Wray- the currency as a public monopoly
Posted by WARREN MOSLER on April 6th, 2011
Good to see this- been suggesting it for quite a while.
Working Paper No. 658, March 2011
Keynes after 75 Years: Rethinking Money as a Public Monopoly
L. Randall Wray
Economists and government policymakers fail to recognize that money is a public monopoly. The result of this misunderstanding is unemployment and inflation, says Senior Scholar L. Randall Wray. The best way to operate a money monopoly is to set the “price” and let the “quantity” float, as exemplified by Hyman P. Minsky’s universal employer-of-last-resort program.
Understanding how a monopoly money works would advance public policy formation a great deal, says Wray. And since banks are given the power to issue government money, failure to constrain what they purchase fuels speculative bubbles that are ultimately followed by a crash. The real debate should be over the proper role of government—how it should use the monetary system to achieve the public purpose.
ABSTRACT:
In this paper I first provide an overview of alternative approaches to money, contrasting the orthodox approach, in which money is neutral, at least in the long run; and the MarxVeblen-Keynes approach, or the monetary theory of production. I then focus in more detail on two main categories: the orthodox approach that views money as an efficiency enhancing innovation of markets, and the Chartalist approach that defines money as a creature of the state. As the state’s “creature,” money should be seen as a public monopoly. I then move on to the implications of viewing money as a public monopoly and link that view back to Keynes, arguing that extending Keynes along these lines would bring his theory up to date.
April 6th, 2011 at 3:47 pm
“monopoly money”, lol.
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Neil Wilson Reply:
April 6th, 2011 at 4:15 pm
Of course one of the ways to show what will happen once the nutters get their budgets through Congress is to try and play a game of Monopoly *without* the banker handing out any starting cash and having a limit on salaries.
It shortens the game as everybody goes bankrupt very quickly.
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kkken530 Reply:
April 6th, 2011 at 7:14 pm
That’s what I was thinking..An unfortunate choice,as people associate that term with play money…As bad as the “Theory” part of MMT..
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Geoff Reply:
April 7th, 2011 at 8:18 am
Agreed. Although monopoly money really IS like “monopoly” money, try explaining that to your friendly hard money gold bug. He will say exactly! Both are worthless pieces of paper!
Some seem to grasp quickly (or have always known intuitively) that the dollar is simply a token, but it seems that others will never get it.
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leja Reply:
April 8th, 2011 at 12:17 pm
On the contrary I found this concept illuminating. It got me thinking how Keynes and Knapp must have held similar perceptions about the economy and how it contrasts with mainstream barter-view of economy. This conceptual division has been there for a long time.
April 6th, 2011 at 7:07 pm
So brillant it is unbelieveable…
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April 6th, 2011 at 7:57 pm
Getting scarey close to the truth here!
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April 6th, 2011 at 11:56 pm
Boy, if Wray’s right (duh…), then Mary Meeker (with help from Laura
Tyson, Al Gore, Meg Whitman, Peter Orszag and others) has wasted a significant chunk of her life turning out this colossal turd:
http://images.businessweek.com/mz/11/10/1110_mz_49meekerusainc.pdf
Anyone seen this yet? Comparing the US to GM or any other for-profit entity and then analyzing it as such, without ever examining the underlying assumptions (or sheer idiocy) of such an exercise? Unbelievable.
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beowulf Reply:
April 7th, 2011 at 1:44 am
I’ve always liked a “naval engineering for dummies” manual written for WW=II Merchant Marine recruits that begins simply with, “The Sun is the source of all energy” and builds from there.
http://www.scribd.com/doc/29502735/United-States-Maritime-Service-Training-Manual-1943 (p.5)
I guess public finance for dummies should begin with two sentences, 1. Govt has a monopoly on seigniorage (or currency, which is certainly easier to spell), which it uses to print money. 2. Govt has a monopoly on violence, which it uses to unprint money.
When GM is free to stockpile nuclear weapons or mint its own coins for legal tender, then yes, GM and Uncle Sam would be comparable. Until that fine day (well unlikely it’d be the SAME day), its a spurious comparison.
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WARREN MOSLER Reply:
April 7th, 2011 at 12:14 pm
how about when the govt owns all the stock of gm? ;)
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beowulf Reply:
April 7th, 2011 at 4:18 pm
Good point Warren, I’m now going to go get some ice before my brain melts. :o)
Calgacus Reply:
April 10th, 2011 at 7:01 pm
Or how about when Goldman Sachs owns all the senators, congressmen, judges and officials. Oh – that’s right now. They really should put how much they paid for all these guys on their financial reports, but I guess the amount is too small, the size of a rounding error.
Tom Hickey Reply:
April 10th, 2011 at 10:14 pm
I guess the amount is too small, the size of a rounding error.
This is actually true. It is amazing how cheap politicians come.
April 7th, 2011 at 11:07 am
Anyone have any commentary on this? I am sure it will make the blogs soon.
http://europe.pimco.com/EN/Insights/Pages/Skunked.aspx
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Dan Kervick Reply:
April 7th, 2011 at 5:02 pm
Well, the deficit hawks have changed their tune a bit under pressure:
Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates.
So now, what they mean by “default” is not default at all, but devaluation. Obviously, that’s not what any person with common sense means by “default” – which signifies an inability or unwillingness to pay one’s bills. But I guess that it’s at least the basis for a conversation.
As I think Warren, Bill Mitchell and others would point out, there is no need for increased deficit spending to produce devaluation and inflation so long as our economy is running so far below capacity.
The biggest driver of the rise in US non-discretionary entitlement spending is the massive rise in health care spending due to the wasteful and inefficient US health care system. The way to attack the problem is not by focusing simply on the entitlement programs themselves, but on the whole health care system. Costs in the US for health care services are far higher that what people pay for equivalent services in other countries. US citizens need to get much more bang for their health care buck, whether those bucks are coming from government programs or private accounts.
Of course, we also need to grow our economy, and that requires a government willing to support aggregate demand, instead of sending us into a decade of Hooverite or Japan-style stagnation. Getting richer as a country will do wonders for our non-discretionary budget picture.
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Neil Wilson Reply:
April 8th, 2011 at 2:51 am
Yep I’ve noticed that. The line has changed to
“It will cause a currency crisis and massive inflation”
To which the response is
“Therefore the interest on bonds represents nothing more than an import subsidy. Why do you believe that the government should subsidy foreign production at the expense of domestic?”
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save america Reply:
April 8th, 2011 at 4:58 am
That’s easy, imports are a benefit, and exports are a cost. Soon, china, russia, and USA are going to subsidize african production so they can be the worker bee slaves of the world while the rest of us sit around on blogs talking MMT right?
Tom Hickey Reply:
April 8th, 2011 at 9:32 am
It’s called cyber-colonialism, and maybe will be trademarked by someone as iColonialism.
save america Reply:
April 11th, 2011 at 1:16 pm
cybercolonialism – LOL! I like that, already at disney in florida I see they are bringing many african workers over to do the work (cause they work so cheap) and now even our kenyan president has been exported by africa (cause he probably works cheaper too) Global labor arbritage all the way up to the white house :) Me and you Hickey know that work is silly and stressful, better to sit here all day talking about MMT memes.
Rodger Malcolm Mitchell Reply:
April 8th, 2011 at 10:23 am
“Wasteful” federal spending benefits the economy. The infamous “bridge to nowhere” should have been built.
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Tom Hickey Reply:
April 8th, 2011 at 11:46 am
If the bridge to nowhere had been built, “Nowhere” would have been somewhere. Now it is still nowhere.
art Reply:
April 8th, 2011 at 2:22 pm
““Wasteful” federal spending benefits the economy.”
Not always.
TC Reply:
April 11th, 2011 at 10:51 am
I don’t fully agree with building bridges to nowhere, but once they are built, the money that is in the system will then be used in the wider market.
WARREN MOSLER Reply:
April 11th, 2011 at 3:27 pm
right, it’s bad public policy as keynes stated.
but overtaxation/unemployment is in many ways even worse.
TC Reply:
April 11th, 2011 at 10:49 am
The change in language is important. Language is a weapon more powerful than any other.
We lost this recent battle – the new budget is horrible.
But we are winning the War. Changing the field of debate to inflation is a gain for understanding and will turn out to be a gain in prosperity for people.
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April 7th, 2011 at 11:24 am
Warren, despite not being sure I fully understand your Currency as Commodities paper, especially its implications, I think it’s much better than this one from Randy Wray.
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WARREN MOSLER Reply:
April 7th, 2011 at 12:20 pm
Thanks!
I first did it as a presentation at New School in NYC at Ed Nell’s office, with Randy there and a few others I can’t recall.
When I finished there were questions asked. Randy was silent, so I asked him what he thought. He said he had to go back and add it to his book which wasn’t yet finished.
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April 8th, 2011 at 11:31 am
“”The real debate should be over the proper role of government—how it should use the monetary system to achieve the public purpose.”"
That is straight up central planning as is price fixing. Certainly not something that a Tea Party supporter would endorse.
And who gets to decide what “public purpose” is??
The amount of fuzzy, gray area terms in MMT is amazing.
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WARREN MOSLER Reply:
April 8th, 2011 at 1:04 pm
public infrastructure for public purpose includes the military, legal system, etc.
call it central planning if you like.
and both endorsed by the tea party.
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Tempest Reply:
April 8th, 2011 at 1:41 pm
Thanks, I will call it central planning.
If you get elected, you will have to swear to up hold the Constitution. Central planning and price fixing in order to guarantee “full employment” is not in the Constitution. Nor is the government being the “employer of last resort”. They are found in more communal documents, however.
I assume that you will drop your central planning MMT position so as to conform to your sworn oath?
“”public infrastructure for public purpose includes the military, legal system, etc.”"
You have said that government spending is far too small to keep up “aggregate demand”. The items you mention are quite small in the grand scheme of things, so you must want much more spending than on just those things.
How do you reconcile that position?
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Tom Hickey Reply:
April 8th, 2011 at 2:12 pm
Of course, “bank” is not in the Constitution either. This battle was fought back at the beginning and Alexander Hamilton won in his argument that the Constitution conveys the power to meet the aims it enumerates.
You are presuming that the body of constitutional law and court precedent, especially that of the Supreme Court, which adjudicates constitutional issues, doesn’t exist. Get real.
Tempest Reply:
April 8th, 2011 at 2:25 pm
So the government has limitless power in your view. Got it.
Can you show me a court case that says the government is to be the “employer of last resort” and guarantee “full employment”?
WARREN MOSLER Reply:
April 8th, 2011 at 2:47 pm
govt. power/authority is limited by it’s instructions from the people called the constitution.
govt is what creates unemployment with it’s management of its monetary system (the monetary system is constitutionally authorized).
there’s nothing in the constitution that says the govt. must manage it’s monetary system such to create unemployment.
the govt is allowed to provision itself with labor in general as per acts of Congress.
john f Reply:
April 8th, 2011 at 2:26 pm
If you get elected, you will have to swear to up hold the Constitution. Central planning and price fixing in order to guarantee “full employment” is not in the Constitution. Nor is the government being the “employer of last resort”.
While those statements aren’t in the Constitution, the federal gov’t is ordained and established with the public purposes of “…to form a more perfect union,…provide for the common defense,promote the general welfare, and secure the blessings of liberty…” Congress is specifically authorized taxing powers to promote the general welfare and authority to regulate commerce, borrow credit, and to coin money and enact all laws necessary and proper to carry out those powers. So how would the ideas that are discussed here, like a jobs guarantee program, be unconstitutional? If it helps to regulate commerce among the states to mitigate periods of unemployment during the business cycle, that’s promotion of the general welfare.
save america Reply:
April 8th, 2011 at 3:20 pm
Tempest, in the old days, if a girl got pregnant, she couldn’t run to big daddy government and get some medical treatment, but now she can. Do you see the pattern here, get old people hooked on govt SS, get single moms hooked on govt welfare, get smart college kids hooked on govt student loans, get workers hooked on govt sponsored housing, get young girls who don’t want babies hooked on govt abortion doctors, get unemployed hooked on gauranteed government job program, etc etc its all about centralizing power, and absolute power corrupts absolutely, all about breaking up local families, local communities, and making all the citizens/borg dependent on 1 borg queen at the top, instead of each other at the bottom, perot talked about the destruction of the family unit, some guy with AEI just talked about it on cspan too, the tower of babel in the bible didn’t last, and niether has any other large concentrated center of human power. I was former network engineer, server client model is weak because if someone nukes server, all the clients are dead, but the peer to peer internet we have today, much more robust, can nuke one node, and the other nodes carry on.
Personally my social life has been ruined because in my fathers day people and families were more dependent on each other instead of the state, but now they don’t need each other. Big brudda there to meet every need, food, housing, education, medicine, you name it, there is a big brudda program to take care of everyone.
Warren wants me to believe octomom and old guys feeling “independent” are a big social goal and public good. But I have many friends who have went to jail and whose lives were wrecked by lawyers and “systems” that suck them dry to FEED this demand from octomoms and old people.
In his mind, it is EVIL for my wife, my mother, my daughter to DEPEND on ME and for ME to DEPEND on them, we all must depend on the state and stay “independent” of each other, yet he advocates small gubbmint, I don’t get it. I wonder if warren threw his parents into a state nursing home with strangers and if he wants to go to one himself instead of rely on his kids.
Tempest Reply:
April 8th, 2011 at 5:30 pm
“”While those statements aren’t in the Constitution, the federal gov’t is ordained and established with the public purposes of “…to form a more perfect union,…provide for the common defense,promote the general welfare, and secure the blessings of liberty…” Congress is specifically authorized taxing powers to promote the general welfare and authority to regulate commerce, borrow credit, and to coin money and enact all laws necessary and proper to carry out those powers. So how would the ideas that are discussed here, like a jobs guarantee program, be unconstitutional? If it helps to regulate commerce among the states to mitigate periods of unemployment during the business cycle, that’s promotion of the general welfare.”"
Then please explain to me what the 10th Amendment is for.
Your are saying that government power is unlimited.
WARREN MOSLER Reply:
April 9th, 2011 at 7:06 am
Unemployment is evidence the govt is over taxing us for the size govt congress has selected.
my current proposal is to suspend fica taxes. I presume you agree tax cuts are constitutional.
furthermore, congress is allowed to hire people to do things that are allowed to be done in the constitution.
the constitution does not prevent congress from hiring people the private sector doesn’t happen to want to hire (the unemployed)
to do things approved by the constitution.
john f Reply:
April 9th, 2011 at 5:49 pm
No, Tempest, I am not saying the fed gov’ts powers are unlimited, I stated that the Congress is delegated the power to enact all laws “necessary and proper” to carry out the powers I mentioned above. Now, exactly what laws are “necessary and proper” for Congress to enact in order to “regulate commerce” and “promote the general welfare” is going to depend on the economic circumstances of the time.
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beowulf Reply:
April 10th, 2011 at 10:55 pm
And who gets to decide what “public purpose” is??
The market, Tempest, the market. Every two years, congressional candidates bid for votes.
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Tempest Reply:
April 11th, 2011 at 12:16 pm
So then you are saying the Congress is all powerful with no Constitutional limitations?
If this is the case, why did the Founders enumerate the roles of the government and put in a process to amend the Constitution?
Makes no sense if Congress has no Constitutional bounds.
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beowulf Reply:
April 11th, 2011 at 3:29 pm
The govt can spend on whatever it wants and can levy taxes on whatever it wants (it can even tax real property if the revenue bill focuses on income, imputed or actual, accruing to property).
The Commerce Clause and the 10th Amendment relates to govt regulatory statutes, neither bind the Congress in any way as to its spending and taxing powers.
Tempest Reply:
April 11th, 2011 at 3:41 pm
It binds them as to what they can spend money ON (the regulations they can enforce).
beowulf Reply:
April 11th, 2011 at 3:48 pm
You can believe whatever you like about the Constitution. I’m simply describing what the Supreme Court believes about the Constitution, and the Justices disagree with you on that point.
WARREN MOSLER Reply:
April 11th, 2011 at 3:50 pm
and the court was set up by the constitution to do that
Tempest Reply:
April 11th, 2011 at 3:58 pm
If the Founders wanted SS, medicare, health care, ad infinitum…. Why didn’t they set them up in the Constitution?
The 11th Amendment was passed because the courts were becoming too activist.
Lets not forget that SS and other social programs were brought into being by FDR threatening the courts. Many of his programs were struck down prior to that.
WARREN MOSLER Reply:
April 11th, 2011 at 10:04 pm
the strong point of the constitution is the processes it prescribes for changing it and interpreting it
ESM Reply:
April 11th, 2011 at 10:33 pm
“the strong point of the constitution is the processes it prescribes for … interpreting it”
Doh! Warren, you’ve been hanging around too many lefties who believe in a “living” constitution. The Constitution does indeed prescribe procedures for amending itself. Everything in theory is on the table, except for only one very specific thing.
However, there is nothing currently in the Constitution that prescribes a procedure for interpretation. The supreme court arrogated that power to itself in the Marbury v Madison decision, thus elevating its status in the view of the unwashed masses from a simple appeals court to the final arbiter of what is and is not constitutional. Andrew Jackson did not accept this encroachment on his authority, and neither should any President.
WARREN MOSLER Reply:
April 12th, 2011 at 7:29 am
and we can amend the constitution to change the current role of the supreme court as desired.
beowulf Reply:
April 12th, 2011 at 8:43 am
ESM, Marbury does far more to strengthen the power of the Presidency than to weaken it since the vast majority of constitutional challenges are decided the President’s way (which to the public looks like Court ratification of his decisions– and actually most bad policies are permissible under Constitution) and on national security matters almost universally.
If I may go way off topic and bring this conversation to the arcane field of monetary policy, the greatest Court injury to presidential power was their 1935 decision, Humphrey’s Executor v. United States. Case details at the link, but its this decision (about a Federal Trade Commissioner FDR wanted to fire) that underpins the Federal Reserve’s “independence” from presidential supervision and control.
http://en.wikipedia.org/wiki/Humphrey%27s_Executor_v._United_States
Over the last 30 years, the Court has edged towards a unitary executive theory of the presidency and will sooner or later (within the next decade I’d wager) overturn Humphrey’s Executor. As one immediate consequence, the Fed will be under the President’s thumb.
http://volokh.com/posts/1207512634.shtml
April 8th, 2011 at 11:36 am
I’ve got a question about banking that I don’t know where to ask. Hopefully someone will read it here.
If a government were to use one bank to pay all its expenditures and this bank manages to keep most of these deposits, wouldn’t that give an unfair advantage to this bank over the others since it is the one that gets most if not all of the free extra reserves that it can then lend to the other banks or buy government bonds?
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WARREN MOSLER Reply:
April 8th, 2011 at 1:05 pm
you just described the Fed.
which is highly regulated…
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save america Reply:
April 8th, 2011 at 8:58 pm
Brookesly Borne may take issue with you warren, she didn’t think things were regulated when they shut her up. Naked Capitalism Yves Smith just talked about possible illegal foreign currency swaps/unsecured loans (that even you talked about when they were happening realtime) no regulation there either, ron paul says everyone else gets audited, where is the fed audit? Even zerohedge talks about what is all this garbage on who took tarp – they don’t tell you all kinds of info about the assets they took in trade. I thought Obama said transparency was good? At the save america convention they kept playing this clip over and over and over of some congressman asking bernanke about certain loans to certain banks and certain collateral and bernanke kept saying he would not answer the question or disclose that info – so who oversees him?
Lots of articles everywhere about robosigning and foreclosure mills in our court system where due process was thrown out the window to help banks/servicers/mers expedite kicking grannies out of thier homes. What world are you living in Warren where you see regulation? I don’t see it, I must be in the bizarro superman world, or maybe you are.
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MamMoTh Reply:
April 8th, 2011 at 2:41 pm
Warren, I am talking about a normal commercial bank where public servants and government providers receive their pay. As I understand the system this seems to give an advantage to this bank over the others. I would like to get a confirmation or a refutation from someone who has a better understanding of the commercial banking system, which must be almost everybody on this site.
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WARREN MOSLER Reply:
April 8th, 2011 at 2:51 pm
If a government were to use one bank to pay all its expenditures and this bank manages to keep most of these deposits, wouldn’t that give an unfair advantage to this bank over the others
***perhaps, if the deposits were are below market rates. but govt doesn’t do that- it’s puts its business out for bid, best I can recall.
since it is the one that gets most if not all of the free extra reserves that it can then lend to the other banks or buy government bonds?
***reserves don’t have any particular value. it’s all about cost of funds.
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MamMoTh Reply:
April 8th, 2011 at 3:35 pm
If you are operating with an interest rate larger than 0, then a reserve deficit has some cost, and a reserve excess has some value, right?
So if most reserves go into one bank it seems to me this bank gets a free lunch, or a bigger one than the other banks, which will make it more profitable all other things equal.
(I’m not thinking of the US government here)
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WARREN MOSLER Reply:
April 9th, 2011 at 6:53 am
what you might be missing is that banks have costs of reserves.
that is, if the govt deposits its funds in a bank, the bank will pay interest on those funds, presumably equal to the fed funds rate, if the banks are competing for those funds.
if govt gives banks funding at ‘below target’ rates then that is a subsidy.
So a bank would only profit from reserves if the cost of those reserves is below the marginal cost of funding
MamMoTh Reply:
April 10th, 2011 at 4:47 pm
I understand holding reserves has a cost. But the cost of holding borrowed reserves must be higher than the cost of holding not own reserves.
Otherwise I don’t see why banks would compete for customers to hold deposits at their bank. There is your story about depositing your bank’s money at other bank and not getting the toasters, but is that the normal functioning of the banking system?
It seems to me in that case banks should try to make loans and ask the borrowers to move their money to another bank as soon as possible to optimize profit.
WARREN MOSLER Reply:
April 11th, 2011 at 8:39 am
banks compete for ‘retail’ customer balances often because regulators (who don’t understanding banking dynamics) currently are requiring banks to have ‘stable’ customer balances.
April 10th, 2011 at 6:28 pm
“If a government were to use one bank to pay all its expenditures and this bank manages to keep most of these deposits, wouldn’t that give an unfair advantage to this bank over the others since it is the one that gets most if not all of the free extra reserves that it can then lend to the other banks or buy government bonds?”
The recipient tells the government which account he/she wants the payment to be made. The government can’t decide this.
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beowulf Reply:
April 10th, 2011 at 10:19 pm
Ramanan,
I see his point, he’s talking about govt deposits (from tax receipts), not govt expenditures. And leaving aside US federal govt with its odd duck TT&L accounts, every state and local govt deposits its receipts into an account with a private bank, North Dakota with its state-owned bank excepted.
Washington State, for example, deposits state funds with Bank of America.
http://www.webofdebt.com/articles/washington_state.php
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MamMoTh Reply:
April 11th, 2011 at 6:20 pm
I was talking about govt expenditures i.e. wages, payments to providers, contractors, etc. But my question might also apply to the case of govt deposits. Does that give an advantage to the state bank over the others? I can’t figure why it wouldn’t, unless banks are better off without deposits. But maybe intuition doesn’t help.
I just thought it would be something that the banking experts on this site could help me understand.
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WARREN MOSLER Reply:
April 11th, 2011 at 10:14 pm
again, only if it gets those deposits cheaper than the going fed funds rate.
the cost of deposits is the rate the bank has to pay on deposits.
banks can get unlimited funding at the going rates. so getting funding per se isn’t a big deal. but getting cheap funding is a very big deal
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MamMoTh Reply:
April 12th, 2011 at 10:33 am
I am afraid I still don’t get it. Banks need reserves. The cost of reserves is either the FFR if they need to borrow them, or 0 if they get them through government spending.
So regardless of the interest rates paid on deposits, it seems to me that costless reserves is better than borrowed reserves.
It might be that holding deposits is not profitable to a bank, i.e. a bad deal in absolute terms. But in relative terms I’d say it is still an advantage for a bank to get free reserves from government spending.
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ESM Reply:
April 12th, 2011 at 10:53 am
“So regardless of the interest rates paid on deposits, it seems to me that costless reserves is better than borrowed reserves.”
A government deposit is a deposit. It is no different from any other deposit, and presumably the bank has to pay interest on that deposit.
When you or the government deposit money (e.g. a check) at the bank, the bank gets the reserves when the check or whatever clears, and the bank gives an IOU to the depositor on which the bank pays interest. I’m not sure why you say the reserves are costless.
MamMoTh Reply:
April 12th, 2011 at 11:05 am
When the govt pays someone, it credits his bank account at bank A, and credits the reserves of bank A at the Fed right? Govt spending creates reserves, that’s why they are costless to the bank who owns them.
WARREN MOSLER Reply:
April 12th, 2011 at 1:17 pm
right, so the bank has the guy’s deposit, that it pays interest on, a bank liability
and the reserve balance is the bank’s asset.
the bank would be far better off with an asset that payed more than reserves
ESM Reply:
April 12th, 2011 at 11:21 am
Yeah, but bank A now has an IOU outstanding to whomever the govt paid. Presumably bank A has to pay interest on that IOU/deposit.
Tom Hickey Reply:
April 12th, 2011 at 11:26 am
MamMoTh, deposit account turn over quickly and banks loose those reserves to other banks. There is always some float in the system but banks can only plan on the reserves they obtain from time accounts, and they have to pay interest greater than the FFR rate on those.
MamMoTh Reply:
April 12th, 2011 at 11:40 am
Every bank has to pay interest on deposits. I think it’s safe to assume they all pay pretty about the same. That’s why I mentioned relative advantage more than once.
I’m probably missing something… The way I see it is basically if all G goes to bank A and T is withdrawn from all banks more or less uniformly, then
i) bank A can lend reserves to the other banks (G-T=0),
ii) bank A can buy more Tsys than the other banks (G-T>0)
iii) bank A needs to sell less Tsys than the other banks (G-T<0)
In each case the situation is advantageous to bank A right?
WARREN MOSLER Reply:
April 12th, 2011 at 1:20 pm
G goes to the depositor at bank A, unless bank A is getting a govt check for something it sold.
WARREN MOSLER Reply:
April 12th, 2011 at 1:13 pm
the cost of reserves isn’t 0 if you ‘get them through govt spending’ or any other way.
an what do you mean by ‘get them through govt spending’?
govt spends by the fed debiting the tsy’s account at the fed and crediting a member bank’s account for further credit to the holder of the account getting paid.
so if you get your $1000 social security payment, and it’s in your citi bank account, at the end of the transaction citi has say 1,000 in its reserve account and it has your deposit it has to pay interest on.
ESM Reply:
April 12th, 2011 at 1:14 pm
G is not giving bank A reserves for free, nor is it lending bank A reserves for free. I don’t know why you think that. G (or anybody G gives money to) is a depositor of bank A, just like any other.
WARREN MOSLER Reply:
April 12th, 2011 at 1:14 pm
it the govt buys something from the bank, like a property or something, then the bank has balances they don’t pay interest on. but that’s the bank’s own capital
MamMoTh Reply:
April 12th, 2011 at 1:19 pm
so if you get your $1000 social security payment, and it’s in your citi bank account, at the end of the transaction citi has say 1,000 in its reserve account and it has your deposit
This is what I call citi getting $1000 reserves through govt spending for free as opposed to borrowing them from another bank or the Fed.
I thought this was the basic MMT description of how govt spending works.
WARREN MOSLER Reply:
April 12th, 2011 at 1:31 pm
yes.
note that reserves are bank assets that earn some interest. not bank liabilities or deposits.
MamMoTh Reply:
April 12th, 2011 at 1:32 pm
G goes to the depositor at bank A
But G also goes to bank A’s reserves at the Fed right?
MamMoTh Reply:
April 12th, 2011 at 1:36 pm
note that reserves are bank assets that earn some interest. not bank liabilities or deposits.
that’s the case of the bank’s own reserves, not of borrowed reserves which are also a liability.
which is basically my whole point although we got stuck somewhere else…
MamMoTh Reply:
April 12th, 2011 at 10:30 pm
ESM: G is not giving bank A reserves for free, nor is it lending bank A reserves for free. I don’t know why you think that. G (or anybody G gives money to) is a depositor of bank A, just like any other.
The govt credits G in different accounts at bank A, and credits G at bank A’s reserve account at the Fed. I learned it here. I thought it was MMT 101.
April 10th, 2011 at 6:57 pm
The recipient tells the government which account he/she wants the payment to be made. The government can’t decide this.
Not in every country. You can think of my question as hypothetical, although it is not, I’m just interested in the answer.
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April 11th, 2011 at 1:10 pm
[...] by Bill Gross is hugely important. This was pointed out as a huge change by some people doing the daily grind work over at Mosler’s place: Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in [...]
April 11th, 2011 at 1:44 pm
Now the Democrats and the Tea (formerly Republican) Party will begin to compete on who can cut the federal budget more. The scenario goes like this: “The child is starving. I can feed him less food than you can.”
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