Yes, Deficit Spending Adds to Private Sector Assets Even With Bond Sales

By Stephanie Kelton

In a recent blog post, I explained that government deficits increase the private sector’s holding of net financial assets. And this led to the following question from one reader:

“How does a chartalist respond to the idea that gov’t spending does not actually add $ to the private economy because of debt issuance?”

And to the following command from another:

“stop insisting that gov’t deficits add wealth to the private sector (they don’t if the gov’t sells debt).”

Apparently, both readers believe that budget deficits could, in theory, increase the private sector’s holding of net financial assets, but that, in practice, they do not because, the sale of bonds “pulls dollars out of the private economy,” leaving the private sector with no net addition to their holding of financial assets.

Below, I show why this is wrong. And note that I am showing that it is wrong. I am not cutting any corners, committing any economic sleight of hand or glossing over any institutional detail. I’m tracing through the actual balance sheet entries that reflect the government’s fiscal operations.

Before we begin, let’s make sure we understand what actually happens when the Treasury issues debt in anticipation of running a deficit. In the U.S. this involves a debt auction. So let’s suppose that the Treasury plans to spend $100 and anticipates tax payments in the amount of $90. If it did not sell bonds to coordinate its fiscal operations, the private sector would end up with a $10 net addition to its financial holdings. On this point, there appears to be general agreement. But what happens when the Treasury auctions off $10 of new debt in order to offset the “reserve add” that would otherwise result from this deficit spending?

This involves the use of what are known as Treasury Tax & Loan Accounts (TT&L). These accounts are held by thousands of private banks – known as Special Depositories – across the country. When one of these banks wishes to purchase government debt, it acquires the debt (Treasury bonds) by crediting the Treasury’s TT&L account. (Note that this is exactly how a commercial banks acquires a loan – i.e. it credits the bank account of the borrower and adds the loan to its books.)

Now, back to my example. Let’s break the entire process down into four distinct stages so that we can see what’s happening to the balance sheets of the relevant players at each step of the way. (Note: Stages are separated by dashed lines, beginning with stage 1 at the top, and T-accounts show assets on the left and liabilities + net worth on the right.  Plus signs “+” indidate that we are adding to the asset or liability side of the balance sheet, and minus signs “-” show that we are reducing assets or liabilities.) For simplicity, let’s assume that I am the only taxpayer (and also the only non-bank producer) in the economy, so I’ll foot the entire tax bill, T = $90. The government will spend $100 buying whatever it is that I produce (economists seem to like widgets, whatever those are), and I’ll deposit any payments I receive into Bank of America (BoA).

In stage 1, I settle my tax obligation with the state by writing a check for $90 on my account at BoA. My assets are reduced by $90 (I have less money in my account), and my liabilities are reduced by the same amount (I no longer owe the government $90). As a result of this payment, my bank marks down the size of my account, and it experiences an equivalent decline its reserve account at the Fed. The Treasury, meanwhile, gets a credit to its bank account, which is held with the Fed, and it loses an asset (in essence, an accounts receivable) because it no longer has a claim on my income. The Fed’s balance sheet reflects the fact that the $90 payment is now in the Treasury’s account (and not Bank of America’s).

In stage 2, the Treasury sells $10 of debt to BoA, and BoA pays for these bonds by crediting the Treasury’s TT&L account. (Again, this is analogous to a bank acquiring a loan by crediting the borrower’s account.) It does not “cost” the bank anything. No existing resources (reserves) are spent when the bond is acquired. BoA gets the bonds (assets) and the Treasury gets a credit to its account at BoA.

In anticipation of its imminent spending, the Treasury places a “call” on its TT&L account. This is a formal direction that instructs BoA to transfer funds from its TT&L account to the Treasury’s account at the Fed. This is shown in stage 3. Because the Treasury is moving its account out of BoA, BoA experiences a loss of reserves. The Fed changes its balance sheet to indicate that the Treasury has added $10 to its account at the Fed, and BoA has lost $10 in its reserve account.

Finally, in stage 4, the government buys $100 of widgets from me, and it pays for them by writing a check on its account at the Fed. I deposit the check into my account at BoA, BoA gets an equivalent credit to its reserve account at the Fed, the Treasury’s balance is reduced by $100, and the Fed’s balance sheet reflects the fact that it owes the Treasury $100 less and BoA $100 more.


Whew! So where does all of this leave the private sector? My bank account has an additional $10 in it (my asset), which is offset by the fact that BoA owes me an additional $10 (their liability). This nets to zero. But, wait! There is still a new financial asset out there . . . the government bond! And this clearly shows that deficit spending, even when we account for the sale of government bonds, increases the private sector’s holding of net financial assets.

** One caveat: I did something here that adherents to MMT may wish I had not done – I began with the payment of taxes rather than with government spending. As we in the MMT tradition consistently insist, spending must, as a matter of logic, precede taxation in the first instance (for it would be impossible to collect dollars from the private sector unless they had first been spent into existence by the public sector). But in the real world, the Treasury receives tax payments on a daily basis, and government checks are clearing bank accounts on a daily basis as well. So there is really no objective beginning point or ending point. You can begin with spending if you prefer. But it will not alter the result.

49 responses to “Yes, Deficit Spending Adds to Private Sector Assets Even With Bond Sales

  1. "I began with the payment of taxes rather than with government spending. As we in the MMT tradition consistently insist, spending must, as a matter of logic, precede taxation in the first instance (for it would be impossible to collect dollars from the private sector unless they had first been spent into existence by the public sector). But in the real world, the Treasury receives tax payments on a daily basis, and government checks are clearing bank accounts on a daily basis as well. So there is really no objective beginning point or ending point."May not matter to economists; matters to political philosophers, such as we, or they, are.

  2. I got the impression from the Fiscal Sustainability Teach-in that there was *no* transfer from government tax collection (the IRS) to the parts of government that are spending. In other words, the circuit is broken: the IRS is like a black hole, destroying money, and all govt spending is newly created money. This blog post seems to suggest that there *is* a transfer from the IRS to the spending agencies. Which view better represents MMT, or have I misunderstood even more than I realize?

  3. This T-account approach is awesome. Scott did one a while back on "what if the Govt just prints money?"Can anyone do one to show what is happening with QE? I'd find it really helpful.BestAnders

  4. Chris, You are basically correct: The collection of taxes destroys money. Look again at the entries in Stage 1 and pay particular attention to BoA's balance sheet. As a result of my tax payment, both "outside money" (we call it high-powered money, bank reserves, or the monetary base) and "inside money" (bank deposits) are reduced/eliminated. You are also correct to note that the payment does result in a credit to the Treasury's account at the Fed, but notice something here: if you consolidate the Treasury and Fed balance sheets into a single "government" balance sheet, the left-hand side (Treasury's balance at the Fed) is exactly offset by the right-hand side (Balance owed to the Treasury by the Fed). It is all smoke and mirrors, as the government is simultaneously referring to the Treasury's account as an asset and a liability. But the main point is this: payment of taxes to the federal government results in the destruction/elimination of government money (reserves) and bank money (demand deposits).

  5. Hi, Stephanie- Not being a balance sheet wizard, I found the diagram highly confusing. Would it be fair to say that in the end, the bond held by the bank is virtually as liquid as the $10 of cash it sent to the government, meaning that this particular debt is operationally the same as having $10 in the bank's notional mattress? And that this is because of the political stability and monetary powers of the Fed/Treasury- that they stand behind their bonds just as they stand behind their currency notes, with no solvency risk? So what the government has accomplished is to slightly change the complexion of its liabilities, from currency notes to longer bonds, while adding net assets to the private economy through spending?

  6. Are we to distinguish then how a commercial bank buys treasury bonds as opposed to another private agent? In your example, the bank bought the bonds by issuing new dollars. But I cannot buy them that way.

  7. Anonymous,True, but the post was about the financing of deficits. You and I do not participate as buyers when the Treasury auctions new debt. But it wouldn't matter. If the Treasury spent $100 and taxed $90, that would leave me (Kelton) holding a $10 balance (in my checking account) that I would not have otherwise had (it is a net addition to financial assets). If I turn around and swap my deposit for a government bond, I simply have a different financial asset. But I am still "up" as a result of the government's deficit spending.

  8. One thing – where did the widgets come from? You didn't say the government simply sent you a check for $100.Perhaps "widgets" is a bag of trash, but then the government has to pay to dispose of it. If the widgets were valuable (consider if the "widget" is something valuable like silver or gold jewelry or even something like food or gasoline), then you have no net gain – you are out $100 worth of widgets, and have a $100 book entry.If the widgets cost you $110, and you can't sell them except at a greater loss and are paying storage fees, you've lost. If the widgets cost you $90 at some point ($90 going out of your account at an earlier point is not shown) you have only $10 new and not $100.The private sector cannot print widgets, it takes raw material and labor and whatever capital.And your grocery store doesn't take widgets. If food now costs $200/wk instead of $100/wk you are also poorer by half, just as you would be twice as wealthy if the price level fell by 1/2. The items at the NBS that are used as measuring references are made of of precious metals because they are durable and don't change.Back in the early 200s, I could buy an ounce of gold for under $300, and silver under $5. The same dollars today buy about 1/5th the amount.It can be dollars or shares in – but you are only as wealthy on paper as the amount you can buy at the current moment if the paper is consumed.You are correct in nominal terms, but if at the beginning, gasoline was $2.70/gal when you paid the $90 goes to $3.00/gallon, the extra $10 is merely slicing the same pies in 10 pieces instead of 9.Your example is redundant – anyone can look at Zimbabwe where the country is being flooded with monetary units from the government. I don't see what the point is. You can create more monetary units, but they are applied over the same quantity of goods.They are spending $100 for N widgets. That only mean they are inflating the price of each widget 10% than if they spent $90 for N widgets.So now what happens if I come to you to buy a widget? Do you sell the same number to me for $90 or $100?

  9. Excellent explanation. I gather that what this says in essence is that at the macro level (in aggregate) the $-4-$ offset of deficits with tsy's (as required politically but which is not operationally necessary) means that the increase in nongovernment net financial assets through deficit expenditure is saved as tsy's. Operationally, this drains excess reserves so that the Fed can hit its target rate (FFR). The national "debt" is really nongovernment accumulated savings of NFA.Deficit expenditure is therefore a fiscal operation that increases nongovernment net financial assets, while the issuance of tsy's is a monetary operation that shifts asset composition but does not affect the amount of nongovernment NFA.

  10. tz, are you just highlighting the fact that in the end it is all about use of real resources?I think that if we're living "beyond our means" in terms of real resources then nothing, not MMT and not anything else, will help us in the long run…

  11. Thank you so much for clarifying this!So government bonds are always bought with newly created bank credit. Government deficit spending therefore adds both bonds and deposits to the private sector.

  12. tz: perhaps "widgets" simply measure the number of hours of labor I worked for the government. You really can't concede a point when you're wrong, can you?Tom: The whole reason for using TT&L accounts is to prevent the existence of excess reserves in the first place. I broke the whole thing down into "stages" for pedagogical reasons, but, in reality, everything is coordinated much more closely. Bond sales add balances to TT&L accounts so that the Treas can drain reserves (by placing a "call" on these accounts) simultaneous with the anticipated deficit spending (G>T). This is supposed to prevent the Treasury's activities from wreaking havoc in the fed fund market. But, since it's impossible to accurately predict the size/timing of tax payments and the clearing of government checks, there will always be errors (e.g. the emergence of excess reserves). When this happens, it is the Fed (not the Treas) who steps in to sell bonds and drain the excess.

  13. Thanks for explaining this Stephanie. I am well aware of the MMT explanation of how the Fed drains excess reserves with bond sales, but the mechanics to which you allude regarding the TT&L accounts that the Treasury uses is generally just footnote. Glad you fleshed it out with the accounting.It's clear that before deficit expenditure can occur, by law the Treasury has to issue tsy's and the Fed has to auction them off prior to putting reserves in the Treasury's account for settlement — as I understand it because the Treasury is not allowed to run an overdraft on its account at the Fed. My understanding is that the TT&L accounts are the way that the Treasury deals temporally with tax revenue, which comes periodically in batches, so that tax payments do not increase excess reserves suddenly, forcing the Fed to engage in lots of OMO.Is there a paper that lays out these operations and how they are accounted for?

  14. Stephanie,This is interesting. So you are saying that most funds raised out of both tax payments and bond sales "hit" the Treasury's commercial bank account and not the TGA ? And when the Treasury is making a payment (or at the time of settlement), the Fed transfers funds to the Treasury General Account, since the cheques is written on chequebooks saying the account is kept at the Federal Reserve. I used to think the other way round where tax payments hit the TT&L accounts but bond sales reduce reserves and directly hit the TGA and I believe that is how you had been describing in your papers.

  15. Ramanan and Tom,Both very astute comments. But Ramanan, I have always bucked the tendency of many on the MMT side to argue that the Treasury sells bonds ex post, in order to drain "excess reserves". The Treasury works very hard to prevent the excess reserves from emerging in the first place. Tom: yes. Treasury TAX and LOAN accounts are used to divert payments from private sector buyers into gov't accounts at private banks in order to prevent them from draining reserves until the Treas is ready to coordinate with spending flows. The Treas used to try to keep a steady balance of about $5B in its account at the Fed. Any payments that would put the Treasury's balance above this level were diverted to TT&Ls (the opposite of a "call"). Recently, the Treas has allowed its balance at the Fed to swell to much bigger levels, probably to coordinate with Fed purchases of assets.

  16. Tom,Yes, there is a paper that lays this all out. My "Do Taxes and Bonds Finance Government Spending" was published in the Journal of Economic Issues, 2000. I was Stephanie Bell back then. Scott Fullwiler has published an even more detailed account, but I don't have the reference off hand. Scott? Can you provide?

  17. – you guys are slowly eradicating the remaining vestiges of my tiny gov austrianism – somebody needs to write a book – "the complete idiot's guide to MMT" – low cost, available to many, easily readable, two day shipping free on amazon….

  18. How about this content you want (an easy-to-read guide to MMT) at a price you'll love (free download). Sorry about the title. Don't tell the author, but I like yours better. 🙂

  19. Thank you for this excellent explanation of how deficit spending and debt issuance intersect in the economy. One of the best I've read in the year or so I've been coming to MMT related websites.

  20. NKlein1553 ,you're right – one of the best. Speaking of best, all these MMT people need is something like the Best Party they will conquer the world.

  21. The description of the bank bond purchases here is very much at odds with other MMT descriptions of the same thing. This version suggests that there is no disruption to the aggregate reserve supply as a result of banks buying Treasury bonds at auction. That’s due to the function of the TT&L accounts, which isolate the effect of bond settlement away from the Fed balance sheet. Several other MMT’ers (Mosler, Fullwiler) assert very explicitly that the Fed must supply additional reserves through repos in order for banks to have sufficient reserves to pay for the bonds at the auction settlement. That’s due to bond settlement taking place directly on the Fed balance sheet. This explanation takes on a larger role when these MMT’ers start describing the "logical order" of reserves and spending. These descriptions can’t both be right. Which one are we to believe?

  22. Anonymous,Mosler doesn't usually take the time to go through TT&L accounts. As you must know, he usually says something like, "government spends first. Spending adds reserves to the banking system. These reserves push the overnight lending rate down, so bonds are sold to drain excess reserves (and it's not always clear by whom)." My position has always been more nuanced (and Mosler doesn't dispute it — he just skips to the end result rather than droning on about the technical details of reserve accounting). The Treasury coordinates it operations (spending, taxing and bond sales) in order to minimize disruption in the private banking system. In the absence of coordination, banks would constantly see large swings in their reserve holdings, and this would be disruptive. In essence, it would force the Fed to intervene on a much larger scale, buying and selling larger quantities of bonds in order to hit its FFR (fed funds rate) target. Knowing this to be the case, the Treasury does the BEST IT CAN to minimize the impact of its fiscal operations on reserves. How does it do this? By ESTIMATING the flow of funds that will be coming into/out of the Treasury's account at the Fed and by using its TT&L accounts to manage these flows. But it is impossible to get it just right, so the Fed must supply/drain reserves, as needed, in order to offset the effects of the Treasury's operations. I'll let Scott speak for himself, but I believe that he and I have always been in agreement on all of this. We have both written detailed explanations (Scott's more so than my own) of this. If you read one (mine is "Do Taxes & Bonds Finance Government Spending?" from the 2000 Journal of Economic Issues), you will see the actual accounts, dollar volumes, etc. and it will be clear that this is how it all works. -sk

  23. So just to clarify then, everytime the Treasury sells a new bond it is purchased by one of the primary dealers with new dollars, even if I buy it myself thru Treasury Direct? And the primary dealer then exchanges the bond with me for my dollars?I get your point that "it wouldn't matter" because there is a new asset created (the bond) but it does matter because in the 1st instance the government has created $100 (spending) and drained $100 (90 taxes and your last $10 by selling the bond…and then makes interest payments) whereas in the 2nd scenario they spend $100, drained 90, sold the bond for 10 new dollars and the last $10 is never drained from banking reserves.

  24. Anonymous,Not necessarily, but it doesn't matter.Start with G = $100. Leads to +$100 Demand Deposit and + $100 Reserve balance at Fed.Then collect T = $90. Leads to -$90 Demand Deposit and -$90 Reserve Balance at Fed.Now let the holder of the Demand Deposit spend the $10 buying a newly issued government bond. Result: -$10 Demand Deposit and -$10 Reserves. But they are still left with the bond! This is the net financial asset that exists because of the deficit spending!

  25. I was hoping professor kelton or another knowledgable poster on this site will be able to help me with a question regarding reserves. Take the example of a de novo bank; how does this de novo acquire reserves? Is the amount of initial reserves equivalent to the amount of capital in he bank? Deposits? How is the amount of initial reserves calculated? Thanks in advance for any help.

  26. Stephanie,Posted this at Billy Blog as well in discussion with another commentator. You will know this mechanism, going by your detailed analysis here and in your 2000 paper. Federal Reserve Banks as Fiscal Agents and Depositories of the United States in a Changing Financial Environment, Autumn 2004, page 443 – pink box on the right of the page:Relationship between the Treasury’s Balance with the Reserve Banks and the Implementation of Monetary PolicyThe Treasury maintains its primary account for making and receiving payments, the Treasury general account (TGA), at the Reserve Banks. An increase in the balance of that account means that funds have moved from depository institutions’ accounts at the Banks into the TGA. This movement of funds reduces the amount of reserves in the banking system.1 Conversely, a decrease in the TGA means that funds have moved from that account to depository institutions, thereby increasing the amount of reserves in the banking system. This relationship between the Treasury’s balance with the Banks and the amount of reserves in the banking system is important from a monetary policy perspective. This is because the amount of reserves in the banking system affects the federal funds rate—the rate at which depository institutions lend reserves to other depository institutions and the operating objective of the FederalOpen Market Committee (FOMC) in its conduct of monetary policy. Through open market operations—the purchase and sale of U.S. Treasury and federal agency securities on the open market—the FOMC adjusts the amount of reserves in the banking system so as to achieve the targeted federal funds rate. By fluctuating, the Treasury’s balance at the Banks affects the level of reserves and, therefore, the conduct of monetary policy.The Banks and the Federal Reserve Board work closely with the Treasury every day to ensure that the Treasury’s balance with the Banks remains stable, between $5 billion and $7 billion. The Banks use the Treasury Tax and Loan program to shift amounts in excess of the targeted Treasury balance into depository institutions’ accounts and, as a result therefore, back into the banking system.(Boldening in the end: mine) So the funds do reach the TGA, but the Fed/Treasury transfer it back to the banking system. (Immediately I guess)

  27. Re: de novo banks —- Here are answers to your questions — from Warren Mosler Q: I was hoping professor kelton or another knowledgable poster on this site will be able to help me with a question regarding reserves. Take the example of a de novo bank; how does this de novo acquire reserves?A: no reserve balances are required until after the bank has the types of deposits that require reserves at the next statement date. Q: Is the amount of initial reserves equivalent to the amount of capital in he bank?A: no Q: Deposits?A: yes. Q: How is the amount of initial reserves calculated? A: it's based on deposits and it's relatively small nowadays.

  28. Thank you for the response regarding de novo banks. if I may, I want to extend the example further for greater clarity. Assume during the first statement period the de novo bank acquires $500,000 in DDA's and $200,000 in savings deposits all in the form of cash deposits. If the reserve rate is 10% I assume the bank would need to maintain $70,000 in reserves. Are these reserves transferred to the fed reserve leaving the bank holding $630M in cash? I'm trying to get a handle on the operational steps that underpin the transactions and I'm still cloudy. Again, any assistance would be appreciated.

  29. A de novo bank would issue capital and, as a result, acquire reserves from other banks equivalent in size to that capital. Checks written to acquire the new capital stock would be paid for with other banks' reserves. The opening balance sheet of the de novo bank would be reserves and capital. The reserves would be excess, not required, as there is no opening requirement for reserves, given the lack of deposits.

  30. "In a recent blog post, I explained that government deficits increase the private sector’s holding of net financial assets."Why is the level of the private sector's holding of "net financial assets" relevant to anything?"Net financial assets held by the non-government sector" is nothing more than an arbitrarily defined accounting identity. If there is any evidence that there is any relationship at all between NFA and any economic variables that any citizen should be concerned about (unemployment, real wealth, inflation, etc) then I would like to see it.If there is not, then what is the point of this post? Purely academic?

  31. I think I understand better. $10 in, through gov. spending, $10 out, from the bank, and the bond remains. I suppose I just never really thought of a bond as a true asset in itself, but of course it is. And I suppose the interest payments play a role as well.thanks for an interesting and detailed post!

  32. All this is good stuff and proves a point, but there is still one question that is yet to be answered.Why is the non-government sector able to net-save these assets in aggregate, and therefore 'cause' a deficit?In a perfect frictionless, non-leaky, instant transaction world a government spending $100 will always get $100 back in taxation immediately – because the money will bounce from transaction to transaction like a stone across a pond and be taxed away at every step. Bank lending should, again in a perfect world, induce just enough spending to offset the savings of the private and external sector. Everything then gets taxed away and there is no net-private saving, and therefore no deficit.Now moving from the perfect world to the real world that clearly doesn't happen very often.Why not? What is the friction that stops bank lending offsetting saving perfectly?

  33. "If there is any evidence that there is any relationship at all between NFA and any economic variables that any citizen should be concerned about (unemployment, real wealth, inflation, etc) then I would like to see it."NFA is spending that hasn't happened, which means real output hasn't been bought, which means more real output hasn't been produced by somebody employed to do that.

  34. The bulk of those "widgets" = miltary related spending. Just think of the trillion or so spent on unusable nuclear weapons vs what could have been spent on genuine infrastructure improvements etc

  35. As I read this blog entry (and sit through our class sessions), Keynes’s critique of Say’s Law keeps coming to mind. In the General Theory, Keynes demonstrated that Say’s Law holds only in the rare case when leakages equal injections. Isn’t the same true for MMT? Don’t deficit spending and the issuance of Treasury bonds increase U.S. private-sector assets only if deficit spending is financed through U.S. Banks with TT&L accounts and newly-created reserves are used to purchase domestic goods? If foreign ownership of U.S. public debt and government imports continue to increase, would that leave “functional finance” impotent as a policy tool in practice?Similarly, in small countries (still sovereign in their own currencies) don’t the increased risks of inflation and exchange rate fluctuations leave MMT untenable?

  36. Aleks,No — it doesn't matter whether we bring TT&Ls into the picture or not. As I explained in a response above, "Start with G = $100. Leads to +$100 Demand Deposit and + $100 Reserve balance at Fed.Then collect T = $90. Leads to -$90 Demand Deposit and -$90 Reserve Balance at Fed.Now let the holder of the Demand Deposit spend the $10 buying a newly issued government bond. Result: -$10 Demand Deposit and -$10 Reserves. But they are still left with the bond! This is the net financial asset that exists because of the deficit spending!"To your other point — the answer, again, is that this changes nothing. (We can discuss this in class tonight). Until then, have a look at bullet point #9 in this piece by Jamie Galbraith. It should answer your question.

  37. You have shown that the transaction adds net financial assets, but it hasn't added MONEY. Usually you have to convert a bond into money in order to spend.Aren't the debt hawks essentially claiming that at some point you won't be able to covert the bond to money? Could this ever happen?

  38. Abellia,Please read the comment that appears just above yours. There, I show that when G>T (i.e. government deficit spends), then the private sector is left with more deposits (money balances) that it would otherwise have had. If holders of those net additions convert bank deposits into bonds, e.g. buying newly issued Treasuries, then the bond sale would reduce the money supply and leave the private sector holding bonds as their net financial assets (instead of demand deposits). So, I have shown both — (1) deficit spending adding net financial assets in the form of demand deposits and (2) deficit spending adding net financial assets in the form of bonds. It all depends who buys the bonds (and how), but the end result is the same. Deficit spending adds to the private sector's holding of net financial assets. Hence the title of the blog.

  39. Abellia,In addition to the comments above pointed out by Stephanie, I've answered your questions in my post here:,Scott Fullwiler

  40. Thanks for the clarification, Professor Kelton. After class last night, you can consider me a convert! My greatest hurdle was understanding that MMT explains what a government CAN do – not necessarily what a government SHOULD do (although you have certainly offered several persuasive goals which to pursue).It's refreshing to view our monetary and fiscal policymaker's decision process as a set of careful maneuvers chosen from a (potentially) limitless ability to spend. Previously, I pictured something more like a blind man trying to steer our economy away from the precipice of insolvency. Now, if we could just get you an audience with Mr. Bernanke and Mr. Geithner . . .

  41. You say that deficit spending adds both demand deposits and bonds.I get that we are adding a bond to the private sector assets.But if the government is required to issue a bond for the amount of the demand deposit it created, doesn't it take the same amount of money out of the private sector (through the bond sale) than it put in through the purchase of goods? Isn't that exactly what you say in your comment above?

  42. Abellia,Why does it matter?Whether the net addition to the non-govt sector is a bond or a deposit, the non-govt's ability to spend is the same.A deposit doesn't guarantee spending, because it can be converted to a time deposit at any moment.Likewise, a bond doesn't guarantee not spending. It can be sold for a deposit at any time. Further, unlike a deposit, it can be leveraged–often many times over–to create deposits that may be far greater than the value of the original bond. Indeed, the purchase of a Tsy bond by dealers at auction often is itself financed by borrowing collateralized with Tsy bonds already owned.Suggesting that a deposit creates more spending than a bond is arguing that somehow having greater liquidity by itself automatically leads to greater spending out of existing income. I highly doubt that is true. If all my investments were suddenly converted to deposits while my income did not change, I wouldn't go out and spend what had up to that point been my retirement savings.Further, the issuance of a bond actually adds MORE income to the non-govt sector than a deposit, since the former provides additional interest income that the latter does not. Still further, whether a deposit or a bond is held by the non-govt sector, the banking system's ability to create additional credit is the exact same.Best, Scott Fullwiler

  43. This post and discussion is really terrific. Thanks to all who participated.

  44. Stephanie, Scott, thank you for making this clearer. May we look at the same spending process when the government issues a $10 bond, spends, then taxes later? In other words, begin with step 2?If BofA buys a bond, it has a $10 asset and a $10 TT&L liability. The Treasury has $10 accounts receivable asset from BofA TT&L liability, and "owes" BofA the mount of the bond (forgetting coupon for now, assume zero interest.)When the treasury calls in BofA's TT&L balance of $10, both BofA's assets and liabilities are reduced by that much. So what happened to the bond BofA bought at this point? Does it still exist as a BofA asset. Or did the call on its TT&L account somehow relieve BofA of both the bond issue and it's liability, simultaneously? After all, the Treasury only borrowed the $10, right?Continuing, the Treasury looses it's accounts receivable asset but get's $10 to spend as a result of the deposit into it's 'checking' account held as a Fed liability. Also assuming the Treasury has a positive transaction balance, it now spends the budgeted $100 as in stage 4. The amount spent at this point is $100 with only $10 financed (or matched) so far. Now, of that $100 spent into Stephanie's account to buy widgets, the remaining $90 will be taxed taxed back over time from Stephanie's account. This will eventually bring the total budgeted spending in line with the matching tax and loan funds. The $90 in taxes are removed from the banking system: destroyed ex post, I guess. This seems to show taxing does not fund spending, but results from it.So, as Stephanie's $100 deposit is drained of $90, she is left with $10 NFA. But where's BofA's 3 month bond? Stephanie doesn't have it, though she could buy one if she wanted. What if BofA's bond matures during the year? Would the Fed simply type some digits into BofA's reserves?If so, then this process in the end, appears to be no different than if the government had just typed $100 into Stephanie's account and taxed $90 back. Hence, it seems to show, even in the real world, the government never really needed to issue debt to spend. It simply delayed typing fiat digits into someone's account when the bond matured and not immediately upon spending. Either way, those digits came from the finger tips of some government employee typing on a keyboard.Am I missing something? Thank you.

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