When Will the White House and OMB Ever Learn About Sector Financial Balances?

In my last post I asked this same question about the House Budget Committee. As my readers saw in that one, the attempts at deficit reduction leading to budget balance were so severe that they implied that if the House budget were followed, and if the economy did not collapse before the decade projection period ended due to a collapse of aggregate demand, then private sector deficits would be produced in every year from 2017 – 2025. In addition, since the budget provided for severe cuts to federal spending designed to benefit poor people and the middle class, it was likely that the private losses from this budget would be concentrated on the people who can least well absorb them.

In this post, I’ll review the sectoral financial balances implications of the White House/OMB projections to see how they compare to those of the House Budget Committee. I’ll begin by repeating the explanation of sectoral financial balances basics I included in my earlier post.

The Sector Financial Balances (SFB) model is an accounting identity, and these are always true by definition alone. The SFB model says:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0.

The terms refer to balances of flows of financial assets among the three sectors of the economy in any specified period of time. Why must there be flows? Because the three sectors trade financial assets with one another. So, the equation says that the sum of all the balances of flows for the three sectors of the economy is zero, because, since there’s only so much in assets traded in any time period, the positive balance(s) of one or more sectors relative to the others must be matched by the negative balance(s) of the other two sectors.

So, for example, when the annual domestic private sector balance is positive, more financial assets are flowing to that sector, taken as a whole, than it is sending to the other two sectors.

Similarly, when the annual foreign sector balance is positive, more financial assets are being sent to that sector than it is sending to the other two sectors.

And when the annual government sector balance is positive, then it is getting more in financial assets from the other two sectors combined than it is sending to them.

Conversely, when the private sector balance is negative, the private sector is sending more to the other two sectors than it is getting from them, and so on for each of the other two sectors.

Now let’s apply this to the White House/OMB Federal budget projections from 2016 – 2025, in Table One, just below.

Table One: Sector Financial Balance Projections (from OMB) 2016 – 2025

 SFBprojections20152025 Assuming White House Budget
From Table One, you can see that in the unlikely event the OMB plan were passed by the Republican Congress, and the further unlikely event that shocks to the economy would not knock the projections into a cocked hat anyway, the private sector as a whole would have a small surplus of 1.5% of GDP in 2016, and every year thereafter through 2025 the OMB projections imply small aggregate private sector surpluses varying from 1.2% of GDP to 1.6% of GDP, and ending at 1.5% again in 2025. These small annual gains in net financial assets for the private sector are an improvement on the almost continuous losses implied by sectoral financial balances projections contained in my previous post analyzing the House Budget projections, but they are nothing to write home about.

To place these gains in perspective, we need to recognize that the mean private sector surplus in the period 2009 – 2014 was approximately 7.2% of GDP for that 6 year post-crash period. But the Government deficit spending injections resulting in those surpluses were not great enough to create the level of aggregate demand necessary to produce a robust economy with rapid job creation, full employment and widespread prosperity for the 99%.

Instead, these private sector surpluses have only been enough to end the recession and produce a slowly growing stagnant economy, whose rewards are vast for the already wealthy and for large corporations, but are miniscule, or non-existent, for everyone else. So, ask yourselves what the projected small Government deficits over the decade 2016-2025 resulting in mean private sector surpluses of approximately 1.4% of GDP annually are likely to do by way of producing the aggregate demand needed to create full employment and shared prosperity? Not very much I’m afraid.

We know very well that our nation’s economy is structured so that some parts of the foreign sector and some parts of the private sector have sufficient economic and political power to direct financial flows from outside and inside their sectors disproportionately into their coffers. So, this means that the sub-sectors with lesser economic and political power will suffer the burden of the losses, as they have been doing for the past nearly 40 years.

Which sub-sectors will grab what aggregate savings are produced are identified in the House Budget post. The Government can counter the maldistributive impact of the current economic institutional structure, at least in part, by targeting its spending and tax relief on the sub-sectors that need it most. But the OMB budget doesn’t do much of that.

So, the implications of its budget are that small and large companies not in the sub-sectors that have the power to channel gains to themselves, and also households in the 99%, will still get poorer and poorer, year after year, if the OMB projections should be realized, though this won’t happen quite as rapidly as it would under the House Budget Committee’s plan. It’s a case of boiling the frog more slowly than the Republican version, but its planned deficit spending is far too small and poorly targeted to create satisfaction with the economy. In other words, we have austerity lite, as opposed to the militant austerity of the House Budget effort.

Eventually, unless there’s a credit bubble providing money and corresponding debt liabilities to these sub-sectors, consumer demand will gradually decrease until it finally collapses because net financial assets cannot be drawn upon to maintain it. In other words, the implications of the OMB budget projections are another economic crash during the coming decade probably sooner rather than later, but probably later than we will get with the House Republican Budget.

What can delay this process leading to collapse? It will be the failure of the OMB deficit projections, because they don’t accurately project the effects of the automatic stabilizers reacting to the very small private sector gains implicit in the OMB plan.

The automatic increases in government deficit spending caused by rising unemployment insurance payments, food stamp spending, early retirements and disability spending will create larger deficits than OMB projects, though probably not until after the elections of 2016. At that time, deficit spending will be greater than planned, and it will ease the pressure on the private sector from the small private sector surpluses because, one more time, government deficits in the realm of automatic stabilizer spending mean private sector surpluses and gains in consumer demand that will boost the economy.

However, the “accidental deficits” produced will not be big enough, nor targeted well enough to prevent continuing stagnation. In my next post, I’ll look at the Congressional (CPC) budget and see if the CPC has yet learned the lesson that projections that don’t take sectoral financial balances into account project private sector results that are far from consistent with what is necessary for a robust and just economy.

21 responses to “When Will the White House and OMB Ever Learn About Sector Financial Balances?

  1. I like you comments about the change in private savings rate shortly after the recession. If my memory serves, weren’t these actions criticized in 09 and to a lesser extent in 08 under Bush? What I mean is, people were de-leveraging and paying off credit card and housing debts instead of buying new products. I seem to remember much criticism point out how this failed to recover the economy in a timely manner. Thanks for any feedback.

    • Joe Firestone

      We’re talking here about the aggregate new savings flowing to the private sector given the flows going to the other two sectors, the issue of how much of this added potential demand is saved by individuals and how much is consumed is a separate consideration and a different issue. yes, people were de-leveraging after the crash. many are still doing so now and would probably save much more if more nets financial assets were flowing to the private sector.

  2. Steven Greenberg

    I have prepared a diagram that I intend to use in a blog post I am composing. Something like it is probably already in the Diagrams and Dollars post on this web site, but mine is very simplified and it is intended to make only the single point of Joe’s post above.

    I decided to use the diagram even before I write my intended post that was going to use it.

    You’ll find the diagram on my web site


    • Joe Firestone

      Thanks! I really like the explanation. on the diagram, I think the double headed arrows may be a bit confusing to people. perhaps pairs of single headed arrows would work better, even though it makes the diagram busier?

  3. Stanley Mulaik

    Looking back on remarks made about your Kindle book on paying off the national debt, I see someone said the private Federal Reserve banks are the ones buying the securities. Are they? Which Federal Reserve Bank is doing quantitative easing and Open Market Operations? And those are government operations established by law.
    Anyway, my chagrin has been at the way in which even the Treasury describes the ‘national debt’, in which they talk about investors and banks holding US Treasury securities. But they don’t say what they were for.

    The marketable securities issued by Treasury are bought by different categories of entities. There are banks that buy the securities from Treasury for government’s deficit spending. And there are the investors, who routinely hold about 80% of the Public debt.
    When the Fed does QE it buys US securities and toxic assets from banks and certain bank-like financial institutions. It does not buy up the securities held by private investors in QE. Certainly not the Chinese and the Japanese, the two largest foreign investors in US securities. I don’t think the Fed has direct access to where those securities are kept in safekeeping.
    The way the Treasury routinely gets its money for deficit spending and paying interest, I think, is by issuing securities and selling them to banks. Banks create the money to buy these securities out of thin air. With fiat money there is no need or connection between depositors’ deposits and some external gold supply that had to be referred to when making new loans under the gold standard. So, banks do not lend their depositors’ money when making loans. That’s current new understanding, which rules out the fractional reserve concept as irrelevant and outmoded.
    So the banks initially create the money out of thin air and lend it to the government via the Treasury.
    The banks buy the securities at public auction at discount. And they will be owed interest equal to the difference between the face value of the securities and the principal paid to purchase the securities.

    But the Treasury never pays back the principal on the securities, only the interest, because in the meantime, when a security for deficit spending matures, the Treasury just creates a new security with a new maturity date farther in the future and swaps it for the bank’s security. It also pays interest on the mature security. The Treasury will do this over and over, rolling over the security perpetually by swaps of new for mature securities plus interest.

    Treasury gets money for interest in the same way as it does for deficit spending, and it manages that ‘debt’ in the same way by perpetually rolling over securities for interest with security swaps.

    A debt that is never paid on the principal is not an ordinary debt; in fact it is not a debt at all. In return for interest, the banks have essentially given debt-free money to cover deficit spending. This is as it was before 1917 when the banks succeeded in lobbying Congress to prevent Treasury from simply creating money by issuing US Treasury Notes to cover deficit spending. That money was debt-free; but banks did not then get interest.

    Parenthetically, you can see why the Secretary of Treasury is warning disaster if the debt-ceiling is not raised or even eliminated. Preventing borrowing after a certain level of ‘debt’ in effect paralyzes the Treasury. But imagine what will happen, not only in the case of deficit spending securities but
    investor securities, on which interest has to be paid.

    Banks that depend on the uninterrupted interest stream coming to them from Treasury, may find themselves on the short end in some derivative gamble or hedge bet, being unable to pay the winner.
    Investors may no longer consider US Treasuries safe investments and no longer buy them and even will withdraw them by selling the securities at public auction. That would put a lot of money suddenly in circulation, and depending on exports, investment, lowered taxes and heavy lending by banks, there could be sudden severe inflation as those holding excess dollars bid up prices of goods and services in the United States. Then the value of the dollar would indeed drop.

    But let us turn to what the Fed has been doing with QE. Until quite recently I saw it as an attempt by Ben Bernanke to get the banks to start lending again. And while many predicted severe inflation from this, it didn’t happen because banks don’t lend from their reserves, but out of thin air. And QE was described as cleaning up the banks’ ledger sheets to make them start borrowing reserves from one another, secure that they could be repaid. But buying all those ‘toxic assets’ was mainly camouflage for the fact that the Fed has been redeeming the national debt on deficits by buying up all those deficit securities from the banks.
    The Fed has not been buying up the investors’ securities, because the principal already exists in time deposits at the Fed. I haven’t yet confirmed that the Fed instead of the Treasury could be providing the interest on these deposits as they mature and possibly rolled over at the behest of the investors (not the government).

    Consider what this means: We do not need a platinum coin to buy all those securities at the Fed.
    Right now they are in limbo, the government’s debt to the banks has been redeemed by the Fed.

    Furthermore, the Fed may just keep those mature securities on hand until inflation arises, at which point it will swap them with the Treasury for new securities, which it will sell to banks and public to drain bank reserves and circulation of excess money into time deposit accounts.

    Also note that in these swaps, the Treasury is redeeming any potential debt to the Fed in the securities it holds by the act of creating securities out of thin air and providing them to the Fed in return for the mature securities at the Fed. (None of this has to clear all securities at once). So, the government does have the power to pay off the debt on the securities absolutely using fresh securities.

    And then when the Treasury gets the mature securities back from the Fed, it can extinguish them.

    The Fed will not derive any gain from the new securities, except a transaction fee of 6% of the interest on all sales or purchases of securities respectively, which is how the Fed finances its activities, independent politically and financially from Congressional appropriations. So in its actions it is just an agent of the government in handling these securities.

    Of course, at other times the Fed will engage in routine Open Market Operations of buying and selling securities to fight deflations or inflations respectively. It constantly has to moderate the economy.

    I have another idea I’d like reacted to by other MMTers but I will hold off on that for a later post.

    • Joe Firestone

      Hi Stanley, Btw, I’m a big fan of the first edition of the first edition of your Foundations of Factor Analysis book, which I used very frequently in my research and consulting during the 1970s and early 1980s. Thank you for communicating that form of multivariate analysis very well.

      The Fed is a strange institution. It is not a single bank, but a system of the Federal Reserve Regional Banks, the Board of Governors which is a Federal Agency controlling what the regional banks do, and the Federal Open Market Committee (FOMC) which sets policy for the system. The regional banks are privately owned, but are highly regulated and limited in their profit taking to a small share of the gross profit, some of which is used to fund themselves and the Board of Governors, but most of which is returned to the Treasury at the end of each year.

      The important point to note here, is that the Board of Governors and the FOMC are not banks, do not hold accounts, and do not execute the banking functions performed by the system. It is the regional banks that “create money out of thin air”, and it is they that actually swap reserve credits in return for other assets, toxic or otherwise, while implementing Fed policy.

      Most of what you say above is correct, but I need to raise a few issues. First, technically the Fed doesn’t redeem Treasury debt. when the Fed buys securities from the private sector, the face value of the purchased debt instruments is still counted as outstanding Treasury debt subject to the debt limit. So, the level of debt owned by the Fed is still a political issue that gets expressed in discussions of the “crippling” public debt burden we and our grandchildren supposedly face. second, so while the platinum coin isn’t necessary to fund redeeming Fed-owned or any other Treasury debt as long as the debt limit is not an issue; unfortunately it is an issue, so the PC becomes an instrument for taking this issue off the table.

      Third, while there is no financial hardship for the government in continuing to issue debt and pay interest as long as the Congress doesn’t play debt ceiling games, using debt instruments as a financing expedient has the effect of paying continuous streams of unearned, because risk free, interest, basically welfare, to institutions, wealthy individuals and foreign governments because they own most of the debt subject to the limit, not owned by Federal agencies in “trust funds”. Is that good public policy in accord with public purpose?

      I don’t think so. but it is a debatable question, since to maintain interest rates at its target the Fed would have to pay interest on reserves which payments might turn out to be roughly the same as what the Treasury now pays in interest. Still, there is a political difference in the two arrangements since if securities ceased to be issued to finance deficit spending, and interest on reserves was paid rather than interest on Treasury debt, the Treasury would be incurring no new debt and the faux issue of debt burdens on our grandchildren due to Federal debt would then disappear.

      Fourth, if platinum coins were used to replace deficit financing through debt instruments, then that would not cause a crisis in investor confidence when it comes to already existing Treasury debt, since under that assumption, the supply of outstanding Treasury would be continually shrinking, making the debt instruments that still existed increasingly valuable as “safe-harbor” investments.

  4. Stanley Mulaik

    Joe, I’m with you 100% on the need for our Congress and the rest of government to focus on sector balances. A couple months ago I came across the following equation when I was considering monetary flows:

    IF – OF – ΔS

    This is a basic equation in hydrology, and it’s about all I do know about hydrology other than watching the water in my sink and bath tub as I fill it.

    IF = inflows
    OF = outflows
    ΔS = change in quantity of water in stock (like a pool, lake, the ocean, city reservoir).

    If ΔS is positive the quantity held in stock rises. If negative this quantity falls from its current level.

    OK let’s use this equation with monetary flows:

    IF – OF = ΔC

    (E + G + I + L) – (M + T + S + P) = ΔC

    All quantities are flows:

    E – exports, G – government spending including deficit spending, I – investment spending, L – bank lending.
    M – imports, T – taxes, S- savings, P payback of bank loans by borrowers.

    ΔC – ‘change in’ quantity of money in circulation C at a given time.

    ΔC is the index we want to focus on. But we need another quantity:
    C’ – quantity of money in circulation when there is full production and employment at stable prices.

    When C C’ we are moving into inflation; excess money is in circulation bidding up prices and wages.
    The pool is not only just full, but overflowing. We need IF – OF to be negative. That will drain some of the money out of circulation back to C’. When we get back to C’ or come up to it, we need to focus on balancing IF – OF = 0. Inflows and outflows should equal each other at full production and employment and stable prices.

    Note that different mixes of various inflows may yield the same total inflow IF; similarly different mixes of various outflows may yield the same outflow. And we may at times focus on countering one kind of outflow with one kind of inflow, but all of them together must be considered to consider what value of ΔC is and what must be done to achieve a certain growth or drainage.

    So, thinking the big picture of all inflows and outflows and their consequences when considered together is what Congress and Administration needs to think of.

    Stanley Mulaik
    Quantitative Psychologist
    GA Tech

    • Joe Firestone

      Well done, but one correction, I think. More than the “money flows” I think what we need to keep our eyes on are the flows of net financial assets. when the government deficit spends using current financing practices. no additional “money” is added to the non-government because of the debt instrument sales that send reserves to the government sector. However, after both the “borrowing” and deficit spending occur, an additional net financial asset is left in the economy, in the form of the new securities that were sold.

      In addition, when the Fed “adds money” to the non-government by buying securities from the public, it, technically, doesn’t create any new net financial assets, because the reserves issued and created out of thin air, remain “locked up” at the Fed in reserve accounts, and can only be used for repo exchanges, while the securities are held in regional Fed security accounts and technically are still in the private sector. in other words, Fed operations create portfolio changes in the private sector without adding net financial assets, which treasury deficit spending does add net financial assets to the economy.

  5. Stanley Mulaik

    It looks like a ‘greater than’ symbol was not printed in the above. C > C’ = C greater than C’.

    • Hi Stan,

      Your equation (E + G + I + L) – (M + T + S + P) = ΔC is a useful extension of the well know identity

      (S-I) = (G-T) + (X-M).

      I was thinking about these issues and came to realize that interest on loans must be included.
      When I take a loan for $100, must deliver nominal cash flows over time in excess of $100 because of interest payments. These payments cannot be financed with velocity, and must come from government deficits, export earnings, or new bank loans. (Or in the short term from a pool of savings) In essence, on a aggregate level, debt can only be repaid and serviced with new debt!

      • Stanley Mulaik

        I have wondered whether paying the banks interest on their loans during the roll-overs of securities by the Treasury doesn’t put additional money into circulation that would counter the absence of money to pay the debt interest in the loan. I don’t know if there is enough or more than enough. But interest on the securities may be a ‘redeeming’ virtue of the Treasury’s procedure of rolling over the debt with securities swaps plus interest. I know there are objections to paying the banks what appears to be free money in the interest they get, but this may be an unintended desirable consequence of their success in forcing the Treasury to borrow to get money for the deficits.
        Keep thinking about this problem.

      • Stanley Mulaik

        I have wondered whether paying the banks interest on their loans during the roll-overs of securities by the Treasury doesn’t put additional money into circulation that would counter the absence of money to pay the debt interest in the loan. I don’t know if there is enough or more than enough. But interest on the securities may be a ‘redeeming’ virtue of the Treasury’s procedure of rolling over the debt with securities swaps plus interest. I know there are objections to paying the banks what appears to be free money in the interest they get, but this may be an unintended desirable consequence of their success in forcing the Treasury to borrow to get money for the deficits.
        Keep thinking about this problem.

        This for Joe also: What is the status of new securities obtained from the Treasury by the Fed before the Fed sells them to banks and investors? This looks just like a move from the Treasury to the Fed for some new as yet unsold securities. What disconnects the Fed from ‘owning’ them and deserving of being given money equal to their face value by the Treasury or equal value in a swap for mature securities.

        For that matter what is the status of new securities at the Treasury before the Treasury sells them at public auction? Is the Treasury owed full face value for them for possessing them? I suppose it is, if it sells them. But it sells them at discount. Explain.

  6. Stanley Mulaik

    It is not the Fed then that is adding new money to the economy, but the banks through their “loan” to the government via the Treasury, which spends these funds. Note that when the Fed is not involved with deficit securities but the Treasury is, the money created by the banks and spent by the Treasury is effectively ‘debt-free’ new money added to the economy. A debt never to be paid is not really a debt, as long as banks and Treasury understand that, because the debt will be rolled-over forever and ever by security swaps between Treasury and banks. The banks just wanted the interest, not the principal.

    If the Fed buys those same securities from the banks, (using money it creates out of thin air) it automatically cancels the government’s debt to the banks. When the Fed swaps the mature deficit-spending securities with the Treasury for new securities, that automatically extinguishes the remaining debt obligation on the mature securities.

    But the Fed’s money created out of thin air just cancels the loan on the books at the banks. And how is that represented? The money originally created just vanishes “into thin air” when the loan is cancelled by being repaid by the Fed. But the real original deficit money spent by the Treasury continues on in circulation.

    But money lent by a bank to a borrower other than the government has to be taken out of circulation by the borrower to repay the loan. That extinguishes the money in circulation from the loan.

    But the new money from the Fed by the fungibility of money, allows the government’s loan to be repaid with money not taken from circulation. And the Fed’s money is not a loan but pure credit. That leaves the money from the deficit spending still in circulation and debt-free. The Fed’s money has just restored the banks’ reserves to what they would have been had the loan not been made to the Treasury (ignoring any subsequent changes to the banks’ reserves not due to the loans in question). So, also by the fungibility of money, the deficit spending money is new money added to money supply in circulation, as if the Fed had directly bought the Treasury’s securities with money created out of thin air.

    But we know that the Fed is prohibited from buying securities directly from the Treasury.

    In the end the result is the same as if the Treasury had created the US Treasury Notes out of thin air, and spent them debt free on the deficit.

    I’ve stated this position elsewhere at least a year ago.

    The importance of the IF – OF = ΔC is that this provides a method that central banks and their associated governments can use to know when to stop deficit spending. If we detect an increase in prices and wages and no changes in employment generally when ΔC is positive, then that means we are at full production and employment , level C’. Depending on how serious the inflation is then occurring we will need to formulate a counter to that by making ΔC negative. Raise taxes, cut spending, encourage buying of imports.

    For me this is MMT’s answer to the Austrian economists who regard fiat money as inherently inflationary. It is only inflationary if you do not know what you are doing and you continue to keep ΔC positive beyond the point where you reach full production, employment and stable prices and wages. And once there you need to continue with counter adjustments to keep the economy balanced at C’. (But C’ can change too with population increases, changes in availability of raw resources, education level of workers, etc. etc. It’s a moving target).

    So, if we understand IF – OF = ΔC and its applications, we don’t need to treat fiat money as beyond reasonable control.

  7. Stanley Mulaik

    New fiat money is potentially inflationary when spent into circulation. So, we need to be careful not to deficit spend when there is already full production and employment at stable prices and wages. But during depressions and recessions, we need to deficit spend to get money in circulation back up to a level sustaining production and employment and at stable prices and wages.

  8. Stanley Mulaik

    I just discovered your other reply to my first message. So, you have used my Foundations of Factor Analysis book! Small world, or is it?

    I don’t know the details of how the Fed and its member banks work. I will accept the member banks as doing the buying of securities with money created out of thin air. New for me is recognition that all banks (in fiat money systems) create new money out of thin air. The difference between them and the Fed (banks) is that when they buy securities from banks they are not lending the money but giving it in return for the securities. When the Treasury sells securities (instead of buying them), it borrows money from the banks which they make out of thin air as they do for all their loans.

    You are correct, and I’m aware that my saying that the Fed ‘redeems’ the debt when it buys the securities is not the right way to say it. At times I simply say it “cancels the government’s debt to the banks”.
    But you are right, until the mature securities come back to the Treasury, the Treasury can’t extinguish them. But that happens by a maneuver known as “swapping securities”. I saw this in the Mechanics of Money put out by the Federal Reserve Bank of Chicago: The Fed legally can and does swap mature securities for new ones from the Treasury. In this way the Fed gets paid by Treasury equal value for the mature securities it has in its possession. Even Treasury has a power to create money in the form of securities out of thin air.

    You have specialized in understanding the Fed and the Treasury. Why are they so reluctant to explain to the public how they are in truth eliminating the national debt. Are they afraid the public will not understand and demand changes that will ruin a perfectly fine monetary system. I’m afraid that the Public will anyhow now without clear education of the public on this score. That’s why I spend hours trying to clear up these misconceptions about the national debt and how it is going to collapse our economy, in others’ comments to news items on the web. For example, why haven’t we been told by the Fed that they have bought up all those mature securities for deficit spending since applying QE, so there is no longer a large debt due to government spending. I think only the current holdings of these securities by the banks are for last years fiscal year deficit spending plus borrowing to pay interest by the Treasury using securities (and roll overs). Previous years’ securities have been taken up from banks in QE.

    And Treasury or Fed need to clarify the nature of the investors’ buying of these same securities. They are not used to fund deficit spending or any other spending by government. The government can only spend what Congress authorizes. And the principal remains ready to return to the investors. All that is needed then is interest, which the Treasury can get by issuing securities, or the Fed by simply creating it on the spot out of thin air.

    About these investors’ securities and their corresponding time deposit accounts at the Fed: when the securities mature and the investors want their money back plus interest, who pays the interest, Fed or Treasury? Can either one pay it at any time? It would seem to me that if the time-deposits are at the Fed, then the Fed can most conveniently return their principal plus interest made out of thin air.
    There seems to be no need for the Treasury to intervene in returning this money from the time deposit accounts to the investors’ checking accounts. But when the Treasury has security swaps to make, it has to borrow to get money into an ‘interest’ account from which it will draw money for individual interest to accompany the new securities.

    Anyone know how this works in detail?

  9. Stanley Mulaik

    I’ve down-loaded your book in Kindle form and now am reading it. I think you do a marvelous job of synthesizing a host of concepts into what corresponds to a kind of movement (conspiracy?) and providing labels for these: Neoliberalism and its assertion of GBC on a global scale.
    I’m not too far into the book yet, but I have come to the Platinum Coin idea that MMT users tried to get the Administration to use to get around the debt-ceiling idea. I originally was attracted to that method for MMT to redeem the national debt. But eventually, even before it became more popular, and even was considered in the early Obama Administration, I rejected it because it seemed to me to involve two purchases of the same securities by the government, a second of which was not authorized by Congress. I’m talking about securities held at the Fed and trying to use a platinum coin created by Treasury to buy back all those securities from the Fed. I already regarded the Fed as a government agency, so the Fed had already cancelled the government’s debt to the banks by buying the securities.
    The Treasury couldn’t turn around and issue a platinum coin to do a second buying. There was no
    Congressional authority for government’s buying something twice.
    Since then I’ve developed a more nuanced understanding of the nature of the national debt and how the government is already paying it off or never going to have to pay it off (Treasury). Some of that is the result of reading Frank N. Newman’s “Six myths holding America back”. He’s a banker, deputy secretary of the Treasury in the Clinton administration, CFO of several large American banks and then CEO of a Chinese bank some Americans had bought when it failed. So Newman has seen fiat money systems like China up close, and he’s seen the tremendous growth it has been able to make without losing control of inflation. So, he clarified for me how the Treasury, limited to borrowing from banks to raise money for deficit spending and interest on securities, rolls over securities over and over forever so these debts are no longer real debts. So, I modified my views to incorporate that description of the Treasury’s manner of dealing with its borrowing-debt into it. Previously I had focused on the Fed as the entity able to create money out of thin air, like Lincoln’s Secretary of Treasury did. I didn’t then realize that our US banks have the same power to create new money: whenever they made loans. And that explained how the Treasury gets new money created out of thin air by the banks, which could be inflationary under the right circumstances. (But not in a recession, depression, or underdevelopment). But the Treasury’s rolling over the securities forever makes the initial deficit-spending money debt free new money. (I refer to debt in terms of a loan using money, not the debt obligations implicit in money per se). The key to that is the Treasury’s unlimited ability to issue securities out of thin air! And banks will always be able to lend to the government via buying Treasury’s securities–whether for deficit spending or for interest in the roll overs of securities.

    So, I feel that our still using the platinum coin idea to buy the Fed’s securities is a bad idea. We enticed Secy Lew and Pres Obama to pursue it, but were blown off by the Fed. Now they don’t think too much of MMT, and I think that allowed President Obama to be coopted by your Neoliberals.

    Then it finally dawned on me that the Fed’s QE was buying up all those deficit spending securities at the banks. No need for the platinum coin at all here. Once the Fed has them, they do not represent any specific debt between the government and the banks. They are sort of in limbo. The Fed is an agent of the government manipulating securities and money. It has no claim nor use for getting its money back from the Treasury or taxpayers. It does have a claim to a transaction fee of 6% of the interest on a security purchase. That’s for operations.

    The only loose end remaining was how do we extinguish the explicit debt obligation in the securities themselves at the Fed. Then I came across at the bottom of a near final page in Modern Monetary Mechanics (or is it Mechanics of Modern Money?) the idea that the Fed “exchanges” mature securities for new ones with the Treasury. Very little discussion was given however of the implications of these swaps. But it was obvious now that this is the way the debt obligation in a security at the Fed is finally extinguished. And the beauty was that the Fed could make these swaps with Treasury without any money changing hands, thereby circumventing the prohibition of the Fed buying securities from the Fed.

    The other problem was the investor-held securities. But when I realized that these functioned like time-deposit accounts connected to a CD, it was again obvious that the principal deposited by the investor in return for the security, was there all the time and would be there to pay off the principal on the investor’s purchase of the security. Investor securities do not fund our government’s operations. The Treasury can get all it needs for deficit spending by “borrowing” from the banks. But again, I put that in quotation marks because it is not exactly the same as borrowing with an agreement to pay back the principal plus interest,

    But now a new thought has occurred to me. I know Secretary Lew has been before Congress several times recently trying to explain to them how the debit-ceiling needs to be raised, because that totally crimps its operations in managing the debt. He talks about some other procedures may be invented to get around this limit.

    It seems to me what the Treasury could do when it no longer can pay interest on its roll-overs of the securities, is simply to tell the banks to put their securities up for public auction and imply they want face value. I doubt if other banks would regard that as a use for their money, since there would be no interest to earn in such an exchange. So, the likely buyer would be the Fed, which could give them full face value which would include the interest. That cancels the government’s debt to the banks. The banks could get new securities, not by lending to the treasury but by just buying new securities like investors do. (A call to the Fed from the Secretary of Treasury could get them to handle the investors’ demands for their money back plus interest in lieu of the Treasury. Fed already has the investors’ monies in time-deposit accounts. When they return the money to the investors they could just include the interest and give back face value.)

    So, how does the government get its money for deficit spending without borrowing? At the moment I don’t know the answer.

    But my other suggestion on this is challenge the deficit-ceiling law as unconstitutional–it clearly is. Congress cannot place a priori limits on its paying the debts and borrowing by passing a law placing a ceiling on borrowing measured by debt created. If it can do that, then it could pass a law to the effect:
    “The rights of the people to keep and bear arms shall not be infringed except within the city limits of cities of the United States with populations of 75,000 or greater.” Maybe Justice Scalia could see the reasoning in that case.

    As for your :”In addition, when the Fed “adds money” to the non-government by buying securities from the public, it, technically, doesn’t create any new net financial assets, because the reserves issued and created out of thin air, remain “locked up” at the Fed in reserve accounts…”

    Isn’t this just the same as saying that banks don’t lend from their reserves, so, when the Fed increases a bank’s reserves, that has no effect on increasing or decreasing its lending ability. That’s why there has been no inflation from QE. And none this time from deficit spending because of the recession.

    BTW, there is a new revised edition of my Foundations of Factor Analysis book issued in 2010 by Taylor and Francis CRC Press and Chapman and Hall.

    And speaking of your book, why not send copies of it to President Obama, Secy Lew, and Tom Price Chair of the House Budget committee. You can do that with your author’s discount. (I have a book self-published by Create Space, a subsidiary of Amazon. com, and while it has 375 pages, I can buy it for $5.95 and ship it at cost from the printers (Create Space). I love print on demand. But before you do, rewrite that section on platinum coin.

  10. Joe Firestone

    Thanks for your lengthy reply Stanley. I think your understanding of the reality of Treasury “borrowing” through debt instrument issuance is very good, but that the variety of political and legal aspects related to the platinum coin aren’t clear to you yet. I think when you read the rest of my e-book your perspective on the usefulness of the Platinum coin and its functionality will broaden.

    For now, however, I’ll point out just a couple of things. First, bonds owned by “the Fed” are technically not owned by the system but by the Fed regional banks which, in turn, are private, if highly regulated, institutions owned by stockholders. So the Treasury debt they hold isn’t owned by the government and still qualifies as debt subject to the limit owed to the private sector. The Treasury must pay to redeem every debt instrument when it falls due, and whether it uses further borrowing, taxing, or coin seigniorage to do that makes no difference. It sill buys back the debt instrument, only once and not twice.

    Second, if the Treasury exchanges a platinum coin for reserve credits at the Fed, then those reserves can be used to extinguish those debts and pay any interest when they fall due. Indeed, it is possible for the Treasury to mint a $100 Trillion coin right now and receive $100 trillion in reserves created out of thin air from the Fed after the coin is deposited at the Fed.

    Of course, those reserves can only be spent as directed by Congress, but that means that they can be used to pay off all debt instruments and interest as and when these fall due since the constitution already guarantees the repayment of all Federal debt. In addition, those reserves could be used to implement appropriated deficit spending for quite a few years. The result would be that all Federal debt subject to the limit would be paid off, and all deficit spending would be funded until the public purse was emptied of reserves resulting from the minting and depositing of the coin.

    Third, why use the coin since you are correct, that the Treasury can always fund all Federal spending through selling securities? There are a few reasons. a) issuing debt creates a risk free investment mostly for the wealthy and foreign nations holding dollars. Do we really want to provide that kind of welfare for them? b) There’s the debt ceiling of course. It’s a reality now, and it does provide the possibility of periodic extortion of spending cuts and tax cuts that could otherwise not get passed. Until it is gone, debt issuance has the disadvantage that the authority to do it is constrained by the debt ceiling. c) To mint the coin has the advantage over other methods of getting around the debt ceiling, that it only takes an order of the president and compliance by the Secretary of the Treasury and the mint to create it. The authority from Congress has already been given. So, no new authority is needed, including raising any debt ceiling which may exist.

    Fourth, I know you suggested above, that the Fed blew off the Administration when it came to the platinum coin. I think, however, that the Fed expressed its opposition to Treasury’s use of it because it would compromise Fed independence, but that the Treasury Secretary has the authority to force the Fed to take a deposit of such coins and to credit Treasury accounts. The Fed, in my view, does not even have the authority to challenge this in Court for reasons I explain in my book. I think the truth is that the President didn’t want to issue the coin because he didn’t want to enable the progressive restructuring of fiscal policy that could have followed the removal of the rationalization of opposition to deficit spending arising from the apparently true or at least plausible claim that the United States was running out of money and had a heavy burden of public debt. The President did not and does not want people to understand that the Federal government is beyond budget constraints arising from the possibility of involuntary insolvency, and that the only restrictions on its spending should arise from the expected effects of that spending on a variety of outcomes, listed in my book and in many other posts I’ve offered here.

    Anyway, once again, I suggest you finish the book. It’s intended to be a comprehensive treatment of the platinum coin and its implications. It’s also the only book on the subject thus far.

    Thanks for the suggestion about sending the book to the President, Jack Lew, and Tom Price. But, I think all of them have heard of the coin by now and have formed opinions about that, and I doubt that a copy of the book sent to them as a gift through amazon would ever get out the trash pile. Nor do I think that any of them would use the knowledge in the book for any good purpose. All three of those good gentlemen are totally bought Wall Street. The President and Lew might stoop to using the coin, but only if the Republican right took the country to the brink of default on the debt and the Wall Streeters were in a panic screaming for the President to do something, and he was boxed into the coin as his best alternative. Even then he would use it only in a limited way, for example to mint a trillion dollar coin to demonstrate to the Congress that it may as well give up on the debt ceiling approach to extortion, since he can always get around it by issuing a platinum coin.

  11. Stanley Mulaik

    Already you recognize that the platinum coin idea turns off people to MMT.

    I’ve gotten far enough into the book to see the other uses you cite for the platinum coin besides ‘buying up all the securities at the Fed.” I accept those as good aims.
    I once sent Ben Bernanke a letter describing MMT positions on the debt and he referred my letter to the head of the monetary division to respond. In my letter I had said that the Fed had cancelled the government’s debt to the banks on securities it bought; and he insisted that I was suggesting that the securities were extinguished, and the Fed could not accept that. After all, Open Market Operations involve the buying and selling of securities to help moderate deflation and inflation. Buy securities during deflations and sell them during inflations. To do that the Fed had to obtain securities–by buying them from the banks. The Fed has those securities for a purpose, to control inflation. It can buy securities from banks during deflations, but will sell them to both banks and investors during inflations to drain money from circulation, by constraining lending and spending. So, the Fed does not want all their securities bought up with a Platinum coin. The Fed will swap mature securities it has for new securities from the Treasury.

    Furthermore, what if, as I believe, the Fed has pretty much bought up the securities for deficit spending. No need for the platinum coin, because the Fed will swap the maturities for new, and the Treasury will extinguish the mature securities that come back to it in the swap. So, that completes the debt cycle on the deficit spending securities.

    And no need for the platinum coin to buy up all the investors securities, because their money is already there to be given back to them along with the interest they demand.

    The coin might be useful, if you can deposit it to gain Federal Reserve dollars in return as a reservoir of debt-free money. (When I say debt-free, I mean money not owed to anyone else; I am not referring to the debt obligation of the government to pay the holder the face value of the dollars and securities. But the banks aren’t the holder anymore with respect to the securities at the Fed.

    I think that the investors’ securities tie up a lot of dollars in time-deposit accounts and out of circulation where they might be harmful, if our government wishes to engage in deficit spending on some other objectives while avoiding inflation.

    I think Cheney (through Bush) fought the Iraq war with deficit spending while our trade balance with China, Japan and the Saudis was negative, draining dollars out of circulation and preventing inflation. Remember he says “Deficits don’t matter.” Frank Newman argues that dollars never leave the US Banking system. And we don’t borrow Chinese currency to fund our government’s operations. Those dollars are their export dollars not yet absorbed into their banking system by conversion to their own currency. So, what should they do with them? Should they make a sudden move to buy up American properties and companies with all those dollars? If to do so would contribute to inflation, after a short while, the prices would start to rise, and their remaining dollars would devalue. Better to wait for deflation and slowly buy up things here. So, securities are a good place to park their dollars. And there would be the hue and cry that they were trying to buy up America!

    You seem to attribute to Obama hardened attitudes in favor of Neoliberalism. I see him as just a naive lawyer when it comes to economics, relying heavily on his economic advisors. And he is still infected with the common idea that household finance is like federal finance. I think back when there was all this activity in favor of using the platinum coin to buy up the ‘national debt’ at the Fed, he was truly open to the idea. But in the interim somehow his advisors got to him and impressed on him the need to cut deficits.

    • Joe Firestone


      Some people are turned off to MMT by the platinum coin. But 1) they haven’t seen it in operation, 2) the President doesn’t need to have people like the platinum coin in order to use it, 3) the majority of people would love the platinum coin if it were used in the way I suggest, and 4) most MMTers aren’t overly enthusiastic about the platinum coin because they know it isn’t necessary to use it to get whatever money is needed to roll over debt and cover deficits.

      All that said, I care more about demonstrating to the public in a manner that not be forgotten, the truth that the Federal government is unconstrained in its ability to create/spend money due to fear of involuntary insolvency, than I do about persuading people that MMT is the best approach to economics. That, of course, is a very important long-term goal, but MMTers have been pursuing that goal for 20 years now, and may well need to spend another 20 years to get the job done. Meanwhile, we have extremely high real unemployment, a second class educational system, an environment that is going to hell and changing our climate in the process, infrastructure needs that we haven’t begun to address, inadequate government provided retirement pensions, a third class social safety net, and a medical insurance system that still doesn’t support the health care needs of at least 40 million people, and that makes getting health care far too expensive for another tens of millions more.

      If we used a $100 Trillion platinum coin, the illusion that the Federal Government must restrict its spending for fear of running out of money would be dispelled. Congress would have to debate the merits of different fiscal policies in a framework of whether policy alternatives met public purpose, rather than in a framework centered around the idea that we must reduce deficits as much as we can to be fiscally responsible. And many of the above needs could perhaps be addressed before too many more people have their lives destroyed by an unnecessary Federal macroeconomic austerity.

      I understand the Fed’s need to drain excess reserves out of the banking system when it wants to drive interest rates up. But Bernanke is wrong if he thinks this needs to be done through the Treasury issuing debt. Right ow the Fed is paying interest on reserves to help it target interest rates. As all Treasury debt is being increasingly repaid, the Fed can just rate of interest on reserves to perform this function. There is no need for it to play with Treasury securities. Also, the Fed can ask Congress for authority to issue its own securities if the Treasury is no longer in this business. Either way, the Fed will be able to meet its target interest rates.

      On your point about there being no need for the platinum coin to the Treasury to generate the money it needs to spend, I’ve already agreed with that, know the point very well, and have made it in my book. But this point ignores the political and messaging issues involved our situation. The process by which the Treasury and the Fed interact to handle both the funding problem for spending and the problems of draining or supply reserves to the banking system when needed is a process whose details cannot easily be messaged to the public to show them that the Government can have no involuntary solvency problem, if Congress will only get rid of the debt ceiling. On the other hand, using a $100 T platinum coin and showing people the consequences of that over the 12 months following its minting will make the solvency point very plainly to everyone in a way that can easily be messaged (see the speech in my book that the President could make after having such a coin minted.)

      The coin might be useful, if you can deposit it to gain Federal Reserve dollars in return as a reservoir of debt-free money. (When I say debt-free, I mean money not owed to anyone else; I am not referring to the debt obligation of the government to pay the holder the face value of the dollars and securities. But the banks aren’t the holder anymore with respect to the securities at the Fed.

      I think that the investors’ securities tie up a lot of dollars in time-deposit accounts and out of circulation where they might be harmful, if our government wishes to engage in deficit spending on some other objectives while avoiding inflation.

      You haven’t gotten to the part of the book yet on inflation. You’ll see when you get there that using Treasury debt securities, rather than just having reserves in accounts at the Fed is unlikely to make any material difference when it comes to circulation of money that may be harmful to the economy. That’s true because those holding securities are able to borrow against them, and leverage their bond collateral multiple times at banks when they need liquidity. So, securities don’t remove money from circulation to nay greater degree than would the case without them.

      Next, we all argue that US dollars don’t leave our banking system, and we’re all aware that the Chinese can’t quickly divest themselves of their US dollars without devaluing their holdings. These points are covered well in Randy Wray’s Modern Money Primer and in many posts that have appeared here in the past including posts of my own. They’ve also been covered in posts of mine, Bill Mitchell’s, and others published elsewhere before Frank Newman’s book appeared. BTW, we never say “deficits don’t matter,” but instead say “deficits do matter but not in the way you think.” Anyway the bottom line here, is that China and other nations holding a lot of dollar-denominated assets are constrained to slowly divest themselves of those assets and due o the economics of the situation cannot dump those assets without severely hurting themselves. Also, it is clear that as long as they want a positive trade balance with us they need to accumulate dollars in the future. So, until they decide that they want to use their productive capacity primarily for the well being of their citizens rather than to accumulate dollar reserves and bonds the present situation won’t change very much.

      Finally, I don’t believe Obama is just a naive lawyer because he has been pursuing neoliberal doctrine since the beginning of his Administration. This is reflected in is inadequate stimulus program, his letting the banks and the banksters off rather than prosecuting them, his early support for the Bowles-Simpson catfood commission effort, his later support of the Grand Bargain, his trade deals including his latest TPP, TTIP, and TSA efforts, his PPACA law, which is a neoliberal nightmare, his failure to pursue more sorely-needed deficit spending during the 2009-2010 period after it became apparent that ARRA would fail in enabling full employment, and his cooperation with the Republicans later to drive deficits down in order to pursue a Clintonesque budget strategy during the last few years.

      Obama has never given the slightest indication that he is anything but a confirmed neoliberal, completely within the bounds of the Washington consensus. It is long past the point where his actions can be excused by listening to his advisers. He after all, is the one picking his advisers, and these have been overwhelmingly neoliberal people bought by Wall Street. We have to face the reality that Obama is not about doing for public purpose, but about doing things that will maximize the possibilities of post-presidency wealth using the models of Bush41 and the Clintons before him.

      You seem to attribute to Obama hardened attitudes in favor of Neoliberalism. I see him as just a naive lawyer when it comes to economics, relying heavily on his economic advisors. And he is still infected with the common idea that household finance is like federal finance. I think back when there was all this activity in favor of using the platinum coin to buy up the ‘national debt’ at the Fed, he was truly open to the idea. But in the interim somehow his advisors got to him and impressed on him the need to cut deficits.

      • Stanley Mulaik

        You said, Joe, : For now, however, I’ll point out just a couple of things. First, bonds owned by “the Fed” are technically not owned by the system but by the Fed regional banks which, in turn, are private, if highly regulated, institutions owned by stockholders. So the Treasury debt they hold isn’t owned by the government and still qualifies as debt subject to the limit owed to the private sector. The Treasury must pay to redeem every debt instrument when it falls due, and whether it uses further borrowing, taxing, or coin seigniorage to do that makes no difference. It sill buys back the debt instrument, only once and not twice.

        All right, but then who at the Fed directs the regional banks to swap the mature securities for new ones with the Treasury? The swap of new securities is the payback to the Fed.

        Who at the Fed directs the regional FR banks to sell new securities to banks at public auction during inflations?

        Who directs the regional FR banks to buy securities during recessions/depressions? What role does the FOMC have in these circumstances?

        Can the regional banks use the securities in their possession to leverage loans for themselves: that would be a sign they have full ownership of them. Do they in fact? Or are they just serving a caretaker role?

        I think this reveals your ultimate goal in your rhetoric for the platinum coin:

        All that said, I care more about demonstrating to the public in a manner that not be forgotten, the truth that the Federal government is unconstrained in its ability to create/spend money due to fear of involuntary insolvency, than I do about persuading people that MMT is the best approach to economics.

        So, what you want is a demonstration of this ‘unconstrained ability’. Of course, a demonstration in itself is not an argument. You want to counter the neoliberal’s austerian influence on the people.

        I know it’s not an argument against the idea of the platinum coin’s efficacy in making the Treasury independent of banks in money creation. But who do you want to accept the idea of the platinum coin and put it into effect? The President? What likelihood now is there of his doing that?

        I think all of us MMT advocates wish somebody would do something wonderful like that, but is putting our eggs in one basket tied to the platinum coin going to succeed? Except for your need to cancel all the national debt with it, I see the platinum coin’s value as a method of creating a reservoir of debt-free money in Federal Reserve dollars in an account at the Fed. I already accept that. In fact, I supported that idea back when I first came across the idea of the platinum coin. But I have moved on, while not totally discarding the platinum coin idea.

        My own rhetorical strategy has been to expose to the public in public comments to news items about various politicians’ the very nature of the national debt as defined by the Treasury securities and the intragovernmental series securities. The debt is already being managed. (1) In fact the Fed’s QE has likely already cancelled the national debt on mature securities sold to banks for deficit spending by the Treasury. (2) But most of the time the Treasury’s roll-over procedure on the deficit securities suffices to make the debt not really a debt in the usual sense. (3) The principal on the investors’ purchase of securities already exists and can easily be returned to them by the Fed. All that remains is the interest. (I also see value in having the investors buy securities because this is a sink for draining their excess dollars instead of coming back to us as export money in buying up America.) These are facts. This exposes the phoniness of the national debt as a problem for our government, and American taxpayers. (4) The debt-ceiling law is unconstitutional. So, who has standing to sue? The President? Secretary of the Treasury? (5) The balanced budget amendment would be a disaster because it would eliminate deficit spending, not consider the multisectorial nature of our economy and the need to adjust their balance at a level of money in circulation to achieve full production and employment at stable prices.

        So, who are we going to get to champion these ideas of ours to the public? Do it ourselves. Maybe. But we need some public figure who will advocate them. Bernie Sanders running for President?
        Elizabeth Warren from her seat on the Senate Banking Committee? Al Franken? Who do we need to convert to these ideas of MMT and push them before the public as solutions to our problems?

        My impression that President Obama is not a dyed in the wool neo-liberal was formed by personal correspondence between him and me earlier in his administration. I thought at that time he was seeking a wide variety of viewpoints on the economic issues facing him. We all know about neo-classical economists and how feckless they are. But those are advisors to him, because he knows he doesn’t have the background in economics, and what he has already had at Harvard may have been the neo-classical slant in an introductory economics class. And everyone says go with the received view in economics. And what do neo-classical economists know about government finances, especially when they’ve been steeped in the fractional reserve banking concept? Anyway, I’m a fan of Steve Keen and his Debunking Economics