ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Politics and Social Issues»
  • Economy & Government

The U.S. "National Debt" explained, MMT-style

Updated on October 16, 2013

The "National Debt" is not a measure of debt, but a measure of saved dollars.


Step One: forget everything you thought you knew about economics.

Most of the conventional wisdom is bunk. Flush your old college Econ 101 course out of your memory and start with a clean slate. If what you think you know doesn't stand up to both logic and hard data, it's probably wrong.

Where dollars come from


The U.S. dollar is a fiat currency. Dollars can only be created by the U.S. government (for simplicity, it helps to think of the Fed, the Treasury, and the government as a single entity, as they work in concert). Dollars are introduced into the economy by deficit spending. (Where else are they going to come from?)

Where dollars go


When large amounts of dollars are amassed, the people, banks, businesses, or countries that hold them often choose to "invest" those dollars in federal government bonds, as they earn a bit of interest, and are basically non-risk places to park money. This is our "National Debt." As you might have already noticed, it's not really debt at all.

Here is the best analogy I have heard to illustrate this... You have $12,000 in a non-interest-bearing checking account at your bank. You only need $2000 available for checking, so you put $10,000 of your money in a Certificate of Deposit account at the same bank. The bank marks down your checking account by $10K, and marks up your CD/savings account by $10K. When it matures, the bank marks your CD account down by $10,000 and marks your checking account up by, say, $10,050. You were always in the same financial position - you had $12,000 (now, a bit more). And the bank was always in the same position as well. Nobody ever says that the bank is "in debt" for $10,000 just because you moved money from your checking account into a savings account. Saying that the U.S. government is "in debt" because people have exchanged dollars for government bonds is just as misleading. Government bonds are basically dollar equivalents - you can easily trade them for dollars, or vice versa. And the government creates them both from thin air.

The "National Debt" is not a measure of debt, but a measure of saved dollars. And since that pile of saved dollars never gets any smaller, you can consider those dollars to be "retired." Government bonds, in a net sense, don't ever get cashed in and spent (although they could). They just sit there, unused, and once in a while a small bit of interest is added to the pile. And that pile has no discernable effect on the economy.

America is the richest country in the world. We are not in debt up to our ears. That should just be common sense.

Then why does everybody call it the National Debt?


Because those people don't know what they are talking about. But realistically, it's an arcane subject, and not many people are interested in learning the details, so it's hard to blame people for simply parroting what they have heard over and over. Politicians have no such excuse - anybody that gets to vote on the federal budget should know how money works.

At best, those people are living in the past. Back in the gold standard days, the creation of dollars was restricted by our gold holdings. When the government wanted to create more dollars than we could back with gold, they actually did borrow in the form of bonds. Happily, those days are over, and we are no longer restricted by some amount of a certain shiny ore randomly chosen to represent value.

The government is still required by law to issue bonds in the same amount as the federal deficit. This law is a holdover from the gold standard days. Now, those bonds are used to control the interbank lending rate. By controlling the sale of these bonds (and buying them at auction when necessary), the government can keep the interest rate where they want it.

What about banks? Don't they create money?


Banks can only create credit. Every dollar loaned out by a bank comes with an attached liability. A bank can lend you $1000, but that does not make you any richer, as you are now in debt for the same amount. And the bank is not any poorer, because (assuming you pay them back) they are owed $1000 (plus interest). No net dollars created there. Also, you may notice that your dollars don't bear the name of Wells Fargo or Chase Bank. ;)

So, with all of these new dollars, how are they holding their value?

The value of dollars is backed up by our economy's productive capacity. As long as we don't create so many dollars that we can't keep up with the demand they create, inflation should not be a problem.

Here's another analogy: A bakery, one of many in the city, sells 100 loaves of bread in a typical day. With the bakers and the equipment they have, they are able to crank out 150 loaves/day if the demand is there, but normally they don't run at full capacity. There is no shortage of flour, eggs, milk, energy, etc. - i.e., if they need more flour, they can get it.

If the government decides to distribute some new dollars to the poor (how or why isn't important), more people now have the means to buy bread, and demand goes up to 120 loaves/day. The bakery easily adjusts to the increased demand, buying more supplies and working a bit faster. Since there is no shortage of any ingredients needed to produce bread, the per-loaf price remains the same. (Remember that there are many bakeries in town - if they raised their price for a loaf, plenty of other bakeries would take their customers by keeping their prices low.) This is an example of an economy's productive capacity being able to absorb new dollars without inflationary pressure.

On the other hand, if the government decided to distribute so many new dollars to the poor that the demand for bread rose to 200 loaves/day, the bakery would either have to invest money in their labor and/or equipment to satisfy demand, which takes time, or they would simply raise their prices (as would the other bakeries, assuming they are in similar circumstances). Or, the increased demand for ingredients might lead to a shortage of flour or eggs, which would drive up the per-loaf cost of bread. Now, you have inflation (demand-pull inflation, to be exact). This is an example of an economy's productive capacity being outstripped by demand (too many new dollars created).

America clearly has plenty of dormant productive capacity. Detroit could certainly produce more cars if there was sufficient demand. We don't suffer from many shortages of anything. So new dollars are welcomed by businesses, and prices remain low. Most, if not all, of our inflation can be blamed on the price of oil, which we have no control over. (That's cost-push inflation.)

Some links on Modern Monetary Theory

When I was introduced to MMT a couple of years ago, it was a revelation. I haven't looked at politics the same way since that time. I encourage you to read up on the subject, and here are a few links to get you started:

http://en.wikipedia.org/wiki/Chartalism

http://mmtwiki.org/wiki/Main_Page

http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html

http://pragcap.com/understanding-modern-monetary-system


Comments

    0 of 8192 characters used
    Post Comment

    • profile image

      pjmeli 2 years ago

      "How do you feel about the assertion that most of the national debt securities are not sold to acquire funds for government operations, i.e. deficit spending"

      That's a no-brainer. Congress passed the law requiring bond issuance dollar-for-dollar against deficits on itself…a voluntary constraint that in practice is not a real constraint. Issuing securities against deficit spending was ostensibly because it was believed to be less inflationary than direct printing, empirical evidence has proven that idea to be nonsense.

      There is no functional reason to issue bonds…it's a choice. The reasons behind that choice are largely based on self-interest, not arithmetic.

      "What about lending money to an external accomplice who then lends the money back to the bank"

      The net of each transaction is zero, as is the net of the circular transaction…both sides of a transaction must always be in balance i.e.…no gain. So where would any profit come from?

      In general within any closed system there can't be a gain (or a loss), it's not possible. Apparently this idea is so simple it repels the mind judging by the fact that it is violated routinely by innumerable (innumerate?) commentators.

      By its nature, every accounting system is closed, meaning it cannot expand itself (grow or contract) without interaction with another (external) system. For a money system, the external system is numbers (from thin air). That's it.

      Your own checking account is an example…it doesn't make itself bigger or smaller. That only happens in the event of deposits or withdrawals, both of which originate from an external account.

      You should be looking at set theory and the laws of thermodynamics, not differential equations.

    • stanfrommarietta profile image

      stanfrommarietta 2 years ago

      Welcome back, Pjmeli. Yes, there are structural constraints imposed externally on banks that constrains their lending only to those with good likelihood of paying back the loan. Borrows also put constraints on the loan in judging what they would be able to pay back.

      I just asked that question rhetorically to see if we could agree on how there are still constraints that limit bank lending.

      What about lending money to an external accomplice who then lends the money back to the bank. Can the bank use that for its own profits? And suppose the accomplice defaults? (He gets paid off later). Can the bank keep its money from the accomplice. A lot of this can be executed by subterfuge and disguise. Meanwhile the accomplice enters bankruptcy.

      Just wondering....

      Nevertheless banks now do not have to first see if they have enough deposits to satisfy fractional reserve requirements before making a loan. That is a new position that is emerging among economists. I think we are beginning to see the effects of taking dollars off the gold standard. It means that the bank does not have to draw on its depositors' dollars (backed by gold) to lend something backed by gold. It just needs to make the loan, and the dollars are created automatically in a deposit from which the dollars will be transferred to a checking account or loan account of the borrower.

      I believe that the Treasury has unlimited power to issue securities. It does not have unlimited power to spend money acquired in that manner. It can only spend what Congress authorizes.

      How do you feel about the assertion that most of the national debt securities are not sold to acquire funds for government operations, i.e. deficit spending. (Treasury does not need to worry about having part of the funds it needs in taxes. It just needs to get funds to cover the deficit.). But most of the securities it sells are like bank CD's. The Fed as Treasury's banker will get the money from the sale of the security and put it in a time-deposit account at the Fed. Because the security is bought at discount, the principal stored in the time deposit account is less than the face value of the security. It is important to realize that the government has not lost record (even if for practical storage purposes it might destroy physical dollars from the investor)

      of the time deposit. Then when the security matures, the investor can demand repayment of the principal plus interest equal to the difference between the principal and the face value. The Fed can easily create that out of thin air. Or if the investor goes to the Treasury and demands the cash back, the Treasury I'm certain has access to the time-deposit account and can return the principal from that and add interest that the Treasury had created by issuing securities and selling them

      to acquire money for a slush fund used to pay interest. The Treasury will then simply roll-over those securities forever by swapping new securities for the old. The Fed has unlimited power to create and issue securities.

      And while the Treasury never says so, the reason the Treasury issues the securities for investors is to drain their money out of circulation into the time-deposit accounts, so that the government has more flexibility to concentrate on projects

      requiring deficit spending, that otherwise would be inflationary if the investors dollars were circulating in our economy buying goods, real estate, and services along with the deficit spending dollars.

      Please be my guest at my own hubpage on the hydrology of money flows or MMT and how do we fill the pool without overflowing. I even discuss a differential equation, which I

      don't need to solve (fortunately because I know very little about differential equations; if you do, I would welcome a solution). I think everyone who has ever swum in a pool, taken a bath in a tub, or shaved over a basin, has the experience needed to see how to use that equation.

    • profile image

      pjmeli 2 years ago

      "But it is dawning on me that banks logically have unlimited power to create loans."

      Banks have a fiduciary responsibility to make loans only to those that can and will repay them.

      Ability to repay is a function of income, and bank loans (spending) are but a fraction of the total spending that generates income.

      Ability to service debt is a functional limit on lending. If banks lower their lending standards to the point that delinquencies rise above some acceptable level (above 5% delinquency) , they are breaking their contract with the government.

      Which they have done, without consequence, so we can only expect another financial crisis.

      Buying anything on credit is effectively a reverse discount…so we have morons shopping at Walmart using credit. Boggles the mind.

      "The Treasury can get any amount of money it needs from US banks by issuing securities and selling them to banks"

      …and then the Fed (can) exchange reserves for the securities, thus completing the circle, i.e. direct printing of dollars without issuing bonds (to the public). Government holding its own debt is a phantom accounting entry.

      The operation of direct monetization was legal until the mid-1980's, when Congress made it illegal, ostensibly because it was never necessary…there has always been more demand for bonds than supply and always will be. The choice comes down to holding dollars, or holding dollars that pay interest. It's a no-brainer.

      Even so, under current arrangements there is no functional constraint on government spending other than it isn't possible to buy more than is for sale.

    • stanfrommarietta profile image

      stanfrommarietta 2 years ago

      Very good, John. We are on the same page. I had the thought today that if the dollars come in as physical money to pay off a loan, the bank could include this along with other physical cash bought from the Fed with the loan deposit money and paid out to the borrower as cash. It's just madeup money.

      But it is dawning on me that banks logically have unlimited power to create loans. But what constrains them from making unlimited size loans?

      Do the fractional reserve requirements still constrain loans even if the bank fulfills the requirement after the fact of making the loan by borrowing from other bank reserves or the Fed (as a last resort)?

      Do you now see that the Treasury is as powerful as the Fed in creating new money, but does it using the banks' buying its securities and then doing an endless roll-over of the principal while making up the interest in the roll-overs out of thin air by issuing other securities for the interest, etc..

      And contrary to Pjmelli's idea that no new money is created, just a shift from banks to Treasury, new money is created--by the banks.

      This seems to be the only logical way to run a fiat money system like ours, don't you think. But we don't get clear descriptions of the process. The Treasury can get any amount of money it needs from US banks by issuing securities and selling them to banks. And it doesn't matter what the money is for as long as it is authorized by Congress.

    • JohnfrmCleveland profile image
      Author

      John 2 years ago from Cleveland, OH

      First of all, I'm glad to see you finally put all of this into an article. Good job there.

      Second, since I wrote this hub, I have been learning more about horizontal money (which I suppose is the natural progression). Yes, banks do create money, by expanding their balance sheets (no deposits or reserves are operationally necessary for this). The bank-created dollars are indistinguishable from government-created dollars.

      The loan can be paid back with electronic dollars, in which case there is no "residue," or it can be paid back with banknotes. If it is paid back with electronic dollars (from a different bank), reserves will follow the transfer, as they do when any check moves from one bank to another. If the loan is paid back with banknotes, the bank adds those banknotes to its vault cash (which counts as reserves), and the transfer of reserves happens that way. In the end, the net results are exactly the same. Bank-created dollars are extinguished as the loan is paid off. The banknotes continue to exist, of course - banknotes are bought and sold from the Fed (with electronic reserves) as demand for cash dictates. They are not directly tied to any specific dollars, be they bank-created or government-created; most dollars exist as bank deposits, and you only convert them to banknotes when you want to walk around with cash in your pocket. In doing so, reserves become, in a way, portable. When you take cash out of an ATM, your account is marked down, and bank reserves decrease by the same amount. When that cash gets re-deposited in a bank, they become reserves again.

      So to sum up, the only difference between bank-created dollars and government-created dollars is that people and businesses hold liabilities equal to the amount of bank-created dollars in existence, while the government continues to hold the liability on all the dollars it has created (which isn't a big problem, as they don't have to pay themselves back). But the dollars (assets) themselves are fungible - they buy stuff, they can be converted into banknotes, they can pay your tax bill, etc.

    • stanfrommarietta profile image

      stanfrommarietta 2 years ago

      John, Pjmelli, and Ken, I hope you are around. I want to pick up on a few threads here. In the interim, I have modified some of my views on how Treasury handles the debt, based on two books by Frank N. Newman, who was a deputy secretary of the Treasury in the Clinton administration, and also a head of a bank in China that he and several other American investors bought when it went bankrupt--I suppose so they could learn how the Chinese banking system works. He says that the way the Treasury deals with securities sold to banks for money to cover deficit spending, is that they roll-over the securities by simply swapping new securities created by the Treasury for the mature securities and add in interest. And they do this over and over each time the securities mature. The banks go along with it because the interest is free interest.

      Also, several authors I have read lately say that private banks do create new dollars when they lend. You have to accept this because when a borrower draws out his dollars from his checking account after it was increased by depositing the loan in it, the borrower can buy something with the dollars. So, dollars from the loan are now circulating in the private sector, and may even be used to pay taxes to the government. When the loan is repaid, that money is (should be) extinguished. (I have some uncertainties here about this and would like clarification fromsomeone who actually works in banks who would know. What happens to the physical cash used to pay back the loan? Surely the loan on the bank's books is extinguished. BTW see my new hubpage on The Hydrology of money flows or MMT and how do we fill the pool without overflowing?

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      John, I want to say that I enjoy your essays and responses to comments. You are a good MMT person, and your views on the Surplus and debt are essentially mine.

      BTW, I read one of the Australian MMT economists this point about the why the surpluses didn't cause deflation in Australia. The economist who criticized MMT by arguing that surpluses didn't cause deflation in Australia's case, didn't think beyond fiscal (taxes versus spending) issues and consider the inflow and outflow of exports and imports or the other sources of inflow to counter the outflow to government coffers of taxes. Taxes drain dollars from the economy. That is different from spending equivalent amounts back into the economy. So what drains and what fills circulation are distinct. The government could simply shred the money that came in in the form of taxes, but if it had a record of that,

      it could spend the same amount back. All that is is redistribution. But not creating new money to replace the amount shredded and spending that creates a surplus.

      Folks, money is only quantitative representations in units of account of exchange obligations for goods and services between parties in the economy. Note that the money taken in as taxes can come into the government as discrete payments. The government can record the amounts and total them and do all kinds of numerical operations on that money. But in the meantime they can shred the money and send it to a landfill, because storage creates huge costs. They could burn it and heat Washington offices in winter. But there will be a record of the money received and that record will allow the government to recreate new money and spend it. The Treasury has the responsibility to carry out the spending for the government. Congress initiates money creation, Treasury acts on the authorization to create money taken in by taxes and to borrow from banks money to cover any deficit . The Treasury will roll over the debt indefinitely. But the Fed ultimately has the power to create actual real new money and buy the securities used by Treasury to borrow money from the banks. The Fed creates money out of thin air. That means nothing backs the money but the full faith and credit of the United States.

      And this may seem so new and confusing because nobody has taught you all this in school. And the banks haven't wanted you to understand it clearly either. Requiring the Treasury to borrow money from banks put the banks in the position to earn collectively trillions in dollars in interest as these loans were rolled over by the Treasury. But the actual debt can be redeemed by only the Fed using powers delegated to it by Congress of the government's power to create (coin) money to buy the securities used in the borrowing.

      And to the folks at the Fed, I am not saying that that extinguishes the debt obligation in the securities themselves to pay the holder of the mature security on demand the face value of the security. I think, and I wish someone who knows would say, that when the Fed swaps the mature securities for new ones with the Fed, that the Treasury can take the returned securities and extinguish them, because their redemption dates are long past, and they can't be sold at discount anymore. That would cancel the final debt obligations on those securities.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      John said 3 months ago: "Why wouldn't the banks simply trade in their mature securities for dollars? Why would you think they would auction them off? And what price would you expect them to auction off for, if not their face value at maturity?"

      Well, the interest can only be added by the government. The Fed is an "independent agency within the government" and it can buy the securities at full value without taking a loss since it is paying with government money created out of thin air.

      So the Fed redeems the gov't's debt to the banks and at the same time pays the interest when it pays face value for them.

      Why would any other bank wish to simply exchange dollars for the securities at face value? If it wanted interest, which only the government guarantees on these securities, there wouldn't be any, since the government would only give it face value for them. The interest already has been absorbed into the face value that the first bank would have gotten. Remember the first bank bought the securities at discount for less than their face value. So it would want face value back to earn the interest. There is no such profit for a second bank buying them at face value. The first bank would have to take a loss to sell them at discount to another bank. So, only the Fed or the Treasury could pay face value. But the Treasury we must assume may not have the money to pay face value. So, that leaves the Fed as the likely buyer. And the Fed only can buy these securities at public auction, by law.

      Furthermore, the Treasury might not have the money to buy back some of these large valued securities. (It didn't have the money initially to cover the deficit, remember?)

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      Welcome back, John. I've been musing a bit over my differences with pjmelli. I think his orientation as an engineer differs from mine as a scientist. (I taught quantitative psychology, structural equation modeling, at Georgia Tech before finally retiring in 2005.) A scientist deals with abstract concepts and tries to see how they match up with the world. An engineer has abstract concepts that scientists have already determined represent some aspect of reality. He does not see the problem that you have to show that your abstract concepts represent something in reality, but assumes that they do already. I'm sorry we have these differences because it creates a false impression that MMT itself is not a coherent body of thought. Ultimately I think we can work out these differences.

      BTW, do you follow some of the papers and videos of Stephanie Kelton? She is the chair of the economics department at University of Missouri at Kansas City, where Wray, Marshall and others are. She gives popular talks on MMT. My point in bringing this up is that she very clearly says that MMT is not just theory but a "description" of what actually is happening in our government's finances.

      "I think that others who began to follow our work branded us with this title and started referring to us as the Modern Money School and to our ideas as Modern Money Theory and in many ways I think it’s kind of unfortunate, but this is the brand that we now, or the cross that we now bear, because it is something of a misnomer. What we’re doing is actually not modern at all. The ideas are not theoretical, and they aren’t particularly modern. What we’re doing is simply describing, operationally, the way government finance works. It’s not a theory; we do not make assumptions, although we are economists. What we’ve been describing to you today is not dependent upon any ceteris parabis condition or any set of assumptions about perfect competition or rational agents or anything else that you get exposed to when you study economics, but rather an attempt to simply describe the way in which the institutional arrangements are set up, and the accounting identities and what happens in a balance sheet framework; when one side of the equation moves, what happens on the other side of the equation? That’s really all we’re up to, so don’t be afraid."

      That's at: http://www.netrootsmass.net/fiscal-sustainability-...

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      Sorry for the delay, Stan. Christmas vacation with the kids.

      Yeah, that credit thing was a flub on my part. I was caught up in the "credits = liabilities" thing, I think, and the $100 liability would prevent one from spending money down the road. Anyway, the sheer volume (and speed) of the comments in this thread was a lot to keep up with, and it got sloppy at times. :) Plus, KenDonHank was obviously not just one guy cranking out comments. That debate was a full-time job.

      I had some things a bit wrong back then (I'm sure I still do today). But I still think that the key is HPM, not bank credit.

      FYI, another MMTer has joined HubPages, and he already cranked out a few articles. Things are looking up.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      John, I noted above quite some time ago you said:

      "Also - if you count credit as money, where did that money come from? If a bank loans you $100, doesn't somebody else have $100 less to potentially spend?"

      You seem to have the notion that when private banks create loans they are taking some of their depositor's money and giving it to the person lent to. At least that is how I interpret your saying "...doesn't somebody else have $100 less to potentially spend?"

      That's not how banks loan these days. They create new money when they lend. But it is only a loan and the bank must be repaid plus interest. The interest is what the bank is after. So private banks creating money can be inflationary if too much new money is being created before being cancelled out again on repayment. That's how the housing bubble grew. It was private banks making easy loans. People were seeing prices of houses rise because of all the easy money going into house construction was inflationary. So, people would buy a house at a low price and hold the house for a short while, then sell it again at a higher price, expecting prices to rise even further. The loans for buying the houses were easy to come by. This is private banking doing this.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      The concern that rolling over does not add new money into the economy is well-taken. The method I described where the Fed buys the securities for deficit spending does indeed do that. I think much of what Newman describes are those securities bought by banks with excess reserves looking for a safer investment. These securities are like CD's. The Chinese and Japanese buy them all the time with surplus dollars from exports to us (imports to us). They stay within the private banking system and do not add to the money in the system.

      It is interesting that no one wants to say that the Fed redeems the debt when it buys

      back the securities for banks holding them with money created out of thin air. I detect a fear that if this becomes well known, the power to do this may be taken from them by Congress (an absolutely stupid thing to do, but what do we now have in Congress? I fear that by keeping this under wraps will only make the possibility of that happening worse.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      I know, that is a common assumption, i.e. Treasury must find money to buy back the mature securities from the Fed. But my essential point has been that there is no need for the Treasury to find money to buy back the securities. The securities have been bought for the government by the Fed. There is no longer a debt to a given bank. To have Treasury turn around and buy them would have the government buying them from itself, and furthermore a second time, which would be unauthorized by Congress.

      Your issue with me is rhetoric. What is the best way to present the argument? You want to present the argument to the average schmo in a simple manner. I have no argument with that as long as you are accurate and not misleading. But I want to show that while it appears there is a debt when Treasury sells securities to banks (etc.) to fund deficit spending, which the average politician and citizen calls "borrowing", the debt has been redeemed to a given bank when the Fed buys the security with money created out of thin air. (This does not extinguish the security; it just eliminates the debt to the bank that held the security and puts the security back in the coffers of the government.)

      I am reading another book by Frank N. Newman, "Freedom from National Debt". He essentially has an MMT view, but sees the issues of debt from the perspective of a former Undersecretary of the Treasury and Chairman and CEO of several banks, including a bank in China that some private investors bought. So, he has seen another government with a fiat money system (China's) and how it relates to banks.

      I don't see how rolling over would ultimately exhaust the money supply. If bank A bought securities S1 from Treasury, and Treasury wanted to roll-over the debt to bank A, it would borrow the required amount from other banks B using a new set of securities S2. Treasury would give bank A the money from banks B and that would redeem the debt of govt. to bank A. Treasury would take back securities S1. But now it has a new debt equal to the old to banks B. In the meantime bank A has its reserves restored and its money back including interest. But Bank A may use its restored reserves to lend more money into the economy. So, the money in circulation is the same but in different hands. The same bank reserve money is cycling around in circulation at different banks, but as long as the banks have enough to cover the security, the Treasury can borrow from them. The banks B now have new securities S2. Treasury may at a future round, issue new securities Sn to banks H to pay off a previous set of securities at some other banks. Bank A may be bank H using money it got from Treasury that it got from banks B, etc.. As long as at any given point in time only a smaller subset of securities are mature and need to be rolled over at the banks, there should be enough money in the banks to to make these "loans" to the Treasury. So, this can go on forever without ending. It doesn't cancel national debt, but puts its payoff to forever. That was the idea I had in my earlier message.

      Newman says that a slightly different system is used between Treasury and banks to put off paying off the debt. He says: "Sometimes people think of Treasuries as a form of 'debt' because each bond can be converted to bank dollars at its maturity. But the issuance cycle is really an operational matter. **New Treasuries take the place of previous ones, with the same backing of the U.S. Government. ** Only the interest rate changes, and investors continue to hold them as the most reliable USD financial assets. It's very like issuing Treasuries without expiration dates, which simply adjust interest rates to the current market at predetermined periods: some have their interest rates based on prevailing rates for three months, and the rates reset every three months, by an auction process; others have interest based on market rates for one yer of five years, then reset to the then applicable rates every one year or five years. The concept is essentially that used for long term (or undated) floating-rate bonds. All these Treasury securities are fully tradable, and the government, which can always create more bank money, can retire any security and change the timing mix of interest-rate resets, through open market operations. {This sounds like what the Fed does}. The securities could be structured in such a form, but instead the Treasury uses a system of series of new issues, which does not change the underlying essence. This program has functioned very effectively for hundreds of years, with never any need to 'pay off' the aggregate" (pp. 30-31).

      So he is seeing how Treasury and banks can deal with the 'debt'. He does not see how the Fed totally pays off the debt when it buys a security, but still has active, live securities to sell. He does not note the way Fed swaps mature securities for new securities with the Treasury. But that may be a matter of what he has experienced as an Undersecretary of the Treasury and a CEO of several banks.

      But the point that Newman makes is that taxpayers never have to pay for the debt, contrary to what everyone believes. Either the way of the Fed or the Treasury does not require taxpayer involvement. There is no real debt problem.

      My use of credit versus debit comes from reading Ellen Brown's "The Web of Debt". She viewed the banks' lending at interest as creating debt-based money by loans which had to be paid back from money in existence. There would never be enough money in existence to pay off the actual debt plus the interest. She argued that the greenbacks method issues credit and not debt. If someone credits you, you don't have to pay them back. Hence if Congress deficit spends with credit money, it does not have a debt problem. If, on the other hand, Congress deficit spends and has to borrow money to cover the deficit, it has debt-based money. So, if we can show that the Fed's ability to create new credit money out of thin air when it buys back the securities for the government, that redeems the debt to the banks, makes the deficit spending money debt-free and fungibly equivalent to the new money deposited in the banks' reserves.

      There are a lot of people with misconceptions about our federal government's finances. They are not all dumb, uneducated shmos. Many of them are even Ph.D.; economists in the neo-classical school (the predominant one). So, they want to see how the details work out with there not being a debt problem in our actual system.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "...That is the "roll-over" of the securities. This process, it is said, can occur ad infinitum, without end, so there is never any time that the debt will ever be finally repaid. Old debt is replaced with new debt, on and on, ad infinitum.

      The assumption is that the Treasury must find the money to to buy back the mature securities from the Fed. And it does that by issuing new securities to cover the cost of the mature securities. This is a way anyone with debt can postpone ever paying it back, as long as the debtor can borrow more money in existence to cover and repay the old debt."

      You cannot "find" enough dollars already in existence to keep on rolling over the debt. At some point, new dollars must be created to account for growth. There are over $1 trillion dollars in circulation today - it wasn't all that long ago that there wasn't even $1 trillion in (currency + bonds). Borrowing more money "in existence" would have to entail bank credit, with the non-governmental sector holding an ever-increasing pile of liabilities.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      Sorry for the delay in replying. It's a busy time of year for me.

      "John, Pjmeli does not want to discuss further with me. But what do you think? I am trying to show how our system which separates the authorization of money by Congress from borrowing using securities by the Treasury, by the Fed buying securities with newly created money made on the spot from the banks, achieves the same thing as a greenback system."

      That's what we're all trying to explain, Stan. Problem is, nobody wants to get that deep into the details, including me. I think they are a distraction - and I like reading about this subject. Now imagine the average schmo trying to absorb all of that. The average schmo understands his or her checkbook, and that's about it, so we really have to keep it simple.

      With that in mind, I prefer not to think of dollars in terms of debt, because the whole point of this is that fiat dollars are effectively debt-free. Even introducing the "D-word" into the conversation changes the tone, and not in our favor. I think it's a big mistake in our efforts to educate people. Average Schmo understands debt in one way only - the kind of debt that they experience costs them real resources (their labor/money). Most don't understand double entry accounting, or that the word "liability" is not always a negative thing.

      " In the greenback system, when there is a deficit, the Treasury issues and spends credit money..."

      Aaaarrghhh! Why do you call the simple distribution of money "credit money"? That's confusing as hell. You go on to call the government exchanging one dollar for another (presumably a nice, crisp bill for a torn one?) a debt situation. Confusing! And as far as treasuries are concerned, I much prefer to use the checking account/savings account analogy.

      "You seem to have read Frank N. Newman's book."

      Nope. I don't do that kind of study on MMT. Honestly, I don't feel that it's necessary to get that deep into the details. I am very happy with my present, big-picture understanding of things.

      Stan - you have already stated that you think it is important to illustrate that our government effectively issues debt-free dollars, which I totally agree with. But why do you think the details are so important? I mean, who is your audience? And what is the main point of your last couple of paragraphs? I think I asked you earlier - what is to be gained by re-complicating our simplifications?

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      John, Pjmeli does not want to discuss further with me. But what do you think? I am trying to show how our system which separates the authorization of money by Congress from borrowing using securities by the Treasury, by the Fed buying securities with newly created money made on the spot from the banks, achieves the same thing as a greenback system. In the greenback system, when there is a deficit, the Treasury issues and spends credit money directly into the economy (when authorized by Congress). This money is debt free (except for the debt obligation that if a citizen presents a dollar bill to the government (Treasury), the Treasury is obliged to exchange another dollar for it. Or if a citizen pays taxes in dollars, the government must honor the payment. There is no debt to anyone from whom money has been borrowed attached to any security bought from a bank or swapped for an immature security in the pile of securities at the Fed. All debts to borrowers have been redeemed. The securities at the Fed are still "live" in the sense that if sold to someone, the government then owes the holder of the security for the face value of the security at any time beyond the redemption date. So redeeming debt to a specific bank that held the security is distinct from the debt obligation to exchange another dollar for one presented to the government, or to honor taxes paid, or to provide services or property to buyers with dollars.

      You seem to have read Frank N. Newman's book. I just became aware of it by a pop up of a notice for the book at Amazon.com. He is pure MMT, except that he seems to think that rolling over the securities at the Fed resolves the debt problem instead of recognizing that the debt to the bank has been paid (redeemed) by the Fed buying the securities with new money. That would make it illegal for Treasury to buy the older mature securities from the Fed with money borrowed from the banks. The Fed of course would end up buying the new securities used by Treasury to borrow the roll-over money when they matured, ad infinitum. That would effectively replace the old securities with new ones in the roll over. But that is buying something twice. (First buying: Fed buys securities from banks. Second buying: the Treasury buys the same securities, now at the Fed, with borrowed money, or a platinum coin.) And Congress only authorizes redeeming the first borrowing.

      If the Fed simply swaps mature securities for new (immature) securities with the Treasury (as it does now) that is not a roll over by borrowing. But it accomplishes nearly the same thing. The Fed does not normally buy immature securities. So, it would not ordinarily have immature securities that it bought. But the Fed wants immature securities to sell to banks to drain their reserves of excess reserves during inflations. Banks do not want to buy mature securities (since T securities are sold at discount and the difference between selling price and face-value is the interest earned). Mature securities, if sold, would not earn interest, so there is no advantage to a bank buying them. So swapping mature for immature securities is the way the Fed would prefer to acquire immature securities.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      There are those, among them even MMT followers, who believe that the solution to the national debt problem is to roll-over mature securities to new, immature securities. The Treasury is expected to find dollars to pay off the debt of the securities held by the Fed. One thing it can do is borrow some more money equal to the face value of securities it wants to roll-over.

      To do this it issues new securities, which banks buy at auction. Treasury then buys back the old, mature securities at the Fed with the money now obtained from the banks. That retires the mature securities, but the Fed then buys the new securities from the banks at auction. This replaces the old securities with the new ones. That is the "roll-over" of the securities. This process, it is said, can occur ad infinitum, without end, so there is never any time that the debt will ever be finally repaid. Old debt is replaced with new debt, on and on, ad infinitum.

      The assumption is that the Treasury must find the money to to buy back the mature securities from the Fed. And it does that by issuing new securities to cover the cost of the mature securities. This is a way anyone with debt can postpone ever paying it back, as long as the debtor can borrow more money in existence to cover and repay the old debt.

      This makes sense only in the context of finding money already in existence to borrow. It is what you would expect of any household's credit card, business issuing bonds to grow, state or local government. But is it necessary for the Federal government to do this?

      Right now that is the way the Fed and the Treasury act. The Fed has all these securities it has bought. Somehow it is thought the Treasury owes the Fed the money it has spent in buying the securities. Either the Treasury will get the money from taxes or from banks which already have money to lend. So, the Treasury issues new securities, banks buy them and then the Fed buys the securities with money it creates out of thin air. (The implications of that are ignored). The Fed now holds the securities. Treasury buys back the old mature securities with money obtained from issuing new securities. Fed then buys these new securities from the banks. Each purchase by the Fed means the Fed will get 6% of the interest on the securities it buys as a transaction fee. So this becomes a steady income stream for the Fed.

      But is this method legal? What is being overlooked here is that the Fed is a government agency, perhaps independent within the government, but a government agency nevertheless. And its buying of the securities is not with old money already in existence drawn from the reserves of the member banks of the Federal Reserve, but newly created money--government money--created by powers delegated to the Fed by Congress based on Article I sec 8 of the Constitution, the power to "coin" Money and regulate the value thereof. (Coining has already been established to mean "create money generally" by the Supreme Court in some late 19th Century decisions). So, the Fed in effect has already redeemed the debt to the banks in the securities they held when it bought the securities from the banks. The banks no longer have the securities. They have their money back in return for them. They have sold them to a government agency for government money. That means the debt has already been paid by the Fed for the government.

      So, this creates a problem for roll-overs and $1 Trillion coins as solutions to the national debt. The very fact that the securities already exist at the Fed because the Fed bought them, means the debt to someone who lent Treasury money for those securities has been repaid by the government.

      So, what authorizes buying them a second time under the guise of the Treasury repaying a debt? There is none. Congress only authorized the initial debt in giving Treasury its spending order, and the Treasury having to find money to cover the deficit in that order (and the 1917 law requiring the Treasury to borrow money to cover deficits). I know of no organization that would authorize paying off its debts twice. And Treasury's buying securities held at the Fed is a second purchase of the same securities by a government agency. Government does not owe itself here.

      The Fed is the money creator and spender that redeems debts by buying their IOU's from their holders with newly created money. So, there is no debt left to any non-government entity in those securities at the Fed.

      The purchase of the securities from the banks does not extinguish the securities property of promising to pay the bearer their face value after maturing. Once mature, they are just like dollar bills. But the Fed cannot claim to be eligible for those payments because it only applies to an entity beyond the Treasury and the Fed. (The Treasury does not owe itself the value of the securities it holds before it sells them. The Fed is not owed by Treasury for the government securities the Fed buys and holds with government money).

      The Fed swaps mature securities for new, immature ones from the Treasury. This is legal, since no ordinary money changes hands. There is just an exchange of securities. But this should be seen as just the Fed desiring to obtain new, immature securities with new future redemption dates, because it wants to sell them to banks later if and when serious inflation arises, in order to drain the banks' reserves and constrain lending. The swap involves exchange of instruments with equal value. The Fed's mature securities "pay for" the new securities. Their face value will not be the value for which they will be sold at public auction to the banks. But their face value will be the value they have at maturity. The Fed will easily redeem these securities by buying them with money it creates out of thin air.

      I have often wondered why the Fed acts in such a way as to disguise its purchase of securities with money it creates out of thin air. The Fed finds many ways to say this without clearly stating the money is created. The "Fed draws on itself and increases the reserves of the bank". What makes them want to obscure this? Although they are making money in transaction fees on these transactions, it could be they fear another law like the 1917 law that prevented Treasury from creating and spending its own money, the "greenbacks" solution. Once austerians in Congress see that Fed's buying with money created out of nothing eliminates the national debt problem they may pass laws that prevent the Fed from doing this. It would cripple our economy, make us like Europe and the Euro. And lead us into an unending downward spiral in our economy. And China, which has an unfettered fiat money system which has allowed it to grow its economy into a world powerhouse in just 20 years, with new infrastructure (roads, bridges, buildings, military), would be in a position to displace the United States as the leading economic power of the world.

    • profile image

      stanfrmmarietta 3 years ago

      Pjmeli: "The money supply increased when Congress appropriated funds for spending, and the President signed the bill, not when Fed increased reserves, but we've been over that umpteen times.

      We may be talking about the same thing. I had hoped you would have had the flexibility of mind to see that. You are talking about Congress creating money when it authorized its spending. But unless the Treasury, the banks, and the Fed get into the act, that act of authorization is just Congress sitting around twiddling its thumbs. No new money is to be seen in the economy. Remember our Congress is separated from the Treasury by the separation of powers in the Constitution. Treasury is in the Executive branch. Congress does not execute its laws. You are talking about the result in a general, plain vanilla fiat money system, with a monolithic central, sovereign government, that I am trying to show also produces the same results in our system. But the actual system we have separates the law passing function from the execution of the laws. And further, Congress in the Federal Reserve Act of 1913 created a further "independent entity in the government," the Fed. So, if we are to claim we have a fiat money system, we have to show how all the functions that a general, prototype-case fiat money government performs are effected and coordinated in our system with separated entities of government: the result is the government crediting the economy with money it creates out of nothing. The government does not expect that money to be paid back. The only debt obligation attached to the government's money on the part of the government is that the government must honor the payment of taxes and fines and provide services and goods it owns to citizens that buy them from the government using the government's money.

      (Maybe you could explain what you think the nature of public debt is.)

      This differs from an account in which citizens must borrow money from banks and pay back the bank for the loan at a future date. They have to pay back not just the value of the original loan, but the additional interest. And there is not enough money introduced into the economy to pay the interest. We had that kind of system when we were on gold. Under a fiat money system, government issues new money as credit not debt. Note that when in our current fiat money system the Fed buys the securities from the banks, it credits their reserve accounts, not debits them.

      Pjmeli: "Cause…effect. Congress appropriates…Treasury marks up bank accounts."

      Treasury cannot mark up bank accounts unless it has an account with funds to draw from. It gets those funds from taxes or from the banks, which reduce their reserves when they lend to the Treasury. By buying up the government's debt to the banks in buying back the securities from the banks, the Fed introduces new money into the economy. And the deficit spending money is then debt-free and equivalent to the new money created by the Fed and restored to the banks.

      ====

      Does a hybrid automobile have the same system as a Model T or my Subaru Outback? Suppose we are considering an "automobile" which runs exclusively on battery power with power directed to electric motors in the wheels. Do we have to consider the power plant at the dam generating the electricity as the first cause? Or the sun and the water cycle? Or are they different systems because one runs ultimately on oil and the other on coal, natural gas, water or wind energy? It seems to me that we would have to see how different systems perform the same function in ultimately the same way by showing corresponding subsystems and their analogous connections. And different systems may be more vulnerable to certain situations and conditions.

      ======

      The European Union does not have a sovereign central government controlling the money supply. I'm not expert in how their banking system works. But I know that the European Central Bank only has the mandate that it must maintain the stability of prices. Our Fed must maintain stability of prices and work toward full employment. Somehow the central government is too weak to deal with deflation by ordering new money be created and distributed to the states in the Union. And the states gave up their sovereignty over their money when they went on the Euro. So the states cannot create their own money and get out of depression. And if Germany refuses to help Greece get the additional money it needs, Greece suffers. But it shouldn't be up to Germany but to the central government, which doesn't exist in these matters. Only a central government can decide whether to help its subordinate units. We have a central government, but one that is paralyzed by ignorance of its powers on the part of the politicians. In some ways, at a more abstract level, we are still like the Europeans, with just a different set of idiots.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Pjmeli, you still have not dealt with the fact that the money supply is increased when the Fed added money created ex nihilo into the banks' reserves."-stan

      I've dealt with it three ways to Sunday…your logic chain is apparently stuck in an endless loop. Time to reset.

      The money supply increased when Congress appropriated funds for spending, and the President signed the bill, not when Fed increased reserves, but we've been over that umpteen times.

      The object system of Congress' spending is not reserve balances…it's goods and services in the non-government.

      If these two things had not occurred, Fed/Treasury would not be doing anything to increase the money supply.

      Cause…effect. Congress appropriates…Treasury marks up bank accounts.

      The rest of your comment is meaningless tail-chasing, because if Congress hadn't spent, those other guys would be twiddling their thumbs, not marking up non-government bank accounts, and none of your what-ifs or hypotheticals would take place.

      Any moron could mark up the bank accounts.

      I'm no longer interested in chasing you chasing your own tail. Promote your theories with R. Wray and company or start your own blog.

      Btw, gravity doesn't exist…the Earth just sucks.

    • profile image

      stanfrmmarietta 3 years ago

      Pjmeli, you still have not dealt with the fact that the money supply is increased when the Fed added money created ex nihilo into the banks' reserves. First of all, to recapitulate, Treasury goes to banks with securities it must sell at public auction (by law). Some banks end up winning the auction by paying a bit more than any other bank was willing to. But the value is less than the face values of the securities. The sale is at discount, and the difference between face value and sold price is the interest the banks expect to get when their securities mature at the redemption date in the future. Now, when the banks send their money to Treasury in return for the securities, their reserves diminish by an equivalent amount and the Treasury's reserve account increases by the same amount. But there is at this point no new money in circulation. There has just been a transfer of old money in the banks' reserves to the Treasury's account.

      But when the banks' securities reach their maturity date, they can now try to get their money back with interest. What they will get is face value of the security.

      The Fed is the only party that would want to buy a security at full face value, because it doesn't care about making a profit on this sale. It wants the security so it can swap it with Treasury for a new security it can sell to banks when there is inflation.

      So, it buys the securities from banks with money it creates ex nihilo on the spot by restoring the diminished reserves of the banks to their original levels before they bought the securities, plus a little interest. Now, how much money is there in the economy? You seem to look only at the purchase of the security by the Fed from the bank, and you focus only on the fact that there is a pure exchange of (new) dollars for securities, which does not change anything (in your view) as far as the money supply is concerned. What you are ignoring is the money the banks originally lent to Treasury. The Treasury no longer has to pay back the banks for the securities, because they no longer hold the securities. It's as if the Fed bought the securities directly from the Treasury. The Treasury's money is a bit less than the face value of the securities, but it will get full value back when Fed swaps the mature security for a new one. So we have money Treasury got from banks plus face value of securities the banks had restored and augmented (the interest) by Fed. There is now more money in the economy than before the Fed created and injected it out of thin air.

      But keep in mind that the Fed is prevented by law from buying securities from the Treasury, or even just sending it money on an order from the Treasury. That was designed to keep Treasury and Fed independent. Treasury is more closely connected to Congress and political manipulation. The Fed does not receive its operating money from Congressional appropriations like other government agencies. It's money comes from 6 percent of the interest on each sale it conducts. So, if the banks earned 10% of the face value of the security, the Fed would get .06 x .10 = 0.006 or .6%. of the face value when it bought them. It would expect the Treasury to give that value to it. Or it might expect the Treasury to pay it the face value, and then the Fed would just return all of that value to the Treasury less the 6% of the interest. This is a very inefficient manner of settle accounts, because it requires the Treasury to have a budget that includes money for repaying interest, which takes a lot of money out of circulation that could be put to use. And then the Treasury accumulates the residual, and that just sits in its reserve account doing nothing useful until Treasury gets another order from Congress to spend.

      Anyway, the point is, Pjmeli, you have not counted the money the Treasury got from banks, after the Fed has restored the money plus the interest at the banks. That represents an increase in the money supply, if you do not see an increase at the banks reserves when those reserves are restored by the Fed.

      And your failure to see this result means you do not see that the Fed really has an effect on money supply in its open market operations.

      Anyway, unless we can reach some understanding on this, I don't see any real value to continue to debate it, since it reveals a confusion in the MMT ranks to outsiders.

      Suppose I want $95. I go to you and ask you if you would lend me $95 and I would pay you $100 dollars at a future date. You give me $95. You now are down $95 in your accounts. I now have $95. But then when the redemption date arrives, I still don't have $100 to pay you. Then my brother Fed says, he will pay you the $100 using money he will create out of thin air. "It's all in the family," he says. So, now you have $100, which means you have $5 more than you had when you lent me $95. I still have the $95 you gave me. And Fed, he doesn't need money because he simply makes it up out of thin air as needed. Our family has a fiat money system.

      Fed gets my IOU back into the family from you. Has the money supply been increased by Fed?

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "If there is any break in the chain, then the effects of the initial force will not reach the wheels." - stan

      Thanks Stan for making my point for me.

      The Fed/Treasury are fail-safe linkages…they can never be the "break" in the chain. If they tried, the wrath of CONGRESS would be upon them like flies on poop.

      It has never happened, so there is little reason to think it will. The Sun may burn out too, but I'm not worried about it. When Congress can no longer spend, our world (capitalism) is doomed (not that I think the end of capitalism would be a bad thing…the math doesn't work without public spending).

      If the U.S. monetary system collapses it will be by suicide, not murder.

      The only possible "break" in the chain would be CONGRESS refusing to spend…or the president refusing to sign a spending bill…which can then be over-ridden by CONGRESS…refusing to "put gas in the tank”…

      …which is what I’ve been saying all along.

      In looking for solutions to problems we must first identify cause and effect…only after we do that is it possible to figure out how.

      The “how” in Fed/Treasury is simple…it can’t fail and it has no impedance…it is there mainly to keep the FRBS in balance and functioning…this is totally disconnected from net money creation through public spending, although in the interests of efficiency they share duties.

      We got along for well over a 100 years before the Fed existed.

      The task could be performed by one small office with a few computers typing numbers onto spreadsheets and marking up bank accounts.

      The Wurlitzer doesn’t make it possible,nor does it get in the way…"it is a tale told by an idiot, full of sound and fury, signifying nothing”…

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "So, Pjmeli seems to have a rather unorthodox use of the word debt here. Can he explain how the 'national debt' arises other than from government borrowing?" - stan

      "Debt" is a technical term, it depends a lot on context, just as the term “money” does…the context in which the term is used matters a lot.

      You seem to be caught in some endless loop of semantics, where you are unable to see the actual underlying abstract relationships…you can’t tell the difference between technical debt (by definition) and real debt…that which places an actual “burden" on the borrower.

      The Federal Government can never run out of dollars, the scorekeeper can never run out of points, There will always be points if Alabama scores them.

      There is no “burden”, no constraint on “borrowing”.

      No private borrower can make this claim…they are constrained by income.

      Even if the government did not issue securities, when it created new dollars on it's side of the balance sheet it would be a liability…the government "owes" you a dollar if you have one, and must give you one in exchange for the one you are holding if you ask it to.

      This is becoming comical, because that is technically debt.

      Is that a ”burden” that can’t be met ?

      This is simple accounting…on one side of the balance sheet a dollar is an asset, on the other a liability. A plain old dollar is technically debt.

      To go from this point and claim the government has to "borrow" that which only it has the power to create is nonsense, no matter how much circular reasoning you pass your argument through.

      Years of propaganda has infiltrated your brain, making it unable to see what is obvious before it.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "the face value of the securities at maturity, when full value is to be paid by government to whatever entity other than Treasury or the Fed holds them. " - stan

      The level of securities in existence remains constant until the government (thru Treasury by way of Congress) issues more of them.

      Existing securities are rolled over ad-infinitum and will be until eternity.

      Rolling over securities does not entail "printing" any new dollars.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Every time I see this it freaks me out! Why does the Treasury even issue securities if it does not want to get money from somewhere already in the economy." - stan

      Because of a law passed by CONGRESS in 1917 requiring that it do so? Beacuse it claimed it would be less inflationary, even though savings tthat settle to the bottom in the system have zero propensity to be spent? Even though since there is virtually no empirical evidence supporting the claim?

      I have pointed this out this numerous times, but apparently you don’t read well.

      It was and still is a con, and a freebee for large holders of dollar assets.

      That said it doesn't hurt anything, nor does not create ANY constraint on spending. It doesn’t do much of anything other than fool the ignorant into thinking we are running out of money.

      I would be willing to bet bankers had a hand in getting the law enacted.

      So, before CONGRESS passed that law, how in the world did CONGRESS create money? It must have been nearly impossible. Oh, wait…greenbacks did you say?

      Bonds, no bonds…it doesn't matter. Any constraint is only in the minds of the weak.

    • profile image

      stanfrmmarietta 3 years ago

      Stan: "my claim is that this happens when the Fed buys T securities with money it created out of thin air. That eliminates the debt to the banks." - stanfrommarietta

      Pjmeli: "No, it does not.

      First of all, the government does not owe a penny to the banks, it's the other way around. From where does a bank get the power to create state money?"

      Every time I see this it freaks me out! Why does the Treasury even issue securities if it does not want to get money from somewhere already in the economy. I've already commented on how this has a perverted and contorted idea of how an IOU works. The banks buy them because they want the interest. Interest is difference between the discounted price at which the banks buy the securities at a public auction (required by law) and the face value of the securities at maturity, when full value is to be paid by government to whatever entity other than Treasury or the Fed holds them. That's what most people think of as a debt of the government to a bank for borrowing money. So, Pjmeli seems to have a rather unorthodox use of the word debt here. Can he explain how the 'national debt' arises other than from government borrowing?

    • profile image

      stanfrmmarietta 3 years ago

      "The driveshaft on an automobile does not “cause” the rear wheels to turn…it is a linkage. The burning of fuel, releasing energy is the cause, everything else is a linkage…a mechanical system…none of which is capable of function on it's own."

      What you are describing is a chain of cause and effect. The burning of fuel in the cylinders of the engine cause the gases produced to expand and exert force (cause) on the pistons, which in turn exert force (cause) on the pistons, which in turn exert force (cause) on the crankshaft, which in turn causes the drive shaft to turn, etc. etc. back to making the wheels turn. Effects in a chain can become the causes of subsequent links in the chain.

      If there is any break in the chain, then the effects of the initial force will not reach the wheels.

      As an engineer didn't you get a course in systems theory? That is about chains and networks of causes. You should have learned to understand that you can't just look at the "first cause" and presume it gets to the final effect. If I had a problem with my automobile, say, the motor starts but I can't get the wheels to turn when I put it in gear, I'd want the mechanic to look at the drive train and see where there is a break. If you want to understand the money system of any particular country you need to consider it in detail and how all the actors work together .

      So far, you are dismissing facts as irrelevant that are crucial to the way the system actually works. And you are making mistakes too when you only focus on how a security gets exchanged for some money, but don't see the bigger context in which that occurs, such as the Treasury selling securities to banks, the banks buying them and reducing their reserves accordingly at the Fed, and the Fed subsequently buying them from the banks with money it creates ex nihilo, which leaves the original money the Treasury got, the restored reserves at the banks, and the Fed holding the securities. You don't see that the Fed's buying the securities added new money to the system, which at the same time redeemed the debt of the Treasury to the banks. You can't ignore the money that went to the Treasury. If you think of the banks as being back to where they were (with a small addition due to interest), and further that the government no longer owes the banks for the securities because it has taken them back, the old money given to the Treasury from the banks can no be thought of as the new money from the Fed--but it is an immaculate transfer, because the Fed never gives the Treasury this money directly. It gives the money directly to the banks that lent it to the Treasury and takes back the securities, which cancels the loan of the banks to the government. Since the Fed did not take this money from somewhere else already in the economy, but created it out of nothing, it has injected new money into the economy. But because the Treasury now has debt-free money it is as if it got it directly from the Fed. And that is what would be the effect in any fiat money system, the money spender gets it equal to new money injected into the system. And the money spender could also be the money creator and issuer, all rolled up into one. If Congress had an office it directly administered it could be the money creator, issuer, spender all rolled up in one. But Congress only indirectly gets involved, delegating its powers to subordinate agencies.

      You have to see that there is a deficit in Congressional spending, and Treasury issues securities to cover that deficit. This is a proximate cause of the issuing of securities. Congress may authorize the spending, but until a chain is set up to where the Treasury gets money to cover the deficit, the full amount will not be spent.

      So, Pjmeli, reflect on the possibility that you may be missing something in believing you can understand every system by only identifying its first causes and ultimate effects. You can't fix such a system without tearing into it and learning how its parts work together. I wouldn't hire you to be my mechanic unless I knew you could think systemically.

      Most Americans don't understand the chain of causes and effects in their monetary system. They think the chain stops at the government owing the banks for borrowing money from them. They don't analyze the nature of the "public debt" and fail to realize that in the case of the Fed, the securities it holds are not held by any other entity, hence there is no debt of the government to another entity. They do not represent a specific debt to some other entity. They are just potential debts of the government to someone else. The debt is fully redeemed when the Fed swaps the mature securities for new ones with the Treasury. But the immature securities are not a debt of the government to the Fed, because the Fed is just the agent of the government. When it sells the securities, then they become debts of the government to the holder of the securities.

      I hope we can still work together in the furtherance of MMT. Let's just accept the fact that we may have differences on details, and maybe we can learn from one another.

      Stan

    • profile image

      stanfrmmarietta 3 years ago

      Stan: "I want to show that the current system produces the same results now that would occur if Treasury was the money creator issuing Treasury Notes as it did under Lincoln with his "greenbacks"."

      John: "That is great, but you are doing so in a very confusing manner. When you describe it, it sounds like a game of Three-Card Monte. Plus, I think you have some things wrong."

      I think you have to show how the present, Rube Goldberg monetary system we have acts like a fiat money system in which the government creates new money with which to spend under deficit spending. Otherwise you are just doing hand waving and effectively saying "Trust me."

      Stan said earlier: ""There is an addition of money into the economy when the Fed augments the reserves equal to the amount the Treasury got in selling the securities to the banks."

      John now said: "This is not what happens. The Treasury has money in its account from the sale of securities. The banks have the securities. Their reserves are not "augmented," and there is no net change of financial assets in the economy. The only net addition of financial assets with securities is when the government pays the interest on them - this is a small portion of the new dollars entering the economy."

      Stan now:

      The bank's reserves are decremented when it lent money to Treasury. So, the sale of the securities just transfers money already in existence at the banks to the Treasury's accounts. No new money is yet going into the economy. That comes later, and a bit after the fact of their spending.

      The banks now have the securities, but their reserves have been lowered equal to the money lent. And furthermore the banks do not give the Treasury the face value of the securities, because they buy them at discount by having the lowest discount at the auction. When the security matures, the banks then are owed the full value of the security. The difference between the full value and the discounted price they paid for the securities is the interest earned. The augmentation of the banks' reserves comes when the Fed buys them with new money it creates out of thin air in the act of augmenting the entries in the banks' reserves spreadsheet, giving them full face value. In the meantime the money that Treasury got from the banks now becomes free of the debt to the banks, since the banks no longer hold them.

      The money supply has been augmented by the Fed's buying the securities from the banks with money it creates out of thin air. The banks' reserves have been restored and then some by this buying. So they are back to where they were originally plus a little more (the interest). But the money that Treasury got still exists, and was originally old money. But now that it is debt free we can think of the Treasury's deficit money as "new" money since it is fungibly equal to what has been restored plus interest to the banks by the Fed. We just exchange in our minds the restored money in the banks' reserves for the money the Treasury got from those reserves.

      "Modern Money Mechanics" (issued by Federal Reserve Bank of Chicago) contradicts your view that buying securities does not change reserves of the bank the Fed bought the securities from:

      "Let us assume that expansion in the money stock is desired by the Federal Reserve to achieve its policy objectives. One way the central bank can initiate such an expansion is through purchases of securities in the open market. ***Payment for the securities adds to bank reserves.*** Such purchases are called 'open market operations'. How do open market purchases add to bank reserves and deposits? Suppose the Federal Reserve System, through it trading desk at the Federal Reserve Bank of New York, buys $10,000 of Treasury bills from a dealer in US. government securities.... ...the Federal Reserve notifies the dealer's designated bank (Bank A) that payment for the securities should be credited (deposited in) the dealer's account at Bank A. At the same time, Bank A's reserve account at the Federal Reserve is credited for the amount of the securities purchase. The Federal Reserve System has added $10,000 of securities to its assets, which it has paid for, in effect by _creating_ a liability on itself in the form of bank reserve balances. These reserves on Bank A's books are matched by $10,000 of the dealer's deposits that did not exist before."

      This gives us one piece of the puzzle.

      What heppens when the bank loans money to the Treasury by buying it's IOU's, the securities?

      In general when an individual bank makes a loan :...it creates (credits) an asset (receivable). To make its books balance, it *debits* its reserve account at the Fed (also an asset) by the same amount."

      http://www.winterspeak.com/2009/09/loans-create-de...

      The explanation continues:

      "The loan creates a deposit, say in a different bank (bank B). That bank credits the deposit on the liability side, and credits its reserve account at the Fed. The reserve account debit made by bank A is exactly matched by the reserve account credit made by bank B. While the total amount of reserves in the system is unchanged, bank A is now short reserves, and bank B is long (assuming they had the correct amount of reserves in the first place)."

      So, let us consider that Bank A is a large private bank and bank B is the Treasury. The loan is achieved through buying a security at auction from the Treasury. Treat Treasury as Bank B. The security is just proof of the loan and of the obligation of the government to repay the Bank. But proof only applies to whomever holds the security (IOU) at redemption. The security might be sold to another bank, which then is the one that the government owes, because it holds the security. We see that when Bank A buys the security it must decrement its reserve account at the Fed accordingly to what it lent (the actual purchase price at auction) to the Treasury.

      But when the Fed holds the security, the government does not owe it for that. It is the government (acting as an agent of the government). It is a creation of the government and acting according to laws passed by Congress (another branch of government). It gains its money creating powers from Congress, which gets them from the Constitution

      Article I Section 8. It's authority to buy T securities and only at public auction is given by subsequent laws of Congress. (I don't have them at my fingertips).

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "What bothers me about Pjmeli's account is that it assumes we have a fiat money system to begin with." - stan

      fiat…ORIGIN late Middle English: from Latin, ‘let it be done,’ from fieri ‘be done or made.’

      In other words, "from nothing". Ex-nihilo.

      Even if one were to agree for the moment that that the government borrowed from banks, the money comes "from nothing"…ex-nihilo. "Money" doesn't exist until it is recorded on a balance sheet in the non-government.

      What the government has recorded on it's balance sheet is of little importance to anyone…if it needs more it has the lone authority to create more…no one has the authority to stop it, other than the citizens, by voting for Congress-critters that have pledged not to spend (yeah, good luck with that).

      The U.S. began with nothing, and there now exists some $59T dollars in the World, cash and bonds.

      I will leave it to you to explain to us from which "account" that money originated.

      Banks don't issue any money the governement doesn't allow them to (well, thay aren't supposed to…they broke the contract, we just don't currently have a functioning democracy, so they haven't gone to jail yet).

      If a non-member bank attempted to issue dollars from thin air, the full wrath of the Federal Government would come upon it instantly.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Would deficit spending be sufficient to account for all increments in growth?”

      I suggest we stop thinking and speaking of deficits as a “thing” or an object.

      A deficit is a residual…something left over after all other entities are accounted for.

      A deficit is not a budget item, it is an outcome, like GDP is an outcome. Neither are “things”…they are measurements of the outcome of economic events.

      In this context a deficit is like a tape measure…it tells us how much the non-government was able to save, after taxes were collected…a residual.

      Deficit is a misnomer…it is a creature of economic activity in the non-government expressed in a term that applies to the government…

      …in other words the object system is switched in mid-sentence. We take a private-sector surplus and refer to it as government deficit…which is nothing more than simple accounting… but in doing so we (purposefully?) conflate cause and effect.

      What a clever way to dupe the masses into supporting policies that will hurt them.

      For the non-government it is properly called a surplus. For the government a deficit. The net result is the ability of citizens to hold financial wealth as compensation for it’s surplus of effort.

      The “cause” is a direct function of decisions made in the non-government. If agents in the non-government are successful in their attempts to save or earn a profit, the outcome will result in a government deficit…beyond control of the government.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Does the European Union have a fiat money system? It is not backed by gold.”

      Yes.

      "Then why are Greece and Spain in such dire straits?”

      The individual members of the Eurozone cannot issue their own currency, they must borrow it…the borrowing is limited by their income, just as it is with private borrowers. They are USERS of the currency.

      In this respect they are more like US states than countries…the individual members are not monetarily sovereign.

      They can’t fund their own public spending, the funds have to be borrowed from the ECB through bond traders.

      This is only part of the problem…

      The money they do have is being drained from their systems as they are net importer countries…Germany is where the funds are draining to.This dynamic cannot be sustained without fiscal injections, just as Mississippi, Alabama, etc. would go broke without fiscal injections.

      If the system is not changed, by the laws of arithmetic the Eurozone must fail, there is zero chance of success…how long things can go on this way is a function of how much pain Eurozone citizens can endure.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      I continue to be puzzled…what point you are trying to make in this discussion?

      "You have to have some governmental entity creating the money. That is not the same as Congress ordering or authorizing the spending of money.”

      You need to spend some time thinking about cause and effect, mainly the cause part.

      The driveshaft on an automobile does not “cause” the rear wheels to turn…it is a linkage. The burning of fuel, releasing energy is the cause, everything else is a linkage…a mechanical system…none of which is capable of function on it's own.

      In this context the FED/Treasury are linkages.

      For an automobile there are losses to heat, lost horsepower. In the money circuit losses = zero.

      The Fed/Treasury create zero friction in the flow of funds from Congress to non-government bank accounts.

      As I said before, Fed/treasury would be modeled as perfect wire in an electrical circuit…zero loss or friction.

    • profile image

      stanfrmmarietta 3 years ago

      John: "From 1997 - 2007 (11 years), total deficit spending was 1.14T. That's just 100B per year. Yet, GDP grew from 8.5T to 14.3T. And inflation averaged 3% per year, or 33% total."

      John: "How did we get 6T of growth from 1T of deficit spending?”"

      Would deficit spending be sufficient to account for all increments in growth?

      Isn't there growth in the money supply from private bank lending? Isn't there something like the multiplier effect even though banks don't first check to see if they have required backup reserves to make a loan? What about growth in exports, even though there is a trade deficit? What about investment during that period taken from savings?

      Not questioning you overall. Just wondering what explains increment in growth.

    • profile image

      stanfrmmarietta 3 years ago

      Stan:"What bothers me about Pjmeli's account is that it assumes we have a fiat money system to begin with. To me that has to be proven in detail, just as we would have to do something similar for Australia, Britain, China, Japan, all of which have central governments sovereign in their money."

      John: "The only thing that needs to be demonstrated is that dollars are created by the government, are not backed by anything, and are not convertible. Under these circumstances you have a fiat currency, whether you issue debt or not. I don't think that the dollar's status as a fiat currency is really in question. Most people you ask will correctly say that the dollar is a fiat currency; they just won't understand what that entails."

      I don't think that is sufficient to explain why people believe we have a horrendous national debt.

      Does the European Union have a fiat money system? It is not backed by gold.

      Then why are Greece and Spain in such dire straits? The details matter.

      You have to have some governmental entity creating the money. That is not

      the same as Congress ordering or authorizing the spending of money. You can create more money than authorized to spend, and you can't spend it until you have an authorized debt to pay. You allso have to have a government entity that is doing the government's spending, e.g. our Treasury. That is different from creating it, especially in our system now. In some fiat money systems both the creator and the spender are the same entity. If Congress orders a certain amount spent on a certain program, Treasury could simply create any money it did not have raised in taxes and then spend that. But the authors of our Federal Reserve System did not want that. They perhaps felt that it would be too inflationary without some restraints. So, Treasury could not simply create and spend money as ordered by Congress. They made the Federal Reserve the Creator and initial spender, spending only on what was authorized, e.g. a debt, a security. But they further placed in law the constraint that the Fed could not buy directly any securities from the Treasury.

      Well, if the money creator and initial spender cannot spend its created money on securities or orders from the Treasury for money, then how could the government get its money, and how could new money get into circulation? The government was already borrowing money from the banks, so that became the way to go. Under a gold system, the Fed could check to see if its gold supply was adequate to create new money matched to it at the fixed rate, and if it wasn't, it couldn't create new money. But under the new fiat money system that resulted in 1971 when President Nixon took the dollar off of gold backing, there is no limit to the amount of money that could be created. Congress placed some constraint on what could be spent. But the full implications of this were not discussed or explored at the Fed or the Treasury or in Congress. We didn't have hyperinflation, because Republicans in Congress resisted deficit spending. But they didn't realize that if we had a recession or worse a depression, you had to increase deficit spending to get new money into circulation. Because then Treasury would issue securities, banks would buy them, then at some later point the Fed would buy the securities from the banks (not direclty from the Treasury). But being a governmental entity the Fed implicitly redeems the debt to the banks represented by the securities it buys from banks.

      What prevents people from fully realizing we have a fiat money system is the fact that the money creator is quietly buying securities from banks and redeeming the debt of the government implied in borrowing using securities (IOU's) sold to banks. They see the borrowing; they don't see the redemption, which quietly takes place at a public auction in Wall Street. So, they don't see the money creator connected to the deficit spending.

      They don't see that the taxpayers are not on the hook for redeeming the debt. They

      are used to household finance, business finance and state and local government finance all requiring spending with money you get or will get from elsewhere on loan. And they see any such entity like Detroit getting deeply into debt becoming insolvent. They think all government spending ultimately is done with tax money. So, they think our government is on the verge of insolvency. They don't see the money creator always there to complete the connection of new money to pay the debts of the federal government, completing the links between the different entities of government in creating and spending new money.

      Now there are conspiracy theories about the Fed, and some of that is made possible by the confused and obscure way in which the Fed discusses the matter of money creation. It's almost like discussing copulation, a taboo subject. They fear revealing the fact that they create money out of nothing, as if doing so will raise the fears of Weimar Republic and Zimbabwe. But when pressed, they will insist that they do it, but not in so many words. Some of the more fraudulent behavior concerns member private banks of the Federal Reserve Systrem. And they get away with that because the Fed has not always functioned independently in regulating these banks. But I think the Fed's Open Market Operations are quite transparent, although the Fed does not always reveal the implications of what it does. Some of that may be explained by a fear to give banks and investors preliminary clues as to what the Fed is going to do next, and thereby get a jump on the market.

      Finally, it seems that in some cases members of the Board of Governors of the Fed don't always know what is going on as far as the system behaving as a fiat money system.

      They sometimes sound like austerians who believe the government is horrendously in debt and must be constrained.

    • profile image

      stanfrmmarietta 3 years ago

      JohnfrmCleveland 21 hours ago from Cleveland, OH Hub Author

      Stan: "...The securities will be put up at auction when mature and the Fed at this point will buy them with new money created out of nothing) by adding the amount to the banks' reserves. This is merely a digital entry. The Fed then gets the securities. So, who does the government owe? It can't be the banks because they don't hold the securities..."

      John: "What is your source on this idea?

      "Why wouldn't the banks simply trade in their mature securities for dollars? Why would you think they would auction them off? And what price would you expect them to auction off for, if not their face value at maturity?"

      Some of the details are obscure if you try to get Treasury or Fed to clarify them.

      But I am just using common sense together with quotes here and there in FAQ's and writings of Ben Bernanke. Treasury securities are bought and sold at public auction especially designated for that. Some of my sources are "Modern Money Mechanics: A workbook on Bank Reserves and Deposit Expansion" published originally by the Federal Reserve Bank of Chicago. You should be able to find it by that title on the web, although it is now out of print.

      It was either an FAQ at the Fed or something Bernanke was quoted as saying, that the Fed did not ordinarily buy immature securities but rather bought mature securities. I think it would depend on whether we were in a recession or not. This is all a part of the Fed's Open Market Operations to manage the money supply with buying and selling of Treasury securities.

      Why would the banks hope to get the Fed to buy their mature securities. Well, consider that the fact that the Treasury issued them indicated it did not have the dollars from taxes to cover the spending ordered by Congress. So, you could not take the securities back to the Treasury and get an exchange for dollars, because the amounts would exceed anything the Treasury had on hand. (This is just my supposition, but it seems reasonable). So, the banks know this. Furthermore, why would another bank want to buy a mature security, which would involve giving face value to the bank selling the security. That would not provide interest. The interest is always the difference between the face value and the discounted price at which the bank buys them at auction. A mature security demands repayment at face value. A bank would not want to sell a mature security for less than its face value. So, the only buyer of a mature security is likely to be the Fed, and it will buy them with newly created money, created on the spot, effected by increasing the reserves of the bank accordingly in return for the security. The Fed always buys T securities at public auction (required by law).

      As for the idea that Modern Money Mechanics described a fractional reserve banking system, that changes little. Banks are not absolutely constrained from making loans by their reserves. A good prospect comes along for the bank to make a profit off the interest, and it will lend the prospect the money and then seek to find ways to increase its reserves accordingly. It can borrow from other banks or the Fed itself to meet the reserve requirements, which are still in effect. But this is after the fact and not prior to making the loan. In principal as the banks make more loans regardless of the fractional reserve requirement, they can increase money supply in circulation beyond the amount permitted by the fractional reserve limit. The law just makes it more difficult to do that after the fact when the bank must scrape up money for meeting the reserve requirement, still in effect by law. It can borrow from other banks and even the Federal Reserve (which creates new money when it lends it to the bank trying to meet the reserve requirement). Maybe meeting the reserve requirement is the source of the $30.00 a month fee you pay Wells Fargo when you have a checking account less than some amount. I had one that only had about $150 in it and they were taking out $30 each month. I need to close that account and move the rest to a checking account with enough money in it to avoid such charges. I dread what happens when it goes below $0.00. Do I have to come up with more money to keep the account open?

      Modern Money Mechanics simply says, "As securities held by the Federal Reserve mature, they are exchanged for new securities. Usually the total amount maturing is replaced so that there is no impact on reserves since the Fed's total holdings remain the same.... If the Fed were to buy more than the amount of securities maturing directly from the Treasury, then reserves would increase permanently. However the Federal Reserve currently is prohibited by law from buying securities directly from the Treasury, except to replace maturing issues." p 34.

    • profile image

      stanfrmmarietta 3 years ago

      The Fed buying securities from banks increases the money supply" - Stan

      pjmeli: "No, it doesn't…when the Fed buys securities it is swapping money

      assets…when it re-sells securities it is swapping money assets. No increase

      either way. This is simple arithmetic. No velocity is created either. See

      further down for the reason why."

      You are not taking into account the money that the banks lent to the Treasury (government). When banks lent to government that was a simple transfer of

      money already in existence. The banks reserves are reduced equal to the loan to the Treasury. When Fed buys the securities from the banks, they increase the reserves of the banks to what they were before lending to the Treasury. But there is now that money the Treasury is using for deficit spending. Also now in existence is the reserves at their original level and other money also still in existence. So the amount of money in existence has been increased equal to the amount of money the Treasury got in selling the securities and the amount to which the Fed increased the reserves of the banks to their former level. Furthermore, at this point the money that Treasury (the government) got from the banks in exchange for the securities is now free of the debt the securities implied to the banks. The banks no longer hold the securities. The Fed (another agency of government) now holds them. The Fed cannot be owed the full value of the securities because that would be like a bank clerk claiming to be paid personally for the securities it has bought bought from bank customers with the bank's money. The debt to the banks is redeemed when the banks get an equivalent value in dollars for the securities, in return for giving the securities (IOUs) back to the government. The Fed can now exchange the mature securities it bought from banks for new securities with new future redemption dates. Equal current value is exchanged for future value. The Treasury can simply record the return of the securities and burn them to avoid a growing storage problem. So, deficit spending ends in the spending of debt-free money (although there is a different debt obligation that accompanies all money, the government must honor the canceling of debt obligations of taxpayers who pay taxes with the government's money, must provide services and goods owned by government in exchange for government's money, and must cancel further penalties and prosecutions for those paying fines to the government with government money.

      What is cute is that the Fed never gives the Treasury this money directly. The law that prevents the Fed from buying securities directly from the Treasury is satisfied. It's a Rube Goldberg system but it ends up achieving exactly the same thing as if the Treasury simply created the money it needed to cover the deficit in its spending, debt free. Hence we have a fiat money system like the greenback system, but with different players performing the needed functions.

      But we see that there can be no long term debt problem of the government for borrowing money from banks by issuing Treasury securities. Taxpayers are not on the hook for the debts (as they would be under the gold standard, since then one had to return an equivalent amount in gold to the Fed for its buying the securities with gold-backed dollars).

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "What bothers me about Pjmeli's account is that it assumes we have a fiat money system to begin with. To me that has to be proven in detail, just as we would have to do something similar for Australia, Britain, China, Japan, all of which have central governments sovereign in their money."

      The only thing that needs to be demonstrated is that dollars are created by the government, are not backed by anything, and are not convertible. Under these circumstances you have a fiat currency, whether you issue debt or not. I don't think that the dollar's status as a fiat currency is really in question. Most people you ask will correctly say that the dollar is a fiat currency; they just won't understand what that entails.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      Stan: "...The securities will be put up at auction when mature and the Fed at this point will buy them with new money created out of nothing) by adding the amount to the banks' reserves. This is merely a digital entry. The Fed then gets the securities. So, who does the government owe? It can't be the banks because they don't hold the securities..."

      What is your source on this idea?

      Why wouldn't the banks simply trade in their mature securities for dollars? Why would you think they would auction them off? And what price would you expect them to auction off for, if not their face value at maturity?

    • profile image

      stanfrmmarietta 3 years ago

      I said:"The national debt gets paid off one security at a time each time the Fed buys a security from a bank or other financial institution." - stanfrommarietta

      "Stan, this is completely wrong."

      You seem to have a strange understanding of IOU's. When someone gives you an IOU in return for money you give that person, the lender has the expectation that it will be paid back, and will give back the IOU to the borrower. A security is a form of IOU with a promise date at which the loan can be redeemed in full face value of the security. Now, I am talking principally about Treasury securities. The bank securities, issued by banks, which the Fed has been buying with QE2 are something else. I agree that QE2 has had no effect on increasing the amount of money in circulation. Hence no inflation.

      So, when Congress "deficit spends", it simply directs the Treasury to come up with money so that the government can spend what Congress wants spent on some program. It checks its balance sheets and discovers that it does not have enough money raised by taxes to cover the spending. Hence there is a deficit to be overcome, which is the difference between what Congress directs to be spent and what Treasury has collected on hand by taxation. So, following procedures originating long ago when the dollar was on the gold standard, the Treasury has to borrow money to make up the deficit. It borrows from banks by issuing Treasury securities equal to the deficit. Banks give Treasury the money and get in return the securities. Actually the banks give a discounted amount, the difference between the face value of the security and what the bank paid to buy it, being interest to be paid.

      Now the security does not have on it the name of the bank that holds it. The security is just a promissory note to the effect that the government will pay whoever holds it the face value of the security. So banks can sell these T securities to other banks. But ultimately someone will want to exchange the securities for real dollars. The securities will be put up at auction when mature and the Fed at this point will buy them with new money created out of nothing) by adding the amount to the banks' reserves. This is merely a digital entry. The Fed then gets the securities. So, who does the government owe? It can't be the banks because they don't hold the securities. It can't be the Fed because the Fed is a government entity and bought them with government (created) money. The government doesn't owe itself. So, the securities at this point are just potential debts of the government, much in the way a dollar bill is a potential debt of the government. The government has to accept dollars paid in taxes, fines and fees and clear the payers of tax obligations or penalty obligations, or provide some governmental service like admission to a national park or forest campground. And a mature security is like a dollar bill; it can be exchanged for an equal amount of dollars, just as one can exchange a $10 bill for two $5 bills or another $10 bill.

      The Fed will hold on to the mature securities for a while and will swap the mature security for a new immature security with the Treasury. The Fed wants this to be used in open-market operations designed to fight inflation by selling it to banks to drain their reserves. The Fed will also seek to acquire securities by buying them to inject new money into the economy during recessions. (That will have an effect on circulation only if the banks turn around and make loans backed by the increased reserves). In the meantime the money acquired by Treasury from banks to cover deficit spending using the securities in question becomes "debt-free" and may be counted as "new money", simply because money is fungible. The debt the government is free of is the debt to repay the banks the value of the security they held. (This does not cancel the debt the government has to pay any holder of the securities the face value after the maturity date). The same with a dollar bill. You can show up at the Treasury and ask for something equivalent in value, and you'll be given another dollar bill in return for your old one. But the Fed is not such a holder when it holds the securities. It like Treasury is an entity of government, an agent of government. To assume the Fed is owed for the securities it holds is like assuming a bank clerk is owed for the securities it bought from customers with bank money.

      "The National Debt gets paid down when budget surpluses occur and would only paid off if we ran a string of budget surpluses that totaled the National Debt."

      "Taxes in excess of public spending is the only means possible to extinguish the debt, unless we utilize an accounting gimmick, like the Proof Platinum Coin, to remove it from the balance sheet (actually, it isn't removed...it's just moved to a different ledger marked as paid and replaced with an asset...the coin." - Pjmeli.

      I think we are confusing two different debt obligations here. The one everyone is concerned about when the government borrows money from banks is the debt to the banks for the loan. That covers the deficit. The other debt which is implicit but rarely focused on, is the obligation of the government to accept its money in payment of taxes, fines, and fees in return for cancelling tax obligations, penalty obligations, or by providing services. It is not a debt of the people, the taxpayers, but of their government. In the meantime the people use the government's issued money in exchanges of goods and services.

      If you think otherwise, please explain the nature of the debt in question.

      First the 'stripped down' version that Pjmeli is providing assumes by definition that we have a fiat money system. But we have to show in detail how that could be,

      since there are many ways in which a money system might be provided, and only some of these are fiat money systems. For almost 200 years our government did not have a fiat money system (with a minor interlude when Lincoln issued greenback dollars, Treasury Notes, during the Civil War). We implicitly went off of a commodity-based monetary system in 1971. But there was very little discussion of that and its ramifications at that time . Many older practices that are now irrelevant or confusing that arose during the gold-backed system still exist. But even so, we do have a fiat money system. And if we can show in detail that it amounts to the same thing as a prototypic fiat money system in producing the same results, then we can say we have a fiat money system. A prototypic money system would be like one in which Treasury (for Congress) creates, issues and spends money as credit, like the greenbacks. In such a case Treasury would not borrow money from banks but simply create and spend it. It would only create and spend what Congress authorizes. But creation is different from authorizing if the creating powers are delegated by congress to some other entity like the Fed. Both the Fed and the Treasury can create more money than currently authorized for spending, but may not spend it without authorization. Spending on debts of government are always authorized.

      What bothers me about Pjmeli's account is that it assumes we have a fiat money system to begin with. To me that has to be proven in detail, just as we would have to do something similar for Australia, Britain, China, Japan, all of which have central governments sovereign in their money.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "The aim is to demonstrate to people who only know about the current system, that it works as an MMT system." - stan

      MMT is applied math and simple logic, nothing more. You have made it much more complicated. Nobody cares about operations any more than they think about how the paymaster was able to write their paycheck, as if the paymaster has a choice.

      Instead, you are derailing the discussion by convoluting what is important and what isn't. You are wasting your time, because I have already rejected your point of view as well as similar points of view expressed by Cullen Roche and company. It doesn’t pass logical muster in my view…it confuses cause and effect, getting it exactly backwards.

      Good luck trying to explain this gobbledy-gook to the average citizen. They haven't learned the tools necessary for solving even simple problems…instead they rely on other people's opinions. That’s why we have to resort to metaphors to get our point across.

      All that electronic gear the scorekeeper uses to put points on the board is irrelevant…everyone knows when Auburn scores who gets the points.

      Here's what Randy Wray wrote in response to a comment I made at New Economic Perspectives last week (no, not name-dropping…you have pivoted several times to what “Randy Wray said”, so maybe you will think his view is rational:

      My comment…

      "Furthermore, Congress effectively “creates money” when it passes spending bills…from this moment on there is no doubt funds will be spent into non-government balance sheets (barring debt-ceiling hysterics) and the Fed/Treasury have no say in the matter, it’s do-or-die.

      There’s some consolidation for ya." - me

      Randy Wray…

      "Nice Job Neil [sic-got the name wrong]. In one short, sweet, and clear sentence you have destroyed the critics, including a 20k+word essay by some JKH that tries to obfuscate the obvious. The Fed and Treas are two branches of the federal govt, and internal balance sheet operations between branches have no impact and should be of no concern to the rest of the world. The critics live in a never-never land of their own imagination in which budgeted spending be blocked by the Fed, which will bounce Treas checks for insufficient funds. As if a creature of congress (Fed) will disobey its creator. Right. I’d like to see the interrogation Chairwomen Yellin would get for bouncing Treas checks to seniors."

      The FED/Treasury are accounting tools, bookkeepers…neither "creates" anything. The scorekeeper does not create points…points are created at the moment the football team scores a legal touchdown. And again if it successfully makes the exrta point. I apply the same kind of logic to Monetary operations no matter who is involved in them. They are autobots…the Fed/Treasury job could be done by a few capable bookkeepers in small office with a few computers. The fact that monetary operations look complicated is testament to the fact that TPTB have no intention of letting the public in on their dirty little secret, that…

      "‘The process by which money is created is so simple that the mind is repelled." - John Kenneth Galbraith

      I rest my case.

      Now, I have no delusions wrt convincing you of my position…OTOH you have not presented any logic capable of moving me off my position, which has been carefully thought out in the interests of getting the system right so that I can live with it, not winning debates, because solving problems and puzzles gives me pleasure. My toughest opponent is myself.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "We can show that having the Treasury issue securities to get money to cover deficits does ultimately end up in creating new debt-free money. But they have to see this in detail. I want to show that the current system produces the same results now that would occur if Treasury was the money creator issuing Treasury Notes as it did under Lincoln with his "greenbacks"."

      That is great, but you are doing so in a very confusing manner. When you describe it, it sounds like a game of Three-Card Monte. Plus, I think you have some things wrong.

      Dollars and Treasuries are basically the same thing - net financial assets provided by the government. In both cases, the govt. holds the "liability," while we can hold the assets liability-free. When dollars are exchanged for treasuries, it is an even exchange. That is not where the dollars are created, and that is not where (most) new dollars enter the economy. New dollars enter the economy when the government spends. And while those new dollars generally enter the economy via private banks, treasuries have nothing to do with those transactions.

      Treasuries are created (out of thin air). They are then exchanged for dollars, which can be thought of as being deposited in the Treasury's account at the Fed. From there, the dollars are spent. It is a fiction that satisfies the outdated laws that require the Treasury's account to remain positive. In this case, the govt. is creating debt instruments and exchanging them for dollars. They could accomplish the same thing by minting some trillion-dollar coins (again, out of thin air) and depositing them in Treasury's account. Operationally, a positive balance is not necessary for the Fed to mark the reserve accounts of private banks up or down. That's the greenback situation.

      "There is an addition of money into the economy when the Fed augments the reserves equal to the amount the Treasury got in selling the securities to the banks."

      This is not what happens. The Treasury has money in its account from the sale of securities. The banks have the securities. Their reserves are not "augmented," and there is no net change of financial assets in the economy. The only net addition of financial assets with securities is when the government pays the interest on them - this is a small portion of the new dollars entering the economy.

      But when the Treasury "writes checks" to effect government spending, they will mark up the reserve accounts of private banks, which will then mark up the accounts of whoever the government is paying. Now there has been a net addition of financial assets into the economy. But this is a completely separate operation from selling securities to banks (or buying them from banks, for that matter).

      "And the Fed by buying these securities with money created out of thin air is creating new money, which will back new loans made by banks. Banks can also borrow money from the Fed, and this is also new money created by the Fed and entered into the banks' reserves."

      The government created financial assets out of thin air when they created the bonds. When the banks buy those bonds, it is an even exchange. The banks have no more than they did before the exchange, so it isn't really correct to say that the new money is backing new loans made by banks. If anything, the banks are in worse position to make loans, having traded dollars (reserves or capital) for securities (capital).

      Also, when banks borrow from the Fed at the discount window, they are indeed borrowing those dollars. As in, the bank owes that amount, plus interest, to the Fed. As the bank holds that liability, there is no net addition of dollars into the non-governmental sector. In fact, a little bit of interest will be leaving.

    • profile image

      stanfrmmarietta 3 years ago

      Pjmelli asked what my aim was in adding all these complicating details to my MMT account.

      The aim is to demonstrate to people who only know about the current system, that it works as an MMT system. I have to show that there is no real national debt problem. But people have to be taught a new interpretation of what our financial system is as it actually is. We can show that having the Treasury issue securities to get money to cover deficits does ultimately end up in creating new debt-free money. But they have to see this in detail. I want to show that the current system produces the same results now that would occur if Treasury was the money creator issuing Treasury Notes as it did under Lincoln with his "greenbacks". Right now it looks on the surface as if the Treasury is creating all these huge debts when it sells securities to cover deficits. And further most people believe taxpayers must come up with the money to cover these debts. This is false. The current system does not work like that. It is a fiat money system, not a commodity-backed money system. But there is no real need to enact new laws to make it into a fiat money system. But we have to show how the Fed as money creator (with that power delegated to it by Congress, as it also has done with Treasury as coin creator) works with Treasury to produce the same outcome as if Treasury had the exclusive power to create our money and simply created it debt-free as needed to cover any deficit.

    • profile image

      stanfromMarietta 3 years ago

      "As to your discusssion of the Fed's tools, my perspective is that the Fed cannot add or subtract to Net Financial Assets in the non-government, it can only change the composition of existing assets (cash and bonds) and the rates of interest they earn." -pjmeli

      There is an addition of money into the economy when the Fed augments the reserves equal to the amount the Treasury got in selling the securities to the banks.

      Before the Treasury sold the securities to the banks there was the money in circulation and out of circulation (savings, imports, unspent taxes). The banks had their reserves at level R0.

      When banks buy the securities from Treasury, the banks create a loan and send it to the Treasury. The banks reduce their reserves accordingly. The securities are the asset they get from the Treasury. So, the security at this point is backed by the loan from the bank. No new money has entered circulation or the larger economy (which besides what is in circulation includes savings, imports and unspent taxes).

      But when the banks put their mature securities up for sale at public auction, no bank would see an advantage in buying them because there is no interest on the full face value of the mature security, and the original banks holding the securities must get full face value on a mature security. But there is one buyer that wants the mature security: the Fed. And it can pay full face value by crediting the reserves of the banks the the full face value of the mature securities, which the banks then give to the Fed. Because the Fed pays for the securities with money created out of thin air, that is newly created money added to the economy. The Treasury has the old money it got for the securities. The banks have their reserves restored to what they were, and the govt. (Treasury) does not owe the banks for the securities. They no longer hold them. The Fed (govt) now has the mature securities. But it wants to sell them, so it goes to the Treasury and swaps the mature securities for new securities, which have a future redemption date. These can be sold at discount creating interest obligations, so banks will buy them. But the point I want to make is that the money supply is now increased, since the deficit spending money obtained from the banks is now debt-free. There is old money already both in circulation and out of circulation. The banks have the same reserves they had before they gave money to Treasury and reduced their reserves accordingly. So, that matches the old money reserves. So, what the Treasury now has is fungibly new money. It is important to remember the fungibility of money and securities . We can regard the deficit-spending money as fungibly equivalent to the new money added to the reserves of the banks by the Fed. And because it is no longer a debt to the banks, it is like debt-free credit which the Fed gives to the banks. The result is the same as you would get if the Treasury simply created the new money and didn't sell securities to raise money for deficit spending. But the law that prevents the Fed from buying securities directly from the Treasury makes it necessary to use the banks as intermediaries between the money creator (the Fed) and the Treasury. Note that there can be more money created than Congress authorizes spending. This unauthorized money has no effect on the economy because it cannot be spent into circulation without Congressional authorization. Treasury can coin billions, but unless there is an authorization to spend it, it is money in limbo. The money must first be spent into circulation before it can go into savings accounts, be given govt as taxes, or paid to foreigners for their imports to our country. The Fed can buy endless streams of securities created by the Treasury and sold to the banks, but the Treasury cannot spend the money it gets for its securities unless there is a Congressional authorization for the spending. (All govt debts are authorized). And the Fed by buying these securities with money created out of thin air is creating new money, which will back new loans made by banks. Banks can also borrow money from the Fed, and this is also new money created by the Fed and entered into the banks' reserves.

      While banks are not constrained in making loans by their reserves, they still have to acquire reserves to back up, after the fact, those loans to meet the 10% (whatever) requirement. They can borrow money from other banks or from the Fed (as blender of last resort) to meet these reserve requirements.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "...First you say that the government does deficit spending which creates new money. Taken as a whole, including Congress, Treasury and the Fed, you are correct. But to turn around and say that 'Congress created the money when it authorized spending ' that is a fallacy of ambiguity."

      Stan - to be honest, I have been more confused by your posts than enlightened, so I'm just going to ask you straight out - what is it that you think you have hit on by re-complicating our simplifications?

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "And so as the purchases of securities occurred, the way we paid for them was basically by increasing the amount of reserves that banks had in the accounts with the Fed." - Stan

      Correct. The Fed bought toxic assets held by banks THAT THE BANKS THEMSELVES CREATED, not Treasuries. The Fed bought these assets with reserves, which took the bad assets off the banks books…securities created by banks, not bonds or dollars. This transaction did not take place on non-government balance sheets.

      All this did was make the banks appear solvent, but hey aren't because they now owe the Fed…they are liable for those toxic assets

      Not one single new dollar was created…reserves are not dollars, they are accounting abstractions. In order for banks to enable new dollars to be created, they have to loan money to qualified borrowers…they have not been able to do that, so QE did not increase the money supply that matters…dollars.

      ************************

      "The government can decide to spend more than it has collected in taxes as long as it knows what it has collected in taxes" - Stan

      You contradict yourself in the same sentence. The government doesn’t know what it has collected in taxes until it collects them. The deficit is then ex-post. The govt. can’t go back in time and make adjutments to taxes or spending. THE DEFICIT IS ENDOGENOUS (from within) TO THE NON-GOVERNMENT.

      Taxes are collected after spending and incomes occur…EX POST (after-the-fact). You need to look up Arrow of Time in Wikipedia. Timing matters. It is fundamental to the understanding of processes. This is not a mistake I would expect from an engineer or a physicist.

      ************************

      "It pays with new money it creates out of thin air by augmenting the entry in the banks reserve spread sheet at the Fed with the needed amount."

      Increasing a banks reserves does not increase the level of dollars or bonds on balance sheets in the non-government. Period. Banks are never resrve-constrained,so this is irrelevant.

      ************************

      "The Treasury can't distribute money it doesn't have to parties designated to do work for the government. It first has to have money in its deposits at the Fed to draw from. It gets that from selling securities to the banks," - Stan

      Treasury has every tool necessary to spend regardless of it's own balance sheet…accounting tricks, whatever, Treasury always manages to pay the bills it has been ORDERED to, not ASKED to pay. That is what is expected of them while at the same time maintaining the charade that our spending is constrained by the Bond Vigilantes™. If you believe in the Bond Vigilantes™ quit wasting my time, you are beyond help.

      Treasury spends by marking up bank accounts in the non-government…if banks purchase government securities they use funds provided by the government through the designated authority (the Fed, a creature of Congress), or private citizens buy them…voluntarily. It is a service to the buyer. Only the 8 primary dealers (banks) can buy bonds directly. The rest can’t, they buy in the secondary market. Either way, Treasury will always be able to spend what it has been ORDERED to spend under any circumstances one could imagine. Except for the nutjobs in Congress, who have been known to shoot themselves in the foot on many an occasion.

      Every dollar produced from thin air by any entity is by authority of the Congress of the United States under the Constitution. The Fed and banks were given their power by Congress, and Congress can take it away. They are SUBORDINATE. There is no constraint on Congress' spending, other than politics.

      **************************

      "When you say "the government"" - Stan

      When I say "the government", specifically I am talking about Congress, the only entity with the authority to create money…but on a broader scale, "the government" is the entity with the highest authority. Making things more complicated doesn't make them more right.

      **************************

      "But to turn around and say that 'Congress created the money when it authorized spending ' that is a fallacy of ambiguity. Treasury can create coins and certain notes." - Stan

      You can't be serious. You need to take step back and examine your logic before you hit "post". Treasury does not have the power to do what it pleases. Ever. It is paying bills appropriated by Congress…creating new coins or notes (subs to the Fed) to replace old coins and currency that has worn out is not money creation, it is money rplacement. That operation is not spending, it's maintenance.

      Congress appropriates SPENDING, which creates money.

      ***************************

      "hand-waving without getting into the specifics" - Stan

      Specifics have zero effect on how much is spent. Congress dictates that…and Treasury does not have the power to say no we don't have the funds. or no we don’t want to. If they did, heads would roll.

      This is all 99% of the population needs to know…when Congress appropriates spending, the die is cast and the money will be spent. There is no one with the authority to say no after that.

      Can Treasury ever tell Congress it doesn't have the money? I don't think so.

      If Congress appropriates $1T to spend on whatever, Treasury will spend $1T on whatever, period…it doesn't matter how much accounting gymnastics take place in between…Treasury pays Congress' bills, an accounting entry is made after-the-fact in a ledger.

      Nothing ambiguous about that.

      You seem unable to get to the root of a problem. You conflate mangement with authority consistently.

      Is gravity authority or management? A lot of things can happen between the time someone jumps out of a plane and the time he hits the ground. The outcome is known. He will meet the ground. If he doesn't have a parachute it will be a hard landing.

      ****************************

      Your final paragraph is incoherent…again, something I wouldn’t expect from an engineer. The first step in solving any problem is to DEFINE THE PROBLEM. Otherwise you will end up solving the wrong problem.

      Operations are meaningless in the sense that once Congress appropriates the funds, there is no question the funds will be spent. I can’t stress this point enough. What happens in-between only matters to academics. If you are an academic, go for it. otherwise, If the outcome is known, who cares? All I care about is cause and effect, not how it gets there, because that is how problems are solved. The in-betwen is trivial by comparison. Every fiat monetary system country gets the same result using different accounting procedures.

      Are you aware of Occams Razor? The Pareto Principle? John Maynard Keynes once said “It is better to be mostly right than precisely wrong”.

      Do yourself a favor and learn how to define the problem before you set out to solve it.

    • profile image

      stanfrmmarietta 3 years ago

      pjmeli quotes stan and comments:

      ""In our system it [money creation] begins with deficit spending." - stan

      pjmeli: "Again, noted several dozen times already. Have read anything I've written?"

      I wasn't saying you did not hold this idea. I was just stating it as a MMT position I hold. Here we actually agree. But saying something begins with

      something else doesn't tell the whole story.

      "The quote by Bernanke merely stated that the government marks up private bank accounts when it spends. That has nothing to do with the FED…it is Congress that creates this spending." --pjmeli

      Here is what Bernanke says in his book "The Federal Reserve and the financial crisis": "You might ask, 'The Fed is buying two trillion dollars' worth of securities. How do you pay for that?' The answer is that we [the Fed] paid for those securities by crediting the bank accounts of the people who sold them to us. And those accounts at the banks showed up as reserves that the banks would hold with the Fed. So the Fed is a bank for the banks. Banks can hold deposit accounts with the Fed, essentially, and those are called reserve accounts. And so as the purchases of securities occurred, the way we paid for them was basically by increasing the amount of reserves that banks had in the accounts with the Fed."

      "I will take this opportunity to point out that the government doesn't deficit spend…the non-government saves, what is left over pays taxes…leaving a number we refer to as a "deficit". The government does not choose to deficit spend…it's an ex-post event…you can't "choose" something after-the-fact." -pjmeli

      The government can decide to spend more than it has collected in taxes as long as it knows what it has collected in taxes. The difference between spending and taxes is the deficit. Congress struggles with this issue all the time. But this is not yet money creation. If I tell you that you are authorized to buy a house for $150,000 that does not mean you can do so unless you have $150,000 to spend. If you only have $100,000 in cash in the bank, you will have to get a loan for $50,000 to make up the difference. So, you go to your bank and see if you can get a loan for $50,000. That means you have a debt of $50,000 to pay back. The Treasury can't distribute money it doesn't have to parties designated to do work for the government. It first has to have money in its deposits at the Fed to draw from. It gets that from selling securities to the banks, which are like IOU's with a designated repayment date.

      The banks buy them at discount, with the difference between the discount and face value of the security the interest it will be paid at full redemption. So, the banks put the securities up for sale at the public auction when they mature. The Fed buys mature securities at its pleasure (it depends on whether there is inflation or deflation going on). It normally buys during deflations, sells during inflations. It pays with new money it creates out of thin air by augmenting the entry in the banks reserve spread sheet at the Fed with the needed amount. At this point there is new money creation. It is being created by the government because the Fed here is functioning as an agent of government.

      There is another issue I won't deal with, and that concerns whether the reserve

      upgrade is the same as paying back the loan by depositing in the loan account at the bank. Can bank reserves be used as already existing money to pay back depositors? The banks lent already existing money or private bank money. They took a hit in reduced reserves when they made the loan. Shouldn't the Fed deposit in the loan deposit of the reserves. (maybe it does). I can't deal with this now, because I have just encountered this and am trying to get my arms around this.

      problem in a blog by Cullen Roche on the national debt.

      A major problem with discussing economics is that everyone tends to make fallacies of ambiguity. Words mean one thing then another and another. We need to anchor them in specfic realities.

      When you say "the government" you are just hand-waving without getting into the specifics of how this occurs in reality. You are committing a fallacy of ambiguity.

      Here "government" has many parts and each part does certain things. Congress, the Fed, Treasury, the Administration, etc. are parts of the government. Different governments are constituted differently, and the parts interrelate in different ways in different governments. First you say that the government does deficit spending which creates new money. Taken as a whole, including Congress, Treasury and the Fed, you are correct. But to turn around and say that 'Congress created the money when it authorized spending ' that is a fallacy of ambiguity. Treasury can create coins and certain notes. Fed creates Federal Reserve Notes either by ordering their being printed or whenever it creates them in digital entries in spread sheets.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Pjmeli, you need to realize that fiat money is created at some point." - stan

      I left off the obvious…fiat currency is created when Congress passes spending bills…the Treasury distributes the money by marking up the bank accounts of the targets of the spending with keystrokes…something that used to be done with pencil and paper.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "According to MMT, that constraint doesn't apply in a fiat money system to the central government sovereign with respect to its money supply." - stan

      That isn't what MMT says…with MMT, the money supply is Net Savings from the sectoral balances, plus the dollars the Treasury adds to the account…by collecting taxes less than spending.

      The "money supply" the Fed is dealing with is reserves, which is meaningless since we are never serve-constrained. It is a bogus metric of little real-world use, it just promotes the myth that credit (the Fed) drives the economy.

      Public spending drives the economy.

      ***************

      "we use the Fed as a federal entity buying and selling of securities is allowed by law to the Fed), then the central government is creating and issuing new money. The Fed is not just moving around assets already in existence. It is creating new money. Bernanke has said as much.' - stan

      The quote by Bernanke merely stated that the government marks up private bank accounts when it spends. That has nothing to do with the FED…it is Congress that creates this spending.

      The Fed creates no net money, just assets and liabilities that add to zero. No MMT academic says that the Fed creates net money…it springs from the sectoral balances identity…the Fed is nowhere to be seen in that equation.

      *****************

      "Pjmeli, you need to realize that fiat money is created at some point." - stan

      Umm, I've only noted that several dozen times…proof you don't really read my comments.

      *****************

      "In our system it begins with deficit spending." - stan

      Again, noted several dozen times already. Have read anything I've written?

      I will take this opportunity to point out that the government doesn't deficit spend…the non-government saves, what is left over pays taxes…leaving a number we refer to as a "deficit". The government does not choose to deficit spend…it's an ex-post event…you can't "choose" something after-the-fact.

      *****************

      "But while it looks like the government is borrowing money from private banks…"- stan

      It doesn't look like that to me…

      *****************

      "it ends up with the Fed redeeming the debt to whomever holds the securities (IOU's) and the deficit spending becoming debt free and fungibly new money." - stan

      Stan, no. Those securities are never redeemed. Only the interest rate (yield) changes. I led you to to treasurydirect.gov…there it is clear the securities remain. Debt Held by the Public keeps going up. This is in direct contradiction to what you just wrote and have written before.

      If the Fed were buying securities for cash Debt Held by the Public would decline…the debt would transfer over to intra-governmental holdings.

      Repeating simple accounting back to me does not make your point, which, btw, I still don't know what is.

    • profile image

      stanfrommarietta 3 years ago

      stan:

      "I think MMTers are looking at the wrong thing when they note that QE2 etc.

      is ineffective…debt free money created ex nihilo by the Fed in buying the

      securities from the banks." - Stan

      pjmeli: "The money the Fed moves around is saving…saving has no effect on demand

      (spending) by definition…saving is income not spent. Since saving is always

      increasing, spending cannot emanate from that source.

      This leads to an important insight…not one penny of savings can be drawn

      down on (spent) until all of one's income is spent…it's mathematically

      impossible to do so, no matter how hard one tries."

      Stan:

      According to MMT, that constraint doesn't apply in a fiat money system to the central government sovereign with respect to its money supply. if we have a fiat money system, (in ours we use the Fed as a federal entity buying and selling of securities is allowed by law to the Fed), then the central government is creating and issuing new money. The Fed is not just moving around assets already in existence. It is creating new money. Bernanke has said as much.

      pjmeli: "When an agent exhausts his income (spends more than his income) then it is

      possible to spend savings…but not until then.

      "I think MMTers are looking at the wrong thing when they note that QE2

      etc." - Stan

      Stan, I think you've been spending too much time over at Monetary

      Realism.com.

      ?Try Mike Norman Economics instead."

      I've shared my views with Mike and he liked them.

      Pjmeli, you need to realize that fiat money is created at some point. We

      don't just move around money with a constant money supply in existence.

      In our system it begins with deficit spending. But while it looks like the

      government is borrowing money from private banks, it ends up with the

      Fed redeeming the debt to whomever holds the securities (IOU's) and

      the deficit spending becoming debt free and fungibly new money.

      A debt is redeemed when a borrower returns an equal amount of money

      borrowed to the lender plus interest and the lender returns the IOU to the borrower.

    • profile image

      stanfrommarietta 3 years ago

      "But I think this [buying securities from Fed and other agencies with

      Treasury issued platinum $1 trillion coins] would be illegal" - Stan

      pmmeli: The law itself says it's legal. Only politics could manage to make it look

      illegal.

      Stan: It is legal for the Treasury to create a $10 trillion coin, But what it spends it on has

      to be authorized by Congress.

      stan: The securities were authorized by Congress, because Treasury is authorized to cover any debt of the government. But the Fed creates new money to buy them, and since it now holds them the government has redeemed the debt to the banks. So, if the Treasury turns around and creates a $10 trillion coin to buy all those securities at the Fed, it is making a second purchase for the government of the same securities it now holds? Is that authorized by Congress if it is acknowledged that the Fed has already redeemed the debt?

      You don't have to look to any particular law to recognize that when the Fed as a government agency buys the securities from the banks, the banks got their money back and they no longer have a claim on the securities because they no longer have them. That implies the debt has been redeemed. This is just Emperor's New Clothes if you can't see that their debt has been redeemed.

      Don't confuse a debt of government to a specific lender with the obligation

      of the government implicit in its money and securities, where govt. will accept its money for taxes, fees, and fines and sales of govt. assets . That obligation is also indicated in bookkeeping in the liability column.

      When we were on gold backing, there was gold that had to back the purchase of the securities. The Fed had to get back gold to replace the gold it used to make the purchase. So, in effect we were just moving around gold with no change in the gold supply. But Fed couldn't go on making these purchases against its gold supply, without getting equivalent gold back. The only external source would be taxpayers and fines and fees and sales of government assets. All of them were backed by gold. But gold is finite and limited in supply, so Nixon was forced to go off gold in 1971, creating our fiat money system. It is not as straight forward as the greenback fiat system Lincoln and Congress implemented during the Civil War.

      "has been somewhat frustrating on how specifically the Fed actually redeems

      the debt" - Stan

      pjmeli: "The Fed doesn't redeem any debt…did you not look at the data at

      treasury.gov?"

      stan: Again the Treasury and the Fed are functioning like the dollar never went off the gold standard. There are a lot of practices still in effect that should have been phased out when Nixon took the dollar off of gold. Perhaps the Fed likes the constant flow of interest payments, and the Treasury has not rethought its situation. But very

      little discussion followed Nixon's act.

      "The Fed buying securities from banks increases the money supply" - Stan

      pjmeli: "No, it doesn't…when the Fed buys securities it is swapping money

      assets…when it re-sells securities it is swapping money assets. No increase

      either way. This is simple arithmetic. No velocity is created either. See

      further down for the reason why."

      This is where MMT as a theory of fiat money disagrees with you. The Fed creates money out of thin air when it buys securities. It does not draw down on assets already held. There is no gold backing which has to be drawn on. Bernanke has said so. The Fed just makes a digital entry in the banks reserves in its spreadsheets that increases the reserves accordingly. That's all there is to it.

      So, there is the money that initially existed before the Fed bought the securities. Some of that was moved to the Treasury from the banks. No increase yet in money supply. But next the Fed buys the securities with new money created out of thin air. The banks now have the same reserves they had before. But the money for deficit spending still exists, so there is an increase in the money supply. Because money is fungible, we can think of this as being equivalent to the banks never lending and the Fed giving the Treasury newly created money for deficit sending.

      You are not an MMT person. MMT persons believe that in a fiat money system there is

      some central government entity that creates and issues new money. It happens in our case to be the Fed. So, that is how our money supply grows.

      "That is important during inflations." - Stan

      pjmeli: "The only tool the Fed has to control inflation is to alter interest rates

      to reduce private borrowing that leads to spending. That tool is no longer

      in it's toolkit…private debt is saturated, and we aren't growing enough to

      change that reality."

      stan:

      To control inflation the government has to raise taxes, encourage imports, encourage savings, raise interest, and the Fed sell securities to drain bank reserves. So, the Fed can't do it alone.

      But during deflations the government has to conduct deficit spending on

      a larger scale to increase money in circulation. Time for major infrastructure

      projects. Exports need to increase. Fed lower interest rate. Fed buys

      securities which make the deficit spending debt free. The banks don't have to lend the additional increment to their reserves for the money supply to increase in circulation. The deficit spending now does that.

      pjmeli: "Private debt moves with deficits…that's where the funds for payments

      originate…if public spending doesn't increase people's income, how could

      credit expand?"

      stan: I agree that Congress has to authorize deficit spending to increase money in circulation.

      But in our system the reality is that Congress only authorizes spending on its various projects. It does not direct by this authorization that Treasury automatically increase its deposits equal to the deficit. Congress does not automatically issue new money with

      its authorizations. If you call this just book keeping, its like saying that a car will burn fuel in its cylinders, without specifying how the fuel gets to the cylinders from the gas tank

      when driver presses down on gas pedal. Sure, it is correct to say that Congress initiates new money spending, but you have to show how it actually works in any given system and we have had several of these. During the Civil War Lincoln had Congress authorize the Treasury to issue Treasury notes to cover deficit spending. The private banks wanted to charge Lincoln from 25% top 35% interest to lend Treasury the money. Those were called "greenbacks". But that power was taken from Treasury by Congress and bank notes were issued by banks. But the Federal Reserve Act of 1913 required that it would create the new money, and private bank notes were no longer to be accepted.

      Treasury thus has some money collected from taxes to cover the spending. But it also needs to create securities equal to the deficit and sell them at auction. The money from banks is deposited in the Treasury's account at the Fed. Bank reserves drop when they lend money to the government via the Treasury. So, they would like to get their money back plus interest so that their reserves will come up to what the law requires them to have, even if they make loans independently of their current reserves. They will have to increase their reserves to meet reserve requirements on the loans not initially backed by reserves. They will borrow from other banks, or the Fed, or sell the securities at auction. So, the securities may get passed to another bank as long as they have not reached redemption date. The Fed usually waits for securities to mature before buying them. But eventually some bank will be holding the securities when they mature, and seek their redemption. The Fed at this point may buy them at the auction. When the Fed buys them, it buys them by simply increasing the holding bank's reserves to the full value of the securities. That effectively creates new money out of thin air in the banks' reserves. We now see that the private banking system's reserves are restored to their original level. But the Treasury still has the money lent to it for deficit spending. So, the overall money supply has increased. Als

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      I thought so…I'm a regular commenter over there myself, and have had a few posts up.

    • profile image

      netbacker 3 years ago

      Pjmeli,

      Yes, I do comment on Mike's site and other related ones. Its only last week or so that I came across this excellent Hub.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      Nathan, haven't you commented over at Mike Norman Economics?

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      Thanks for the comment, Nathan. (I'm in the Deficit Owl group with you, btw.)

      We could use another voice of reason on HubPages. It's insanely conservative here, and the level of discourse is, well, not that great. But we get good exposure on search engines, anyway.

      The current debate is over on my gold v. fiat article. The link is above the comments, if you want to get in on it.

    • profile image

      Nathan 3 years ago

      Excellent commentary guys. I still haven't finished reading all of it, but wanted to drop in a quick note to thank you & ask to see if any of you are on twitter? I go by @netbacker and would love to follow you all on twitter if possible and get the message of MMT across a wider audience.

      Am new to hubpages, will look at what it can offer & sign up.

      thanks again

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "But I think this would be illegal" - Stan

      The law itself says it's legal. Only politics could manage to make it look illegal.

      "has been somewhat frustrating on how specifically the Fed actually redeems the debt" - Stan

      The Fed doesn't redeem any debt…did you not look at the data at treasury.gov?

      "The Fed buying securities from banks increases the money supply" - Stan

      No, it doesn't…when the Fed buys securities it is swapping money assets…when it re-sells securities it is swapping money assets. No increase either way. This is simple arithmetic. No velocity is created either. See further down for the reason why.

      "That is important during inflations." - Stan

      The only tool the Fed has to control inflation is to alter interest rates to reduce private borrowing that leads to spending. That tool is no longer in it's toolkit…private debt is saturated, and we aren't growing enough to change that reality.

      Private debt moves with deficits…that's where the funds for payments originate…if public spending doesn't increase people's income, how could credit expand?

      "I think MMTers are looking at the wrong thing when they note that QE2 etc. is ineffective…debt free money created ex nihilo by the Fed in buying the securities from the banks." - Stan

      The money the Fed moves around is saving…saving has no effect on demand (spending) by definition…saving is income not spent. Since saving is always increasing, spending cannot emanate from that source.

      This leads to an important insight…not one penny of savings can be drawn down on (spent) until all of one's income is spent…it's mathematically impossible to do so, no matter how hard one tries.

      When an agent exhausts his income (spends more than his income) then it is possible to spend savings…but not until then.

      "I think MMTers are looking at the wrong thing when they note that QE2 etc." - Stan

      Stan, I think you've been spending too much time over at Monetary Realism.com.

      Try Mike Norman Economics instead.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      pjmeli quotes Wray: ""You see, the Fed has tried and failed to target Bank Reserves, Money Supply, and Inflation. So, what the heck, let’s have the Fed try and fail to hit Nominal GDP. As if the Fed has any tool that would allow it to do that. Anyone who understands central banking knows that central banks have one tool in their tool kit, and it is not a Hammer. It is the overnight interest rate—the rate at which it lends to banks, and at which banks lend to each other against the safest collateral. That target, in turn, impacts other short rates on other very safe lending and on Treasury Bills. Most bets are off once we move beyond that, however. The Fed has been trying for years to get the mortgage rates low enough to stimulate home buying—using ZIRP and QE1, QE2, and QE3 up the ying-yang to very little effect."

      I targeted my studies on how the Fed in effect redeems the debts to the banks by

      buying the treasury securities from them. Wray has been somewhat frustrating on how specifically the Fed actually redeems the debt. This to me has been a failing of a fiat money proponent. He recommended Treasury

      notes and bills to buy back all the securities at the Fed. This is the same as the

      platinum coin idea, but in paper. But I think this would be illegal, if the Fed

      already redeemed those debts to the banks for the government. The pile of mature securities at the Fed are just like piles of $1000 bills. But they do not take part in any debt of the government to banks or other buyers of securities. And Congress has not authorized any such second buying.

      What happens at the Treasury to the securities when the mature securities come back in swaps with the Fed for immature securities, which can be sold.

      I think MMTers are looking at the wrong thing when they note that QE2 etc. is ineffective. Of course it is ineffective. But the Fed has augmented the money

      supply with purchases of the securities, and these are fungibly equivalent to the debt free money created ex nihilo by the Fed in buying the securities from the banks. Government has to spend new money into the economy to give consumers money to start buying more goods and services from businesses. The economy can grow without serious inflation (3% or so per year is not serious inflation) as long as there is under utilization of productive capacity and available resources at current prices, and serious unemployment. Deficit spending entails new debt-free money creation and augmentation of the money supply in circulation. The very act of canceling the government's debt to the banks makes the funds obtained from the banks debt-free and augmentative.

      The Fed buying securities from banks increases the money supply. But the Fed also sells securities to diminish the money supply temporarily. That is important during inflations.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      Randall Wray, today…

      "You see, the Fed has tried and failed to target Bank Reserves, Money Supply, and Inflation. So, what the heck, let’s have the Fed try and fail to hit Nominal GDP. As if the Fed has any tool that would allow it to do that. Anyone who understands central banking knows that central banks have one tool in their tool kit, and it is not a Hammer. It is the overnight interest rate—the rate at which it lends to banks, and at which banks lend to each other against the safest collateral. That target, in turn, impacts other short rates on other very safe lending and on Treasury Bills. Most bets are off once we move beyond that, however. The Fed has been trying for years to get the mortgage rates low enough to stimulate home buying—using ZIRP and QE1, QE2, and QE3 up the ying-yang to very little effect."

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "pjmeli: You ask me (Stan) where writers like Wray discuss flows." - stanfrommarietta

      Stan, I've never asked you for that information…I 'm well aware that MMT is about flows, so it would not be a surprise that is what MMT academics are mostly concerned with.

      ***************

      Re the discussion about what the Fed can or cannot do, I am not saying that technically the Fed couldn't extinguish the National Debt™, only that by law it isn't allowed to do so.

      There are any number of accounting tricks that can extinguish the National Debt…all illegal except for the Proof Platinum Coin as far as I can tell.

      Of course, the National Debt itself is enshrined in law…it is a law passed by Congress in 1917 that decrees the government must issue bonds dollar-for-dollar with deficit spending.

      Mathematically there are no constraints on our monetary system…the only constraints are self-imposed (voluntary) laws.

      As far as the Fed reducing Debt Held by the Public through it's open-market operations, I will refer you to this site (treasury.gov)…

      http://www.treasurydirect.gov/NP/debt/current

      Where you are free to look at Public Debt over any period.

      What you will find is that public debt never goes down in the net…there may be some day-to-day downticks but over the budget cycle the debt is always equal to the deficit for that year.

      The exact amount Treasury spent minus taxes.

      The Fed is not involved in public spending, it isn't allowed to be.

      The Fed and all banks in the banking system are subordinate to the government…therefore banks are not in a position to lend the government it's own money.

    • Ralph Deeds profile image

      Ralph Deeds 3 years ago from Birmingham, Michigan

      Here's the "standard" deficit economics that I learned in college:

      http://www.nytimes.com/2013/10/31/business/cutting...

    • Ralph Deeds profile image

      Ralph Deeds 3 years ago from Birmingham, Michigan

      Here's the "standard" economics that I learned in college:

      http://www.nytimes.com/2013/10/31/business/cutting...

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      I'm still trying to get a handle on what Treasury does with securities it gets back in swaps with the Fed for giving the Fed immature securities with active future redemption dates. Maybe the mature securities represent the backing for the deficit spending dollars, the securities themselves backed by the newly created dollars given to the banks for the securities by the Fed. So, while the deficit spending dollars represent a liability of the government to accept the taxes, fines, and fees of whomever gets those dollars, the security is an asset backing them.

      I'll have to see what Treasury says they do with them? Maybe they don't extinguish them, just record them in some spreadsheet somewhere and burn the physical

      representation of them.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      pjmeli: You ask me (Stan) where writers like Wray discuss flows. Have you

      read his recent book "Modern Money TheoryL A primer on macroeconomics

      for Sovereign Monetary Systems"?

      Get the book and look at pages 1 - 38, 58 - 69,96-97.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "The national debt gets paid off one security at a time each time the Fed buys a security from a bank or other financial institution." - stanfrommarietta

      Stan, this is completely wrong.

      The National Debt gets paid down when budget surpluses occur and would only paid off if we ran a string of budget surpluses that totaled the National Debt.

      Taxes in excess of public spending is the only means possible to extinguish the debt, unless we utilize an accounting gimmick, like the Proof Platinum Coin, to remove it from the balance sheet (actually, it isn't removed...it's just moved to a different ledger marked as paid and replaced with an asset...the coin.

      Perfectly legitimate because creating money from thin air is an accounting gimmick too.

      The problem with doing this is that instantly all interest paid would cease and Trillions of dollars would have to find a vehicle providing safe storage (and interest) that provided liquidity without risk...there is no such thing (other than government bonds). Further, all future savings in large amounts would be subject to the same risk.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      Ralph,

      I read Krugman's essay in our Atlanta paper. It was great and sounded a lot like a Mike Norman attack on the doomsayers from the MMT point of view. But I was disappointed, because while he pooh pooh's the idea that we have enormous debt that we cannot pay off, he does not spell out the specific way in which those debts are indeed paid off. So, his readers don't have reason to not believe he is just lying, making it up.

      He needed to say that while the Treasury borrows from banks to cover deficits, it does so with securities, which are IOU's of the government. But then the banks put the securities back up at auction, and if they are mature, the Fed most likely buys them. When the Fed buys the securities with money created out of thin air, that redeems the government's debt to the banks. That does not automatically extinguish the securities as fungible money instruments. The Fed will trade the mature securities for new securities with new future redemption dates. At that point, the Treasury has those securities back and it can extinguish them if it so desires. But the debts to the banks and other nongovernmental agencies are paid off when Treasury securities and bonds are bought by the Fed. Meanwhile the securities held at the Fed are counted by law as a large part of the national debt. In reality they do not represent debts to banks, but the debt obligations of the government to honor its money instruments, which securities are. So, Congress counting these securities at the Fed and the government Trust funds as "debt" that the American taxpayers have to pay back. is absurd, ridiculous, and ignorance.

      The national debt gets paid off one security at a time each time the Fed buys a security from a bank or other financial institution. The Fed in doing this is acting as an agent of the United States government, empowered by law to buy securities with money created out of thin air.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "…Cullen Roche lists his equations…" - stanfrommarietta

      OK, now I understand.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      Ralph, Dalio says most of the same things I've been saying throughout this thread.

      He gets this part wrong or at least gives the wrong impression…

      “The key is to avoid printing too much money and causing unacceptably high inflation, the way Germany did during its deleveraging in the 1920s…”

      Over history, excessive money printing has been a result not a cause. The U.S. has never experienced this, likely because we have yet to lose a war.

      The cause of Weimar Germany's hyperinflation (and Zimbabwe as well) was a drastic loss in production while trying to repay war reparations from WWI. The loss in production caused prices to rise and Germany had no option (the option was to go back to war) so instead attempted printing money faster to try to keep up. This game always fails (mathematically) and so the outcome wasn't surprising.

      Note that in the end Germany did go back to war, at great expense to the rest of Europe and the U.S. as well. Not imposing reparations (by the allies) would have been much less expensive and the smart thing to do.

      We learned our lesson after WWII, not imposing reparations, but instead helping to re-build the losers.

      In the case of Zimbabwe the (drastic) loss in production came about when the new government replaced established white farmers with inexperienced black (natives) farmers when the country came under control of the black majority.

      Production dropped because of the inexperience and prices rose drastically, the government printing money faster and faster in an effort to catch up, which was impossible unless production suddenly increased.

      The U.S. is in a position completely opposite… we have the ability to produce way more than we are, because consumers don't have enough money to spend, so we have high unemployment/under-employment and a stagnating economy, approaching deflation.

      It would be very difficult for us to print too much money right now…to employ everyone willing to work would probably require we spend between $500B and $1T more each budget cycle for the foreseeable future.

      Whatever deficits occurred would be the savings desires of domestic and foreign savers.

      Saving is income not spent…and in the net it will never be spent. How do I know that? Because savings has increased steadily over history…it has never declined except maybe for brief periods during depressions, and mathematically in order for savings to decline the economy would have to be so bad that most people would have no income, thus would have to spend out of savings.

      If one has no savings, one cannot borrow long-term because savings (a residual from income) is what it takes to make loan payments.

      It follows that since public spending funds savings, then public spending also funds loan repayment.

      Note that Dalio in his video is talking solely about private debt and subsequent re-payment…he doesn't mention public debt as the problem.

      If it is a problem, then the other problem (too much private debt) has no solution.

      Simple logic…the economy isn't that hard to understand (as long as one gets a few hints along the way). Expecting everyone to figure this out by themselves is asking too much.

    • Ralph Deeds profile image

      Ralph Deeds 3 years ago from Birmingham, Michigan

      "How the Economic Machine Works in 30 Minutes"

      http://dealbook.nytimes.com/2013/10/21/economic-th...

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "my claim is that this happens when the Fed buys T securities with money it created out of thin air. That eliminates the debt to the banks." - stanfrommarietta

      No, it does not.

      First of all, the government does not owe a penny to the banks, it's the other way around. From where does a bank get the power to create state money?

      Secondly, and this will be at least the fifth time I've stated it…if the Fed buys a security that is already held in the private sector it is an asset swap…the change in NFA is zero. Example…

      Current National Debt (held by the public) ~ $12.1T , made up of bonds and dollars (we don't know how much of each but if you really want to know I can find out from someone I know where to look).

      Fed buys $2T worth of securities…Then…

      National Debt =$12.1T, with $2T more dollars and $2T less bonds in the non-government.

      You seem to think that the dollars are then spent on goods and services…I doubt that seriously…wealthy people spend out of income, not savings, otherwise in the net savings for that cohort would be declining (it isn't).

      If this amount of money is spent on a financial investment or in the purchase of a company or business, or on any existing enterprise, there is no effect on GDP.

      The other reality you don't seem to be considering is that simultaneously the Fed is selling $2T worth of securities at a different yield…

      So the relationship between the level of dollars and bonds doesn't change much but the portfolio rate is changing, ie the level of interest the government pays on the National Debt. That has been declining over the past 5 years.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "People like Bernanke and others at the Fed obviously recognize the fiat nature of our money, but they are loath to use terms like "make money out of thin air", "make money ex nihilo". Why? I don't know but they seem to be trying to obscure this fact." - stanfrommarietta

      Stan, This is naive. If the citizens knew how simple money creation was and how it can provide for prosperity for everyone (practically speaking) the elites would lose most of their power.

      You're mystified by that idea?

      Still, this has liitle to do with the mechanics of money-creation, which boils down to taking something from the non-existence side of the ledger and entering into the existence side.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "…my reading of MMT authors is that they stress that neoclassical economists do not pay attention to money flows in the real banking system…" - stanfrommarietta

      I think you're mis-reading then. Find me an example of an MMT academic looking at flows in the banking system where they are not trying to show that there is no financial constraint to government money creation, and banks don't create net money. That is hardly an examination of flows that affect the economy.

      The banking system is entwined with public spending by design, so bankers can bee seen as calling the shots. This is a power issue, not financial.

      The point is, all MMT academics recognize that banks create no NFA, and MMT is all about NFA (hint…it starts with the Sectoral Balances), it's distribution within the non-goavernment and the idea that we can always afford to buy what we can produce no matter what the cost.

      ***************

      "The thing I have faulted some MMT authors for is that they claim we have a fiat money system, but do not demonstrate how it does and where the government actually pays off the national debt." - stanfrommarietta

      The National Debt was never intended to be paid off by the people that designed the system…ever. It would be disastrous, and it is practically-speaking impossible (in other words it's only possible mathematically).

      Make everyone give up their net savings? You are suggesting that as a goal?You clearly have not been reading the comments in this thread, even from the point you joined…this has been discussed ad-nauseum.

      WRT private debt there are more liabilities in the system than there are dollars available to pay them back as a consequence of distribution.

      The asset side of private debt is held by the top 0.1% of the population, or is tied up in pension funds where it must remain until it is disbursed, the liabilities are held by the rest of us. It is effectively impossible to transfer the money held by the top to us. How would you suggest "we" do that? We would have to confiscate all their financial wealth, but that still wouldn't pay it off. Then we can start with the National Debt.

      The only possible source of dollars to repay the debt is public spending…the banking system cannot create those dollars beacuse whenever it creates a dollar it creates an equal liability so the solution merely makes the problem worse.

      The only liability the government (which is by the way us) has with regard to paying off the National Debt is to pay interest, at rates set by the Fed, i.e. the government, to the private sector.

      This liability, which was entered into by choice and could thus be exited by choice, adds NFA to the non-government…which itself adds to the debt…again going in the wrong direction.

      To make an argument that taxes should pay off the National debt is to make the argument that citizens should have to pay back all of the savings they worked for and earned…it's absurd on it's face and impossible besides if one’s goal is to maintain a functioning economy and social order.

      ***************

      "You may have a theory of how an automobile in general works, but to apply that theory you have to have more specific descriptions of how that works in a given automobile." …stanfrommarietta

      This is a logical fallacy…once you know how an automoboile works it is a trivial exercise to produce automobiles of different kinds…the differences are trivial, and we have engineers and workers that do that.

      What would not happen is building an automobile without understanding how.

      The U.S. produces one kind of money…dollars (two if you include bonds). To say that it requires a different set of operations to produce coins of varying denominations is a stretch. Money (net) is created one way…Congress spending…there are probably endless ways to accomplish this but the exact same product emerges at the end in exactly the amount appropriated.

      If you really understand that F=ma every solution is trivial. It got me through engineering school. The sectoral balances identity (core of MMT) is the economic equivalaent of F=ma.

      The system that produces these accounting objects is pretty simple at it's root (if one is interested in such things), but you can't burrow down any deeper than Congress being the entity that creates the money…everything else is nothing more than going through an orchestrated series of operations to end up where the conclusion was already known.

      It’s about as dramatic as professional wrestling. Imagine how interesting a football game would be if we knew the final score before it started. I suppose if one was a student of the game and loved it it would be interesting but for the rest of us not so much. The only thing that matters in the end is the final score.

      If you think MMT is more complicated than that you will be missing the forest for the trees.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      John, I understand that we basically do not have theoretical differences. You are concerned with the rhetoric of presenting MMT to people who know little economics or banking. That may work, but I think the trillion dollar coin is essentially illegal beause it represents an attempt of government to buy a security it has already bought and stored at the Fed. There is no Congressional authorization for the second purchase of what already is in possession of a government entity. It is not good to use examples that ultimately don't work, don't represent reality. You seem to be targeting lesser educated people. I think it is also important to educate educated politicians, like our President, the Secretary of the Treasury, and leaders at the Fed, as well as Congressmen and Senators about our fiat money system we actually have. When Nixon took the dollar off of gold backing, there was very little discussion of the implications of this, and many practices that were in place when the dollar went off gold continued in place. People like Bernanke and others at the Fed obviously recognize the fiat nature of our money, but they are loath to use terms like "make money out of thin air", "make money ex nihilo". Why? I don't know but they seem to be trying to obscure this fact. They should be arguing that they already have paid off the debt to the banks and that the pile of securities at the Fed no longer represent specific debts to specific individuals but are just debt obligations of government related to obligations of government to those who use the government's money. The debt ceiling law, however, specifically lists the value of securities held by the Fed, government trust funds (like Soc. Sec. Trust Fund) and perhaps even those bonds bought by investors as time deposits (that act like CDs) as part of the national debt and hence used to calculate where the government is with respect to the debt ceiling figure. But these really do not represent any problem for the government. They do not imply that taxpayers will have to produce money to pay the holders for their securities. Actually if taxpayers were required to contribute, that would take money out of circulation equal to the new money the Fed had indirectly injected into circulation when it bought the securities, defeating the Fed's purpose in this of increasing the money supply in circulation.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "Right now you seem to think we need to scrap the current system and introduce new legislation to entirely change the federal banking system."

      No, not at all. I have no problem with bonds, and I don't think Paul does, either. But I find that it's much easier to talk around them and/or simplify them when I'm trying to explain the basics to people without a background in finance and economics. When I talk about changing the law, or minting a trillion-dollar coin, it's always in the context of explaining why bond issuance is not operationally necessary in a fiat system.

      "Better is to show how actually the current system is a fiat money system with all that entails."

      Good luck with that. ;) Maybe if you are trying to convince an Econ major... In my experience, as soon as I lose someone in the details, they give up attempting to understand.

      Stan, you know this stuff pretty well, and you have a different way of explaining it. Write an article already! The more angles we can offer, the better the chances of somebody's light bulb turning on. Right now, I think I'm still the only MMT guy here.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      @pjmeli: ""I find his (me) arguing that I do not have an MMT positiion very weird…" - stanfrommarietta

      "Only because your arguments have focused on Fed operations so far. You will rarely read any MMT academic discussing Fed operations other than make the point that they don't create NFA, there is no mathematical constraint on public debt, and we don't have to borrow to spend. Scott Fulwiller is an exception but he is engaging in the points outlined above." - pjmeli

      This is strange because my reading of MMT authors is that they stress that neoclassical economists do not pay attention to money flows in the real banking system. They do. Scott Fulwiller does. The thing I have faulted some MMT authors for is that they claim we have a fiat money system, but do not demonstrate how it does and where the government actually pays off the national debt. It doesn't let debt pile up forever then do a ten trillion dollar move to eliminate the debt. It does it all the time. And my claim is that this happens when the Fed buys T securities with money it created out of thin air. That eliminates the debt to the banks. That means that the Treasury now is covering the deficit in the spending with debt-free dollars equal to the money it got from the banks. Furthermore this move allows one to regard the money in the economy as having been augmented equal to these debt-free dollars. It doesn't matter whether the banks go on to increase their lending after having their reserves restored to their former level. Money is fungible, so we can think of the Treasury as having gotten the equivalent of the money paid to the banks by the Fed. But the Fed never gives Treasury a dime in this, which keeps it to within the law that Fed cannot buy securities from the Treasury. So, this is how the Fed redeems the national debt (its part of it). We have a fiat money system where the government ultimately gets debt free money that is equivalent to new money entered into the system. The result would be the same if Congress actually deposited money equal to its spending in a Treasury account at the Fed, or if the Treasury could create the money to spend itself out of thin air without borrowing from the banks. Or if the Fed actually gave Treasury whatever new money it needed on request.

      Also much of the so-called national debt in the pile of securities at the Fed is only the debt obligation the government has in any dollar bill: govt. must accept dollars as proper payment for taxes, fees, and fines. The securities are fungible money instruments. We don't confuse that debt obligation with the debts between parties represented in dollar accounting units, like between the government and banks, or between businesses, or between individuals in the economy. Nobody but a federal government entity, the Fed, holds them, and as an agent of the government, it does not have a claim to be paid for the face value of the securities. All it has claim for is 6% of the interest on a security it has acquired. This funds Fed operations. The practice of paying the Fed full value for the securities arose during the time the dollar was backed by gold. As it stands the Fed returns all that money less its 6% of the interest as transaction fees used to fund the Fed independently of the whims of and political influence of Congressional appropriations.

      You may have a theory of how an automobile in general works, but to apply that theory you have to have more specific descriptions of how that works in a given automobile. Right now you seem to think we need to scrap the current system and introduce new legislation to entirely change the federal banking system. I claim that that is not really necessary, and furthermore is unlikely to get much political support. Better is to show how actually the current system is a fiat money system with all that entails.

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      Ralph,

      There is a group of heterodox economists, among the MMT economists, like at the University of Missouri at Kansas City. Perhaps the most thoughtful critics of the current received view, the neo-classical economists, are Steve Keen and Yves Smith.

      Keen is the author of "Debunking economics", a critique of neoclassical economics, while Smith is author of ECONed. These are more sympathetic to monetary theories.. Keen works with nonlinear systems models. He disagrees with the idea that the market has a tendency to return to equilibrium. He predicted the 2007-2008 crash starting in the private shadow banking system on the basis of his model simulations. He gives me the impression that the kind of economics you got taught in college is analogous to astrology in the middle ages. It is not based on empirically tested foundations but is a system that begins with "self-evident" truths and seeks to derive logically consequences of these. It rarely attempts to test empirically the predicted consequences. Keen wants to make economics a science based on empirical evidence. He also wants economists to learn how to deal with nonlinear systems, which can have positive feedback loops that can cause an economy to go out of control and lead to collapse.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      Ralph, the National Debt is identically equal to non-government savings.

      It follows that non-government savings minus net exports equals domestic savings.

      Why do you think we can have too much savings if we can earn it?

      The National Debt is not a measure of debt…just the opposite, it is a measure of how many dollars the world has saved. Why would the government have to borrow that which only it can produce?

      These are questions you will have to answer if you want to move forward from here.

      Whether or not MMT is accepted or not is irrelevant…it's a scientific description of real-world systems that will behave as expected regardless of what economists think.

      Regardless of whether one believes gravity exists or not, we can say with 100% certainty that if one walks off a cliff he will drop, and continue in that direction until something stops him. MMT is that intractable.

      There is nothing in economics that can tell us anything with that kind of certainty…MMT can. Economics as a whole should be discarded and re-invented from the beginning.

      Krugman has accepted several tenets of MMT that he originally ridiculed…it's just a matter of time until he accepts it all. He has little choice if he is intellectually honest. Some problems have only one solution.

      When Einstein came up with his theory of relativity very few accepted it. Did that make him wrong?

    • Ralph Deeds profile image

      Ralph Deeds 3 years ago from Birmingham, Michigan

      "Ralph, the sad thing about Krugman is his denial of MMT, despite gradually accepting it's core ideas on-by-one. He's almost there but still in full denial.

      I'm afraid in the end he will claim he "knew it all along".

      Well, I have faith in Krugman because his position is consistent with what I learned as an undergraduate economics major and in a graduate school MBA program. I hadn't even heard of MMT until this forum discussion. Krugman (nor I) are fans of Pete Peterson, et al.

      I gather that MMT, whatever it's merits, is far from being a widely accepted theory by hawks or neo-Keynesians. It's hard for me to see that there is now upper limit on the national debt although I'm not worried about it at the moment.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "I find his (me) arguing that I do not have an MMT positiion very weird…" - stanfrommarietta

      Only because your arguments have focused on Fed operations so far. You will rarely read any MMT academic discussing Fed operations other than make the point that they don't create NFA, there is no mathematical constraint on public debt, and we don't have to borrow to spend. Scott Fulwiller is an exception but he is engaging in the points outlined above.

      What the Fed does is strictly bookkeeping and accounting (sorry, I had to say this one more time)…nothing is created by any operation it performs. It takes willing and qualified borrowers for that to happen wrt the banking system. If no one wanted to borrow money we wouldn't need a Fed…there would be no point. For many, borrowing is a trap and it is this trap the banking system (and TPTB) wish to catch us all in. It catches the weak and the uninformed.

      It was you who first said that my comments were inconsistent with MMT, yet you failed to note a single instance. In a discussion your goal should be to undermine the other persons premise if you wish to prove your point. You have been missing the target. No worries, we're all on the same side here. Don't be so sensitive.

      I look at the comments I make here as practice, and I welcome challenging arguments because it makes me make better ones in return. In this way when the argument matters (Austrians, monetarists, or Conventional Wisdom™) I can go straight for the jugular.

      ***********************

      "Yes the government has to continue to create and spend money to keep our economy going . That helps drive the economy. But so do the banks." - stanfrommarietta

      Banks are able to create money because willing and qualified borrowers exist, and because the government allows them to do so. Banks create state money under oversight by the Fed which in turn is overseen by the Federal Government. The Fed exists as an act of Congress, and in the same way could be eliminated.

      Banks require public spending to function, because that is where the funds to make the payments come from. A banking system cannot function (sustainably) without public spending. This should be obvious if one is aware of and internalizes the 2nd Law, which basically tells us that perpetual motion is impossible. There is friction in money flows…saving being the main one, imperfect settlement is another, which makes money flows behave like all other flows in the known universe (water and electrical current are the best examples).

      Banks create vacuums (bubbles) that only public spending can fill. If the bubbles get too big, public policy can't react quick enough to fill them and the bubble bursts, creating unemployment and losses…mainly for the 99.9% (us).

      Banks are a proxy for public spending…they put the decision to spend in the hands of borrowers instead of the government, although after the first transaction the same can be said of government spending.

      The main difference is targeting…the government can decide where spending occurs in an attempt to get the most bang for the buck. Not saying it succeeds at that but that's for another discussion.

      So, in the hierarchy of things public spending is at the top. Banking provides an important function in a modern capitalist society but it is not a neccessary and sufficient condition for commerce. See the Eurozone for further evidence.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      ""So taxes as a means of draining money out of circulation in the economy is an MMT position."

      It matters who is taxed. Taxing rich people of their excess savings (and they have plenty of it) won't do anything to lower inflation, while taxing consumers will.

      Then again, it's hard to tax people that aren't working, although they still try…people on SS have to pay taxes on it and unemployed students have to repay their student loans regardless (it's effectively a tax…the government now holds all student loans).

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      Ralph, the sad thing about Krugman is his denial of MMT, despite gradually accepting it's core ideas on-by-one. He's almost there but still in full denial.

      I'm afraid in the end he will claim he "knew it all along".

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "…so I try to keep things as simple as possible…" - JohnfrmCleveland

      In fact, they are simple…when did complexity ever make anything easier to explain? The most powerful laws of the universe…things that "just are" or are undeniably true…are very simple concepts…2nd Law of Thermodynamics, closed-systems, entropy, conservation of mass, energy, etc. are all very simple ideas, although abstract.

      Once you can apply those concepts to real-world problems you are off-and-running, ready to do battle with the so-called smartest people in the world, who in reality aren't really any smarter than you.

      A quote I like says it all…

      "Do you not know, my son, with how little wisdom the world is governed?" - Axel Oxenstierna

      Most extended debate in a discussion is different ways to explain the same idea hoping the light will come on or the dots will get connected.

      That's the wonderful thing about starting with the core ideas or foundation…that which is undeniably true…one need never worry about making arguments from shaky ground.

      Base an agument on an opinion or false premise and you are in trouble from the start.

    • Ralph Deeds profile image

      Ralph Deeds 3 years ago from Birmingham, Michigan

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      @Stan - I'm sure we are all on the same page here, more or less. But I have to admit that some of your wording confused me as well. Paul and I have been debating (on the same team, of course) for over two years now, and we are pretty familiar with each others' thinking, and each others' shorthand, too. There really isn't an official "language" of MMT (contrast to the Austrians), so MMTers often confuse each other with our particular ways of saying the same thing. My articles here at HubPages are directed at noobs (and usually very hostile noobs), so I try to keep things as simple as possible. People here tend to wander in, while at other, more economics-oriented sites, you get people that are seeking out the material and are more likely to understand it, or at least give it a chance. So for my purposes here, I take some liberties.

      ***********************

      "During that time, Australia was exporting billions of dollars worth of iron ore to China . So Australia had a strong inflow of dollars that canceled the deflationary effects of the fiscal surplus."

      I find Australia particularly interesting because they are, I believe, net exporters. But if the Chinese are paying for their ore in Australian dollars, they must be getting them from somewhere. Did Australia run deficits in the past?

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      After quoting Mosler on the idea that taxes are needed to ffight inflation, Stan concluded: "So taxes as a means of draining money out of circulation in the economy is an MMT position."

      @Johnfrmcleveland: "Stan - when Mosler is talking about the need to tax to cool off a hot economy, he's talking about a (theoretical) situation where the economy is running at full speed. But when he talks about our current situation, he always points out that we are nowhere near full employment, so there is still a need for the government to spend. "

      I know that.

      And that is when you should raise taxes instead of cutting them. You seem to miss my view that this is contingent on precisely what you say above. But it is more than

      hypothetical theory, it would be an MMT recommendation to a government during inflation regardless of its cause.

      But did you notice the implicit concept of inflation that Mosler has?

      "[Taxes] help regulate total spending, ***so that we don’t have more total

      spending than we have goods available at current prices -

      something that would force up prices and cause inflation. ***"

      That's my view of inflation also.

      The point I made in a much earlier post here is that there are a number of inflows and a number of outflows, and the net effect of these on the money in the central pool of economic activity (circulation) must be considered. If there is excess money beyond what is needed to clear the goods and services of full production and employment, then that excess money if continuing to flow in faster than it is flowing out increases demand for goods and services across the board, causing inflation.

      Savings for later investment and consumption is another drain from circulation.

      At the moment I'm not sure if this was an example by Bill Mitchell, but there is the case of Australia which ran fiscal surpluses year after year without even inflation or deflation. Deflation would be the normal expectation if you (government) continually, year after year, take in more money in taxes than you spend into circulation in the economy. But here is where you have to take a systemic approach: During that time, Australia was exporting billions of dollars worth of iron ore to China . So Australia had a strong inflow of dollars that canceled the deflationary effects of the fiscal surplus. Taxes were sufficient still to offset any inflation arising from the influx of dollars for iron ore.

      Another case is Japan which has deficits more than twice its GDP, but does not have serious inflation. There are a number of explanations for this. My own speculation is that the Japanese are known savers for their retirement. They also have massive imports of fuel and raw materials for manufacturing. The deficits and the heavy exporting help counter the effects of imports and savings so that Japan has a balanced economy.

      We fought two wars in Iraq and Afghanistan with heavy deficit spending on the wars.

      Yet we did not have serious inflation (generally and continual, which Mitchell says is necessary to establish inflation). Why? We even cut taxes under Bush-Cheney. I think the answer is partially that we began importing billions in goods. We bought at the gas pump oil from foreigners (Saudis, Venezuelans, etc..) and dry goods manufactured and imported from China and other Asian countries like at WalMart and Target and other discount stores. Dick Cheney said "Deficits don't matter". He was on to something. They don't matter if you can offset them with some other drain from circulation. ("Circulation" for me is that part of the economy which is concerned with production and consumption of goods and services through which money circulates to keep everything going.

      Pjmeli brings up a different issue, that of a continuing influx of money, without which the effects of what I would call "entropic sinks" will lead to losses here and there and the 'pool' would in time empty and dry up. I have no disagreement with that. Yes the government has to continue to create and spend money to keep our economy going . That helps drive the economy. But so do the banks. And so does the Fed by holding the reserves of the banks on deposit at the Fed, thereby sanctioning the dollars created by the banks as government dollars.

      I respect pjmeli his views, but for me after reading most of the works on MMT, I find his arguing that I do not have an MMT positiion very weird. Perhaps he has formed his own interpretations of what he read of MMT. O.K. We may just have to agree to differ as to our interpretations.

    • Ralph Deeds profile image

      Ralph Deeds 3 years ago from Birmingham, Michigan

      "The only workable solution I see is to nationalize healthcare, including public ownership of the infrastructure, or to re-arrange incentives somehow."

      My letter to the NYTimes published November, 2007:

      NY Times

      To the Editor:

      I live across the river from Windsor, Ontario, and for several years I've asked every Canadian I've met whether he or she would trade their health care system for ours. I have yet to get a ''yes'' answer to that question. And, as someone who is covered by Medicare, I completely agree with Paul Krugman's comment that Americans like the program very much.

      So it seems to me that since we already have a national, single-payer system called Medicare that works quite well, the most logical approach to health care reform would be to extend this system in gradual increments to the rest of the population, starting with the most vulnerable of our citizens -- children, the long-term unemployed and so forth -- until everyone is covered by the program. Am I missing something?

      Ralph Deeds

      Birmingham, Mich., Nov. 9, 2007

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "I used to be a big Bill Clinton fan, until I learned that he was on the PPF team…" JohnfrmCleveland

      He's also the guy that brought neo-liberal economics to the Democratic platform, signed-off on de-regulating Wall Street, and cut entitlements. He balanced the budeget for two years, which set off a recession-depression that we still haven't recovered from, and won't unless we start spending more.

      It's those things, along with Greenspan's easy-credit policies at the Fed, that essentially killed the world economy.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "Meanwhile, millions of children are malnourished and poorly educated. Poor women lack prenatal and postnatal care and health care insurance…"

      What does the money system have to do with that? A major cause of the things you mentionaed is the belief that we can't afford it. Charging citizens for education and healthcare…necessities for a prosperous future…is absurd.

      Thats why most civilized industrial nations don't do it.

      People continue to believe money is a scarce resource…it's not a resource…it's a score-keeping system, and it can't run out of points.

      We (as a country) can afford to buy whatever resources are necessary to provide healthcare to our citizens. Healthcare is mostly labor…we don't have a shortage of that.

      The problems you are focusing on are a result of excess profits for pharmaceuticals, medical equipment, health insurance, excessively-high wages for the industry, etc.

      There are no market forces in action that will drive costs lower. This is not a competitive marketplace.

      The only workable solution I see is to nationalize healthcare, including public ownership of the infrastructure, or to re-arrange incentives somehow. I'm not optimistic wrt the latter.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      "Meanwhile, millions of children are malnourished and poorly educated..."

      Ralph, I'm not trying to explain why politicians run things the way they do. I'm simply trying to explain how the economy works. Once one understands how fiat money works, and that we are not limited by the number of dollars available to the government, the policy prescriptions are (to me) pretty straightforward - the government should spend enough money to guarantee a certain minimum quality of life for everybody. I'm all for feeding the kids, hiring more teachers, govt.-supplied healthcare, etc., because we have all the resources available to do so. But not everybody has caught on, including (especially?) the people who make the decisions.

      What do you think would happen to a presidential candidate who ran on the platform of increased government spending *and* lower taxes? Most people would think the country couldn't afford it. The idea that we are in tons of debt is so deeply ingrained in people's minds that I don't see us voting our way out of this self-imposed austerity in my lifetime. Plus, we are fighting the likes of the Pete Peterson Foundation, who (with the backing of lots of his many billions of dollars) are actively promoting the idea that the country is in actual debt, and we should chop spending to the bone (anything but raise taxes on the rich!) in order to get out of debt. I used to be a big Bill Clinton fan, until I learned that he was on the PPF team, shilling those stupid misconceptions to people that trust him.

    • Ralph Deeds profile image

      Ralph Deeds 3 years ago from Birmingham, Michigan

      "True, we are espousing views that have a basis in MMT insights, but those insights are based on a solid foundation of math, and a logical view of how the monetary system is arranged."

      Meanwhile, millions of children are malnourished and poorly educated. Poor women lack prenatal and postnatal care and health care insurance. Our health care system is among the worst in the advanced countries. And inequality of wealth and income has reached unprecedented levels to the point where increasing numbers of people are losing faith in our democratic free enterprise system. Not to mention that our government is polarized to the point of dysfunction.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "…if our deficits and debt get increase too far in excess of our growth in GDP and productivity…" - Ralph Deeds

      In order for that to happen wouldn't we have to be near full employment and attempting to buy more than we can produce? It appears to me we aren't anywhere near that situation.

      The ratio of workers to retirees is a red herring…the only thing that matters is whether those working can produce what retirees (and themselves) need. Productivity has increased well beyond the rate of change in the worker/retiree ratio. Further, the folks that designed SS knew this beforehand.

      Considering the increased rate of mechanization, what we should be worried about is whether there will be jobs for anyone. If nearly all workers are replaced by machines where will the spending come from?

      At this point capitalism fails…the government will have to provide citizens with money for spending, or buy it from producers and give it to citizens. Or we would work 1 hour a day or say 5 hours a week.

      The important issue is sustainable resource allocation. Labor is a resource…the most important one.

      Money is not a resource…the supply of money is unlimited…what matters is who has the money necessary for spending to support commerce.

      Those funds originate with public spending.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "My impression is…" - Ralph Deeds

      If your impression is based on conventional wisdom you are likely to be mis-informed…most conventional wisdom is based on propaganda and marketing.

      The conventional wisdom is usually wrong.

      We have been trained from birth to be submissive and do what we are told.

      The military, police, government, the rich, etc. want us to do what they say we should do.

      After 9-11 GWB told us to keep shopping.

      One of the best tools one can possess is the ability to solve problems on one's own without worrying with what others say. We should be skeptics. I don't know if that comes from our parents or genetics. I like this quote:

      ""It is the mark of an educated mind to be able to entertain a thought without accepting it." - Aristotle

      True, we are espousing views that have a basis in MMT insights, but those insights are based on a solid foundation of math, and a logical view of how the monetary system is arranged.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      Ralph - I went over why interest rates aren't subject to market forces in my "gold v. fiat" hub. Basically, the market determines the yield of a bond largely based on risk - as in, what are the chances of GM eventually making good on this thing? Well, the chances of a government that can print up the currency needed to make good on the bond actually making good on the bond are 100% (minus any political stupidity, of course). So no matter how big our debt is, and no matter how crappy our economy might one day become, the chance of the U.S. being able to print up more dollars is always 100%. (The only actual risk to our *willingness* to make good on our bonds is Ted Cruz and idiots like him.)

      Also - we do not need other countries to buy our bonds. Bond issuance is now just a legal hoop we jump through in order to create new dollars, and the government can satisfy that legal hurdle simply by "buying" all of those bonds itself.

      The ratio of GDP to growth - the Reinhart & Rogoff paper that got so much press - that has been shown to be baseless. The best refutation of that theory points out that the debt follows GDP, not the other way around. That is, deficits grow faster because economies do poorly.

    • Ralph Deeds profile image

      Ralph Deeds 3 years ago from Birmingham, Michigan

      My impression is that if our deficits and debt get increase too far in excess of our growth in GDP and productivity we will eventually reach a point where other countries won't buy our bonds and/or where our cost of borrowing will increase. And, as I mentioned, absent a change in our immigration policy, the ratio of workers to retirees will eventually lead to a situation where relatively fewer workers will be supporting a relatively greater number of retirees (and providing their health care).

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "If we were growing faster the proportion of debt to GDP…" - Ralph Deeds

      Comparing Debt to GDP is comparing a stock to a flow…meaningless in any context. it's a major fallacy in economic discourse.

      If you want to compare something compare each annual deficit number to GDP…a flow compared to a flow…much less scary but more accurate. now we are looking at a ratio of .0625 or 6.25%.

      Look at that ratio over several budgets…

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "is it not true that eventually we will reach an amount of debt that will cause our borrowers worry about getting paid and cause interest rates to increase?" - Ralph Deeds

      No. the ability of a government sovereign in it's own free-floating non-convertible currency is unconstrained mathematically.

      The U.S. government can always afford to pay any bill denominated in it's own currency because that government alone has the power to create that currency at will (see Article I Section 8 of the Constitution).

      The U.S. government does not "borrow" and it does not have to "borrow to spend", not in terms of what private borrowers think of as borrowing…paying back principal and interest.

      The government does not pay back debt from income, because the government does not need income. Plus the government pays only interest (voluntarily) not principal.

      The government is not "borrowing" when it creates Treasuries out of thin air and exchanges them for dollars…it is providing safe storage for large holders of dollars…they can't put those dollars in regular savings accounts (insurance limitations) and investing in anything else is risky, and illiquid. Bonds are cash equivalents.

      Further, the Fed sets interest rates, not the market, and interest rates could be set at zero if the Fed chose (yes, the Fed is subordinate to the Federal Government, contray to popular mythology. Unfortunately lately the Fed and the Government have become subordinate to the rich).

      As Warren Mosler (and other MMT scholars) often points out, the natural rate of interest is zero.

      The only constraint on government spending is political…there is no mathematical constraint.

    • pjmeli profile image

      Paul Meli 3 years ago from Mount Dora, Florida

      "that tiny bit of interest isn't going to sway anyone's decision whether to buy goods or buy bonds." - JohnfrmCleveland

      Exactly. Look at it this way…rich people don't ordinarily spend out of savings…they spend out of income…rich people don't spend all of their income, otherwise they wouldn't be rich. If one can spend out of income why would dis-saving occur?

      It follows that savings always increases and the "spending down of savings" ie dis-saving, does not contribute to aggregate demand wrt the rich.

      Everyone else…us…will not spend out of savings unless we have to, or unless we are saving up to buy something. The money we save for an unforeseen shock to our finances or for our future is not on the table unless we have no other options.

      Bottom line…virtually all spending and all saving originates with public spending, which provides both the flows and stocks necessary for capitalism to work.

    • Ralph Deeds profile image

      Ralph Deeds 3 years ago from Birmingham, Michigan

      John, we're not far apart. I agree that the U.S. economy is capable of producing enough to satisfy everyone's foreseeable needs, including Social Security and Medicare. However, that doesn't mean this will happen since the richest Americans' share of wealth and income continues to grow. Secondly, is it not true that eventually we will reach an amount of debt that will cause our borrowers worry about getting paid and cause interest rates to increase? Of course, the best way to avoid this is to increase the growth rate in our country's productivity and output. If we were growing faster the proportion of debt to GDP would decline without any reduction in our national debt???

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      Stan - when Mosler is talking about the need to tax to cool off a hot economy, he's talking about a (theoretical) situation where the economy is running at full speed. But when he talks about our current situation, he always points out that we are nowhere near full employment, so there is still a need for the government to spend. He's constantly calling for an end to FICA taxes (on both ends) and other tax cuts.

      "As for the Fed's selling securities, that looks to me more like they do drain money from the economy. Those sold directly by the Fed to investors like the Chinese do have the effect of taking those dollars out of the economy. Otherwise they might come back and start buying with their dollars, and depending on conditions, that might be inflationary since it increases exports."

      Selling securities does drain *dollars* (but not Net Financial Assets) from the economy, but the impact on the economy is zero. The entities that exchange their dollars for bonds probably weren't going to buy anything anyway - that tiny bit of interest isn't going to sway anyone's decision whether to buy goods or buy bonds. And large institutions simply prefer to hold bonds over dollars. Bonds are used in large transactions all the time. So whether one's assets are in the form of dollars or bonds, it makes very little difference to one's ability to spend.

      I suppose China has enough dollars to cause inflation, if they were to spend them all in short order, but there is no reason that an increase in exports should otherwise cause inflation. I also do not see why an increase in bank lending should lead to inflation, either. By what mechanism do you think either increased exports or increased lending lead to inflation?

    • stanfrommarietta profile image

      stanfrommarietta 3 years ago

      JohnfrmCleveland replied to this remark from Stan:

      Stan said: “When banks are lending because businesses and individuals are borrowing, then their operations to drain or augment the reserves of the banks do control inflation and moderate deflation. But the Fed can't do it alone. There are other operators in the system that get involved in fighting inflation and deflations. The main one is Congress and the central government.”

      "Why do you think the level of reserves affects inflation? Or even spending? Look at the Japanese – they can't drum up inflation no matter what they try."

      I've been rethinking this, John. I think I was looking at the wrong thing. All the Fed does by restoring the reserves of the banks that lent money to the Treasury is restore the status quo (as far as the banks are concerned). They may or may not go on to lend.

      The significant thing is that by buying the securities from the banks with new money created out of thin air, the Fed has eliminated the government's debt to the banks. And further since the amount of new money created equals the amount restored to the reserves of the banks and the amount of money lent to the Treasury, this increases the money supply in circulation when the Treasury spends it for Congress. Money is fungible. So despite the law that says the Fed cannot buy securities from the Treasury, the Treasury ends up with newly created money just as if the Fed had directly given it to the Treasury. The banks are just back to where they were in the first place. And the Fed never gave a dime directly to the Treasury.

      This new money equal to the deficit of Congress, now in circulation, may or may not be inflationary depending on conditions. All those Tsecurities bought by the Fed from banks in QE also have eliminated the government's debt to the banks for them. While those dollars may have been created by deficit spending, they are already circulating in an economy that is in recession, so QE does not have an inflationary impact until the banks start lending again.

      As for the Fed's selling securities, that looks to me more like they do drain money from the economy. Those sold directly by the Fed to investors like the Chinese do have the effect of taking those dollars out of the economy. Otherwise they might come back and start buying with their dollars, and depending on conditions, that might be inflationary since it increases exports.

      Taxes probably could be more effective at draining money from circulation.

      Here is what Warren Mosler says about taxes:

      " Taxes serve to make us want that [government] money -

      we need it in order to pay the taxes. And they

      help regulate total spending, so that we don’t have more total

      spending than we have goods available at current prices -

      something that would force up prices and cause inflation. But

      taxes aren’t needed in advance of spending - and could hardly

      be, since before the government spends there is no money to

      tax." Warren Mosler, "Seven deadly innocent frauds of

      economic policy". p. 2

      "The government taxes us and takes away our money for

      one reason - so we have that much less to spend which makes

      the currency that much more scarce and valuable. Taking

      away our money can also be thought of as leaving room for

      the government to spend without causing inflation. Think of

      the economy as one big department store full of all the goods

      and services we all produce and offer for sale every year. We

      all get paid enough in wages and profits to buy everything in

      that store, assuming we would spend all the money we earn

      and all the profits we make. (And if we borrow to spend,

      we can buy even more than there is in that store.) But when

      some of our money goes to pay taxes, we are left short of the

      spending power we need to buy all of what’s for sale in the

      store. This gives government the “room” to buy what it wants

      so that when it spends what it wants, the combined spending

      of government and the rest of us isn’t too much for what’s for

      sale in the store." Warren Mosler, Seven deadly innocent frauds..."

      p 27

      "What matters is that the purpose of taxes is to balance the economy

      and make sure it’s not too hot nor too cold. And federal

      government spending is set at this right amount, given the size

      and scope of government we want." p. 28

      "To prevent the government’s spending from causing that

      kind of [hyper]inflation, the government must take away some of our

      spending power by taxing us, not to actually pay for anything,

      but so that their spending won’t cause inflation. An economist

      would say it this way: taxes function to regulate aggregate

      demand, not to raise revenue per se. In other words, the

      government taxes us, and takes away our money, to prevent

      inflation, not to actually get our money in order to spend it."

      Mosler, p. 30

      So taxes as a means of draining money out of circulation in the economy

      is an MMT position.

    • JohnfrmCleveland profile image
      Author

      John 3 years ago from Cleveland, OH

      Hi, Ralph, welcome back.

      "Longer-term, deficits deserve our concern because of increases in the retired population relative to the work force and skyrocketing health care costs..."

      The federal deficit is not what determines our ability to support our retirees. The real question is, can our private sector produce enough goods and services to meet the demand of the whole population? When you look at it like that, I don't think there is any question about our ability to meet the needs of our whole population. We produce far more than we need with a smaller and smaller portion of our available labor force already. That's the real question, because the government can always come up with the dollars.

      Look at where we are today - there is obviously enough food and housing for everybody in the country, and then some. There are enough hospitals, enough doctors, enough cars, etc., and, if needed, we could come up with more of any of that in short order. The only thing needed to put all of those resources into action is money, and the government could pick up the whole tab without breaking a sweat. And, without inducing inflation, raising interest rates, crowding out industry, or any other excuses conservatives can come up with.