Mitchell’s laws:
●The more federal budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor, which leads to civil disorder.
●Cutting the deficit is the government’s method for taking dollars from the middle class and giving them to the rich.
●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.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
●The penalty for ignorance is slavery.
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The debt-nuts get crazier and crazier. They must believe that acting crazy is the way to get attention. They probably are right — except it may not be an act.
Anyway, here is yet another warning about the phony “federal debt.”
America Should Declare Bankruptcy: Doug Casey
By Lauren Lyster | Daily Ticker 1/18/13This week started with President Obama Monday demanding lawmakers raise the U.S.’s $16.4 trillion debt ceiling, warning Republicans not to insist on spending cuts in return. The same day, Federal Reserve Chairman Ben Bernanke advocated getting rid of the debt limit altogether.
There are two parts to the debt limit that are ridiculous: The debt and the limit.
The so-called “debt” is ridiculous, because it is not what you think of as debt. It actually is the total of deposits in T-securities accounts at the Federal Reserve Bank. A T-security account is very much like your savings account at your local bank.
To “lend” to the government, you instruct your bank to transfer dollars from your checking account to your T-security account.
To “pay off” your T-security account (i.e. federal “debt”), the government does exactly what your bank does, when it “pays off” your savings account. The government transfers dollars from your T-security account to your checking account.
This is no burden on the government. The entire federal debt could be paid off tomorrow, simply by transferring dollars from one account to another. No new dollars would need to be created. Someone simply would type $16.4 trillion into a computer, and the transfers would be made. Done.
The debt limit is ridiculous, because it doesn’t limit federal spending. It limits federal paying of bills to which it already has committed. Visualize spending $100 on your credit card, then refusing to pay the credit card bill, because you have exceeded your debt limit.
Congress already has spent the money, and now the debt-nuts in Congress claim they are being fiscally prudent by refusing to pay their bills. This is classic Orwellian language, in which words mean the opposite of their true meaning. To Congress, being a deadbeat is prudent.
And the week ends with lawmakers still careening towards a deadline somewhere between mid-February and late March, when the U.S. will run out of funding for most government programs and risk default. They have no plan to raise the ceiling or abolish it.
Doug Casey, chairman of Casey Research, professional investor, and author of Totally Incorrect: Conversations with Doug Casey tells The Daily Ticker. “The problem is the amount of debt itself. The problem is so big at this point, I think it’s very questionable whether this can be solved at all.”
He is saying there is so much money in T-security accounts, the government will be unable to transfer it to checking accounts. Why? Are all those dollars too bulky to move? Is it too hard to type $16.4 trillion into a computer?
This is what passes for wisdom in today’s debt-nut world.
Casey points to the money America owes above and beyond the official $16 trillion in national debt, as the real issue. This includes the so-called unfunded liabilities from entitlements like Social Security and Medicare.
Two former U.S. government officials put the federal government’s actual liabilities in excess of $86.8 trillion, or 550% of GDP, in a Wall Street Journal Op-Ed. Casey argues we’re talking of upwards of $100 trillion when you also factor in the liability of promises such as FDIC deposit insurance.
“This is far more than can conceivably be repaid, so the debt is going to be defaulted on, it’s simply a question of how,” he says.
To quote Casey, “Totally Incorrect”:
Consider Social Security. For you to receive a benefit, the federal government sends instructions to your bank, to increase the number in your checking account. The instructions can be in the form of a check or a wire.
Either way, the government can send instructions endlessly. It could, if it wished, instruct your bank to increase the number in your checking account by 100 trillion. Instantly, you would be $100 trillion richer.
A Monetarily Sovereign government does not need a source of income to do this. Even if federal taxes were zero, the government could continue sending those instructions. That is what Monetarily Sovereign means.
So when Casey says $100 trillion is “far more than can conceivably be repaid,” he is demonstrating incredible ignorance of federal financing and Monetary Sovereignty. There simply is no limit to what the government can pay, especially when the so-called “debt” can be repaid by transferring existing dollars from one account to another.
For new spending, new dollars would be needed, and here the only — ONLY — limit is inflation. The government can, and should, keep creating money up to the point of inflation. Though inflation is unlikely (for reasons described at Federal deficit spending doesn’t cause inflation; oil does), it always is on the minds of debt-nuts, which is why the next paragraph either is humorous, sad or frightening, depending on your mood:
Casey takes it one step further. “I think the U.S. government should default on the national debt,” he says, pre-empting his statement with the admission that it may sound outrageous and too radical. “I say that for several reasons. The most important of them is if they don’t default on it, it’s going to make the next several generations of Americans into effect indentured servants, serfs, to pay off the debt that their parents and grandparents have incurred.”
If anything is guaranteed to cause inflation (i.e. the loss in value of the American dollar) it’s default on our debts. Would you accept dollars if you thought the government would default on its own currency? It’s madness to the extreme.
Also, as we have seen, the next several generations of Americans will not pay even one dollar of the federal debt. Nobody does.
If you wonder how someone like Doug Casey gets media space, understand that the media are owned by the rich, and debt cutting benefits the rich by widening the gap between the rich and the rest.
Nearly all the “fiscally prudent” suggestions – the FICA increase, the cuts to Social Security and Medicare, and the cuts to myriad other federal initiatives – take money from the lower 99% income group, which widens the gap.
The gap is the main concern of the rich, for without the gap, there would be no rich.
Defaulting on American debt is crazy and reckless, but perhaps no crazier nor more reckless than the many other austerity ideas being promulgated by the stooges for the upper 1%.
Rodger Malcolm Mitchell
Monetary Sovereignty
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Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%
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 Imports
#MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
Yet another way austerity punishes the 99% and widens the income gap.
Consider what a hiring freeze and layoffs will do to the unemployment problem. Who will be affected, the upper 1% or the 99%?
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Maybe Casey and others would be attracted to this sort of temporary solution to their problem: The Fed takes a “haircut” on the debt they hold, say 80%. So their $3T or so of US bonds becomes $0.6T, and we are then $2.4T below the debt ceiling, and ready to deal with more substantive problems.
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Yes, the Fed could take a 100% haircut, for all the difference it would make, except . . . the “debt” doesn’t belong to the Fed. It belongs to the people who have deposited dollars into their T-security accounts at the FRB.
I don’t think you’d be too happy if your bank took a “haircut” on your savings account. 🙂
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You misunderstood. I meant on only the bonds that the Fed has bought, in its open market operations. Not bonds held by (or for the benefit of) human beings or foreign governments.
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1. Excellent post.
“Doug Casey is saying there is so much money in T-security accounts that the government will be unable to transfer it to checking accounts. Why? Are all those dollars too bulky to move? Is it too hard to type $16.4 trillion into a computer?”
Yes. When I say that banks and the government create money on keyboards, I know this is banal to the readers of Rodger’s blog, but for average Americans this fact is as impossible to accept as it was once impossible to believe that man could fly. Today we live in a nearly cashless society, yet most people continue to think of money as physical and limited. It cannot be created on a keyboard.
If we did away with the selling of T-securities (as the process currently exists) the “debt crisis” would evaporate, federal spending would simply be federal spending, and austerity would be exposed for the scam that it is.
2. “Two former U.S. government officials put the federal government’s actual liabilities in excess of $86.8 trillion, or 550% of GDP, in a Wall Street Journal Op-Ed.”
Why stop at $86 trillion? If government continues to spend $3.8 trillion per year, then over the next century the government’s “unfunded liability” will be $380 trillion ($70 trillion for SS alone). This is a crisis! It’s not like the government will create the money out of nothing, on computer keyboards. The only solution is AUSTERITY NOW.
3. Rodger writes, “Consider Social Security. For you to receive a benefit, the federal government sends instructions to your bank, to increase the number in your checking account. The instructions can be in the form of a check or a wire.”
As of April 2013 there will be no more SS checks for anyone. All benefits will be direct deposit to bank accounts. Nonetheless, most people will continue to think of money as physical and limited.
4. Rodger cites an article about US Air Force austerity measures. Yes, as I have noted before, even though government spending on weapons makers will continue to increase, the money will increasingly flow to the top. It will pay for overpriced (and unmanned) systems, while military personnel and local U.S. communities will be deprived. And the more money is concentrated at the top, the more the 1% can control the government via bribes and kickbacks.
In all cases the real target of austerity is average people. Mitchell’s law: “Austerity is the government’s method for widening the gap between rich and poor.”
5. Rodger speaks of our “debt nut world.” The debt nuts come in all shapes. Here is an example…
ON THE “BANKS ARE OMNIPOTENT” CROWD
Which is worse: people who reject the facts of Monetary Sovereignty, or people who partially understand it, and twist their vague ideas into compound errors? In the words of Alexander Pope, “A little learning is a dangerous thing.” (Essay on Criticism, 1709).
Example: L.A. attorney Ellen Brown advocates for public banks, and has a huge following. Today she wrote that, “Many people believe that the U.S. government creates its own money. This is not true. Today the Federal Reserve creates trillions of dollars on its books and lends them at near-zero interest to private banks, which then lend them back to the government and the people at market rates.”
Ms. Brown offers no proof of this assertion. Nonetheless, it is eagerly absorbed by her countless fans. I have communicated with her regarding her errors, but she and her fans are as cement-headed as the MMT people (who love federal taxes, and who insist that politicians and the 1% simply “misunderstand” economics).
Banks are very powerful, but Ms. Brown (plus millions of others) go to extremes. They insist that banks are omnipotent. Such people think they are exposing greed, when they are actually supporting greed. For them there is no such thing as government spending. There is only bank lending. Therefore austerity is good, since it will reign in the banks. Austerity will ease our supposed “debt crisis” and “deficit crisis.”
If you tell them that, “GDP = federal spending + private investment and consumption – net imports,” they will claim that federal spending is not federal spending, but bank lending.
The “banks are omnipotent” crowd are closed-minded cultists. For them, banks are Satan, and everyone is Satan’s slave. You, me, politicians, the 1% – everyone is a slave to the banks. This is their Satan, their Great Evil.
(For me the “Great Evil” is human selfishness in myriad forms, from the top of society to the bottom. Each of us must remain vigilant against our own personal selfishness.)
Ms. Brown made the above-cited comment while discussing the Platinum Coin Solution, which she says would be “actual” government spending, and not bank lending. She is like people who obsessively (and wrongly) think that issuing Lincoln-style greenbacks would be a radical change. In reality, the only difference between Civil War greenbacks and today’s government spending is that we now have a Fed, and the government must sell T-securities equal to each year’s budget deficit.
What these people are really saying (although they do not realize it) is that we should abolish the law that says the Treasury must sell T-securities equal to the deficit. Then the Fed could continue to sell securities if the Fed wanted to, but the securities would be a Fed debt, not a “national debt.” Meanwhile U.S. government spending would simply be called spending, not borrowing.
It’s extremely simple, but try explaining this to the “bank are omnipotent” crowd. They refuse to listen, since theirs is a religion.
When we do not understand the facts, we indulge in logical contradiction. For example, Ellen Brown and the “banks are omnipotent” crowd say there is no government spending, only bank lending. Yet they also say the government bails out the banks. You can ask them, “If the government gets all its money from banks, then do banks bail out themselves?” They will say no, the government bails out the banks.
This is totally irrational, but that’s what happens when economics becomes a religion (e.g. banks are Satan). I myself hate private banks with their profit motive, but to call them the source of all evil is to excuse politicians and the 1%, for example.
Conclusion: the “banks are omnipotent” crowd is a sub-section of the overall debt nut crowd. All are unreachable.
(By the way, Ellen Brown reads MMT people like Warren Mosler, Randy Wray, and Joe Firestone, but she remains locked in her own bubble. In some ways, they do too.)
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Ellen Brown is correct. A “bank” is a business that is licensed to create financial credit, wich functions as “money”. When a bank makes a loan it expands its balance sheet, adding a newly created bank deposit into the borrower’s bank account (which is on the liability side of the bank’s balance sheet) and adding a new asset to the asset side of its balance sheet. Our “debts” are a bank’s “assets”, and our bank deposit balances are a bank’s liabilities. We sign a “promissory note”, promising to pay interest and to repay the loan principal, and that note is our “debt” and the bank’s asset. To make a loan or to purchase a government security like a bond or T-bill, a bank simply “creates” the money and “lends” it to us, or to the government, in exchange for our promises to pay interest and to repay the loan principal according to the terms of the loan agreement.. Money creation is a banking system balance sheet expansion. Money is not created by government spending, because that is illegal under US money and banking legislation.
Do you actually know how government “gets” the money that it deficit spends? The government is not allowed to create its own money (except coins). Ellen is right: the trillion dollar platinum coin would have been the government “actually” creating its own money. The Fed is not allowed to directly purchase new debt from the government, so the Fed cannot create the deficit spending money. Nor is the Fed allowed to let the government overdraw its TGA account at the Fed, the “bank account” out of which the government spends money. The Fed is not allowed to create money for the government to spend. I’m just reciting US banking system legislation, which is actually practiced and is not violated. So if you think the government creates its own money, or the Fed creates money for the government, explain the mechanics of the process in light of the money and banking legislation.
In fact the government can only spend money that it has previously deposited in its TGA bank account at the Fed, just like you and me if we don’t have a line of credit or overdraft privileges with our bank. Under US law, 21 US and international banks have been granted “primary dealer” status. These banks (and China) are allowed to bid on new issues of Treasury debt. The PD banks “pay” for the new Treasury securities in the same way all banks fund all loan: by creating deposits in a balance sheet expansion exercise. The deposit is made via FedWire by the purchasing bank into the government’s TGA account at the Fed, and the PD now holds the new Treasury security as an asset on its balance sheet. The PD can then sell that asset into the secondary markets, or it can simply hold it on it own balance sheet as the government’s interest paying debt. No different than a bank buying your promissory note in exchange for a loan.
You seem to assume that the debt ceiling that constrains the government’s ability to borrow and spend money is some kind of a mirage. But it’s very real. The government formally transferred its money issuing function to the Federal Reserve banking system in 1913. Lincoln issued government money, greenbacks, US Notes, an “spent them into circulation” paying the costs of the Civil War. That is what “government spending money into existence” looks like. Auctioning Treasury debt to banks is not government money issuance.
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Your comment,”In fact the government can only spend money that it has previously deposited in its TGA bank account at the Fed,” begs the questions, “Where did these dollars come from? Who created them, when and how?”
Your entire comment is complicated by a law made obsolete by the end of monetary non-sovereignty in 1971. No one questions that the law exists. The primary question is, “Why?”
When you say, “if you think the government creates its own money, explain the mechanics of the process in light of the money and banking legislation, Here are the mechanics:
The government pays its bills by sending instructions to creditors’ banks to mark up creditors’ checking accounts. This markup instantly creates dollars, out of thin air.
Meanwhile, the Treasury is required to create, also from thin air, T-securities in an amount equal to the difference between spending and taxing. This process is misleadingly called “borrowing,” but it is not like private borrowing, where the borrower receives and uses dollars it did not previously have.
The way to “lend” to the government is to transfer your already existing dollars from your checking account to your T-security account at the Federal Reserve Bank. This neither creates nor destroys money. It merely is a transfer, identical with transferring dollars from your checking account to your savings account.
You still own those dollars; they merely are in another account. The government, being Monetarily Sovereign, has no use for those dollars and does not take possession of them. The dollars merely reside in your T-security account.
If that one obsolete law, requiring the issuance of T-securities in an amount equal to the deficit, were rescinded, so-called “borrowing” could end and along with it, all the misplaced concern about the federal debt.
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Rodger,
I’ll add my answers to your text, with R in front of your text and D in front of my answers:
R:Your comment,”In fact the government can only spend money that it has previously deposited in its TGA bank account at the Fed,” begs the questions, “Where did these dollars come from? Who created them, when and how?”
D: I stated very clearly that “banks” create those dollars by expanding their balance sheets. This is the function that “banks” are licensed to perform. Money “comes from” banks. Banks create money by making loans and by purchasing government securities.
R: Your entire comment is complicated by a law made obsolete by the end of monetary non-sovereignty in 1971. No one questions that the law exists. The primary question is, “Why?”
D: Gold backing of money creation became obsolete in 1971, but it didn’t change the fact that commercial banks create the money supply. In the gold standard era we didn’t “spend” gold. We spent dollars that were created by banks as a legislated multiple of their “fractional reserve” holdings of gold. Today we don’t spend “reserve balances”. We spend dollars that are created by banks as a multiple of the fractional reserve holdings of banknotes and reserve balances in their acounts at the Fed. Banknotes are printed by the Treasury, sold to the Fed for the cost of printing, and made available to commercial banks at face value by the Fed. The Fed creates the reserve balances by expanding its balance sheet. A bank that needs additional reserves to cover new loans that it created pledges collateral to the Fed, and the Fed creates the reserve balance. The pledged asset goes on the asset side of the Fed balance sheet, and the new reserve balance goes on the liabiity side. The Fed could not create gold so the Federal Reserve banking system was “reserves constrained” in the amount of new loan money it could create. Since 1971 there is no constraint on money creation by the US banking system.
R: When you say, “if you think the government creates its own money, explain the mechanics of the process in light of the money and banking legislation, Here are the mechanics: The government pays its bills by sending instructions to creditors’ banks to mark up creditors’ checking accounts.
D: That is correct. When I write a check against my bank account balance, I am instructing my bank to debit my account for that sum and credit the payee’s account for that sum. The government does the same thing when it “authorizes a payment” from its Fed account to some recipient’s account.
R: This markup instantly creates dollars, out of thin air.
D: That is just false. If that were the case, then the Fed would have to create the money that the government transfers to some recipient’s account. As I noted in my original post, the Fed is not allowed to create money for the government. The money is created when the government sells a Treasury security to a primary dealer bank, and the bank’s payment for the security is credited to the Treasury’s checking account at the Fed. Congress passed this legislation in 1913, and Congress can change the legislation if it chooses. But until the legislation is changed, commercial banks create and lend all the money supply into circulation; the government is not allowed to create its own money (except coins); the Fed is not allowed to directly “monetize” government debt to fund deficit spending (though the Fed can buy Treasury debt in the secondary markets, after the PD banks have originally funded the government deficits in the “primary” market); and the government has to “borrow” its deficit spending money from private banks who create the money they use to buy the government’s debt. Banks create credit money out of nothing, simply by adding a matched set of new assets/liabilities accounting entries on their balance sheets. Monetary system reformers have been advocating changes to the 1913 legislation at least since Irving Fisher in the 1930s who advocated taking the money issuing function away from the bankers and restoring it to the government where (he believed) it properly belongs. But the bankers remain firmly in charge of money issuance. Ellen Brown advocates public banking. The State of North Dakota has legally structure itself as the Bank of North Dakota, and as a “bank” this public institution is allowed to create money just like any other bank. So public banking is a legal way for governments to create their own money within the existing banking laws.
R: Meanwhile, the Treasury is required to create, also from thin air, T-securities in an amount equal to the difference between spending and taxing. This process is misleadingly called “borrowing,” but it is not like private borrowing, where the borrower receives and uses dollars it did not previously have.
D: Again, this is just false. T-securities are issued at the time the Treasury is ready to auction new Treasury debt to the primary dealer banks. T-securities ARE, in fact, the government’s way of “borrowing” its deficit spending money. When its securities “mature”, the Treasury has to “redeem” them by paying the holder “money”. The government is not allowed to “create” its own money, just like you and I are not allowed to. So the government borrows, and has to pay back, money that it does not create. When our debts are due we have to pay them either out of money we have earned and saved, or by getting a new loan to repay the old loan. The government is in the same boat as we are, because it can only get debt repayment money either by taxing or by borrowing. The primary dealer banks are “required” to purchase a minimum quantity of new Treasury security issues at auction, or they lose their primary dealer privilege. So there will be no “failed” Treasury debt auctions. But “forcing” banks to lend you money is still “borrowing” money from banks, an the loans have to be repaid when they come due. IF Congress changed the legislation and allowed the government to create its own money, and IF the government and the Fed agreed that they needed T-securities as a means of exercising monetary policy, THEN it could be the case that the government spends money into existence and simultaneously issues new T-securities in the same amount. But at present this is not how it is done, because it is not legal.
R: The way to “lend” to the government is to transfer your already existing dollars from your checking account to your T-security account at the Federal Reserve Bank. This neither creates nor destroys money. It merely is a transfer, identical with transferring dollars from your checking account to your savings account.
D: This is how parties purchase T-securities in the secondary markets, where individual and institutional investors use their “savings” to buy T-securities. The PDs hold a lot of government debt on their own balance sheets, but the PDs are the banks that distribute Treasury debt to buyers throughout the world. China is also allowed to bid directly, like a PD, on new Treasury issues, and China uses its savings of dollars to purchase these. But the PDs create new money to purchase the new issues of Treasury debt, and when other US banks buy Treasuries in the secondary market they also create new money to buy the debt, though this is not another “addition” to the money supply because the Treasury-selling PD bank reduces its balance sheet by the same amount that the Treasury-buying bank expands its balance sheet (the PD takes a profit on the exchange). So you’re right that Treasury buyers in the secondary markets, who use dollars that they already have as their savings to pay for the Treasuries, “pay” by transferring a credit balance in their bank account to the bank account of the seller of the security.
R: You still own those dollars; they merely are in another account.
D: No, you have parted with your dollars. You “spent” your money buying an “asset”, a T-security. You now have a T-security, but you no longer have the money. Buying a T-security is not much different than buying a CD. Your bank debits your bank account for the price of the CD, and credits your CD account for the amount of the purchase. You spend money to buy assets. When the CD matures you get your money back (with interest) and your CD balance is reduced to zero. Swapping money for assets is called “buying” assets, just like swapping money for toothbrushes is called buying toothbrushers. The seller gets your money, you get his toothbrushes. You can call it an “asset swap” if you like, but that’s just a confusing way of saying you spent your money buying something.
R: The government, being Monetarily Sovereign, has no use for those dollars and does not take possession of them. The dollars merely reside in your T-security account.
D: False again. The government “could” be monetarily sovereign if Congress repealed the Federal Reserve Act and authorized the government to create dollars in the form of United States Notes (greenbacks) rather than Federal Reserve Notes; or if Congress confirmed that the government could mint proof platinum coins in very high denominations, and that those coins are “money”, and the government deposited the coins in its Fed account then spent the credit balance. The 1913 legislation makes “the banking system” monetarily sovereign, the issuer of the money. The government very much DOES need the money it gets by auctioning T-securities, because at present that’s the only way it can get the money to defict spend. When a public company issues new stock and you buy the stock, your money goes to the company. When you sell the stock to someone else, the money goes to you, not to the company. When Treasury issues new debt and a PD bank buys it, the money goes to the government. When the PD sells that security to you, your money goes to the PD bank, not to the government. “Assets” are being bought and sold. In the first place the money from the sale goes to the issuer of the assets. After that the money from any subsequent sale of the asset goes to whoever owns the asset at that time.
R: If that one obsolete law, requiring the issuance of T-securities in an amount equal to the deficit, were rescinded, so-called “borrowing” could end and along with it, all the misplaced concern about the federal debt.
D: You are 100% correct. Which is why I join a long history of monetary system reform advocates who argue that Congress should change the legislation to allow the government to create its own money. You have been holding forth as if that epic battle over banker vs. government money issuance has already been won and the reforms are already in place. But the reform battles have consistently been LOST by reformers and WON by the bankers, who retain their monopoly over US$ money issuance. IMF authors Benes and Kumhof (“The Chicago Plan Revisited”) have recently revived Irving Fisher’s 1930s proposal to take back the money issuing function from the bankers. Fisher called it 100% reserves, where the government would issue all the money and lend it to the banks interest free, but the banks would not be allowed to create ANY money. They could only lend out the money that the government first created and loaned to them. Instead of allowing banks to create money based on “fractional reserves” of gold, or of Fed reserve balances, the banks would have to hold 100% reserves of government money (I support the “principle” of this plan, but I don’t believe 100% reserves is the best way to fix the money system. I think all we need is for government to create “some” of its own money, and spend that debt-free money into the economy. I don’t think the government should create ALL of the money: I believe there’s a large role for banker created money). The fact that Fisher, and now these IMF authors, are arguing to take away the money issuing function from banks and arguing for government money issuance as a “reform” of the current system, should be proof enough that at present the government is NOT issuing the money and the banks ARE issuing the money. Fisher an the 100% reserves advocates are not alone in understanding that banks, not the government, create our money. Ther is a long history of monetary system reformers arguing in favor of one form or another of government money issuance. I hope you will become one of us.
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To the best of my knowledge none of the US wars in the 20th century were ever “paid off”. That must be the reason I live on the street and type on a borrowed computer in an internet cafe. My parents got divorced in the ’70s; it must have been because they had to “pay their grandparents’ and parents’ portion of the National Debt”. Needless to say, none of this true, except that my parents did get divorced. Paul Krugman’s column today in the NY Times at least got the part right that needs to be more federal spending to improve the economy, not less. He’s closer to MS and MMT than most – it would be nice if he adopted some of their principles. Meanwhile there is a one page sized ad in the Times signed by former govt. officials (James Baker and the like) that effectively says the world will end if we don’t fix the debt. I did not see if Batshyt Bachmann’s or Eddie Munster Ryan’s names were affixed to that ad but should have been. Maybe these dignitaries got the HPV vaccine and “turned retarded”…
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Rodger/Mark, what about interest? I am under the impression that when banks and the government create new money by borrowing or lending, however you may call it, there is an interest portion that is assigned.
This interest portion is either fixed or variable. This interest needs to be assigned to payments to service new and outstanding loans. This would have the impact of extracting more from the economy than is created by the loan in the first place. More loans, or more money creation will only result in a greater net economic deficit as they require greater and greater amounts of interest to be removed from the economy to service the net borrowings.
While interest is an important way to “market regulate” speculative risk, and regulate the “value” of money, the problem remains that more money has to be found to service the loans (with interest attached, than was created in the first place.
When interest rates are very low as they are now, then private and government lending levels can be sustained without further “interest deficit” to the economy. If however, interest rates started to rise, the net loss from the economy as the allocation of interest started to rise, would result in stagflation.
Many of the “debt-nuts” as you call them, are rightly or wrongly concerned about the economic “serviceability” of these “debts” due to the interest portion assigned to them. Not just the principal. How is this of no concern at all?
While the principal is “created out of thin air” the interest assigned to the loan is not. This must come from gains in economic surplus. This is difficult during times of deflation, like most of the developed nations are experiencing today, simply because there is no economic surplus in real terms.
Deflation or Austerity, whatever you wish to call it, is a reduction in the economic capacity to service loans. While new “free” money can help to provide liquidity to markets, it does nothing to address the interest portion.
As more and more “free money” enters the economy, more and more “interest obligations” do as well. Without an economic surplus from increased productivity, these newly created interest obligations are a future tax.
Are they not?
Therefore, there is really no “free money” in real terms because of the deficit that interest causes in the money creation process. Interest acts like a future tax in this way. While creating new money is simply a matter of pressing a keyboard, the surplus required to service the interest portion is not so easily created. This requires a productive surplus in real terms. An effective increase in purchasing power through greater productivity.
Is this not the case, or is interest of no concern whatsoever?
Sincerely,
Trozer
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When the federal government pays interest domestically, that adds dollars to the economy, so is stimulative.
When any non-federal entity pays interest domestically, that merely circulates dollars within the economy.
When the federal government pays interest to a foreign entity, that adds dollars to the world supply, but does not subtract dollars from the U.S. economy. Long term, that is stimulative in that it enriches the world.
When any domestic, non-federal entity pays interest to a foreign entity, that subtracts dollars from the economy, and is short term, anti-stimulative.
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Hi Rodger, thanks for your reply. If I am understanding you correctly, the government pays interest by creating/borrowing more dollars with interest attached. Which increases the money supply, which is stimulative. So interest is in effect simply a further monetary surplus to the economy. And not a problem at all?
Many debt hawks harp on about how “the interest alone will send the country bankrupt!” Yet the interest is simply additional spending. And as such, not really a burden at all. Is this correct?
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Yes.
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Thank you for this.
It’s all becoming crystal clear for a non-initiated non-economist lay person such as me.
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Roger says, “To “lend” to the government, you instruct your bank to transfer dollars from your checking account to your T-security account.”
Does this process subtract dollars from the economy?
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No, you still own the dollars. They are part of Debt Outstanding Domestic Non-finacial Sectors, the broadest measure of the money supply.
This is the difference between paying taxes, i.e giving dollars to the government vs. so-called “lending” to the government, i.e. buying T-securities.
The former does subtract dollars from the economy; the later does not.
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Seems to me we have two schools–one school phasing out and one phasing in. The one phasing out is the scarcity model, not enough to go around, austerity, etc. The one phasing in is the abundance model (MS, MMT) which says we have enough to go around. The question is no longer “do we have the money?” The question is “do we have the physical resources?”
There is also the question of whether the message of abundance will be heard and realized in the nick of time before total panic sets in and we start shooting at problems that have no existence other than in our poor imaginations.
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Darryl,
In your scenario, the U.S. Treasury is nothing more than a big printing organization.
Money creation and handling is a collaborative effort. For instance, when you buy a bank CD, you are the lender and the bank is the borrower. When you take out a mortgage, you are the borrower and the bank is the lender.
In both cases, dollars are created. So who created the dollars, the borrower or the lender? I’ll go along with either answer, because it’s just semantics.
Similarly, when the federal government spends, dollars are created. So, when Congress assigns a budget to an agency, and the agency wires dollars to a creditor and the creditor’s bank clears the transaction through the Federal Reserve Bank and the Treasury — who has created the dollars, Congress, the federal agency, the bank, the FRB or the Treasury.
You may argue for the FRB, and I have no problem with that, except for one detail. By focusing on the FRB, one can come up with the false idea that FRB is the money creator, when in fact it is just part of the process.
Personally, I opt for Congress as being the money creator, because Congress initiates and directs the process. But if you differ, no problem.
When you give someone a check, you instruct your bank to debit your checking account and your creditor’s bank to credit his checking account. So who transferred the dollars — you, your bank, your creditor’s bank or your creditor?
Again, you all are part of the process, and you can opt for anyone you choose to be the money transferer.
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Rodger,
I’ll do another point by point answer:
R: In your scenario, the U.S. Treasury is nothing more than a big printing organization.
D: I don’t understand how you get this conclusion form anything I wrote, because I consistently and repeatedly said that the US Treasury issues DEBT and the private banking system issues the money that purchases that debt as interest bearing “assets”. To a bank, our debt is its asset. We owe interest payments and principal repayment to the bank. The bank “originates” the money, creates it out of thin air as balance sheet accounting entries. Treasury is a money “user” and a debt “issuer”, no different at all than any private person or business who borrows from a bank. We sign “promissory notes” which the bank buy from us and fund the purchase with the creation of new bank deposit money. The government signs bonds, bills and notes signed by the Treasury Secretary, which the primary dealer banks buy and fund the purchase with the creation of new bank deposit money. The government issues debt, the banks issue the money to buy that debt. That is the plain simple fact.
R: Money creation and handling is a collaborative effort. For instance, when you buy a bank CD, you are the lender and the bank is the borrower. When you take out a mortgage, you are the borrower and the bank is the lender. In both cases, dollars are created. So who created the dollars, the borrower or the lender? I’ll go along with either answer, because it’s just semantics.
D: When a bank buys my mortgage the bank creates new dollars to pay for it. When I buy a CD from my bank no dollars are created. The bank will not sell me a CD unless I already have money in my bank account to pay for my purchase of the CD. I did not “create” my bank deposit money. I deposited money into my account that I earned when somebody paid me money for something. When anybody other than a bank “buys” something, we have to pay with money that we already have. When a bank buys an asset, the bank “creates” the money to buy our asset, our promissory note, or the government’s bonds, bills, notes. You are assuming that banks lend out money that they already have, which is simply false. You and me and the government can only lend out money we already have, because we are not ‘banks” and we do not enjoy the legal privilege of “creating” money to buy assets. MMT has the government on the money issuing side of the balance sheet and the banks and the rest of us on the money using side. This is wrong and is probably the source of your confusion. The banks are on the money issuing side and we and our governments are on the money using side. You ask, “So who created the dollars?” And I have answered repeatedly, The banks created the dollars, every time they made a loan or purchased a government security. I can only lend out money that I already have because I am not allowed to create money. Banks can only lend out money that they create, because banks are not allowed to lend out their depositors’ bank account balances. So if a bank is the lender, then the lender created the money. But if anyone else is the lender, then no new money is created.
R: Similarly, when the federal government spends, dollars are created. So, when Congress assigns a budget to an agency, and the agency wires dollars to a creditor and the creditor’s bank clears the transaction through the Federal Reserve Bank and the Treasury — who has created the dollars, Congress, the federal agency, the bank, the FRB or the Treasury.
D: Rodger, this is just nonsense. Just like you and me, the government has to get money before it can spend.
R: You may argue for the FRB, and I have no problem with that, except for one detail. By focusing on the FRB, one can come up with the false idea that FRB is the money creator, when in fact it is just part of the process.
D: That conclusion follows from your false premise that the government creates money by spending. The Fed CAN in fact create money, but it cannot create money and lend it to the government. The Fed is a “bank”, and banks create our money. That is the system that Congress authorized in 1913. I don’t think it’s a good system. But until it is changed by Congress, it is the system that we abide by.
R: Personally, I opt for Congress as being the money creator, because Congress initiates and directs the process. But if you differ, no problem.
D: I agree that the government should have some money issuing ability, for reasons I have exhaustively explained elsewhere. The money should be issued as “net financial assets”. That is, the government should create money off the balance sheet, new money that is not simultaneously owed as new debt. The platinum coin would have done that. Auctioning Treasury securities does not create net financial assets, because banks create the money to fund them, and our banking system is a balance sheet accounting system. If you have been in business you may know that in your financial statments your balance sheet must balance to $zero. The money value of all the business’s assets must = the money value of all the business’s liabilities plus its owners’ equity. Banks are businesses, and they issue money on their balance sheets, which is a zero sum accounting system. So our money is zero sum: money = debt. We need a positive sum money system to match our value-adding for profit economic system. Government can make the money system positive sum by creating, rather than taxing and borrowing, some or all of the money that it spends. Under current law the government is allowed to mint coins, and regulate the value thereof. Coins are “money”, and the difference between the cost of producing the coins and the face value of the coins is “seigniorage”. If it costs 14 cents to mint a dollar coin, then the government gets one dollar of spending power for its 14 cent cost for a net seingiorage of 86 cents. So the government could mint platinum coins and stamp a vey high face value on them, $trillions, and almost all of the coins’ “money value” would be seigniorage. Nobody can make change for a trillion dollar coin so the coins could not be directly “spent” like nickels or quarters, so the government would deposit its money with the Fed, who would credit the government’s account with the deposit, and the government could spend all the seigniorage money.
R: When you give someone a check, you instruct your bank to debit your checking account and your creditor’s bank to credit his checking account. So who transferred the dollars — you, your bank, your creditor’s bank or your creditor?
D: Only banks are allowed to directly transfer money between bank accounts. This is one reason the idea that the government reaches into banking system computers and “marks up accounts” is so absurd. We “instruct” our bank to transfer our money to another party, and the banking system does all the accounting. Who “built” your house: you, or the contractor and construction crews? It’s the same question. You “instruct” the builder, and he does the actual building. You “instruct” your bank, and they do the actual banking.
R: Again, you all are part of the process, and you can opt for anyone you choose to be the money transferer.
D: Within the process the various parties have various realms of power. I cannot directly make any changes to my bank accounts and neither can anyone else. The banks maintain a monopoly on their accounting. I have the power to convert my bank account balance to cash at the ATM or teller window, and I can directly transfer cash to somebody who sells me something. But my bank debits my bank account for my cash withdrawal, so when my supply of pocket cash increases by $200, my supply of bank deposit money decreases by the same $200. No “money” is created. I have merely converted my money from one “form” into another form.
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You said, “Just like you and me, the government has to get money before it can spend.”
This is the typical belief of the man in the street. It is wrong, and demonstrates lack of knowledge regarding the difference between Monetary Sovereignty and monetary non-sovereignty.
I won’t argue it with you any further. I suggest you read anything by Warren Mosler, Randy Wray or any of the other UMKC professors, who subscribe to MMT.
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Rodger,
If by “the man in the street” you include Irving Fisher, John Kenneth Galbraith, Benes and Kumhof, Dennis Kucinich and the American Monetary Institute, textbooks in monetary economics (other than Wray’s, which describes a theoretical nation with a monetarily sovereign government, not a real nation with a money issuing banking system), then yes, my statement that banks create our money reflects the knowledge of the man in the street. Our money system is not some mystery of cosmology. It is a simple mechanical system that can be observed. We don’t need to “theorize” about it because human beings operate it and they tell us what they are doing. MMT began by describing what a monetarily sovereign government “could” do with a fiat currency not linked to gold. But somewhere along the line people confused what such an entity “could” do with the way our money system is actually operated. The money system is the banking system. The government “legislated” the banking system but the government does not “oeprate” the system, so the government does not create our money. Banks, not the government, own the money they create. BIG difference. After you read a few books written by monetary economists from other than the MMT school maybe we can have a discussion. But as long as MMT is your Bible and you refuse to read any heretical works that describe banks creating money and lending it to governments, you will never understand the nature of our monetary problems.
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You just made my point. The populace has been brainwashed by authority. Were that not the case, I would have no reason to write this blog.
In science, authority can be wrong, and yes, I include Kucinich and especially the absolutely clueless AMI.
I also include every Congressperson and the President of the United States. As for Galbraith, I’d rather listen to James than John, who did nearly all his writing when the U.S. was monetarily non-sovereign. You should read James’s articles.
Banks create money; you think that’s heretical??? As I said earlier, the debate is semantic. Banks are a part of the process, which also includes the Treasury, Congress, the President. In some cases, you and I are part of the money creation process.
My daughter helped create dollars last year. She took out a mortgage. Her bank and the FRB also contributed to that process, but she was the instigator, so perhaps she deserves the most credit.
But none of this matters. You’re arguing about how many angels can dance on the head of a pin.
The key issue is whether the U.S. can run short of dollars, and the answer is: It cannot. Even were federal taxes to be $0 and T-securities also $0, the government cannot run short of dollars.
That is the fundamental difference between Monetary Sovereignty and monetary non-sovereignty.
Illinois, Chicago and Cook County can run short of dollars. Greece and Italy can run short of euros. The U.S. cannot run short of dollars.
Anyway, why not start your own blog, or subscribe to the Concord Coalition web site. It’s at http://www.concordcoalition.org/, and you will find many like-minded people there.
Also, you’ll enjoy http://www.teaparty.org/. They are equally informed.
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Rodger, I’m with you in the semantic duel, but when you buy a CD you don’t create money the same way the bank does when it makes you a loan. You have to give over currency, or transfer money from another account. The total amount of money doesn’t change. You can’t give the bank a non-interest-bearing IOU (Rodger-owes-you) and have them open a CD for you. That would be creating money.
Creating money and creating dollars are not the same. Banks create money that is denominated in dollars, but the source of all dollars is the US government. Bank-created money is exchangeable at par with dollars created by the government.
It is very confusing to use the same word to denote the unit of account as well as all the various types of money.
Creating net financial assets in the non-government sector is not the same as creating money. Only the US government, not banks, can do that. That’s the important thing in macroeconomics, not this semantic argument about who creates money.
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Roger,
Thanks for the wealth of information on this site. I’ve only been reading about MS for a few days and I have a basic question I hope you would answer or provide a link to:-)
When the US government runs a deficit the fed is required by law to sell an equivalent amount of treasury bonds, right? So if Congress authorizes 3 trillion in spending while collecting 2 trillion in taxes then by law one trillion must be collected by selling treasuries. My question is whether any money has actually been created in this process and if so, how. It seems like 3 trillion has been taken out of the economy -2 from revenue/taxes and -1 from the bond purchases to give a net zero for new money created. Is there something special about the way the treasuries are purchased that allows the deficit spending to be considered to as an addition to the money supply. I am asking because I am trying to understand what effect issuing the money directly as opposed to the status quo would have on the money supply. I know it’s all just numbers on a computer but it seems like right now the government by law must delete the same amount as it enters.
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Hello, Ben,
Welcome to Monetary Sovereignty.
You have put your finger on a point of widespread confusion, i.e. what is the “money supply”? Most arguments in this area devolve to semantics.
As you may know, there are many definitions for “money supply”: M0, MZ, M1, M2, M3, L, Debt Outstanding Domestic Nonfinancial Sectors.(TODNS). Within TODNS there are many sub-sectors: business, farm, non farm, household, etc.
TODNS is the broadest description of the domestic money supply, and it includes T-securities. Even “L” includes T-securities that are less than one year to maturity.
Since T-securities are part of at least two descriptions of “money supply,” the domestic purchase of T-securities does not reduce “the” money supply. In fact, the purchase of T-securities merely is the transfer of exisiting dollars from one bank account (checking) to another bank account (T-security).
The federal government does not actually receive or use the dollars in T-security accounts. They just sit there, earning interest, like a savings account, the primary economic issue being liquidity. Like savings accounts, T-securities are less liquid than are other investments.
Many T-securities are purchased by foreigners, using “repatriated” dollars. So when people fret about China “lending” to us, i.e. buying T-securities, we really should be happy they are using “foreign” dollars.
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Thanks Rodger. Let me continue my questions if you don’t mind. I had to look up those definitions of money supply because they were unfamiliar to me. So let me try to clarify what I am trying to ask. Please correct any errors.
As is known by law, the federal reserve has to maintain collateral equal in value to the federal reserve notes it puts in circulation.
What is the nature of this collateral? I had assumed it was somehow related to the sale of treasury bonds that correspond to the the federal deficits.
I also assumed that the purchase of those bonds reduces reduces the amount of money in circulation, which I understand based on my preliminary research to be m0, the monetary base.
My conclusion was that deficit spending does not actually increase the money in circulation because for every dollar that enters the economy through deficit spending an equivalent amount in value has to be taken out of circulation to be held as collateral at the federal reserve. So, and this is where I am getting confused, it would seem that deficit spending does not increase the money in circulation.
What measure of the money supply does deficit spending increase?
The reason I ask is that according to the federal reserve website there is $1.16 trillion in circulation. I have no way of evaluating
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…whether this figure is accurate but it seems lowered than I thought it would be considering there was over $1 trillion in deficit spending in 2012. So it seems obvious that the deficit spending does not actually increase the money in circulation.
This seems to explain why our deficits have not led to inflation.
Now suppose instead of maintaining their collateral by taking money out of circulation by selling bonds, the federal reserve simply accepted am platinum coin of very large nominal value to hold as collateral for the money in circulation. Or suppose that the laws were changed such that the treasury could directly spend new dollars into existence.
Wouldn’t both of these options increase the money in circulation in a way that the status quo does not?
To me this might still be a good thing, especially because the fed would still have the power to take enough money out of circulation to prevent inflation.
Your thoughts, suggestions, corrections, etc are appreciated in advance.
-Ben
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Ben, your questions are good, but given all the various definitions of money supply and all their effects on inflation, plus the all various causes of inflation, the answers would require a book.
In addition to focusing on money supply, you might also consider what happens when the government spends, i.e. it created demand for goods and services, which leads to the increased production of goods and services, which in turn, requires employment to create those goods and service.
Bottom line, federal spending increases employment (reduces unemployment), which further increases spending on goods and services.
Think, for instance, about why wars seem to be stimulative.
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