–Loans, deposits, fiscal prudence and financial nuttiness, all rolled into one.

Mitchell’s laws:
●The more budgets are cut and taxes increased, the weaker an economy becomes.

●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Austerity = poverty and leads to civil disorder.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

==========================================================================================================================================

Visualize this: You deposit $1000 into your bank savings account.

What have you done? You have lent your bank $1000. That money was not a gift; it was a loan. Your bank now owes you $1000, plus interest. Your deposit has increased your bank’s total debt by $1000.

There is zero difference between a “deposit” and a “loan.” They are identical in every way.

Banks love to be in debt. In the old days, a bank would give people toasters, if people would lend it money.

Like all debt, your loan to your bank creates dollars. When you deposit (lend) that $1000 into your bank savings account, you still own $1000. Remember, it was not a gift. But now the bank also has $1000, which it invests to make more money.

So where there were $1000, now there are $2000. You have created $1000, and added it to the money supply, simply by lending to (depositing with) your bank.

Banks brag about their indebtedness. Big banks tell the world how much they owe. “We have $10 billion in deposits (debts).” Banks advertise to get people to lend to (deposit with) them.

The media, the politicians, the old-line economists and the debt hawks do not criticize banks for accepting too many deposits (borrowing too much money). When your bank borrowed that $1000 from you, no one said that debt (deposit) is “unsustainable.” No one told the bank its deposits (debts) are too high and it should “live within its means” by not accepting more deposits (borrowing more money).

No one published a debt clock showing how much of the bank’s debt you supposedly owe, when it is the bank that owes you.

At some time after you have lent your bank money, you will decide you want your money back. As the banks creditor (“depositor” and “creditor” are synonyms), you will say, “I want to end the $1000 loan (deposit). Give me back my money.”

The bank can return your $1000 in several ways. One way: It can give you a check for $1000, which you will deposit in (lend to) your checking account — perhaps at the same bank. Or, it simply can debit your savings account loan and credit your checking account loan (Checking accounts also are loans to banks).

I hope I have beat this dead horse enough to make the point: A loan is a deposit; a deposit is a loan. “Loan” and “deposit” have exactly the same meaning. The total of deposits is the total debt.

Now, let’s say that instead of lending your bank $1000, you decide to lend the U.S. government $1000. How will you do it? You will reduce the size of your bank checking account and deposit $1000 into your T-security account, at the Federal Reserve Bank. You have reduced your loan to your bank and increased your loan to the federal government.

You have caused the federal debt (deposits) to increase $1000. But, the Federal Debt is nothing more than a total of deposits in the Federal Reserve Bank.

The media will express concern about the size of the federal debt (deposits). The politicians will look for ways to reduce the federal debt (deposits). The old-line economists will write articles saying the federal debt (deposits) are too high. The debt-hawks will put up signs warning about the size of the federal debt (deposits).

All of these people will want you to transfer dollars back from your T-security account at the Federal Reserve Bank, to your private bank checking account. They will want you to reduce the size of your deposits with the federal government, while you increase the size of your deposits with private banks.

They even will put up debt clocks showing how much of the federal government’s debt you supposedly owe, when it is the federal government that owes you.

Now consider the irony. The federal government is Monetarily Sovereign; private banks are monetarily non-sovereign. Financially, the federal government is much stronger than any private bank.

Banks can and do become insolvent, and be unable to repay their loans (deposits), but fortunately, most bank loans (deposits) are guaranteed by the federal government (FDIC). So the irony is, the media, the politicians, the old-line economists and the debt hawks want you and your fellow Americans to increase your lending (deposits) to private banks, while you reduce your lending (T-securities) to the financially most powerful entity in America, the federal government.

They call it, “fiscal prudence”! I call it “financial nuttiness.”

Next time a media writer, politician, old-line economist or debt-hawk says the federal debt is too high, ask him why he thinks the nation is safer when private bank deposits increase while Federal Reserve Bank deposits decrease. Ask why private banks should borrow more so the federal government’s bank can borrow less.

Then smile while he stumbles for an answer.

Rodger Malcolm Mitchell
Monetary Sovereignty


==========================================================================================================================================
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports

#MONETARY SOVEREIGNTY

19 thoughts on “–Loans, deposits, fiscal prudence and financial nuttiness, all rolled into one.

  1. Excellent explanation. I will pass this on to my ex-husband, my current brother-in-law and a few other hardheads. Thanks.

    Like

  2. and as Warren Mosler points out (in my own words), the Federal Govt does not actually NEED to borrow any money, nor tax, except according to certain archaic “rules” enacted to be in line with the Constitution.

    The Treasury can legally and constitutionally issue unlimited “debt instruments”, Bonds. The Tsy can also issue Coins, but those are bulky and harder to transfer than electrons or paper.

    The Govt’s own central banks can legally and constitutionally issue unlimited “loans” in the form of US Dollar deposits, by exchanging those for the Treasury’s Bonds. Further limitations are that the Fed cannot purchase those Bonds directly from the Treasury, but instead it must buy them from private banks via “Open Market Operations” or Treasury Auctions (I’m not clear on that all) where Banks (and frgn govts and others) purchase from the Tsy first … Primary Dealers.

    This “kludge” is DESIGNED this way, to benefit large holders of capital. It may seem unjust, it may BE unjust, it may be plutocratic, but growing “public debt” is certainly NOT a crisis.

    CONCUR?

    Did you see Randy Wray’s recent post on Naked Capitalism where he’s gone all “Bill Black” on the topic of LIBOR and financial fraud?

    Like

    1. Gary, not only does the federal government not need to borrow the dollars it has the unlimited ability to create, but it doesn’t benefit from the borrowing.

      When you and I borrow, we use the money. That’s why we borrow. When the government borrows, the government gets to . . . ta dah! . . . pay interest on the money, but doesn’t use the money.

      The money goes to a T-security account (i.e. savings account) at the Federal Reserve bank.

      Like

  3. Another thing that confounded me for a time, esp with so many “conspiracy theories” and disinfo on “reserves” and QE, is the distinction between a bank’s capital base or capital reserves, including debt-based assets, vs a bank’s “reserve account” on the Fed’s hard drive.

    The former has a lot to do with the bank’s actual health and “solvency”.

    The latter seems more about “liquidity”, a statutory or “rules” based requirement which is adjusted constantly (so banks can borrow from one another to prop up reserves balances) and which could be changed or abolished by Law.

    Mosler points out that Canada has zero mandatory “reserves” balances, and the US partially abolished the need for reserve balances some years after 1971. I forget if it’s corporate accounts or household accounts which are not subject to reserve balance requirements.

    Like

    1. Gary,

      Reserves are meaningless. A bank with zero reserves could lend billions tomorrow, so long as it had sufficient capital. Why? Because any bank can obtain limitless reserves from the Fed, from other banks and from the public.

      Years ago, I owned a company that each night lent millions of dollars to our local bank, and reclaimed the money in the morning. These loans were called “overnights,” and the bank used them as reserves (which are required at night, only.)

      The correct terminology really should be “fractional capital lending,” not “fractional reserve lending.”

      Like

      1. thanks, the first one I got, people on Mosler’s blog were asking why the Govt borrows money to pay interest if it does not need the cash, and someone quipped that “the Govt likes to give away money to rich people”.

        Plus, Mosler explained that by selling T-bonds to banks, the Fed mops up “excess” reserve balances, which prevents overnight Interbank lending rates from being bid down to Zero. If I’m not mistaken, Mosler considers the entire Interbank Lending process to be superfluous and harmful.

        The Fed is usually propping UP the overnite rate, not pushing it down. His proposals to reform the Fed, Tsy, and FDIC were comprehensible by me but a little over my head.

        Not only can “any bank obtain limitless reserves from the Fed, from other banks and from the public”, but reserve balances are rectified roughly two weeks (rolling) in arrears anyhow, two weeks after loans are issued.

        That is, banks look ONE week back to determine if they need more or less money in reserve accounts to meet varying requirements set by the Fed, then they have one additional week to acquire the cash if they need any.

        I suppose you know that, but it’s nice to find agreement, and if you didn’t, thank W. Mosler.

        Like

      2. “But now the bank also has $1000, which it invests to make more money.”

        Reserves are meaningless?

        But not vault notes and coins

        To be honest I found this article confusing. Whereas I often point people towards articles on this site

        Like

  4. Gary,

    Warren and I have corresponded for years. He is one the the most knowledgeable guys I know when it comes to bank operations. If you’ve not read his book, you should — especially the first few chapters. He does a good job explaining dollars.

    The book is free, online.

    Like

    1. Yep. 7DIF. Fascinating in it’s simplicity. Amazing that govt and econ people whose job is to know that, they really don’t get it!! He described his conversations with some of them.

      Larry freaking Summers “I don’t understand reserve accounting.” “Really?!!! WTF?!! Why are you Asst Tsy Secy then?”
      So policy is driven purely by ideology, misunderstanding, and fear …. like we’re in the Dark Ages. Next they’ll be advocating leeches and spells for illness, instead of penicillin.

      I like Mosler’s line: “no grandchildren were involved” when T-bonds mature and are “paid back”.

      Ben’s QE: how the heck can that “boost the economy” OR “cause an inflationary crisis” if the Fed debits banks’ Securities account and credits banks’ Reserves account, all on the Fed’s hard drive? It can’t. No more than if you transfer funds from savings to checking.

      Bill Still’s well-meaning monetary reform video, Secrets of Oz: “Govt debt is just like household debt.” NO it’s NOT!!!!

      The high-finance stuff that participants discuss on Mosler’s blog about complex derivatives and whatnot, outside of 7DIF, some is over my head, but 7DIF is straightforward.

      I still agree with Bill Black and Wray and others, and even Steve Zarlenga on this point, that when Govt supports or creates a vast flow of Dollars to bank CEOs and other 0.5% that are unearned wealth, or economic rent, that has serious ramifications for political and power relations vs everyone else who has to struggle just to stay afloat.

      Stratospheric wealth carries the power to dictate outcomes across the planet, usually not with kindness. I don’t think that’s about “punishing the rich for being successful”.

      Like

  5. I’m reading your discussion with Hickey and others on Occupy. So now I know a bit more about who and what you know.

    Like

  6. “Like all debt, your loan to your bank creates dollars. When you deposit (lend) that $1000 into your bank savings account, you still own $1000. Remember, it was not a gift. But now the bank also has $1000, which it invests to make more money.”

    Aren’t you confusing the banks money (vault cash and reserves) with our money (bank credit and notes and coins in circulation).

    They are different and IMO should not be treated as being the same. This is where a lot of the confusion comes from.

    QE is called printing money when it should be called creating (not printing) the banks and treasuries money. I explain this as different levels of money

    Bank and treasuries money = Bank reserves and vault notes and coins
    Our money = bank credit
    Notes and coins = a token for bank credit

    Like

    1. as I understand it now, hard to grasp, is that banks create loans ad-hoc for anyone they feel is credit-worthy. When that happens, they create (1) a deposit, in an account which they “owe” you, their liability (2) a signed loan contract, debt obligation, what you owe them.

      BANKS DO NOT NEED ANY “MONEY” TO DO THAT. Bank of America doesn’t need “reserves” which is a cash balance in a Reserve Account at the Fed, a checking account owned by Bank of America. Banks create loans FIRST, then through a process the policy-controlled Reserve account balance can be adjusted TWO WEEKS LATER.

      This is why QE — the Fed taking T-Securities (debiting balance of banks’ Securities account) and crediting banks’ Reserve account, it’s changing a mix between the two accounts, but THAT’S ALL.

      If that sounds like some stupid hocus-pocus that can’t possibly cause anything to happen, or only something very tiny perhaps, CORRECT!

      Like

      1. Money (bank credit and reserves) is a financial asset created by millions of journal entries

        The bank credit journal is

        DEBIT Bank loan (bank asset / our liability = DEBT)
        CREDIT Cheque account (bank liability / our asset = MONEY)

        Like

    2. RJ,
      for a more accurate answer on QE, read up on what Mike Norman wrote.

      As for banks money vs our money, read up a bit on MMT or MS, where the differentiation is between PRIVATE money which is “inside” the economy, so to speak, what WE have in our wallets and bank accounts, not including Credit-money which “nets to zero” (but adds to circulation, very very important per Steve Keen, Hyman Minsky)

      vs.

      PUBLIC (govt) money which comes from “outside” the economy, and the Fed/Tsy can add into the private sector economy by spending, but upon which there is not “real” debt obligation. When Treasury writes a Soc Sec check, payment to Lockheed, welfare check, some other contract, there is no debt obligation (unless it’s just some loan guarantee sponsored by the Govt via bank loan).

      This box does not cover everything that happens in Finance, such as “private money” such as “CDO securities” which are financial assets that can be traded on Wall Street as if money (but not cash or “legal tender”).

      I’m intentionally super-simplifying this, plus I’m stupid. Sometimes economists use too much terminology which is confusing.

      Like

      1. “When Treasury writes a Soc Sec check, payment to Lockheed, welfare check, some other contract, there is no debt obligation”

        This is not correct

        The Govt has a debt obligation. They

        DEBIT Expense (or asset account or accounts payable)
        CREDIT Liability account = DEBT

        Debt free money is not possible. Money (a financial asset) and Fed reserves (a financial asset) is always backed by either Govt or non Govt debt (a financial liability).

        Like

  7. Hello, Roger.

    I must say I am very confused by this article. Can you elaborate on a few things?

    “But now the bank also has $1000, which it invests to make more money. So where there were $1000, now there are $2000. You have created $1000, and added it to the money supply, simply by lending to (depositing with) your bank.”
    –But I don’t really have $1000, not that I can spend. All I have is a record that says that I can go to the bank and get $1000 if I want. I can’t spend the money while it is at the bank.The bank can spend it, loan it, etc., but not me. So how is the second thousand?

    “When your bank borrowed that $1000 from you, no one said that debt (deposit) is “unsustainable.” No one told the bank its deposits (debts) are too high and it should “live within its means” by not accepting more deposits (borrowing more money).”
    –I suppose if the government took loans and made a big Scrooge McDuck pile out of it, people wouldn’t complain. I think the complaint comes from the fact that when the Treasury gets deposits (debts), it also comes with a promise to repay, just the bank promises to repay me. But the money isn’t sitting in a pile, or even loaned with a repayment schedule+interest requirement, it is gifted out with no promise to repay (though as you point out later, banks can become insolvent). Repayment to the government could come through taxes (gifts … to the government?), but they are almost always lower than the gifts out.

    “The bank can return your $1000 in several ways. One way: It can give you a check for $1000, which you will deposit in (lend to) your checking account — perhaps at the same bank. Or, it simply can debit your savings account loan and credit your checking account loan (Checking accounts also are loans to banks).”
    –I don’t see either of these ways as the bank returning the money to me. They still have it and it can be out on loan, and I only have a statement/record of the deposit (loan). Only when they take it from their vault and I can give it to the guy at the gas station do I really have it, because until then I can’t spend it.

    Now I get how a Fed Reserve Note is an IOU from the government to give me credit upon redemption, that they can create as many of these as they want, but I don’t get how that’s the same my bank statement saying that I have $1000 on deposit (loaned to them) – which I can’t spend. And in fact, this whole post seems to go against what you typically say regarding T-notes, that they should be done away with. Then what’s the accounting?

    Like

  8. Steve, if you were to give the bank $1000, you no longer would have $1000, but if you lend (deposit) $1000 you still own $1000.

    You still can spend the $1000 you lent to (deposited with) your bank. Simply write a check for $1000. If the recipient of your check banks at your bank, your bank still has the $1000 as does the recipient.

    If the recipient banks at a different bank, his bank now has the $1,000. So yes, you can spend the money that is in your checking account, and that money merely goes into someone else’s checking account, with the same results.

    I didn’t understand your 2nd paragraph.

    All dollars are what you call “statement/records of deposits.” There are no physical dollars. See: Why a dollar bill is not a dollar

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s