Marshall’s latest


By Marshall Auerback

To paraphrase Shakespeare, things are indeed rotten in the State of Denmark (and Germany, France, Italy, Greece, Spain, Portugal, and almost everywhere else in the euro zone). An entire continent appears determined to commit collective hara kiri (link), whilst the rest of the world is encouraged to draw precisely the wrong kinds of lessons from Europe’s self-imposed economic meltdown. So-called respectable policy makers continue to legitimize the continent’s fully-fledged embrace of austerity on the allegedly respectable grounds of “fiscal sustainability”.

The latest to pronounce on this matter is the Governor of the Bank of England, Mervyn King. This is a particularly sad, as the BOE – the Old Lady of Threadneedle Street – has actually played a uniquely constructive role amongst central banks in the area of financial services reform proposals. King, and his associate, Andrew Haldane, Executive Director for Financial Stability at the Bank of England, have been outspoken critics of “too big to fail” banks (link), and the asymmetric nature of banker compensation (“heads I win, tails the taxpayer loses”). This stands in marked contrast to America’s feckless triumvirate of Tim Geithner, Lawrence Summers, and Ben Bernanke, none of whom appears to have encountered a banker’s bonus that they didn’t like.

But when it comes to matters of “fiscal sustainability” King sounds no better than a court jester (or, at the very least, a member of President Obama’s National Commission on Fiscal Responsibility and Reform). In an interview with The Telegraph (link), the Bank of England Governor suggests that the US and UK – both sovereign issuers of their own currency – must deal with the challenges posed by their own fiscal deficits, lest a Greece scenario be far behind:

“It is absolutely vital, absolutely vital, for governments to get on top of this problem. We cannot afford to allow concerns about sovereign debt to spread into a wider crisis dealing with sovereign debt. Dealing with a banking crisis was bad enough. This would be worse.”

“A wider crisis dealing with sovereign debt”? Anybody’s internal BS detector ought to be flashing red when a policy maker makes sweeping statements like this. The Bank of England Governor substantially undermines his own credibility by failing to make 3 key distinctions:

1. There is a fundamental difference between debt held by the government and debt held in the non-government sector. All debt is not created equal. Private debt has to be serviced using the currency that the state issues.
2. Likewise, deficit critics, such as King, obfuscate reality when they fail to highlight the differences between the monetary arrangements of sovereign and non-sovereign nations, the latter facing a constraint comparable to private debt.
3. Related to point 2, there is a fundamental difference between public debt held in the currency of the sovereign government holding the debt and public debt held in a foreign currency. A government can never go insolvent in its own currency. If it is insolvent as a consequence of holdings of foreign debt then it should default and renegotiate the debt in its own currency. In those cases, the debtor has the power not the creditor.

Functionally, the euro dilemma is somewhat akin to the Latin American dilemma, such as countries like Argentina regularly experienced. The nations of the European Monetary Union have given up their monetary sovereignty by giving up their national currencies, and adopting a supranational one. By divorcing fiscal and monetary authorities, they have relinquished their public sector’s capacity to provide high levels of employment and output. Non-sovereign countries are limited in their ability to spend by taxation and bond revenues and this applies perfectly well to Greece, Portugal and even countries like Germany and France. Deficit spending in effect requires borrowing in a “foreign currency”, according to the dictates of private markets and the nation states are externally constrained.

King implicitly recognizes this fact, as he acknowledges the central design flaw at the heart of the European Monetary Union – “within the Euro Area it’s become very clear that there is a need for a fiscal union to make the Monetary Union work.”

This is undoubtedly correct: To eliminate this structural problem, the countries of the EMU must either leave the euro zone, or establish a supranational fiscal entity which can fulfill the role of a sovereign government to deficit spend and fill a declining private sector output gap. Otherwise, the euro zone nations remain trapped – forced to forgo spending to repay debt and service their interest payments via a market based system of finance.

But King then inexplicably extrapolates the problems of the euro zone which stem from this uniquely Euro design flaw and exploits it to support a neo-liberal philosophy fundamentally antithetical to fiscal freedom and full employment.

The Bank of England Governor – and others of his ilk – are misguided and disingenuous when they seek to draw broader conclusions from this uniquely euro zone related crisis. Think about Japan – they have had years of deflationary environments with rising public debt obligations and relatively large deficits to GDP. Have they defaulted? Have they even once struggled to pay the interest and settlement on maturity? Of course not, even when they experienced debt downgrades from the major ratings agencies throughout the 1990s.

Retaining the current bifurcated monetary/fiscal structure of the euro zone does leave the individual countries within the EMU in the death throes of debt deflation, barring a relaxation of the self-imposed fiscal constraints, or a substantial fall in the value of the euro (which will facilitate growth via the export sector, at the cost of significantly damaging America’s own export sector). This week’s €750bn rescue package will buy time, but will not address the insolvency at the core of the problem, and may well exacerbate it, given that the funding is predicated on the maintenance of a harsh austerity regime.

José Luis Rodríguez Zapatero, Spain’s Socialist prime minister, angered his trade union allies but cheered financial markets on Wednesday when he announced a surprise 5 per cent cut in civil service pay to accelerate cuts to the budget deficit.

The austerity drive – echoing moves by Ireland and Greece – followed intense pressure from Spain’s European neighbors, the International Monetary Fund on the spurious grounds that such cuts would establish “credibility” with the markets. Well, that wasn’t exactly a winning formula for success when tried before in East Asia during the 1997/98 financial crisis, and it is unlikely to be so again this time.

Indeed, in the current context, the European authorities are simply trying to localize the income deflation in the “PIIGS” through strong orchestrated IMF-style fiscal austerity, while seeking to prevent a strong downward spiral of the euro. But the contradiction in this policy is that a deflation in the “PIIGS” will simply spread to the other members of the euro zone with an effect essentially analogous to that of a competitive devaluation internationally.

The European Union is the largest economic bloc in the world right now. This is why it is so critical that Europeans get out of the EMU straightjacket and allow government deficit spending to do its job. Anything else will entail a deflationary trap, no matter how the euro zone’s policy makers initially try to localize the deflation. And the deflation is almost certain to spread outward, if sovereign states such as the US or UK absorb the wrong lessons from Greece, as Mr., King and his fellow deficit-phobes in the US are aggressively advocating.

There are two direct contagion vectors off the fiscal retrenchment being imposed on the periphery countries of the euro zone.

First, to the banking systems of the periphery and the core nations, as private loan defaults spread on domestic private income deflation induced by the fiscal retrenchment. Second, to the core nations that export to the PIIGS and run export led growth strategies. So 30-40% of Germany’s exports go to Greece, Italy, Ireland, Portugal and Spain directly, another 30% to the rest of Europe.

These are far from trivial feedback loops, and of course, the third contagion vector is to rest of world growth as domestic private income deflation combined with a maxi euro devaluation means exporters to the euro zone, and competitors with euro zone firms in global tradable product markets, are going to see top line revenue growth dry up before year end.

Let’s repeat this for the 100th time: the US government, the Japanese Government, or the UK government, amongst others, do NOT face a Greek style constraint – they can just credit bank accounts for interest and repayment in the same fashion as if they were buying some helmets for the military or some pencils for a government school. True, individual American states do face a fiscal crisis (much like the EMU nations) as users of the dollar, which is why some 48 out of 50 now face fiscal crises (a problem that could easily be alleviated were the US Federal Government to undertake a comprehensive system of revenue sharing on a per capita basis with the various individual states). But, if any “lesson” is to be learned from Greece, Ireland, or any other euro zone nation, it is not the one that Mr. King is seeking to impart. Rather, it is the futility of imposing arbitrary limits on fiscal policy devoid of economic context. Unfortunately, few are recognizing the latter point. The prevailing “lesson” being drawn from the Greek experience, therefore, will almost certainly lead the US, and the UK, to the same miserable economic outcome along with higher deficits in the process. As they say in Europe, “Finanzkapital uber alles”.

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593 Responses to Marshall’s latest

  1. Pingback: The Trillion Dollar Coin | Mecpoc

  2. Dkonstruction says:

    ESM, thanks so much for your response. I am still trying to wrap my head around the MMT ideas (and economics more generally). So, i may come back to you and this blog with a follow-up after i’ve had time to digest and think on your response (at work now and so can’t devote to much time/mental energy. For now though, how does this relate to those that argue that a larger and larger piece of the federal budget is going to pay the interest payments on the debt and so is not available for more productive (whatever one thinks those are) spending? I guess i am still unclear as to why/how if the treasury is minting a coin (of whatever denomination/value) that is not issued as debt and upon which interest payments need to be made, how the “interest savings” are “illusory.” Again, thanks so much for your response. this seems like a great site where some serious and much needed discussions are taking place


    ESM Reply:


    Government payment of interest is a form of transfer payment. It involves simply shifting dollars from one reserve account to another. It may be unfair in that some people receive dollars and other people don’t, but it is not wasteful (or useful) in and of itself since it does not induce or force real resources to be allocated to any specific purpose.

    I’m not saying I would be happy if the government just randomly transferred hundreds of billions of dollars to people other than myself, but it doesn’t waste resources in the aggregate, at least to a first order approximation (there may be second order negative effects in terms of malinvestment, disincentives to work, etc, or even positive effects, for the people who receive those transfer payments).

    As for interest costs on the coin, those exist because the Fed pays interest on reserves. The coin creates $1T more reserves for the Fed to pay interest on. Currently, the rate that the Fed pays is lower than longer term bonds, but actually higher than the yield on T-bills (even out to 1yr maturity). So the government’s interest cost would actually go up versus the alternative scenario of raising the debt ceiling by $1T and issuing that many T-bills.


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  4. Dkonstruction says:

    I have a question about the trillion $ coin idea. Since the vast majority of the public (not to mention the politicians and policy makers) are convinced that the debt and deficit in and of itself is a problem why is the trillion $ coin/debt ceiling “solution” not to have treasury use this trillion to buy back a trillion $ of the federal debt? wouldn’t that lower the overall debt and thus eliminate the need (at least for now) to raise the debt ceiling? In addition, wouldn’t it lower the interest payments on the debt which, again according to the pols and policy makers, is eating up an ever greater chunk of the federal budget and is thus why we “are broke” and don’t have the money for social programs, infrastructure rebuilding etc? So, i guess i’m asking why not use this power to pay down the debt instead of trying to convince people that the debt doesn’t matter which strikes me as a harder sell? And, for those that want to push for increased gov’t spending (on things like infrastrucure, “green” energy etc) wouldn’t it make it easier to make the case and sell it to the public if we were able to say, to use an extreme example, that if we paid off the entire debt tomorrow that we would save nearly 1/2 a trillion a year in intereest payments that could then be used for other spending needs?


    ESM Reply:


    Using the proceeds of the coin to buy back debt would actually end up enriching bondholders and bond traders more than leaving the proceeds as reserves. What you’re suggesting leads to a lot of transactions costs – buying back Treasury debt and then issuing more Treasury debt. Why cross the bid/ask spread twice for $1T of bonds?

    Also, any interest savings from issuing coins instead of debt is mostly illusory. Treasuries trade to a yield equal to the expected interest paid on reserves averaged over time, plus maybe a small risk premium. The Treasury/Fed would only save the small amount due to the risk premium, and in any case, it doesn’t really matter in the grand scheme. It’s more important that the government not waste real resources by spending on stupid things.


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  7. beowulf says:

    Ha ha! Beowulf’s Law™
    Maybe strike the words “self-constrained”, enough coins will get you past most other constraints too. :o)

    Perhaps there’s an economic reason use of the coining power is ill-advised, I’m simply looking at the political landscape. If you can think of another way to both boost aggregate demand and jump on “the no more public debt” bandwagon, let me know.

    In fact, I see an “End the Fed” activist beat me to the punch… last July he asked people to exchange their paper money for dollar coins so Tsy can capture the seigniorage.


  8. beowulf says:

    That’s an interesting GAO report, thanks for posting.
    Because it is not considered a receipt, seigniorage is not counted, or scored by the Congressional Budget Office or the Office of Management and Budget, for purposes of determining the budgetary effects of legislation. (fn, p. 12)


    Matt Franko Reply:

    Beowulf’s Law: “There is no self-imposed constraint so idiotic that a sufficiently large minting of coins cannot deal with it.”


    Ramanan Reply:

    \ \
    ___> \
    (__O) \
    (____@) \
    (____@) \
    (__o)_ \
    \ \

    Ramanan liks this.


  9. Moreover, if the bank wants to create deposits denominated in the currency as the unit of account through extending loans against its capital (and assuming the associated risk), it has to have reserves to clear as these deposits are drawn down.


    It cannot create these reserves. Ergo, banks cannot create fiat money denominated in the currency. Creation of the currency of issue assumes the capacity to create reserves, which all but the CB lack.





    Tom Hickey Reply:

    Right. Banks can make loans but they cannot make reserves — they have to obtain them, the Fed being lender of last resort (discount window) at the price (interest rate) it sets. Therefore, US banks must have access to the FRS, and this entails a charter from the government, as well as following the standards and rules set by the government. Thus, banks are not purely private enterprises, but public-private partnerships.

    The Fed controls the price of money through interest rate, but not the quantity of money (there is no money multiplier). Endogenous money supply is controlled by the banks through making loans against capital, which create deposits denominated in the currency of issue. Hence, a bank is financially accountable for the money (deposits) it creates through loans, and it does participate in money creation (which, I think, is the point that BX12 was making).

    My point in response to BX12 was that banks make loans but not reserves. They have to obtain reserves, at a cost to them and under conditions set by the government (CB is a government agency) that are beyond their control. Therefore, it is not correct to say that bank “create” fiat money, for they do not do so through decree, which is what “fiat” means. They have to follow a procedure that is under government control that involves participation of the government in banking, to the point of resolution if standards are not met.

    This is important to understand because judging from things I have read elsewhere some people think that banks do create reserves by themselves instead of obtaining them, hence, banks are essentially purely private enterprises independent of the CB and government. Often, the same people think that the Fed is privately owned and operated. This is not the case under the present system despite the widespread myths.

    Once the facts are recognized, then it is clear that banks are public-private institutions that exist not only for making a profit as a reasonable return on investment for performing a service useful to society, but they are also institutions chartered for the purpose of serving public purpose as well, unlike most other private enterprise that exist solely for the benefit of the owners/investors. Therefore, it is arguable that banking activities that serve no useful public purpose should be separated from those that do, e.g., through Glass-Steagall type regulation.

    As Scott observes, there is a hierarchical relationship involving government and the banking sector that cannot be ignored. MMT points out that this hierarchical relationship involves the vertical-horizontal and exogenous-endogenous distinctions that affect modern monetary theory in a fundamental way.


    beowulf Reply:

    Public-private partnerships typically end up benefitting a private purpose, any public benefits are likely to be purely accidental. :o)

    In the course of this thread (doing some Title 31 research along the way), I’ve become a fan of Congress funding the deficit by use of its Art I, Sect. 8 coinage power. As mentioned above, Congress has already granted Tsy authority to mint coins in the quantity and denomination of the Secretary’s discretion. Curiously, the proposed (and quite insane) Balanced Budget Amendment wouldn’t impact at all use of the coinage power to provide as much federal spending as economic conditions warrant (or Warrent as they say in the Mosler Monetary Theory literature. :o) ). The Amendment’s restrictions apply to borrowed funds and “internal revenue”, not seigniorage revenue.

    “Section 1. Total outlays for any fiscal year shall not exceed total receipts for that fiscal year, unless two-thirds…shall provide… by a rollcall vote.
    Section 2. The limit on the debt of the United States held by the public shall not be increased, unless two-third…shall provide.. by a rollcall vote
    Section 4. A bill to increase the internal revenue shall require for final adoption in each House the concurrence of two-thirds.. by rollcall vote.
    Section 7. Total receipts shall include all receipts of the United States Government except those derived from borrowing. Total outlays shall include all outlays of the United States Government except for those for repayment of debt principal.”


    Ramanan Reply:

    He he … yes even I have become interested in the usage of coins. The government can run surpluses by the usage of coins :) However sectoral balances approach holds that the sum of income less expenditures of all sectors combined must sum to zero, so it will show up somewhere – I guess as a Fed deficit.


    Ramanan Reply:

    Oops not sure of my comment. However they themselves made accounting errors. COINS AND CURRENCY How the Costs and Earnings Associated with Producing Coins and Currency Are Budgeted and Accounted For –

    Whats internal revenue ?

    Yep the public debt limit need not be raised because neither coins nor Fed’s liabilities is counted in public debt.

    beowulf Reply:

    Internal revenue is what’s collected via domestic taxation (as opposed to customs duties on imports). A more expressive term is used by British equivalent of the IRS– Inland Revenue.

  10. Tom Hickey says:

    A private bank can create money by fiat (moving numbers up in a computer)

    The bank cannot issue currency. It can extend loans denominated in the currency. To get currency demanded at its windows, it has to exchange reserves for currency. The bank cannot create reserves, only the Fed can do this. Moreover, if the bank wants to create deposits denominated in the currency as the unit of account through extending loans against its capital (and assuming the associated risk), it has to have reserves to clear as these deposits are drawn down. It cannot create these reserves. Ergo, banks cannot create fiat money denominated in the currency. Creation of the currency of issue assumes the capacity to create reserves, which all but the CB lack.

    Because the CB (a government agency in the US, UK, etc,) can create reserves and its reserve creation is not financially constrained under a fiat system, the government can create all the currency it chooses operationally, although it can establish voluntary restraints politically. However, the CB does not issue currency into nongovernment other than in exchange for reserves. The Treasury does this through disbursements IAW congressional appropriation. Similarly, taxation is at the sole discretion of Congress, which establishes fiscal policy.

    The fact is that the Treasury “borrows” reserves from the Fed by issuing Treasuries. This is obviously a fiction since both are agencies of the government, carrying out the directives of Congress, who has constitutional authority over the government purse. These transaction just balance the respective books at the two agencies. The reserves that the Treasury uses to clear its deposits just get transferred (at the macro level) into Tsy’s when they are sold by the Fed. What the government spends is saved as Tsy’s as aggregate deposits are reduced accordingly. There is no actual borrowing from the private sector, no competition for loanable funds, and no crowding out.


    Scott Fullwiler Reply:

    Well said. The hierarchy of money matters at the operational level.


  11. Bx12 says:

    Me: “But the net financial assets are just the counterpart of the assumption that government are not revenue constrained”

    TH: “As I understand it, MMT uses “net financial assets” to describe the relationship between introduction and withdrawal of financial assets into nongovernment through issuance and taxation without creating a corresponding liability in nongovernment that would net to zero.”

    My remark is construed exactly from this kind of remark. Sure, NFA is an accounting item, but it is granted special status by assuming the government’s liability has evaporated. Why else would we say that the gov is not revenue constrained? I still don’t know.

    Now, since you read my entries at billy earlier today, you and Scott will have seen that I’ve already moved beyond this :

    A private bank can create money by fiat (moving numbers up in a computer). This does not distinguish it from the CB. Is it, instead, that the funds to pay taxes and buy government securities come from government spending?

    I wonder, instead if this is simply not a feature inherent to all economic activity : acquisition of inputs necessarily precede the generation of output, and banks provide the necessary bridge between these two cash flows. To live until their next paycheck people use their credit card.

    I have argued this in more detail here (the first set of accounting statements is not all that relevant)

    and I reproduce it partially here:

    As Ramanan has said (he is going to deny it?), the Tsy ALSO keeps accounts at private banks. So how about this?

    Step 1: Tsy borrows

    A : + Deposit at Citi
    L: + Borrowings

    A : + Tsy IOU
    L : + Tsy deposit

    Step 2: Tsy spends

    A : – Deposit
    L: – Net worth

    A: unchanged
    L : – Treasury deposit + Client deposit

    Step 3: Tsy taxes

    A : + Deposits (Taxes)
    L: + Net worth

    A: unchanged
    L : – Client deposit + Treasury deposit

    Step 4: Tsy repays bond

    A : – Deposits
    L: – Borrowings

    A: – Tsy IOU
    L : – Treasury deposit

    Again, and again, and again, there is nothing special about spending first and collecting taxes later.

    On your first day on the job, assuming you are broke, you have to borrow from someone until the next paycheck to sustain yourself. That is inherent to economic activity : inputs come before outputs. And that’s why the banking system exists, to bridge the two.

    I’m told (see above) that gov spending is different, because it purchases finished product. In other words they buy outputs, not inputs. I don’t see how this is relevant. The state does not have the money (yet) so it borrows, until taxes come due.

    Employees of a company are paid at the end of the month, but what if they manufacture toys that are only sold around X-mas? In this case, employees need to borrow on the first of each mont to sustain themselves until the next paycheck. The manufacturer must keep borrowing each month to pay the employees. Comes X-mas, sales start flowing in, and it can finally pay back its debt towards the bank.

    Replace employees by civil servants, the manufacturer by the government, X-mas by April 15th, sales from goods by taxes, and you can understand there is nothing special about the gov having to spend before collecting taxes.

    Finally, while I’m thankful for the comments that have coalesced around my questions, I do not recognize myself as the source of fatigue, at least not in substance, honestly.


  12. warren mosler says:

    Scott, maybe if you tell them MMT is Mosler Monetary Theory it might help

    Tom, the treaty prohibits the ECB from writing checks directly to the member nations


    Tom Hickey Reply:

    Thanks, Warren, that is a simple and clear way to put it. The treaty restriction seems to be similar to a constitutional impediment in the US — a very big deal. It could be changed, but ….

    The difference in the US is that Congress has imposed voluntary restraints like the debt offset rule, the debt ceiling, and the no overdrafts rule, and it can remove them.


    Bx12 Reply:

    So let me recap,

    Net Financial Assets is no longer the heart of MMT, as anon daringly suggested, and for a while got away with, but it’s a matter of degree in probability of default.

    And it does not matter that the US and the EZ have exactly the same rules, because they are legislated by congress and the EU parliament, respectively, and moreover in form of a treaty in the second case, even if it was breached on two counts, essentially because the Eurogroup decided it (16 finance ministers, only two of which run the show), namely the SGP and Purchase of sovereign bonds, only leaving no overdraft as yet to be overruled.

    It’s all good to me, although I would suggest adding an M to MMT, for Moving, yielding MMMT. ;-)


    Scott Fullwiler Reply:

    “But the net financial assets are just the counterpart of the assumption that government are not revenue constrained”

    That’s just simply false. No MMT’er has ever said that.

    And I have no idea what you mean by “NFA is no longer the heart of MMT.” Was it the heart? If so, how? I just thought it was an accounting identity. Silly me . . . I just publish on this, so I probably don’t know. Regardless, has there been anything proven one way or the other about NFA? Again, it’s an accounting identity. We never said anything more or less than that. What’s been “agreed upon” besides that?

    I can’t believe that after 530+ comments only 2 people–Bx12 and Anon–appear to have a clue what Bx12 and Anon seem to find wrong with MMT. I’ve heard enough regulars here wonder out loud what the issues we are discussing here actually are to believe I’m not completely exaggerating there.

    Tom Hickey Reply:

    The way I understand what MMT’ers have been saying is that by definition in a fiat system the monetary sovereign can issue currency at will without limit; that’s what “fiat” (Latin for “Let it be”) means. This implies that a monetary sovereign under a fiat system is neither financially constrained (since issuance is at its discretion) nor operationally constrained (since it can put in place any operational constructs it chooses). Different countries have different operational constructs. For example, the FRS has public and private aspects, while the BOE is an indepdendent governmental agency (nationalized in 1946).

    While a monetary sovereign is not financially or operationally constrained under a fiat system, it can impose voluntary (political) restraints on monetary (Treasury and CB) operations. It can even restrain itself voluntarily, e.g., through setting a ceiling on the national debt to restrain deficit spending.

    Monetary sovereigns such as the US have chosen to put restraints on monetary operations, as well as themselves, through, for example, a deficit offset rule, a debt ceiling, and a no-overdrafts rule in the US, although practically speaking the government often makes space as circumstances require, as the US has done.


    Bx12 Reply:

    “I can’t believe that after 530+ comments only 2 people–Bx12 and Anon–appear to have a clue what Bx12 and Anon seem to find wrong with MMT. I’ve heard enough regulars here wonder out loud what the issues we are discussing here actually are to believe I’m not completely exaggerating there.”

    I’m pretty consistent and persistent in my investigation of the matters I seek an interest in, so I doubt that it just came off the top of my hat. You might want to do a word search for “heart”.

    Am I giving MMT too much credit in trying to clarify some aspects, you’re saying?

    Tom Hickey Reply:

    “But the net financial assets are just the counterpart of the assumption that government are not revenue constrained”
    That’s just simply false. No MMT’er has ever said that.

    As I understand it, MMT uses “net financial assets” to describe the relationship between introduction and withdrawal of financial assets into nongovernment through issuance and taxation without creating a corresponding liability in nongovernment that would net to zero. Financial assets that government adds to nongovernment through its spending (issuance) are only withdrawn through taxation. G minus T has three possibilities: 1) zero (balanced budget), in which case NFA is neither increased nor decreased, 2) G is greater than T (deficit), in which case NFA is increased, and 3) G is less than T (surplus), in which case NFA is decreased.

    Conversely, credit money (loans create deposits) is endogenous to nongovernment and necessarily nets to zero, since all financial assets created by lending (deposits) are offset by corresponding liabilities to a creditor (loans), so that extinguishing a loan is extinguished extinguishes a corresponding amount of credit money (deposit). Net = 0

    This is the basis for the vertical-horizontal distinction in MMT, as well as exogenous and endogenous money creation.

    The way I understand the difference between a convertible systems and nonconvertible one is that the former is financially constrained and the latter is not. For example, a government on a gold standard can only issue currency up to the fixe rate of convertibility, and it creates nongovernment net financial assets up to its financial constraint. Such a government is operationally constrained in that if it desires to deficit spend in excess of its financial constraint imposed by convertibility, it, it then must borrow from nongovernment. When this happens, then government competes for loanable funds and crowding out ensues.

    On the other hand, a government issuing a nonconvertible floating rate currency never needs either to tax in order to fund itself or borrow in order to finance itself, because it issues its own currency without financial constraint. It is neither financially constrained by convertibility, nor is it revenue constrained operationally. However, politically, such a government can impose whatever voluntary constraints on itself it chooses, for as long as it chooses, and it can change such restraints IAW its rules for doing to.


    Tom Hickey Reply:

    BX12, I can’t figure out what the problem is either. I could be that I’m just not getting it, but when Scott says he isn’t either, then I think you need to make clearer what you are saying. I am interested and really trying to figure this out. I don’t think that anyone is putting you down but after 500 comments here and a few at bill’s place, some fatigue is probably settling it.


  13. warren mosler says:

    Congress is the entity that decides how much to spend. Congress sets the rules the fed and tsy and alters them at will to do its bidding.
    That is, the same people who vote to spend also vote to tell the fed and tsy what to do.

    in the ez, the national govts decide how much to spend. But if they don’t have sufficient funds in their bank accounts their checks will bounce, unless other people vote to clear them.

    Just like the US States, where it’s not the same people doing the spending that control the people who run the books at the CB.


    anon Reply:

    I agree with the US and EZ characterizations because they’re factual, and I haven’t said anything that contradicts that.

    I’m more sceptical of the States/EZ member analogy in substance.

    With regard to the first, the operational capability for overdraft is the same in both cases. The substance of the no overdraft constraint is the same. The way in which the constraint is broken is generically the same – by political force.

    The difference is that breaking the constraint requires national willingness for the US and supranational willingness for the EZ. The degree of political difficulty is higher for the EZ.

    It’s a self-imposed constraint for both, and in the case of the EZ because nations are voluntary members of the EZ.

    On the issue of the States/EZ member comparison, my reason for some discomfort there is that the States operate through commercial banking connections. The EZ members operate through a supranational central bank. I’ll leave that for now. It requires more exploration on my part.

    My difference of opinion is not on substance. It’s on language. We’re saying the same thing, with different logic in the connections within such language as operations, constraints, capability, and willingness.

    My larger point expressed throughout is that the language of MMT requires more robust connections. That’s just my personal view. No doubt you and the others are comfortable with it. I’m not sure about your larger target audience. I think it’s a problem, but that’s just my opinion. I stand to be voted down on that.

    So maybe the important thing is that I agree on the substance of the facts and the analysis as you state them. I just have a problem with the MMT generic language and logic template when it comes to classifying these things. It’s important to me. The only reasons it might be relevant for you and others is if there is an associated communication issue in getting the MMT message out. Just sayin’.

    What say others?


    Tom Hickey Reply:

    I think you have touched on a matter of importance, Anon. As it nay field, technical terms need to be define operationally, and those definitions have to be adhered to if there is to be clarity and precision.

    This is a reason I have suggested a central repository containing references that can be cited for assertions. A FAQ could contain the definitions of key terminology.

    A lot of material was generated on this blog entry alone, but much of it is just going to get lost in cyberspace. There are many other threads like this on this blog alone and many more elsewhere, some buried in unlikely places that would be relatively impossible to find if someone else didn’t point them out. Usually those pointers are in blog posts or comments that also soon get lost in the cyber-maze of information.

    The problem is that in writing blogs or posting comments the scope of limited by the space. Many blogs, like HuffPo, only allow 250 words for comments. Moreover, only MMT pro’s can answer many questions in the detail that is required if the issue is pursued.

    Only one level MMT is a simple description of how a fiat system functions, but different countries have various operational rules that are significant to a correct understanding of what is gong on there and what the actual possibilities are under those rules.

    MMT is also a developed macro theory that underpins a lot of the more simple assertions. I envision a repository that “tags” those references and organizes them so that they can be called up easily. This is a project that the MMT pro’s aren’t going to get around to themselves, since their expertise is better occupied elsewhere. So we need an unfunded task force to do this, if it going to get done.

    As I’ve suggested before, a Wikipedia article, necessarily at least overseen by MMT pro’s, would be the chief portal for many people initially interested in MMT aka Neo-Chartalism/Chartalism. They could be referred to the MMT info site from there.


    anon Reply:


    “clarity and precision” is essentially my point

    words matter, particularly when building a theory around them

    they can also change the way you view the logical construction of the theory, even if you end up in the same place

    that said, there may be slightly different views within the MMT professional group as to what the logical construction is and what the words mean; that could be a challenge in itself – for my part, I would build the logical edifice somewhat differently, as I’ve noted

    but a glossary with an internally consistent structure would be the practical goal out of this, in conjunction with your bigger idea of a central repository

    Scott Fullwiler Reply:


    I’ve tried to do this with CB operations in my own research, such as here ( and did an even more institutionally detailed chapter (starting on p. 123) for my book here (

    I’ve had plans for several years to do the same thing for Tsy operations, but this discussion has caused me to regret I hadn’t yet done this even more than I already did.

    Matt Franko Reply:

    Do you think a service like this would cover it?

    I perhaps could “donate” 2 years worth of the Deluxe Service ($6.29/mo.) if you think this is all it would take hosting wise…if its mostly just text files with a few diagrams, etc..I think it would suffice.

    I’d nominate you to be one of several administrators ;)

    Tom Hickey Reply:

    Anon: “that said, there may be slightly different views within the MMT professional group as to what the logical construction is and what the words mean; that could be a challenge in itself – for my part, I would build the logical edifice somewhat differently, as I’ve noted”

    I think it is important to show these differences. MMT is not monolithic; rather, it is a project under construction. There is a lot to come, but there is also a very solid background already, which builds on a solid foundation that needs to be elucidated along with MMT as a contemporary school.

    I do think that there will be Nobels coming out of this, and it is a shame that Wynne Godley was not more profusely honored before his demise for his immense contribution to economic understanding even thought he was not a “professional economist,” as he lamented. It’s lucky he wasn’t, but rather worked hands on to get his training. We are gong to be hearing a lot more about Abba Lerner, too. MMT is indeed standing on the shoulders of giants. Not coincidentally, Lerner worked for ten years before beginning his study of economics at the London School.

    Additionally, as a policy tool, it can be used differently, and various MMT’ers have different ideas on this, too, since as an economic theory, MMT reveals various options and their consequences. Then, it becomes a political matter, and everyone is entitle to their view — but it should be reality-based, not myth-based.

    Tom Hickey Reply:

    Matt, thanks for the offer, but Bill has already offered some space on his server to get the ball rolling. As I have said previously, we need an experienced web hand who can take care of the development and design, and then some content people to gather and organize the info. We also need a couple of MMT pro’s who are willing to be advisors.

    I will happily volunteer as a content person. But my web skills are too limited to develop/design the kind of site that is needed, and it will be simpler and easier in the long run to get it right from the outset, if a competent web person is available. If not, we can make do with a preliminary site until someone comes along.

    anon Reply:

    “I’ve tried to do this with CB operations in my own research”

    for one thing, that paper looks like must reading

    yes, too bad you didn’t get around to it for treasury operations

    although the issue is more than just a description of operations, which is factual

    it is the characterization of capability – such as “not constrained”, “operationally constrained”, “financially constrained”, etc. etc. – and the precise, consistent definition of those kinds of phrases, which are very commonly employed in MMT, and the precise, consistent attribution of that capability (or lack of it) to actual operations versus potential operations and the link between the two

    anon Reply:


    good that you acknowledge there are differences

    and maybe there are suggestions from outside that are different again, like here

    Tom Hickey Reply:

    Yes, there has been al lot of discussion on other blogs, especially billy blog, as well as Warren’s, which often bring up differences in viewpoint over both substance and application.

    BTW, there is not necessarily a uniform technical definition accepted by all parties to a discussion. Different parties are free to define their own terms as long they are operational, and there is no monopoly on the use of a term. So differences can arise. The same author doesn’t always stick to his definition either. This is true of all fields, and MMT is no exception.

    Scott Fullwiler Reply:

    Thanks, Anon. Regarding taxonomy/characterization, the issues you mention are embedded in the methodological approach used in the book. If interested, you can see some of it at work in my chapter beginning with the section that discusses “normative systems analysis.”

    Bx12 Reply:

    The rewriting of the rules governing the ECB would require the executive branch of the EU, the Commision, to propose such a law, and for the Parliamant (lower house) and the Euroconcil (upper house) to vote for it. That’s just how a democracy operates. MPs are elected by direct suffrage and represent the largest number of citizens bound by common treaties (not yet a constitution).

    In actuality, a treaty such as the SGP is only as binding as the influential members of the EZ/EU want it to be. The ECB has already breached the no purchase of gov bonds rule, for example.

    While central governments are independent within the constraints they signed on, the formation of economic policy in the EZ is the result of a consensus (or not) between various actors, most notably those of the Eurogroup, in consultation with the ECB. Peer pressure, in other words, plays a big role.

    The Eurogroup is a meeting of finance ministers who preside over the control of the EZ. As such it represents the people. It does not necessarily seek approval from the parliament, as the matters it decides upon are the prerogative of central governments. Decisions can therefore be made and executed fairly rapidly, in principle. It is under the impetus of this group, for example, that a EUR110 billion Greek rescue package was decided, together with the approval of the European Council, for any other country in need of it.

    This somewhat informal way of doing business is likely to be overhauled as a result of the ongoing turmoil. There are calls for fiscal coordination, an IMF-like structure within EZ etc.

    Until then, there is no justification for pointing to its lack of legitimacy simply because it does not equate the near ritualistic US style consultative relationship between congress and the executive branch, and its presumed cozy arrangements with the Fed.

    Should the Germans get sick of Merkel’s puritanism, that would be reflected in a new government, so that the frogs and the PIGS would have their way in shaping policy. There’s only so much resistance the ECB can offer if it is isolated.

    Conversely, deficits hawks could have their day in the US congress.

    It’s all about politics to me and I don’t see where “checks will bounces” delineates the US vs EZ.


    Tom Hickey Reply:

    “It’s all about politics to me and I don’t see where “checks will bounces” delineates the US vs EZ.”

    Under a fiat system, there is no inherent financial constraint and operational constraints are ultimately political. So it’s a matter of who blinks first. It fairly similar between the US and EZ. It’s not whether the dollar or euro will default, but whether the elite will let Greece or California bounce its checks.

    The situation in the US and Europe is actually quite similar in this respect: In the US the prosperous coastal states support the more rural southern and western states economically, and in Europe it is the prosperous countries, especially Germany, that support the peripheral states. At least, that is the perception. So there is an internal tug-of-war politically.


    ESM Reply:

    This has been an interesting discussion (over 530 comments at this point), but there is only so much to be gained by trying to make the English language we employ to describe MMT as rigorous as mathematics. The argument about what it means to be “constrained” is becoming a little Clintonesque. Every currency and debt issuer and user is constrained to some extent, but none are 100% constrained. I could, for example, borrow $10B if only Bill Gates recognized what a good credit I am.

    The analogy we make between the EZ countries and the US states is not precise for several reasons, but it is close enough, and it is illuminating.

    Any of the US states can run out of money to pay its debts because of a failed bond auction. The same is true for any of the EZ countries. It is a real possibility, and not just a theoretical possibility at the level of 0.1% per year.

    Likewise, any of the US states or EZ countries can be bailed out through the collective action of others acting as a higher governmental authority.

    I suppose even the US government could be bailed out by the IMF or through collective action of the BRICs, but the likelihood of a failed Treasury auction is so remote as to be a waste of time to contemplate.

    That is the key difference. The US default probability is teensy-weensy and is not even positively correlated with the size of the public debt.

    And not only is the probability of default material (and always has been) for each of the EZ countries, I submit that you will see an EZ country default eventually, and that it will happen before a US state defaults.


    Ramanan Reply:

    No need for the IMF to bail out the US. The IMF is there because the US has kept it in business.

    The US can bailout itself by this:

    The Secretary may continue to mint and issue coins in accordance with the specifications contained in paragraphs (7), (8), (9), and (10) of subsection (a) and paragraph (1)(A) of this subsection at the same time the Secretary in minting and issuing other bullion and proof gold coins under this subsection in accordance with such program procedures and coin specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the
    Secretary’s discretion, may prescribe from time to time.

    Beowulf pointed this out.

    Page 284 here$$xa$$busc31.wais&start=2282115&SIZE=93048&TYPE=PDF

    No change in law required. The Fed could purchase the coin of any denomination from the Treasury and this would prevent the TGA from going overdraft. The national debt limit law need not be changed as well because Treasury coins and federal reserve liabilities are not counted in the national debt.

    anon Reply:

    you’re right about Clintonesque, a point I’ve already made in the comments

    which is why it’s important to determine an unambiguous definition of words and phrases that MMT tends to “sloganize”

    as opposed to winging the definitions and applications when something like the EZ crisis comes along

    BTW I remain completely uncomfortable with the gold standard “anti-analogy”, for reasons of operational detail relating to the gold standard

    and you’re absolutely right about the importance of probability, and the avoidance of ambiguous claims to certitude

    Ramanan Reply:

    Yes I agree with you on the gold standard. In fact, I think it is important to understand the gold standard to understand fiat currency international economics.

    Bx12 Reply:

    “The analogy we make between the EZ countries and the US states is not precise for several reasons, but it is close enough, and it is illuminating.”

    I’ll accept that as an ironic statement ;-)

    The question of EZ would have been resolved more quickly, I think, had someone taken a stance from the beginning as to whether net deficit spending by EZ government creates net financial assets, G-T = S – I, as most would recognize that as the heart of MMT.

    But the net financial assets are just the counterpart of the assumption that government are not revenue constrained… So looking at one for an explanation to the other does not help.

    warren mosler Reply:

    and more to the point, a failed tsy action process can be addressed and the funds spent in any case by the same people (congress) who are doing the spenidng.

    not true with the states or the euro zone member nations.

    Scott Fullwiler Reply:

    “That is the key difference. The US default probability is teensy-weensy and is not even positively correlated with the size of the public debt.”

    “And not only is the probability of default material (and always has been) for each of the EZ countries, I submit that you will see an EZ country default eventually, and that it will happen before a US state defaults.”

    That, and Warren’s points here are the key points:

    “a failed tsy action process can be addressed and the funds spent in any case by the same people (congress) who are doing the spenidng. not true with the states or the euro zone member nations.”

    And these are precisely the points (a) that are at the core of MMT, and (2) it appears aren’t allowed to be spoken or investigated further in this thread. Now who’s being Orwellian?

    Tom Hickey Reply:

    It’s clear to me that Congress has the say in a federal system over whether the US or any state in the US will default since there is no financial constraint in a fiat system and the operational constraints here are politically imposed. That is to say, certain operational avenues are voluntarily closed and that can be opened in the same way.

    I am still not clear on how this works in the EZ, even after all the go-around. Could someone summarize this simply, so I could explain it someone else who doesn’t know a lot about government finance, with some confidence I have it right? Thanks in advance.

  14. warren mosler says:

    there is an important distinction between willingness to pay and ability to pay

    willingness to pay is always an issue

    for the US govt, Japan, Uk, etc. ability to pay is not an issue.

    For the euro zone nat govs, US states, corps, etc. ability to pay is an issue.


    anon Reply:

    I disagree.

    In the US, ability to pay (ultimately) depends on the willingness of Congress to allow treasury overdraft at the Fed, or the equivalent of that.

    The Fed is not generally willing to do that, but can be overruled by Congress.

    In the EZ, ability to pay depends on the willingness of ECB to allow national treasury overdrafts at the ECB.

    The EZ is not generally willing to do that, but can be overruled by Euro constitutional change.

    Ability and willingness are not the defining issue.

    The issue is the degree of difficulty that defines the political constraint.


    Bx12 Reply:

    While Warren’s input

    “there is an important distinction between willingness to pay and ability to pay”

    is certainly useful in shaping the debate, would he care to qualify gov spending by the Eurozone as

    – functionally (as for a corporation) or politically constrained? Equivalently,
    – a vertical or a horizontal transaction? Equivalently,
    – deficit spending adds or not to nominal savings of financial assets.

    as I’m still seeing wasteful speculation over these matters.


    Ramanan Reply:

    Let us say you are a Spanish and that the Spanish government allows some retail participation in the auction. Your non-competitive bid is successful and you are alloted all the €1000 bid by you. “The Banco de España acts as a treasurer and financial agent for public debt” The Banco de España instructs your bank to reduce your deposits by €1000 and reduces your bank’s account at the Banco de España by €1000 and replenishes the government account at the Banco de España by €1000 and hands you Spanish government bonds worth €1000 in a dematerialized format. Later in the week, the spanish government needs to send a cheque worth €1000 to a school in Spain. Assuming it happens without the use of paper, the Banco de España reduces the government balances at the Banco de España and increases the school’s bank’s account at the at the Banco de España by €1000 and instructs the bank to increase the school’s account by €1000.

    Deficit spending has thus created a networth increase by €1000.

    Now comes the complicated part in the banking operation. The banks in the Euro Zone and indebted to their NCBs. In the points above, I assumed that the institutional setup of the Euro Zone is like that of the US. However there is a difference. So some redoing is required.

    In the second step when the government spent, the Spanish bank’s reserves do not increase since the setup is an overdraft economy. Rather Spanish banks go into less indebtedness to the Banco de España. Collateral worth €1000 + haircut is returned to the Spanish bank. Similarly in the first step, the Spanish bank’s account at the Banco de España doesn’t decrease. Its indebtedness to the Banco de España increases. The Spanish bank needs to provide collateral worth €1000 + haircut at the end of the day if no other transactions happen.

    In spite of this complication, the deficit spending still increases the private sector’s saving.


    anon Reply:

    To be clear, when you say “overdraft economy”, that doesn’t mean government overdraft. There’s potential for confusion there.

    It’s commercial bank borrowing from the ECB, effectively.

    Are you sure the system is net “overdraft” in your sense? It’s certainly gross “overdraft”, but some banks are net long reserves as well.

    Ramanan Reply:

    Yes!! How on earth did I forget to add the part that it doesn’t mean government overdraft :)

    Yes it is true that it is net overdraft.

    Here is the balance sheet of the Eurosystem before the crisis. The crisis adds all sorts of complications!

    There item 5 in assets is the typical ECB way of writing the complicated item “Claims on banks”

    In fact the ECB calls the refinancing operations “open market” but the sense is very different from that of the US. Fine tuning happens by moving government deposits in and out of the banking system – though in some rare cases, they may have to purchase or sell government debt or do repos/reverse (like the Federal Reserve)

    Ramanan Reply:

    “There item 5 in assets is the typical ECB way of writing the complicated item “Claims on banks” ”

    I meant to say that its the typical way of the ECB of complicating things – although in this case its more transparent.

    anon Reply:


    so the net was 264

    that’s weird

    why did the banks need net 264 in “normal times”?

    I think maybe its forced somehow by the fact that the system needed 628 in bank notes but the ECB couldn’t buy government debt to “fund” the required note issuance

    Ramanan Reply:

    I see 441 + 10.

    I think thats the way the system is.

    Yes, its true that it makes it difficult for the NCBs to purchase government debt. However, it was the case even before the Euro Zone was formed. Almost all the Euro Zone countries had the same setup. In fact the Anglo-Saxon institution setup is an exception rather than the rule.

    anon Reply:


    – there’s 177 in reserves on the liability side

    – and it’s not that it makes it difficult for the NCB’s to purchase government debt

    it’s that the prohibition on the purchase of government debt combined with the requirement to issue currency on demand and in sufficient size forces them to “monetize” something else on the asset side – which in this case is lending to banks net

    anon Reply:

    to elaborate on my 2:11

    the typical currency transaction for the typical CB is that the commercial bank “buys” newly issued currency in exchange for a reserve debit; the CB replenishes system reserves by purchasing government debt; so the balance sheet increases over time by debt on the asset side and currency on the liability side

    in the case of the EZ, looks to me like commercial banks “buy” newly issued currency in exchange for reserves borrowed from the ECB

    could be wrong, but I’d like to know the explanation for the big net on that balance sheet otherwise

    Ramanan Reply:

    Thats a good point Anon about the explanation. Yes the central bank buys government bonds over time as currency needs in nominal terms increases over time. In the Euro Zone, even before the Euro Zone was formed, the change in the balance sheet would occur automatically – banks become more indebted to the central bank.

    But I think it has always been like that even before the EZ was formed, when the countries had their own sovereign central banks and Treasuries. The item “claims on banks” was always huge. It probably had to do with the historic setups and Treasuries having accounts at banks instead of the central bank.

    In fact the overdraft financial system is a rule rather than an exception. The Europeans may be surprised why there isnt a big net in the US central bank balance sheet.

    anon Reply:

    are you saying the national central banks never bought bonds to fund currency expansion in Europe?


    and are you saying the national governments never had accounts at their central banks?

    and are you saying the national governments don’t have accounts at their central banks now?

    that’s more than interesting

    are you quite sure on the last two points above, especially?

    Ramanan Reply:


    I am saying that they generally do it that way. In fact, I will phrase it differently. Since currency is a demand-led phenomenon, its banks who get the currency from the central bank and the central bank is fully accomodative. Banks will get more cash depending on how much their customers demand and will never refuse.

    Here is the balance sheet of the Deutsche Bundesbank

    It seems that “claims on banks” is a major item.

    I wouldn’t say that governments don’t have an account at the central bank. It is certainly not the case now. explains that governments do have an account at their home NCBs. In fact its a tool to fine tune – just move the government deposits in and out of the banking system – and you have the control of interest rates.

    In the pre-EZ setup, not sure. Its possible but the sectoral balances still hold.

    Ramanan Reply:

    The balance sheet in the annual report of 1996 – a few years before joining the Euro Zone.

    “I am saying that they generally do it that way.”

    I meant – the item “claims on banks” increases rather than “government securities” when more currency is needed.

    anon Reply:


    we’re on the same page now

    Scott Fullwiler Reply:

    Marc Lavoie wrote about the “claims on banks” quite a bit. He called these operating procedures “overdraft systems” and the US/Canada/UK were referred to as “asset-based systems.” The point Marc and I started to emphasize was that both systems were essentially the same in character (just not always in magnitude), as US/Canada/UK systems do repos (i.e,. loans or “claims”) with banks or at least dealers that are far, far larger than the qty of rbs outstanding (in the US, I think under pre-Lehman procedures, the were around $100B). Unfortunately, the textbook view of the US/Canada/UK was that the open market operations (asset-based operations) created the reserve balances to fund loans, when in reality, again, those operations were not different in character from those of the overdraft systems–the overdraft systems are the general case, in other words. I discussed this a bit in my paper linked to above (it’s in principle 8 or 9), and I think I’ve cited some of Marc’s relevant work there.


    Scott Fullwiler Reply:

    Actually, it’s linked to below . . .

    anon Reply:


    don’t have time just this minute to look at those papers, but a quick question before I do:

    my observation was that in the US for example, the normal state of the Fed balance sheet is that currency issuance is offset by acquiring Treasuries for the asset side – this is the core position of the central bank balance sheet – the other stuff is NORMALLY reserve related noise, etc., although since the crisis the reserves have increased by $ 1 trillion plus in order to accommodate all sorts of abnormal asset expansion

    for the EZ balance sheet, the normal state seem to be currency issuance, like the Fed, but the offset is not acquisition of government debt

    my further point, earlier on, is that this basically FORCES the ECB to doing some else on the asset side, because the demand for currency is effectively exogenous

    and its interesting to me in that interpretation is that the ECB tool chosen in responding to that is to supply lending to the banks that exceeds system deposits/reserves with the ECB

    does that interpretation make sense?

    if so, without looking at those papers yet, do those papers pick up on that?

    and given that the ECB can’t purchase debt, does it have any other choice in managing it’s balance sheet than doing it the way it does?

    if not, can you correct me on it?

    rush comment – sorry if I’ve overlooked something fundamental here


    Scott Fullwiler Reply:

    My understanding was that the ECB was using repos as an offset of currency, rather than the outright purchases of govt securities. Perhaps someone can correct me if I’m wrong (repos can of course be loans to banks, essentially).

    For the US, pre-Lehman case, see, for example, Chart 10 here, where repos total are more than reserve balances, but, yes, most of currency is offset by outright purchases.

    I do have to correct myself, though, as it appears the repos are far less than the $100B, and actually just around $25-$35B (checked that with data on the Fed’s site). That’s still more than reserve balances, but less than I was saying above. That $100B figure was in my head, and I remember the source, so I’ll have to double check why I thought that.

    Repos/loans can be greater than rbs. Repos/loans create RBs, but the RBs are drained when a bank desires currency, and the repos/loans stay on the balance sheet. Only a portion of repos/loans are rolled over at any one time, so it’s not a problem to have repos/loans > rbs.

  15. beowulf says:

    from Jan 2009 Asia Times article
    It’s intriguing to note what Federal Reserve chairman Ben Bernanke, then Princeton University economics professor, said about seigniorage. He wrote in his Macroeconomics textbook, co-authored with Andrew Abel, that the government can print money when it cannot (or does not want to) finance all of its spending by taxes or borrowing from the public. In the extreme case, imagine a government wants to spend $10 billion (say, on submarines) but has no ability to tax or borrow from the public. One option is for the government to print $10 billion worth of currency and use this currency to pay for the submarines… Bernanke and Abel continue: “Governments that want to finance their deficits through seigniorage do not simply print money but use an indirect procedure. First, the Treasury authorizes government borrowing equal to the amount of the budget deficit, and a correspondent quantity of new government bonds are printed and sold. However, the new government bonds are not sold to the public. Instead, the Treasury asks (or requires) the central bank to purchase the $10 billion in new bonds. The central bank pays for its purchase of new bonds by printing $10 billion in new currency, which it gives to the Treasury in exchange for the bonds.”

    Economically, the direct Fed loan route works fine especially since interest flows back to Tsy. But even this interest-free debt counts in the statutory debt limit and every congressional vote for a debt ceiling hike puts more political pressure to raises taxes and cut spending. If instead of new bonds, Tsy deposited $10 billion (ex Mint costs) in coinage, the Navy would get its submarines without Tsy adding one dollar to the public debt (and yes, larger denomination coins would be needed to make this practical).


    Ramanan Reply:

    Excellent find Beo!

    Said almost similar stuff myself in #59.

    However Bernanke is not that accurate. The Treasury would send a coin to the Fed which can have any denomination as per your findings. The Fed would then increase the Treasuy’s TGA account. If the government needs $10b,

    Treasury Assets+ = $10b (TGA account)
    Treasury Liabilties+ = $10b (Treasury Currency)

    Fed Assets+= $10b (Treasury Currency)
    Fed Liabilities+ = $10b (TGA account)

    The Treasury can then write a check without holding an auction and violating any law on public debt limits and/or overdrafts.


    Jim Baird Reply:

    Hmm, who’s face would you put on a $10B coin?


    beowulf Reply:

    Well the GOP is gung go to put Reagan’s name or face on everything. :o)

    What’s funny about this discussion is Coast to Coast AM (late night talk show that finds an endless stream of “experts” on UFOs, ghosts, Bigfoot, etc. ) had a conspiracy theory author on the other night who sounded surprisingly sane. His book is about how currency is based on government debt but it could be more easily issued by the government debt-free, like President Lincoln did with his US Note “Greenbacks”. Of course, he then lost me at the part tying it into astrology, zero point energy and alchemy– and not in the metaphorical sense. :o)

    Tom Hickey Reply:

    Beowulf, the debt-currency debate is usually confused, sine many people commenting on it don’t understand the basics.

    It boils down to whether the government should “print” term instruments or currency to fund its deficits under a fiat system. Of course, there is a strong lobby to print interest-bearing negotiable instruments since that benefits the folks that deal in these things. The problem is that it is unnecessary operationally and represents a transfer of purchasing power to the elite needlessly and for no good reason other than private benefit. Interest on the national debt constitutes a significant portion of the budget, and it subsidizes private interests for no substantial public purpose that I can determine.

  16. anon says:

    We’re now at 500.

    But that’s irrelevant.


  17. RSJ says:

    I can’t keep up with the endless loop between Anon and Everyone else.

    All the points have been made, and yet no one sees the irony:

    If the government can spend by simply adjusting computer accounts, then why can’t Warren do the same and give us Avatars? Is that an operational constraint or a self-imposed constraint? Or is it an “irrelevant” constraint?


    anon Reply:

    It’s not irrelevant – but the rest remains unclear.


  18. Sergei says:

    Actually the FED does not buy banknotes from Treasury but borrows them against collateral (you guessed it! it gives treasuries as collateral) and on top of that FED covers printing costs.


    beowulf Reply:

    Yes, Fed pays Tsy for the printing cost of Federal Reserve Notes (so a $1 bill costs the Fed the same as a $100 bill). The Fed pays Tsy face value for coins, so a dollar coin costs the Fed 100 times as much as a penny. So my question is– From the Fed’s standpoint, what is the operational difference between crediting Tsy with $10 billion from bond sales versus $10 billion in coins?


  19. anon says:

    Tom 1:19

    deficit spending creates non government income, saving, and net financial assets

    that’s a national accounts flow identity, MMT transformation version

    operationally, the government borrows before it spends

    that’s not a national accounts flow identity; it’s a flow of funds characterization

    both are true and consistent with each other

    I believe in both

    with respect, you are using the first to fend off challenges on the second

    it’s not necessary

    the first is strategic, the second is operational

    the strategic representation is the most important for policy

    I believe that and have never said otherwise

    the operational representation is a matter of operational fact

    I think the operational facts should be clear in the development of MMT’s full operational perspective

    my entire emphasis in “Marshall’s longest” has been to prod for clarification of this operational perspective

    I’ve barely touched on the strategic

    the current operational framing for MMT seems to be to default from operational precision around the current system to strategic summary

    it’s not necessary

    clarity in operational explanation is entirely consistent with the strategic sequence

    What do YOU think, Marshall?


    Tom Hickey Reply:

    I think that the confusion arises from the terminology that (deficit) spending “precedes” (offset) borrowing. The term precedes is unclear because it could mean either logically or temporally. The MMT position is precedes “logically,” as Scott stated. This has to be true if the offset requirement is voluntary and could be removed. There is no such financial constraint on a fiat system other than one that is imposed internally.

    Of course, under the “no overdrafts” rule deficit spending must be preceded temporally by debt issuance. I don’t think that was ever the issue as far as the MMT’ers are concerned, since they understand reserve banking very well.

    To my mind, the issue is how to state MMT principles concisely and precisely. Since I am not an expert in this, I try to use the same words that the MMT’ers use to avoid making an inadvertent mistake. I try to understand the words as best I can, but I have a limited amount of time to study things like reserve banking in any detail. Moreover, most of the people with whom I deal would just be confused by such an explanation. I’m looking for something that ordinary people can grasp that overcomes the overly simplistic or outright bogus stuff they are being fed, both by the so-called experts, the inflationistas, and the conspiracy theorists.

    What I am thinking now is that it may be simpler and less confusing to say that the Treasury’s debt issuance does not fund deficit spending, as it may appear. Rather, deficit spending funds debt issuance (at the macro level). I have found that is what the explanation comes down to in the end anyway, if someone pursues it.

    As far as most people are concerned, deficit spending involves either borrowing or printing. They think, or have been trained to think, that printing leads to inflation and borrowing must be paid back by raising taxes. These are the bogus notions that have to be countered if the US and world is to avoid the impending move toward austerity. It is also necessary is the US and world are to b able to break the shackles of the mind that prevent using the potential of the fiat system to achieve full employment and price stability, if the MMT assertion is correct.

    BTW, someone needs to write a simple yet correct presentation on reserve banking, along with the basics of reserve accounting, or provide a reference to something that already exists that I haven’t been able to find. It would also be helpful to lay out the differences among the various CB’s for comparison.


    anon Reply:

    I agree the thing needs to be simplified for mass consumption. You are right on that.

    But the technical groundwork on which that simplification is based should be as good as possible.

    IMO, the operational flow of funds exhibits temporal precedence of borrowing over spending as I described above at 1:36. This is a relationship that is defined as an ordering within a given temporal period, which is the period of the defined deficit and an equivalent amount of borrowing.

    Temporal simultaneity is exhibited in the national accounts derived relationship that deficit spending creates income, saving, and net financial assets. “Temporal simultaneity” reflects the fact that this is an income statement type of measure where a defined temporal period is in play, but the measurement captures the full summary result at the finish relative to the start, without regard to operational order in between.

    I emphasize that the flow of funds relationship is completely different from the national accounts relationship.

    I don’t know what “logically precedes” means; I don’t use that phrase.


    Tom Hickey Reply:

    ” X is logically prior to Y” implies that Y is dependent on X. That is, X is a necessary condition for Y — “Y only if X.”

    Bond issuance is dependent on deficit spending, not vice versa, This is illustrated by the fact that no-bonds is an option. It was also demonstrated when Australian financiers strongly lobbied for continued debt issuance during periods in which the government was in surplus. But the rule is no deficit, no bond issuance.

    Logical priority is formal, e.g., the terms is usually employed in math. Logical priority does not require temporal priority, which would be stated, “Y occurs only if X occurs before it in time sequence.”

    This is obviously confusing to those who do not regularly distinguish these uses, so it is better to avoid the claiming that spending comes before borrowing. Instead, maybe it is clearer to say that in a convertible fixed rate system, government borrowing finances deficit spending, while in a nonconvertible floating rate regime deficit spending finances “borrowing,” i.e., debt issuance saves current currency issuance through deficit expenditure as nongovernment net financial assets (at the macro level).

    Of course, then it is a problem explaining to many people what “at the macro level” means, since they are well aware that people do not take their SS funds and buy Tsy’s.

    anon Reply:

    “Bond issuance is dependent on deficit spending, not vice versa”

    So in that sense you say deficit spending in the current fiat system is logically prior to bond issuance. That’s your definition.

    That’s true whether the system is fixed or floating. You don’t issue bonds in a fixed rate system if you have a balanced budget.

    I don’t see how it’s a relevant definition.

    I must be missing the point.

    Scott Fullwiler Reply:

    “my entire emphasis in “Marshall’s longest” has been to prod for clarification of this operational perspective”

    I think the clarification was available many days ago. Looking back over this, Warren’s comment appears to have given you the answer but been misinterpreted. In #21, you asked:

    “What prevents US government checks from bouncing if it doesn’t have sufficient funds in its account at the Fed?”

    In response, Warren wrote:

    “the fed can let the balance in the tsy account go negative with a nod from congress, which is the entity doing the spending. in otherwords, congress clears its own checks”

    Min then asked, “Warren, can you provide a reference to the legislation that allows that?”

    Warren’s point was that the “nod” from Congress WOULD BE the legislation—it doesn’t yet exist. In other words, we have a self-imposed constraint.

    As I wrote above earlier today:

    MMT says that, in the GENERAL case (not applying to any particular country), a govt that issues its own currency and allow the fx value of that currency to be flexibly set in fx markets does not have an operational constraint on its ability to deficit spend. In a SPECIFIC case, a govt can choose to put constraints upon itself at the policy level that prohibit this from actually occurring.

    That’s always been our approach.


    anon Reply:

    That may be your interpretation of my objective here, but it certainly isn’t mine.

    That was an isolated rhetorical question to get some discussion grounding. I’ve acknowledged that sort of answer many times in these comments in many other ways. It’s the least of my questions.


    Scott Fullwiler Reply:

    OK. Can you direct me to one that gets at any continuing concerns? Like RSJ, given the sheer volume, it’s a bit tough to figure out where everything has been here and where it currently stands. Thanks.

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