the President.

      Congress can do it, but they won’t. Right now, we can barely get Congress even to authorize the further debt issuance necessary to carry out their previously authorized spending instructions. So unless somebody has some bright ideas about how to get Congress to act, we might as well all go home and make the best we can out of the decade of stagnation and misery Congress has delivered to us.

      • Dan Kervick

        Sorry y, I didn’t mean to place this comment as a reply to your comment.

      • financial matters

        I agree this seems to be the main problem. True fiscal policy should also have some direction. Just adding money to reserve balances seems to mainly bid up asset prices.

  13. “MMTers have explained for years that fiscal policy provides income and net financial assets for the non-government sector, whereas monetary policy (whether it be lower interest rates or—for true believers in Monetarism and “hot potato effects”—more “money”) can only stimulate the economy via increased spending by the private sector out of existingincome. In other words, monetary policy only “works” when there is more spending out of current or existing income–i.e., you spend your money balances or you borrow at a lower rate. Your income is the same but you’ve spent more. But fiscal policy raises incomes first, so it enables more private sector spending out of increased income. And, remember, this is just accounting, not “theory.””

    Scenario 1: Let’s say the gov’t gives 100,000 people a tax cut. The gov’t issues bonds, and a bank buys them. The 100,000 people later pay back both principal and interest over 10 years so the gov’t pays down the bonds.

    Scenario 2: The 100,000 people go to the same bank and get a loan for the same tax cut amount. The 100,000 people later pay back both principal and interest over 10 years so the loans get paid down.

    What is the difference?

    • Scott Fullwiler

      You’ve set up a straw man. Try it again but this time recognize in scenario 1 that the govt’s debt never needs to be “paid back.” The difference is then obvious.

      • If the gov’t budget is set up so the bond is not repaid (principal and interest), I believe that means there is a rollover risk.

  14. Y -

    Seems it couldn’t get any wider than prior to IOR?

    JH

  15. Are there any rules regarding what kind of assets the Fed can hold on its balance sheet? I believe the Fed now holds mortagage backed securities on its balance sheet. Not sure if the Fed is disallowed from holding bonds issued by individuals. If it is not, the Fed can buy such bonds to put money in the hands of individuals. That would be helicopter money through monetary policy.

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  17. “MMTers have explained for years that fiscal policy provides income and net financial assets for the non-government sector, whereas monetary policy (whether it be lower interest rates or—for true believers in Monetarism and “hot potato effects”—more “money”) can only stimulate the economy via increased spending by the private sector out of existingincome. In other words, monetary policy only “works” when there is more spending out of current or existing income–i.e., you spend your money balances or you borrow at a lower rate. Your income is the same but you’ve spent more. But fiscal policy raises incomes first, so it enables more private sector spending out of increased income. And, remember, this is just accounting, not “theory.””

    I like this!
    I must confess to never hearing it explained exactly this way. I my self have never used this comparison either but I certainly can see it to be true. This needs to be repeated as well in as many places as it can be.

    But this begs the question…… where does income come from without fiscal policy?

    • Scott Fullwiler

      HI Greg

      One has to be very careful interpreting/repeating my argument there. Your question “where does income comes from w/o fiscal policy” suggests a misunderstanding of the nuances involved.

      Note that if I borrow $ and then spend them at Home Depot, HD has received income, pays its workers income, etc. So income in the aggregate can be created without fiscal policy quite readily. The difference comes in when I don’t want to borrow $ in the first place since for whatever reason I am trying to deleverage; the process can never get started in that case, perhaps even with interest rates at historic lows. In that case, the only way for me to spend more to get the process started and also continue to deleverage (or at least not add to leverage) is to raise my income through, say, a tax cut.

      I would not argue that monetary policy isn’t ever appropriate; I would argue that in the current environment at least, fiscal policy is the more appropriate choice.

      Hope that helps a bit.

      • Thanks for the response Scott.

        Upon re reading I realize the form of my question was not good. I didnt mean to suggest that all incomes come from fiscal operations, I was meaning to suggest though that I think only fiscal policy can raise the “net” level of income. When we use loans from banks to spend and create income for others, there becomes a point where it is unsustainable and ponzi dynamics take over (borrowing to pay back old loans and never paying back). Do you agree with this?

        I agree that monetary policy can be an appropriate response at times………………. just not these times!

        • Dan Kervick

          I don’t think that’s necessarily true. As businesses expand, they borrow more. As they borrow more, banks create more deposits. Those new loans and deposits don’t increase the net financial assets of the private sector, but they do increase the quantity of money. That additional money becomes the income of people the businesses do business with, including their workers. The central bank continues to accommodate the deposit growth. In principle they could do this entirely through discount lending. Managed properly, the process never needs to “go ponzi”. Banks continue to lend additional funds to the non-bank sector in sufficient quantities in the aggregate to ensure that businesses and households can continue to service their existing debt to the banks; and the central bank continues to loan sufficient funds to the banking sector to ensure that the banks can continue to service their existing debt to the central bank.

          The processes are interconnected, because the expansion of bank lending to the non-bank sector creates a need for additional bank clearing balances, which necessarily consist in central bank liabilities. The banks can’t self-generate their own clearing balances.

          In the above process, the non-bank sector is always net indebted to the banking sector, and the banking sector is always net indebted to the central bank. There is no reason in principle why such a process has to tend toward insolvency or crisis. (That’s not to say it won’t, only that there is no reason in the nature of things why it has to.)

          The problem, though, as Scott mentioned, is what happens if the non-bank sector wishes to deleverage in the aggregate – that is, reduce its net indebtedness to the banking sector. If the non-bank sector is deleveraging in the aggregate, then it can’t be paying off its loans in the aggregate with funds that are coming from additional bank loans. So the government has to supply a direct non-loan provision of funds to the non-bank sector. It makes a payment via check or electronic transfer to some business or households, which results after clear with the recipient having a larger deposit at their own bank, and the recipient’s bank having a larger deposit at the central bank – with no additional loans made. So the private sector’s net financial assets have been increased (or at least its net financial liabilities have been decreased.)

    • “But this begs the question…… where does income come from without fiscal policy?”

      I believe you are going to want to eventually ask where does new medium of account (MOA) and new medium of exchange (MOE) come from?

      Plus, ask your question if the gov’t and non-gov’t sectors are combined.

  18. Why do you guys moderate all comments? Isn’t a bit of a waste of your time?

  19. Would you agree that eurozone governments needs this “coordination” in order to deficit spend? Would you also agree that easy way to alleviete these fears associated with expanding monetary base would be to set binding lending limits to the banks? Banks could be regulated to limit expansion of their loan books to, say, 8% y-o-y for example.

  20. Gerry Spaulding

    Scott,
    Lots of really good points.

    There’s a whole para that begins with……….
    Second, non-neoclassicals like MMTers….
    I think its only a couple of sentences with a lot of qualifiers and explanations, even questions about a lot of things, but I think the clear message is the superiority of PK thinking in regards to endogenous and exogenous money, most notably regarding their potential effects on stimulating the economy.
    We can all recognize endogenous money, a rather recent but well-structured view of the system we have now, the only one we’ve ever known.
    But what of the systems we have not known?
    For instance, there must be more than one example of the exogenous money system simply because the proposal advanced by Lord Adair Turner at the recent INET conference, that of Overt Permanent Money Finance(OPMF) of clearly targeted budget deficits, is, of certainty, an exogenous money proposal that has no relation to the explanations that were offered.
    http://www.youtube.com/watch?v=ZhrY_coLK_k

    Turner’s proposal is based on the work of Simons, Fisher and also Milton Friedman’s Fiscal and Monetary Framework.
    When it comes to advancing the economy, the OPMF money being advanced to fund deficits is issued directly into the national income stream. Bank reserves are not on the radar screen, let alone considered a policy mechanism.
    Soros’ introduction is more about the next-Keynesian quality to Turner’s work.

    Perhaps more understanding is needed of other exogenous money proposals than has been explained by the broad PK school.
    Thanks.

    • Adair Turner’s proposal is a ‘helicopter drop’. His plan involves either: (1) the Treasury selling bonds to the public which are then bought back by the Fed, or (2) just creating money and paying it directly to members of the public.

      In both cases the end result is an increase in bank reserves and bank deposits.

      • Gerry Spaulding

        y,
        Thanks.
        I appreciate your reading of the Turner OPMF proposal.
        Not sure why you think it involves issuing debt by Tsy. Neither Simons, Fisher nor Friedman made such a proposal – read any of their works on this subject.
        And Turner addresses the need to issue debt negatively.

        Of course we agree that OPMF involves “paying it directly to members of the public”.
        The economic transmission mechanism to pursue what STF calls “their potential effects on stimulating the economy” is to direct the government payments of new money to the nation’s ‘income’ stream.

        By definition, that is an increase in deposits.
        Whether it increases reserves or not would be superfluous to this OPMF public policy initiative.
        It would not be necessary, as this represents a creation of ‘permanent’ money finance, thus eliminating any risk to the money system, obviating any need for either reserve or capital backing.
        The money is its own backing.
        However, as Turner falls short of completely eliminating fractional-reserve banking – not sure WHY really – it would be up to the CB to determine the amount of media required to operate the payments system.
        But that has nothing to do with creating new money via OPMF.
        Thanks.

        • bank deposits are bank liabilities, i.e. bank debts.

          If you have a $100 bank deposit, that means the bank owes you $100.

          If the government pays you $100 by directly paying into your bank account, bank deposits and reserves NECESSARILY increase by the same amount. This is because the bank receives $100 of money (reserves) from the government, and now owes you $100. So its assets and liabilities increase by the same amount.

          Reserves are just cash (currency) in electronic form. If he government paid you $100 in cash, and you then deposited that cash at a bank, the bank’s reserves and deposits would increase by the same amount. It would now have $100 in cash (reserves) and owe you $100 (deposits).

          It’s actually very simple.

    • Gerry, here’s my reply to your question “We the people and the economy in which we all live and work participate ONLY in those private bank debt-based, money-creation transactions. What other kind are there?”:

      http://neweconomicperspectives.org/2013/06/lavoies-critical-look-at-modern-money-theory-a-reply.html#comment-185881

  21. I need some help with the accounting here. I keep seeing people say debt does not matter because:

    1) for every borrower there is a lender

    2) $ borrowed = $ lent

    3) banks are only financial intermediaries for savers and borrowers

    4) “debt” is an asset to one entity and a liability to another entity

    5) when “debt” is created, both sides of the balance sheet expand

    6) real economy transactions are settled in monetary base

    7) overall, “debt” is owed to ourselves

    I want to deal with 1 to 6.

    Let’s say I save $100,000 in demand deposits. Someone else wants to start a new bank. They sell me a $100,000 bank stock (bank capital). The reserve requirement is 0%, and the total capital requirement is 10%. I believe that means the capital requirement is 5% for mortgages and is 10% for ordinary loans. This example will be all mortgages.

    Assets new bank = $100,000 in central bank reserves (and $100,000 in its checking account???)
    Liabilities new bank = $0
    Equity new bank = $100,000 of bank stock

    The bank now makes 20 mortgages for $100,000 each. The 20 people use the demand deposits to buy 20 homes for $100,000 each from 1 home builder.

    Assets new bank = $100,000 in central bank reserves (and checking account too???) plus $2,000,000 in loans
    Liabilities new bank = $2,000,000 in demand deposits
    Equity new bank = $100,000 of bank stock

    $100,000 / ($2,000,000 * .5) = .10

    The home builder sets up a checking account at the new bank. So 20 checking accounts at the new bank were marked up and then marked down by $100,000 each, while the home builder’s checking account was marked up by the $2,000,000.

    I saved $100,000. I lent $100,000 to the bank, and the bank borrowed $100,000. The bank lent $2,000,000 to ten other people, and the ten other people borrowed $2,000,000. Some people would say that the home builder lent $2,000,000 to the bank thru the checking account and the bank borrowed $2,000,000 from the home builder. The bank lent $2,000,000 to ten other people, however, it only borrowed $100,000 from me.

    The home builder allocates as follows:

    $1,500,000 in a savings account and $500,000 in a 7 year CD. Bank is funded for now, and the reserve requirement for savings accounts and CD’s is zero so that takes care of a positive reserve requirement.

    Assume the interest payments for mortgages are paid out as a dividend so there are no retained earnings that could be used as tier 1 capital.

    I save $50,000 more in demand deposits. I think the bank can now sell a subordinated term debt instrument (bond) of $50,000 as tier 2 capital. It could issue up to $50,000 as tier 2 capital.

    Assets new bank = $100,000 in central bank reserves plus $2,000,000 in loans plus $50,000 in central bank reserves
    Liabilities new bank = $2,000,000 in demand deposits
    Equity new bank = $100,000 of bank stock and $50,000 of bank bond(s)

    The bank now makes 10 mortgages for $100,000 each.

    Assets new bank = $100,000 in central bank reserves plus $2,000,000 in loans plus $50,000 in central bank reserves plus $1,000,000 in loans
    Liabilities new bank = $2,000,000 in demand deposits plus $1,000,000 in demand deposits
    Equity new bank = $100,000 of bank stock plus $50,000 of bank bond(s)

    $150,000 / ($3,000,000 * .5) = .10

    The home builder has a checking account at the new bank. So 10 checking accounts at the new bank were marked up and then marked down by $100,000 each, while the home builder’s checking account was marked up by $1,000,000.

    I believe the $3,000,000 of the home builder is considered by some people to be lending to the bank and borrowing by the bank.

    The home builder allocates as follows:

    $1,500,000 in a savings account and $500,000 in a 7 year CD (the same) plus an additional $1,000,000 to the savings account. Bank is funded for now, and the reserve requirement for savings accounts and CD’s is zero so that takes care of a positive reserve requirement.

    Assume the interest payments for mortgages are paid out as a dividend so there are no retained earnings that could be used as tier 1 capital.

    Notice the .5 times 10% equals the capital requirement for mortgages, 5%.

    Let’s look at what happened with the $50,000 tier 2 bank capital bond that was issued.

    I saved $50,000 in demand deposits. I lent $50,000 to the bank, and the bank borrowed $50,000 from me. The bank lent $100,000 each to 10 other people, and the 10 other people borrowed a total of $1,000,000 from the bank. Some people would say that the home builder lent $1,000,000 to the bank thru the checking account and the bank borrowed $1,000,000 from the home builder.

    The bank borrowed only $50,000 from me and lent $1,000,000 for the mortgages at one step without the bank needing to borrow from some other entity.

    Overall, lending is $50,000 plus $1,000,000 plus $1,000,000.
    **** borrowing is $50,000 plus $1,000,000 plus $1,000,000. $ borrowed = $ lent

    Next, take the capital requirement to 100% for all loans including the mortgages.

    Assets new bank = $100,000 in central bank reserves plus $100,000 in loans plus $50,000 in central bank reserves plus $50,000 in loans
    Liabilities new bank = $100,000 in demand deposits plus $50,000 in demand deposits
    Equity new bank = $100,000 of bank stock plus $50,000 of bank bond(s)

    The bank borrowed only $50,000 from me and only lent $50,000 for the mortgages at one step without the bank needing to borrow from some other entity.

    If the capital requirement is less than 100%, then someone can’t say monetary policy does not work by increasing actual borrowing.

    The purchasing power of the borrowers went up by more than the purchasing power of the savers went down. Debt from a bank matters. It seems to me 1, 2, 4, and 5 are meaningless and 3 and 6 are wrong.

    Thoughts???

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