All Your Bases and Dead Presidents Are Belong to the Government?

A serious wonk debate has broken out over the trillion dollar coin and its ramifications.  As I said 18 months ago when I first discussed the coin here, this idea was never going to come to fruition, but it made for a seriously important discussion regarding our monetary system.  All roads lead to MR on this debate, whether through MR co-founder Carlos Mucha, who founded the coin idea or the inevitable debate over government self financing and JKH’s Contingent Institutional Approach).

Paul Krugman asks the question that all of this debate inevitably leads to:

“what happens if the US government issues a trillion-dollar coin to pay its bills?”

I would change the question slightly for the sake of simplicity.  Instead of a coin, what if the government used its powers as an autonomous currency issuer to just create bank deposits?

It might help to step back a second first before we jump in the mud here.   The monetary system we currently have does not operate as most people believe.  The government doesn’t “print money” (except in the literal case of cash notes and coins), but is actually the issuer of net financial assets.  So, when Peter uses his Treasury Direct account to buy a government t-bill he is divested of a bank deposit that ultimately allows the government to spend a bank deposit into Paul’s account.  Peter gets a US T-bill, no longer has a bank deposit and Paul ends up with  a bank deposit.  There is the same amount of bank deposits in the private sector, but there is an additional financial asset in the form of the bond.

But what if the government didn’t sell t-bills?  Instead of divesting Peter of a bank deposit (and giving him a NFA as t-bill) the government would just type a bank deposit into Paul’s account when Congress wants to spend.  So Peter still has his bank deposit AND Paul has a net financial asset in the form of a bank deposit.  The government, in this case, is a pure issuer of money.  If one were so inclined to call t-bills pure “money” you could claim that the first and second example are virtually the same (aside from the obvious politics involved).

The question this argument really gets at the heart of is the moneyness of government bonds versus bank deposits.  I have argued that t-bills have a very high level of moneyness.  That is, they are highly liquid and risk free, but not pure money.  For instance, if two men are standing in Wal-Mart, one holding $100 in cash (or a credit card) and the other holding $100 in physical t-bills they do not both have money in the eyes of Wal-Mart (the problem of money is not defining it, but convincing others to accept it).  Ie, they cannot both ring the register.  One must sell his t-bills to the other to obtain the cash for purchases.  Now, technology is reducing the discrepancy in “moneyness” between these assets, but the inconvenience of transferability still exists to some degree.  A bank deposit will always have a higher level of “moneyness” than a t-bill.   How this discrepancy influences inflation is up for debate.

But an equally important debate rages over the monetary base and Krugman’s “dead presidents” (cash).   Ultimately, the question in the above discussion leads to a debate over inflation, the degree to which the Fed maintains control of the money supply and the very design of our monetary system.  But first we should agree on a few things:

  • Money is almost entirely endogenous in our monetary system.  Ie, the money supply is determined by private banks who issue loans based on the demand by their clientele.
  • The money multiplier is not just broken.  It is non-existent.  Bank loans create deposits.  Banks find reserves after the fact if they must.
  • The central bank can influence the cost of supplying these loans, but has far less control over the demand for this money.
  • The terms “base money” and “high powered money” are unfortunate terms that should be done away with as they put the cart before the horse in terms of understanding the first three bullet points here.

If the bullet points didn’t help connect the dots already, we should all be realizing that the Fed has less control over the money supply than most of us have been led to believe.  The money supply being endogenously controlled by the banking system means that the Fed can influence the cost of money, but cannot completely control the supply of money.  The money supply is largely regulated by market conditions and the demand for loans.  In other words, the money supply is almost entirely privatized in the USA.  The Fed tries to influence the cost of this money by gauging economic conditions and forecasting policy changes to economic agents.

So, what happens to this system if the government self finances?  Obviously, we’re entering a monumental paradigm shift. We’re transferring from a system where money is created endogenously by banks who compete to issue money, to a system where the government exogenously creates money.   It’s almost impossible difficult to say whether one system is more inflationary than the other.  But what becomes clear in a system of government self financing is that the existence of private banking becomes increasingly less significant which would render the need for the central bank as increasingly less significant (since the central bank exists to support private banks and operates policy through the banking system).

The trillion dollar coin is not a debate about Fed influence, inflation and dead presidents.  It is a debate about a monumental paradigm shift in our monetary system.  A debate that shakes the core of modern banking and the monetary system we have designed around a  market based money issuing system where banks compete privately to issue money as debt.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:


  1. It takes a serious nerd to appreciate all the moving parts in this post. Great thought experiment.

  2. “It’s almost impossible to say whether one system is more inflationary than the other.”

    Do you really think that? I think once the monetary system becomes monopolized by the government that it is bye bye for the US economy.

  3. Instead, imagine a system where the govt self-finances but issues t-bill to accommodate any demand for those existing. Tell me how materially would it be different from the current system?
    The point being, the govt doesn’t “bribe” anybody from holding cash/reserves (HPM) by issuing bonds. Instead, the private sector decides that it wants to save NFAs and then chooses how to allocate those NFAs between the different asset classes existing.
    So, materially, there is no real difference between the current system and the one proposed.
    Re: inflationary consequences, Mosler has long maintained that current setup is actually MORE inflationary, since the savers also earn the interest – i.e., the govt is forced to create additional NFAs to cover the interest on the bonds. If such interest payments were not available, the savers would have to move into a different asset class, most possibly private/state securities, which would reshuffle the NFAs within the non-govt sector but not create any new ones.

  4. A couple of possible advantages to directly issuing money:
    1. We don’t have to issue interest-bearing debt to foreign countries.
    2. Savers would have to put their money into something more constructive than T-notes which seem to just pile up and don’t circulate.
    3. The inflation constraint would come front and center.

    Fascinating question.

  5. In a pure MMT world, how would the government regulate who gets money? The problem with a pure MMT world is that you eliminate the profit driven and risk managing banking sector from the equation. Pure MMT renders banking unnecessary as Cullen has explained previously. Do you really think that’s a better system than the one we have today?

  6. The inflation constraint wouldn’t just come front and center. The government managing the entire money supply would be a disaster!

  7. “3. The inflation constraint would come front and center.”

    Good point, although I sense that you think it will be an automatically more inflationary option (see my comment above for the alternative view). But you’re right that the debates on appropriation in Congress would no longer center about the bogus claim of “we don’t have the money” and instead will focus on the actual desirability of spending in question (or of reduced taxation in question) from the public purpose point of view, as they should be.

  8. You’ve cut right to the chase. The MMT world of government self financing is a socialist government run world that destroys competitive private banking. Being a banker, I might be a bit biased here, but it’s about time we expose MMT as a government take over of the money supply.

  9. I thought LVH said it’s the same thing as issuing a bond?
    It doesn’t necessarily mean nore cash in the system, just that the cash already there goes to paul for some commerce and then ends back at the bank as a deposit.

  10. SS, the govt would continue to do exactly what it has been doing right now, minus automatic coverage of deficit by debt. This is really not materially different from what we have. I think you imagine a system where some bureaucrat somewhere decides who gets a loan and who doesn’t. This is not the case. Just take a minute or two to actually think about. The banks will still create the loans, and the Fed would still supply reserves on demand. No difference from the current system.

  11. Easy buddy. You’re only unbanned because of the site changes. I haven’t forgotten your past indiscretions. So let’s try to be on our best behavior. Thanks.

  12. “The MMT world of government self financing is a socialist government run world that destroys competitive private banking.”

    How’s that? Why would that happen? The govt simply stops automatically issuing debt to cover its spending. Why would that destroy private banking?

  13. I think the present system is probably more inflationary in that you have this huge pile of NFAs which may or may not be someday ‘spent’ into the economy. There is an element of uncertainty.
    By directly issuing money, the money enters the economy right away and you can monitor inflation in current times.

  14. Do you really believe that? That once the government figured out that its money literally grows on trees that it would constrain itself as well as it does now?

    Who would want a loan when they could get debt free money from the government? The amount of money piling out of the government would soar due to demand. Private banking would be rendered useless!

    How would lending work when this scheme unfolds and everyone realizes that banks don’t need to exist? Some bureaucracy does all the home loans? Talk about a recipe for disaster!

  15. Everybody calm down. In a “pure MMT world” when you need a mortgage, you could still go to a private bank to get it. What’s all the brouhaha about destruction of private banking?

  16. But the issue is that your decision to spend or not to spend is not driven by availability of govt bonds. It is driven by your necessities, your income outlook etc. If the bonds were unavailable, you’d be forced to buy a state bond or a corporate bond or an ETF or whatever, but you want be simply spending because there is no T-bond to buy!
    So, you are putting the cart before the horse here. The private sector will always accumulate NFAs in some form or another. It will decide when to spend them not based on the availability of govt bonds but based on other factors. So, there is no impact on inflation coming from there.

  17. Banks could still lend money, right?

    Maybe in this new world they would have to lend from existing deposits?

  18. And who said that money (as in not bond) “enters the economy right away”? Have you never put money into a bank account?

  19. “Maybe in this new world they would have to lend from existing deposits?”

    This is a totally different proposal from govt self-financing.

  20. MMT doesn’t consider unintended consequences and doesn’t properly model how institutional changes might alter the way things play out. This became crystal clear to me when we had the JG debates last year and none of them thought the govt employing 20MM extra people would change anything at all.

  21. Who would want to borrow money at a mark-up when they could just lobby the government for debt free money? Government spending and corruption would go through the roof.

  22. “That once the government figured out that its money literally grows on trees that it would constrain itself as well as it does now?”

    Frankly, govt always realized that. Remember Cheyney’s “deficits don’t matter”? We’ll have to reply on our checks and balances system, the Congressional appropriation process, to prevent runaway govt spending – as we largely do now, by the way – instead of the smoke and mirrors of the current system, that amounts to the same.

    Who would want a loan when they could get debt free money from the government?

    What? Who said govt would be in business of giving out loans like that? You seriously confuse moving towards a total socialist system with simply stopping the automatic coverage of deficits with bond sales. Relax.

    How would lending work when this scheme unfolds and everyone realizes that banks don’t need to exist?

    But this has nothing to do with MMT. If (big IF!) the public decides that banks don’t have to exist, it won’t be because the govt can self-finance. Total non-sequitur.

  23. OK, just getting ahead of the discussion.
    Point being that govt. self-financing wouldn’t eliminate the need for private banking.
    Govt. wouldn’t finance my car loan or my business loan, for example.
    But clearly all that money currently going into Treasury bonds would have to find a new home.

  24. So, this is a totally unproven and unrealistic prognosis. You really think that the Dems and the Republicans would just come together and pass laws that would create socialist banking sector? Have you been to the US lately?

  25. The republicans all think we’ve run out of money. No one is in the MMT paradigm. How can you claim otherwise? Government didn’t “always realize that”.

    And yes, there’s no way anyone would want a loan when they could get debt free money. This idea would not only shrink banking by the amount of spending, but would slowly render it extinct.

  26. I agree. Govt self financing is the end of modern banking. The two could not coexist forever as they’re competing ideologies and money issuers.

  27. But clearly all that money currently going into Treasury bonds would have to find a new home.

    That’s right. It will probably cause some asset classes to appreciate versus some other asset classes. but it won’t make people spend more all of a sudden.

  28. when they could get debt free money

    So, how do you envision the Congress establishing the laws that abolish private banking? Even if govt is realized to create money out of thin air, there are still plenty of reasons many people – conservatives and liberal – would object to establishing a socialist banking sector.
    Basically, what you are saying that that the only thing that stops us from having a socialist banking sector and by extension a socialist system is the smoke and mirrors of the current setup? Fragile, isn’t it…

  29. Strongly disagree. This is like saying that our choice of monetary arrangements is what prevents this country from establishing a socialist banking sector and from there to move to a socialist system in general. Do you really believe that?

  30. The entire broad money supply would become debt free money. It would eliminate the need for private banking.

    You act like socializing the money supply is not a big change. Can you really be that naive?

  31. You just repeated what you said before without any substantiation and asked me again if I could be naive.
    Let me know when you have an actual argument.

  32. The point is simple. You’re just not grasping it. The broad money supply would increase by exactly the amount of the deficit each year. That means broad money would slowly become dominated by debt free money. The banks would be crowded out over time. Self financing will destroy private banking.

  33. In this particular case I don’t think it is about MMT/MR. It is more about believing that the country would turn towards socialism just because the govt no longer issues bonds. This is more like a sociological argument.

  34. So, to make it easier for you, suppose the govt continued to issue bonds on demand. So that people who want to hold govt bonds can still do so. Now tell me how’s that different from the current system.
    You still believe the govt bribes people not to spend by issuing bonds. Remember last time you did not buy that TV because you thought you’d better buy a Tbond?

  35. Peter one of them already has proposed this mindset:

    ” “Guess what this liberal would be all about? This liberal would be about socializing … uh, umm. … Would be about, basically, taking over, and the government running all of your companies.”

    Rep. Maxine Waters (D.-Calif.),

  36. I admit I’m not seeing that, either.
    If the U.S. govt. spent an extra trillion into the economy beyond tax receipts, how would that money crowd out the need for private banking?

  37. So, there are liberals who want the govt running companies. Gasp! They are now going to kill all the rest (the absolute majority) and take over because the smoke and mirrors of our current monetary arrangement would be exposed? Horror! Don’t pay attention to the man behind the curtain!

  38. Peter,

    bonds aren’t the same thing as money. Not everyone wants to hold bonds. EVERYONE holds some bank deposits. The growth of debt free money would inevitably grow to a point where less and less lending is needed.

  39. Cullen, this is a superb summary–thanks. I think your point about the Fed becoming less important if the government were to begin issuing money rather than debt is an insight which has far-reaching ramifications.

    To me, the danger (to TPTB) of the trillion-dollar coin was this: the general public might realize that the government could simply issue currency if it wanted to. That is why the idea had to be poo-poohed. The genie might be out of the bottle, however.

  40. I’ve said it all along. The endgame for MMT is nationalized banking that results in a true money monopolist. I still only think a handful of MMTers realize that this is MMT’s base case. Bill Mitchell gets it. A few others do. The rest of you are trying to convince everyone that the current system would be no different than the pure MMT world.

    I think that’s terribly wrong.

  41. As I’ve said, there are several different ways this can occur. The Kelton example is ONE way. The PRIMARY way is the way my fed source described it.

  42. “There is the same amount of bank deposits in the private sector, but there is an additional financial asset in the form of the bond.”

    If deficit spending plus bond issue creates bonds (debt) but not deposits (credit), then how can credit = debt across the economy?

  43. Let’s be honest. This is really a discussion about who should and shouldn’t issue money. The government should not issue money. It has no capacity to constrain itself from doing so. Banks, on the other hand, must constrain themselves or they make bad loans that blow up their businesses. Anyone who thinks these are the same things is in over their head. A totally government controlled money supply would be an unmitigated disaster that would become instantly corrupted and inflationary. It would be treated by government like a charitable organization and not a business. The business of banking keeps money much tighter than it otherwise would be in government hands.

  44. SS is exactly right. Banks don’t compete with treasury bonds. They compete with other deposit issuers. If the government became a deposit issuer it would crowd out their business. People would borrow less from banks because they’d have access to debt free deposits. If the government tried to sterilize this with bond issues it would help, but it wouldn’t make a huge difference. The growth and demand for debt free money would definitely reduce the need for debt based money.

  45. Right, Milton Friedman, no one’s idea of a MMTer or a socialist thought the govt could (a la the Chicago Plan) self-finance by printing money instead of printing bonds.
    Of course, what’s good for the free market as a whole is not always what’s good for the banking sector. I think Cullen’s right, the Fed killed the TDC because it scared the hell out of some people making a good living creating money out of thin air presently.
    If the Administration had thought this all way through, they would used the TDC as a bargaining chip against Congress publicly and also the Fed behind the scenes (sort of a fractional reserve bargaining chip). :o)

  46. This is purely ideologically driven with absolutely no real facts whatsoever. I guess it’s easy to determine what side of the political spectrum you are on, lol. Govt can spend whatever they want now and that doesn’t cause them to give everyone and their grandma a billion dollars. There would be the same checks and balances over a purely Government issued money system.

  47. The Govt doesn’t need to compete with Banks it just gurantees loans.
    This is how we get the best of both worlds.
    Banks compete for my mtg that govt backs via Fannie/Freddie.
    So therefore we have a perfect public/private relationship.
    Until it breaks.

  48. I would guess that most government spending is not ‘saved.’ Social security recipients rarely save; government agencies buy things. I grant that high-earning government employees would save.

    Adding to a point made elsewhere, I don’t see how government financing deficits with directly issued money would turn me into a Socialist.

    And to another point: Government already has trouble constraining itself with its borrowing. Why is borrowing OK and direct spending somehow less problematic.
    And the idea that banks have got some wonderful constraint in which they don’t make mistakes and blow themselves up — heck, they spent the past decade blowing themselves up!

  49. You don’t seem to understand. The government doesn’t issue money right now. It issues bonds. If it got into the money issuing business it would be competing with banks.

    That’s a direct crowding out of private banks.

  50. ? for the wonks-

    In the developed world where private money created by banks is declining due to declining credit /loan growth, will this decline have to be offset by fiscal/ or GOV money being force fed into the system to keep a consistent price level? all else being equal.

    Not sure if its clear what I am asking is clear- but restated-

    Are declining private loan growth numbers in housing/ auto/ revolving- as deflationary an indicator as there is?

  51. Self-financing may be too incendiary a term. A lot of people would think you mean taxes go to zero. I think you only mean the deficit would be self-financing. Since the deficit can be viewed as part of monetary/economic management we only need to analyze that aspect. (I.e. deficit = spending – receipts … many people will think you’re talking about spending only!) The current system of issuing NFAs seems to be the most effective since the NFAs serve as working capital for the economy as a whole (although, it is used/exploited as a currency manipulation tool and store of long-term value as well for some bond tenures). It’s less obvious that more excess reserves or a platinum coin serves that purpose; it’s a vague asset that is somehow on the government’s balance sheet and is not usable by any private entity. Therefore, I don’t think self-financing threatens private banking as much as it may hinder the private sector.

  52. It doesn’t matter. It creates the budget and determines how much it’s going to spend regardless of how much it has. It’s the Fed/PD’s job to make sure this is properly financed. And there is no crowding out of private banks… all that would happen is essentially the Govt would create base money instead of the Fed. And instead of the Fed having to purchase debt to create reserves, it would be created when the Govt sends out it’s payments.

    The normal lending for business investment, mortgages, car loans, credit cards, etc would still be alive and well and banks would still be making a crap load of money.

  53. That’s not true. The amount of debt free money would increase by exactly the amount of the deficit each year. If done for long enough the debt free deposits would replace the debt based deposits. The government issuing deposits would directly reduce the need/demand for debt based deposits.

  54. Peter,

    If the government sterilized money issued with bonds then why even bother changing the system at all? That would just switch the bank deposits to bonds? There’s no point in even changing the system. The only point of changing the system would be to move away from debt based money controlled by banks.

  55. I don’t think govt self financing would be more inflationary. After all, spending is a function of income relative to desired savings as you always say. Govt self financing wouldn’t change incomes or savings really because the NFA would be the same. But it would change the way the whole money system operates. The change to govt issued money could have wide ranging ramifications that can’t completely be quantified. Obviously, the biggest losers in this change are the banks which is why we’ll never see anything like this occur. So it’s a fun thought experiment, but a waste of time.

  56. Why wouldn’t taxes go to zero? Make the Republican base happy by reducing taxes to zero. Make the Dems happy by spending into oblivion. There would be no checks and balances whatsoever in the system, the govt would continue to spend (print money), people lose faith in the value of the currency, hyperinflation, the economy implodes.

    The fact that the govt must borrow to finance the deficit serves as an appropriate and necessary check on their ability to spend. If people have less faith in their ability to pay back, the cost of borrowing goes up and discourages spending.

    What am I missing? I think we often try to make things more complicated than they really are.

  57. Taxation would still result in a redistribution of existing money. It’s the deficit spending that would be self financed. Instead of bonds, the govt would become an issuer of bank deposits equal to the size of the budget deficit.

  58. Not more inflationary? Let’s say you really want to buy a car, but don’t have the money (savings) or future income stream (borrowing) to support it. Luckily, however, you have a printing press and instead just print the money to buy the car. Now imagine one of the more irresponsible spenders (govt) who is often not held accountable for it’s spending habits has the same ability. How does that NOT become inflationary?

  59. No it wouldn’t. Unless there was enough money printed and no inflation where everyone could afford massive houses and fast cars with cold hard cash. Otherwise, just like now, it would be a balancing act. Banking wouldn’t disappear as people would still need to borrow. If they didn’t need to borrow and can finance all their own stuff than I don’t see what would be the problem with that either, lol.

  60. Paul,

    I don’t think you’re right. Think about times like right now. In a balance sheet recession everyone would use their debt free deposits to pay down debt. What’s the first thing a financial advisor tells you to do before investing or anything? Pay down your debt. Debt free money issued by the government would go directly to helping pay down debt before it went to anything else. This would massively shrink the money supply we currently have which is built on debt based money.

  61. Hmmm. I hadn’t even thought about that. Govt self financing could actually be incredibly deflationary until we reached a level where people stopped paying down their debts. I need to think about that some more, but this makes me think that govt self financing might not even be possible because it would be counterproductive to the debt based system we have in place….

  62. That’s basically the idea behind Keen’s “debt Jubilee.” I think Keen would argue that it’s not the money supply that’s important, but the private debt levels.

  63. Cullen, could you please explain why reserves are not money and what reserves are exactly to banks. In the past reserves used to be = gold = money. This would als automatically answer the question whether the Fed is printing money or not.

    Additionally, would you describe how the govt self-financing by printing money would mean the end of the private banking system (Peter D’s debate above). I do not see it – banks would continue to print inside money / govt will print more outside money. The ratio b/w inside and outside declines, but that is all. Both quantities grow. The govt will not enter the business of giving private sector loans for zero interest. (It is of course possible that govt will become even less responsible and corrupt and the current path of growing share of govt from GDP will accelerate.)

  64. But wait! … isn’t that the “debt jubilee?” Isn’t the idea then that once people paid down their debts, they’re going to be hungry to spend (since they’ll feel more secure… and they’re not WASTING all their income on interest payments and penalties). Once they don’t have to pay a mortgage out of their paycheck, people will start spending on non-wasteful stuff… you know… like pilates lessons, and chocolate waterfalls, … and that will get the economy going?

  65. I guess you could do that. But I don’t know where it would stop? At what level do people feel comfortable holding some debt? And perhaps more importantly, why do we effectively cancel the contracts made out between all of these parties? There are a ton of moving parts here. My brain hurts from thinking about it.

  66. Wow, I’m looking forward to Cullen’s answer about reserves here… since I’m really interested to know how a bank pays its bills. What effect does paying the bank’s electric bill have on its balance sheet? Don’t those funds come right out of reserves? If not, please explain how the bank’s balance sheet changes when the electric bill payment clears.

  67. Reserves are deposits held on reserve at the Fed. Think of them as being deposits trapped inside the interbank market. They don’t leave the interbank market and they’re only used for settling payments and meeting reserve requirements within this market. They are assets of the bank and liabilities of the Fed. Technically, the Fed creates these, but it’s incorrect to think of reserves as money in the same sense that a bank deposit is because a reserve doesn’t get spent at Wal-Mart.

    Govt self financing risks modern banking because it is the govt essentially issuing bank deposits. This would be a form of outside money that is issued directly to the pvt sector from the govt. In other words, it would essentially replace bank deposits as the ultimate form of money since it would be debt free.

  68. @FDO15 you said:

    “People would borrow less from banks because they’d have access to debt free deposits”

    what does that even mean? people would borrow less because they would all have accounts full of debt free money? nonsense. Are you saying home loans will cease to exist and people will all buy houses with cash? nonsense. Same for car loans? construction loans? inventories? venture capital? all gone because people will just use the cash gifted to them by government? give your head a shake man.

    all it does is remove unearned rents from the economy. I think Peter D is right, all it does is force people to buy private or state/local gvt created assets if they don’t want to spend on consumption or accumulate deposits/gvt money. Private banking would not cease to exist nor would the need for leverage.

  69. Excerpts from :

    Q: Won’t the government creating new money for infrastructure and other expenses cause inflation?
    A: …there need not be inflation because real things of real value are being created at the same time as the money, and the existence of those real values for living, keeps prices down….

    Q: How can we trust government with the power to create money?
    A: The U.S. Constitution binds government to represent the interests of the American people… Under the American Monetary Act, the Congress, the President and the Board of the Monetary Authority will all be responsible if any inflation or deflation takes place, and the people will know that they are responsible… an examination of history, despite the current prejudice and massive propaganda waged against government, shows that government control of money has a far superior historical record to private control over money systems….

    Lots more to consider at that link above.

  70. Sure… I think even Steve Keen acknowledges that his debt Jubilee would have negative side effects, and even some of the people he’s trying to help (over in-debted middle class) will suffer some consequences (for example, it’s going to evaporate bank assets, and probably some bank profits — while simultaneously improving (perhaps) the quality of the loans on a bank balance sheet)… well the shareholders of the banks will probably — on balance — suffer… and thus Mr. and Mrs. Middle Class’s pension funds will suffer. And of course there’s the inflation angle people love to argue about. But overall, Keen thinks it would be a help. I think I’d agree… If I got a check for $40K from the US Treas… sure I’d pay down my debts! … I wouldn’t care to much that the financials part of my 401k took a hit. For someone with no debts… seems like a good trade as well!

  71. Since banks and non-bank institutions are allowed to generate loans that are totally backstopped by Fanny and Fred, then there is no contraint at all. Loan to whoever, there is no chance of not getting the principle back since these loans become assets that were AAA rated because of that — and could be rolled over by the issuing bank and non-bank institution for cold hard cash. And you say the government can’t be trusted? The take over of the banks (nationalization), would simply mean that Uncle Sam would be the only shareholder and the bankers would get GS salaries. The service part of the banks would be the same, but the VPs and their shareholders would be regular folks not living off the dole like they are now.

  72. But that’s not necessarily bad perhaps. After all is it the size of the money supply that matters really?

    I like the idea that people wouldn’t have to spend so much on USELESS interest payments! How does paying interest and fees really help anybody except the financial sector.

    My view is that the financial sector is a necessary evil. It’s like overhead in a corporation that actually makes something useful, say a car company. Sure, you’ve got to hire all those bean counters, but that really represents skim off the top of the main business — overhead. As John Bogel states, the financial sector has traditionally been about 10 to 15% of the US economy… back when the economy was healthy. I don’t have an exact figure to compare that with (and I don’t even know what that means “% of the economy”) but I’ve seen that the financials now account for something like 42% of all profits in the US!! That’s a whole lot of profits for moving financial instruments around… doesn’t sound efficient at ALL!

  73. why would people stop using bank deposits as money? I don’t want to carry around stacks of bills so I would deposit my gvt created money at a bank same for the bank as if I brought the reserve by switching banks. then i would have asset deposit bank would have asset (reserve) plus deposit liability. the only thing it changes that I can see is the federal reserve’s balance sheet and its ability to affect the ff rate through omo once it runs out of assets to sell. though they could change reserve requirements pay IOR or increase the cost of using fedwire.

    Please correct me if I’m way out to lunch.

  74. Cullen you write: “because a reserve doesn’t get spent at Wal-Mart.”

    So what happens when the bank goes down to Wall Mart to buy printer paper? Where do those funds come from? How does their balance sheet change after their payment to Wal-Mart clears?

  75. I still don’t get why “government deposits” would end private banking. Let’s call this special government money “gold”. How did that end private banking?

  76. It’s no different than right now. Fiscal stimulus is a way to give people debt free money (nonbank public debt free money) to pay down their debts. The biggest difference between Govt issued money is between the Fed and the banks, not with the nonbank public. It almost would be no different to us. We would still be chasing money like crazed rabits, we would still need to finance homes, education, etc. People still need money, so they will either have to find some to pay them for their labor or their goods or borrow it. I don’t think Govt issued money would stop this dollar chasing whatsoever.

  77. people can already use deposits to pay down their debts and shrink bank balance sheets. the ability to do so is not dependent on gvt self financing. it depends on individual or company incomes relative to spending commitments.

    I guess I fail to see how it reduces the need to finance large purchases with loans but if it were to shrink the financial sector that might not necessarily be a bad thing given the share of the pie currently taken by financial services.

  78. Isn’t this discussion a bit overblown as well as perhaps too U.S. centered?

    After all, since the inception of the eurozone, a huge chunk of the T-bonds issued by governments to finance deficits have always ended up being bought by banks – and ultimately resulted in new deposits for households and firms. Yet the banking system of Europe hasn’t exactly lost its key role as a creator of loans and of endogenously determined money.

    I’d say that Government self-financing would only be relevant politically, in the sense that the Treasury would cease being forced to keep the facade of going to the private markets to sell bonds. But – apart from that – I don’t think it would adversely impact the power of the banking sector to create money at all.

    Likely, the system would even be less inflationary than the present U.S. practice, since households and firms would be receiving no interest payments from the government. They would become essentially, holders of no-interest (or lower interest) deposits instead of interest-bearing T bonds.

  79. The worry isn’t that people would stop using bank money, but that they’d eliminate bank issued money by paying it down. The government issued bank deposits would act like a hot potato bouncing around until they reached someone in debt who would then use it to pay off their loans. This would cause an economic stagnation until most of the debt was paid off and private banking was ended.

  80. The debt free money would be used to pay off all the debt based money. Why don’t people get that? It’s really simple.

  81. It wouldn’t, I have no clue why people are saying that. It’s almost like they believe anyone who wanted a house or a car could just ask the Govt for some money and they would provide it for them.

  82. You act as if everyone would have access to this debt free money. How are people going to acquire debt free money to pay off debt money… is it just going to be falling from the sky?

  83. The government would be spending roughly $1 trillion of it per year.

    Do you even understand the basics here?

  84. That’s almost exactly what would happen. It’s a perfect arbitrage. The government would spend into Joe’s account and if Joe had any debt he’d use his debt free money to pay off the debt therefore shrinking the size of the banking system by exactly the amount of government spending.

  85. Rev, you write: “but if it were to shrink the financial sector that might not necessarily be a bad thing given the share of the pie currently taken by financial services.”

    I absolutely agree with that!

  86. Cullen, I’m new here so starting off my involvement with a critique would seem to be bad form, perhaps you are all 5 steps ahead of me so I don’t get all the ramifications.

    But let me first say that you’ve convinced me of the ‘truth’ of MR, after all you are simply stating the facts & the facts can not be contradicted, you can deny the existence of gravity all you want but you’ll still die if you jump out of a 20 story building.

    My objection addresses your last 2 paragraphs. You have convinced me that there is ‘inside money’ and ‘outside money’, the government paying for its spending by issuing ‘outside money’ in the form of ‘cash’ does not remove the ability of the banks to create ‘inside money’ any different then they do now. After all, you’ve also explained that Banks don’t even use their own deposits to ‘create inside money’, it is created via the issuing of loans. Furthermore money isn’t created ‘endogenously’ by banks buying T-Bills, that’s the ‘exogenous’ money from the Government, which except for ‘liquidity’ (‘moneyness’?) issues has no effect on a banks ability to ‘create inside money’. So unless you are also saying that the government would go on a mad spending spree such that anyone who wanted to buy a house would be issued currency(outside money) from the government to do so I don’t see the upheaval or type of ‘paradigm shift’ that you are alluding to. Or maybe you are suggesting that through shear recognition that there are 2 types of money that there will be a ‘public demand’ to change the banking system to not let banks create ‘inside money’ but if that’s what you believe I’d have thought you’d just say that, which goes beyond ‘MR’ to ‘opinion’, which is fine but then I’m free to disagree with you as opposed to MR which can not be questioned.

    I don’t doubt that the more the facts are distributed amongst society that there WILL be a ‘paradigm shift’, the debate should change from ‘controlling government debt’ to ‘controlling private savings’, but as long as the US as a whole believes in capitalism there will always be a constraint on the government being ABLE to spend, though no constraint on the government being able to create money.

    In fact if I didn’t know better I’d swear that someone else wrote those last two paragraphs as they don’t jive at all with all the other great articles from you I’ve read.

    Furthermore, it would seem to me that issuing of T-Bills to pay the bills has GOT to be more inflationary than paying Government bills with cash, after all the T-Bills provide a promise to issue MORE cash (e.g. the ‘interest’) than is needed to actually pay the bills, there by putting more ‘outside money’ in to the system then necessary. Now it’s true that the T-Bills simply become ‘savings’ and until they are spent can’t cause any inflation, but putting more potential money in to the system then is necessary to pay the bills would seem to at least provide for the potential for increased spending. It would be hard to see how some of that extra money doesn’t get converted in to ‘cash’ by someone at some point. But even so, why would ANYONE pay more to ‘acquire goods’ then the agreed to amount, giving people more money on a T-Bill then is needed to pay the bills gives money to someone who wasn’t party to the original transaction, it’s absolutely 100% ridiculous…in fact I’d label it ‘state sponsored theft’, but you can’t blame someone for taking advantage of a system that the Federal Government is to stupid not to use!

    PS. I think you make too much of the ‘limited liquidity’ of T-Bills compared to ‘cash’, after all we are in a ‘digital economy’, if I had T-Bills but no cash & I needed to go to Walmart to buy something tangible, how hard would it really be for me to immediately sell the T-Bill and transfer the cash to my ‘checking’ account? In fact the distinction could easily be entirely removed via a “simple” change that allowed me access to my T-Bill ‘funds’ from my debit card, then rather than paying from my ‘checking account’ I could pay from my ‘T-Bill Account’…then there is 0 difference & if that EVER happened I’d think there really would be a revolution because then it’s really only 1 step away from recognizing that the Fed Government is paying people to give them back the cash that the Fed Government creates…

    Anyway, sorry I’ve gone on quite long and I do not mean to be contrarian but something seems ‘off’ in this article. I will end with saying that you’ve really opened my eyes and I am embarrassed to have lived 41 years not ‘recognizing’ the ‘facts’ that exist. Please keep up the education it is greatly appreciated.

  87. so people stop buying houses and cars and no longer need lines of credit or any that because they paid off their existing debts with government issued bank deposits. then what?

    Why would credit demand cease because gvt ceases issuing interest bearing risk free assets?

  88. Capital bases of banks would deteriorate at their balance sheets shrink and profits dry up. We’d either need to bail them out eventually or shut them all down and nationalize them. There’s no way they could withstand the debt repayments that would result from government issue bank deposits. Even if there were other sources of loan demand this whole process would destroy modern banking.

  89. Remember we have a very similar banking system world-wide (China is a somewhat more “nationalized”). Are these banks and non-bank institutions helping young folks have better lives these days? NO Stingy central banks and there monopoly on creating funds via private banking is making things worse world wide. “It would shrink the existing banking system enormously” … if the governments of the world took over money creation. Yes The services would still be needed, but then private money creation would go away. As an aside: Governments are pure socialistic, and our private sector is pure capitalistic. It’s a balance!

  90. Minor quibble with the headline. It should be All Your Bases and Dead Presidents ***ARE*** Belong to the Government

  91. “In this manner, by creating ourselves our own paper money, we control its purchasing power, and we have no interest to pay, to anyone. You see, a legitimate government can both spend and lend money into circulation, while banks can only lend significant amounts of their promissory bank notes, for they can neither give away nor spend but a tiny fraction of the money the people need. Thus, when your bankers here in England place money in circulation, there is always a debt principal to be returned and usury to be paid. The result is that you have always too little credit in circulation to give the workers full employment. You do not have too many workers, you have too little money in circulation, and that which circulates, all bears the endless burden of unpayable debt and usury.” -Benjamin Franklin explaining to directors of the Bank of England government issued money

  92. LVG,

    you have lost the forest for studying too much the single trees. I have seldom heard such nonsense on any macro blog.

  93. Well, the debt jubilee idea, as conceived by Keen, and as it historically took place, was not a constant thing. It took place every 50 years or so, when the financial system was suffering due to too much debt. So if there was one large gov payment, to help people get their personal balance sheets in order (admittedly, to the detriment of current debt holders), but then it stopped, I’m not sure all those dire consequences would play out. Perhaps that one “jubilee” would hold us for … say 50 years? Until the system was all crippled up again with excessive debt?

  94. I should have written “economy was suffering due to too much debt” … I’m sure the financial system (creditors) were doing just fine!

  95. Great, thanks for the Kelton link! I just sent her an email question on that.

  96. Actually, wouldn’t all the people buying Tsys just chase high quality assets/bonds (e.g. IBM bonds)? The people who are paying off their debt, how would that change? The people who need to buy a house, how would that change? Debt is just a means to bridge time; I still don’t understand why debt would disappear.

  97. Yes, the people who want to own other assets will buy them. But the debt free money they use to buy these assets will eventually flow to someone with debt. And they will use that debt free money to pay down debt.

    Government self financing is a big debt jubilee.

  98. Sorry, but this whole conversation is a huge waste of time. There is no chance in hell that the government will start self financing. Sorry everyone.

  99. I think you are completely off here. All there is proposed is to swap the NFAs for cash / depositis. Banks lose a source of profits but that is all. Private debt is still 3x bigger than govt debt and will keepbeing used and increased. Govt will not give interest free loans, gifts or free money to anyone who wants some for no return like in communism. The ratio of outside money to inside money will rise, but that is all – just less sources of profits for banks (from govt), but still private sources of profit.

  100. So in the hypothetical scenario: Govt. issues deposit to contractor-x and contractor-x pays off his truck loan. Instead of the current : Govt issues bond, then pays contractor-x, contractor-x uses that deposit to pay off truck loan.

    Rinse and repeat the hypothetical scenario a zillion times and presto, you eventually have mostly non-private-banking-system-created money. Correct?

    I’m not sure where the jump to the government issuing big deposits to everyone for no reason comes, unless they suddenly decide running into the productive capacity constraint at 1000 MPH would be fun.

    On the other hand we could just eliminate this debt ceiling nonsense and be done.

  101. that’s nonsense set up the t accounts and do it yourself it doesn’t have the effect you think it does. sure it removes NFAs and gvt interest payments from private sector incomes. your example of a disappearing banking sector relies on an accelerating rate of debt repayment which is not directly related to gvt self financing. It changes the composition of bank assets not the need for leverage of the private sector.

    gvt issues debt reduces bank deposits and reserves by debt issuance amount and adds treasury assets to private sector. gvt spends increasing deposits and reserves. people may or may not use income from gvt to pay down debt.
    government spends increasing bank deposits and reserves. people may or may not use income from gvt to pay down debts.

    You have to change the rate of government spending and/or private sector saving and/or private credit growth for it to have the effect on bank balance sheets you think it must.

    how would your personal ability to pay down your debts be affected if the gvt ceased to issue treasury securities when it deficit spends? enlighten me please.

  102. Let’s say we linearily follow your example. At the end we’ll have private credit (IBM bonds), no bank debt and all this government currency. Now what? Now call all that government currency “gold”. Joe needs to buy a house … Someone has to intermediate savings and spending desires and time preferences.

  103. I could be wrong. But I am tending to agree with Frederick. This is all an interesting thought experiment, but probably waste of time because it won’t happen.

  104. Thanks for replying. So if reserves are a form of NFA issued by the Fed, then QE is not money printing. But I still cannot wrap my head around it – need to check other sources to verify what you are saying is so. Even if reserves can be spent as cash, the amount of reserves ($3tr) pales in comparison to the inside money of $40-50tr or so.

    Regarding deficit financing by direct money printing by govt – I think yo are completely off base – see my comment below.


  105. It has already happened – President Lincoln used it. IT could happen if the Fed decides to stop QE on inflationary concerns, broker dealers went on strike and IR rose because govt wants to keep $1-2 tr of deficit spending in spite of that. So a rising IR on UST with no Fed cooperation could trigger that.

  106. “LVG,

    you have lost the forest for studying too much the single trees. I have seldom heard such nonsense on any macro blog.”


  107. The people who own bonds aren’t the same people who own debt. Bonds are mostly owned by money managers and rich guys, not your average homeowner. Think about how that works into your equation smart ass.

  108. “So in the hypothetical scenario: Govt. issues deposit to contractor-x and contractor-x pays off his truck loan.”

    So where does it say in your example how the govt obtained the deposit payment to contractor-x? It could be printed or issued as bond. In both cases contractor pays off his loan in your example. Are you too blinded by the trees to see the forest?

  109. Actually, LVG may be right in the short term that the banking sector would be destroyed along this journey, but along with destroying the rest of the economy! It goes back to my original comment: in the long run it wouldn’t change the need for banks. But, there doesn’t seem to be any advantage in taking this journey. In the end you get some untrustworthy private assets (IBM bonds) and a gold like currency (remember, by the time you replace all the private loans, 3oo% GDP, and with a deficit that is only 2-3% GDP, that’s a very slow growth in the money supply). Also, I would expect depression and hyperinflation during that journey!

  110. In the first part of your post you make comments similar to mine.

    As your post is a bit long and difficult to read and grasp – I do not understand how you arrive at discussing whether T-bills are money or not. It is very simple – they are ASSETS and like any asset can be sold and then the proceeds can be spent. But not before that. So assets bind existing cash that cannot be spent.

  111. This whole conversation ignores the shadow banking system and the importance that risk-free government bonds play in the larger economy. First of all, eliminating the issuance of government debt would disrupt almost every market that uses it as a benchmark. It would reduce interest income from the economy. It would eliminate the primary asset banks use for collateral.

    One could say that we could issue bonds to sterilize the self financing, but that’s the same as what we do now so why bother with the change if we need the bonds?

    The bottom line is, whether this is inflationary or political doesn’t matter. It would be extremely disruptive to the banking system which has become dependent on risk free government bonds for a multitude of purposes. Get rid of this and you will only make the entire economy more unstable.

  112. The only way LVG’s scenario works is if govt self-financing = entering communism, where government give gifts to anybody who asks and in the quantity he asks.

    Now by allowing the govt to print and spend as much as it likes, this would mean that govt could quickly become 100% of the economy (e.g. communism). It is already on this path – in France the govt is 57% of GDP, in the US it is close to 40% (and some 50 years ago it was 20%), etc. So the current trend will accelerate.

  113. Yes it will diminish the profitability of banks. Especially if they buy govt bonds with newly created inside money. (Probably this has not been the case so far is because they were prefering to hold higher yielding assets and sell the boring USTs to the sheeple savers, after making a broker’s profit; probably now banks are very happy to hold USTs yielding 2-3%)

    Now the benchmark IR will have to be changed. Probaby high quality corporates will serve as that. But I do not see a big problem with that. Already the case in Greece or Spain.

    Other than even less responsible govt spending and more inflation if overdone, I do not see any big destabilization of the economy.

  114. Yes, I’ve heard that the Australian government had at one time balanced its budget and stopped issuing bonds, but it continued again because there was so much demand for government bonds in the private sector. Anybody know if that story is true?

  115. Well, I don’t think all these posts are a waste of time. This is certainly not MR because this is not how things work. It’s a thought experiment that helps (at least me), understand where our $US fiat currency comes from. It comes from the Banks and they make a lot of money for their own account creating money out of whole cloth. With our country banging it’s collective head on the “debt ceiling”, I wonder why the banks in particular are so fighting “raising the ceiling”. “People who will never turn a shovel full of dirt on the project (Muscle Shoals Dam) nor contribute a pound of material, will collect more money from the United States than will the people who supply all the material and do all the work. This is the terrible thing about interest…but here is the point: If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution, pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People. If the currency issued by the People were no good, then the bonds would be no good, either. It is a terrible situation when the Government, to insure the National Wealth, must go in debt and submit to ruinous interest charge at the hands of men who control the fictitious value of gold. Interest is the invention of Satan.” -Thomas A. Edison

  116. That’s the whole point. The change in the monetary system is a change from private control to public control.

    You guys act like nothing would change. Except we’d all realize that money isn’t necessarily something we have to borrow. The move to eliminate private banks would be slow, but certain.

  117. Yes, other than disrupting the shadow banking system there aren’t any other “big destabilizations”.

    And aside from that, how was the play Mrs. Lincoln?

  118. scharfy, what country are you referring to with declining numbers?
    here in the United States, the decline in numbers in the past 4 years were due in large part to what has been termed a “Balance Sheet Recession”.
    This is basically where people are no longer taking on loans/credit and instead paying them off. Thus the Demand for Credit (From Credit Worthy Borrowers) shrinks.
    But Don’t Quote me on that.

  119. Cullen says no. I do not know.

    In your example I think banks can pay with inside deposit money or physical cash. The first is not related to reserves (except that reserves could make inside money more expensive for the bank to issue). The second – from Cullen’s explanation – seems also not to be related to reserves. But here I do not know.

    In the past reserves = (outside) money = cash = gold (or sth like that).

    Now BS is simple – swap one asset for another. It does not matter for the BS which assets is swapped. It could for sure be inside money or physical cash, it needs not be reserves (if that would be possible at all – Cullen says no)

  120. “So Peter still has his bank deposit AND Paul has a net financial asset in the form of a bank deposit”.

    Yes. But let’s not forget that Paul’s asset is a commercial bank’s liability. The NFA created for the private sector as a whole is constituted by bank reserves.

    So government self finance merely exchanges one form of NFA for another – namely, T bonds for bank reserves.

    No big deal :)

  121. I think it is a wild jump from stop issuing USTs to communism. This jump is not different than all the hyperinflation calls that Cullen rightly ridicules here. But in this scenario not the private banking system is destroyed, but ALL of capitalism (private banking being only one sector).

  122. Nice quote! I personally am entertained by economist Michael Hudson. He’s pretty radical, and I don’t really trust all his facts and figures, but I think he’s a hoot to listen to. He really gives the financial system a hard time! He calls them “rentiers” (RONT-EE-AYS: it’s French), and says that they are a big drag on the world’s economies… all they do being to collect interest, rent, fees, fines, premiums, etc, and to finagle the control of more and more public and private resources for themselves (privatized water system, highways, etc), and they have found they can accomplish this by forcing “austerity” on a nation or society. He claims the original “rentiers” were part of what Adam Smith thought “free markets” needed to be freed from. In Adam Smith’s day, the rentiers were the idle, useless, land-owning aristocrats that charged exorbitant rent to industrialists and entrepreneurs for the productive use of their land, and thus the rentiers acted as an anchor on the economy.

    Michael thinks banks and the financial system in general **can** be a positive force to finance industrial capitalism, but that they’ve become too good at skipping that step and instead make most of their money now by capturing the world’s political and regulator institutions to enrich themselves to the detriment of all the rest of us (including industrial capitalists). Turning us all into “debt peons.” He’s really a fiery speaker, along the lines of that Edison quote! He likes to bring up lots of historical references.

  123. Well, it’s not a big deal from the perspective of NFA as I stated in the original piece. But it’s definitely a change in monetary system design.

  124. Don’t get your point on Loincoln.

    Well I do not see what is bad in destabilizing the shadow banking system. Are you a direct profiter from it? Because society is a loser.

  125. I see many benefits of government self financing. I also see some benefits in nationalized banking. But I do wonder what all the unintended consequences would be. Would we spend more simply because we know money grows on trees? Would government come to dominate the economy in various ways as it would inevitable grow with time? Why would we need private banks once we realize that money can be debt free?

    These are important questions that I don’t know the answers to.

  126. Tom, probably because of a strong demand for them like here in the US.
    Kinda a safe haven during these troubled times.

    I would venture to say that demand for safe havens in Bonds of countries where people feel their savings will be safe is the reason.
    I don’t think there is quite the same demand for Iranian Govt Issued Bonds, But that’s just a guess.. :)

  127. You obviously don’t know much about American history OR shadow banking. I won’t waste me breath explaining it all to you, but the shadow banking system is not just a leach that sucks on society. Most of it is essential liquidity that helps the biggest businesses in the world package huge loans through syndication allowing them to function on a daily basis. Contrary to Zero Hedge, the shadow banking system provides some essential services through hedging, liquidity and operations similar to commercial banking. Destabilize it and you’ll cut off liquidity to roughly half the economy and working class americans through various channels.

  128. First off, thanks for responding! I wish Cullen would address my question directly!

    Cash (at the bank) is classified as reserves. It’s not until a customer requests his deposit in cash, and walks out the door with it, that it loses that status (I think). But I’m pretty sure “vault cash” held at the bank is reserves.

    Scott Fulwiller is another good source for that. Google “Krugman’s Flashing Neon…” for his detailed article.

    I’m not sure what you mean by “inside deposit money.” For the bank, all deposits (except their own, with the Federal reserve) are liabilities… money the bank OWES other people (the depositors), so I don’t see how that works… unless they hold a deposit at another bank. Can they hold a deposit at their own bank? How does that work?

    Regarding the balance sheets, you write “It does not matter for the BS which assets is swapped. It could for sure be inside money or physical cash, it needs not be reserves.” I still have trouble with that because of my trouble with “inside money” being liabilities for the bank. And again, the cash they have is considered reserves.

    I know you said you didn’t know that answer, but regarding the balance sheets I put up in this simple example (involving a bank buying donuts), how do you think they would specifically be different than what I’ve outlined:

    The balance sheets are actually here (a few comments down):

    OK, thanks!

  129. Cullen, where are the days you used to say that QE won’t work because it was an asset swat?
    Please, explain without slogans and shortcuts, how the govt stopping issuing bonds to cover the deficit (HYPOTHETICAL) but still spending the same money as in the scenario where it does issue bonds (PRESENT) brings about the end of private banking.
    We don’t need more than say 3 actors in this game: G(overnment), A and B and maybe C(orporation). A is a govt contractor who is paid for fixing highways. B used to buy a govt bond that G sold in order to obtain the funds to pay A. Now that there is no bond, B is either holding his cash or seeks other investment vehicles for it. The cash changes hands lets say finding a way into buying a C-bond. So the corporation has the cash. What’s the big deal? Now add to this the fact that additional NFAs that G used to emit to pay interest on B’s bond are no longer created, so, you actually have less cash in the system than before. So, deflationary/inflationary effects are uncertain and small anyway. If B wants a loan to buy a house, it still goes to a bank to obtain it, etc.
    What’s the big deal?

  130. I explained the NFA situation in my original article. There’s no need to explain it to me as if I don’t understand it.

    I think the change from using private bank deposits to a blended deposit system is an important structural change from a system built around private banking to a system that is evolving into a government centric model. The move towards govt self financing is a rather significant step away from dependence on private banking and central banking. I find it odd that MMTers aren’t willing to admit that. The next logical progression is to eliminate private banking as it becomes evident that the govt can not only finance itself but finance the entire private sector in a way that is in keeping with “public purpose” and not private purpose (as banks are clearly designed). Bank of North Dakota sort of thing, which I know many MMTers are big fans of.

    I’m not casting a vote one way or the other. I am simply pointing out what appears obvious to me. A move towards govt self financing is a step towards breaking down private banking. I’m not trying to be overly dramatic about this, but I do see this as a partial govt takeover of the money system. Regardless of your definition of “money”, the govt is currently designed as a user of private bank money. Changing this is substantial both from an operational perspective and an ideological perspective. You either aren’t seeing this the way I am or you’re refusing to admit that this is the reality. I don’t know which one, but you’ll accept my apologies if I am skeptical of MMT’s motives when your founders say that the financial industry provides nothing of value and say banking should be nationalized.

  131. no treasuries would not be the end of shadow banking or financial intermediation IMHO

  132. Cullen, do you admit that today a lot of people believe that govt can just print money but that this could “debase the dollar”, lead to inflation/hyperinflation etc? (These people are right, by the way, if one includes the Fed in the consolidated govt sector, not just the Tsy, which is the actual MMT treatment.) Somehow this “common” knowledge doesn’t lead masses to demand the abolishment of the private banking sector. Your claim that a move to self-financing will – maybe, but this is a rather sociological or psychological or whatever claim that is not self-evident from the simple premise of changed institutional arrangements.

    “when your founders say that the financial industry provides nothing of value and many of you say it should be nationalized”

    So, even if all MMTers as one recommended the nationalization of the banking industry (which, by the way, won’t necessarily mean free money, as the govt – if it were in the business of running a bank – would still demand repayment and interest) – which they don’t – that would mean with such a great deal of certainty that the change in institutional arrangements would eventually lead to nationalized banking? I mean, maybe you are right about the sociological claim, but it won’t happen just because some MMTers advocate it. Because to listen to you, the only thing that prevents it now is the ignorance of the populace.

  133. Tom, you need to clarify the type of reserve.
    A REQUIRED Reserve must be held with the FED, an EXCESS Reserve does not and can and in fact is desired by the bank to be lent out.

  134. Peter,

    Most people have no idea how the system works. Most people who think they understand MMT don’t even come close to understanding it. Most people have no idea that our govt is presently designed as a user of bank money. Most people have no idea that the govt doesn’t actually print money, but prints NFA. Most people have no idea that the current system is designed around and caters to private banks. Most people have no idea that the Fed’s very existence is centered around creating a buffer between private banking and govt. So no, I don’t think this is all “common knowledge” at all. So yes, when we break down that barrier and reduce the roles of the current institutional structures I find that to be quite significant. Is it necessarily bad? I have no idea. I haven’t done the research and I haven’t seen anything that’s convinced me either way.

    What I am telling you is that I don’t approach these sorts of things with the sort of mentality of “what’s the big deal” as many people have written in the comments here. To me, that displays a lack of understanding of just how sweeping these sorts of institutional changes could be. Am I skeptical of such sweeping changes. Yes. Am I unable to change and frozen by the status quo. Well, MMT should know the answer to that better than anyone since I was once your loudest proponent. :-)


  135. Does MR still consider the “Swedish Model” a quasi way the Govt should have handled the banks during the past credit lock up in the financial sector?

  136. Sorry, my first post here & Cullen’s exposition of the truth has my brain going like 60 ‘connecting all the dots’ so I got a bit carried away.

    Having said that Cullen did reference liquidity of T-Bills in his article, and suggested that T-Bills have less liquidity then cash and that this is somehow important to the discussion. But it’s not the liquidity of a T-Bill that would seem to matter. A T-Bill is not sufficiently non-liquid to significantly discourage it’s use as ‘cash’. It would seem to me that it’s the extra dollars the Government is giving away for free by issuing T-Bills compared to issuing cash that is the primary difference in this discussion.

    The government “printing” (executing a bank deposit) of $100 to Paul is less cash than they promise to create by selling $100 T-Bill to Peter at 8% (or whatever the interest rate is at time of sale).

    For the purposes of awakening the government to the cost of their decisions not to self finance it should be about the government not paying an extra premium on the cash that they are printing in either case. If Cullen’s previous lessons have sunk in, it would seem to me that the issuing of T-Bills is literally the government paying to create the cash it could ‘print’ itself, that’s just stupid.

    So it’s not the ‘liquidity’ it’s the ‘cost’ of the T-Bill that matters.

  137. The unintended consequences and incentives are the REAL core issue. And if the Government is a currency issuer, why should “fractional reserve” banking be allowed at all? Allowing banks to issue money causes instability and requires a vast regulatory regime. It is better to give each person an account with Treasury Direct that acts like a checking account, and no one ever need deal with a private bank unless they need a loan. And if all electronic money exists only on Treasury Direct, loans would be fully funded by investors who had to put up the entire amount of cash. Lending could no longer create money, and a bank would be on equal footing with a consumer loan company.

  138. During the Civil War, Lincoln issued Greenbacks from the Treasury for the Govt to pay its bills. At that time the dollar’s value plummeted on the world’s markets.

  139. It is not clear which system is more inflationary as a direct issue system would certainly eliminate the power of banks to create money. Everyone’s account would be on Treasury Direct. People would still go to banks for loans, but the loans would have to be fully funded in advance. Some loans would come from the Government – in fact many loans already do. My guess is that such a system would result in loans being more politically allocated than they are right now. Getting a cheap government loan would depend on who you are and who you know. Commercial loans would depend on hard economics, and their rate would be much higher. And government interest rates would have no relation to the rates charged by the private sector.

  140. It is very easy to see how it could destroy competitive private banking (as we know it today). Already the USG directly issues student loans and backs nearly all mortgages in the USA. Under a direct issue system, a government agency would lend directly to consumers. Since inflation is a constraint, the Congress would surely cap or limit the total volume of loans, and political considerations would determine who gets the available cheap loans. Everyone else would have to pay exorbitant rates for a purely private loan. You will get a system where a few thousand in well placed political contributions could score you millions in loans for your business or for your house purchases.

  141. Yes, excess reserves can be lent out… to other banks, I agree. Take a look at my link to the donut example above… in that case it’s clear that ALL the reserves in question are excess (the banks each start out with assets of $100 and nothing else on their balance sheets, whereas the donuts in question are only $10).

    However, I’m not talking about lending anything out… I’m talking about the bank purchasing something: paper, donuts, electric bill, tickets to “Wally World,” salaries of employees, etc.

    This must happen all the time! Somebody out there must know how this works!

  142. The hypothetical example is the one being discussed, where the Federal Govt self finances. “Govt. issues deposit to contractor-x”. Perhaps I wasn’t clear.

    In the hypothetical example you quoted the Govt does not issue bonds to cover its deficit it pays contractor-x with money it issued and then contractor-x pays off his truck (with debt-free money). In both cases, contractor x’s truck loan is paid off.

  143. Because Government spending would no longer be limited by the need to pay interest on borrowings. Under direct issue, deficit spending would be invisible. And without private banks being able to create money, the government would have to take more of the load, and more money would be allocated by pure politics. Think “community reinvestment act”, cubed.

  144. Tom, Excess reserves can be lent out to ANYONE.. They are in excess of REQUIRED and why? Because lack of demand and QEx Fed Swapping Treasuries for reserves.

    Remember, Banks Don’t Want excess reserves they would rather that money be out there in loan portfolios generating income.

  145. Fair enough. I guess my main point is: the institutional arrangements are still a result of the will of the people. We enacted them thru our elected representatives. If we – the US electorate – wanted more govt involvement in one area or another, we would abolish the existing institutional arrangements and enact the necessary institutional arrangements for that to happen. In other words, we decide what we want from our govt first and then enact the arrangements to allow that; it is not the arrangements that decide what the govt can and cannot do – it is us. Arrangements are a tool to enact our will.
    What you and others are saying is that changing these arrangements would result in more govt involvement – as an unintended consequence (at best). But this is a very dubious claim. It means that a large swath of electorate would all of a sudden change its political predilections and would favor more govt involvement where they don’t now. Just hard to believe, but I could be wrong. At least it is a debatable point. I agree to take back my “what’s the big deal”, although I’m still mostly being sanguine about it. But the readers should also take back the unwarranted alarmist certitude that MMT world necessarily means abolishment of the private banking.

  146. Well, maybe. If you have no political advantages you will go to a private loan company and pay through the nose for your mortgage or business loan. If you have a political advantage, you get your mortgage through a government program, directly from a government agency. So, if you are a Veteran, or are of the correct race, or make the correct political contributions, or schmooze with the right crowd, or are producing the right kind of politically correct products, you will get cheap loans and get a huge advantage over your competitors. Just imagine the Solyndra episode to become the general practice instead of the rare exception.

  147. Corrupt yes, but I am not so sure that it would be more inflationary. It might even be less inflationary. Politicians know that high inflation is bad for reelection. Even in China the government is constrained by inflation. They know that high inflation is very bad for stability and their continuance in power. But more corrupt – absolutely. It would bring new meaning to the old adage “to the victor belongs the spoils”.

  148. OK, that seems strange, but that’s not my main question. I’m asking can the excess reserves be used to purchase things (e.g. donuts for a meeting).

  149. Joe gives political contributions to the right guys, but not for “giggles”. He makes a tidy “profit”.

  150. YES, Excess Reserves are only EXCESS because there is no other use for them. Remember, the FED is PAYING Interest on them Thus the reason for the Excess. Banks would rather park EXCESS CASH with the fed and get paid than lend it out to someone to buy a house who is marginally credit risque..

  151. The government could already become 100% of the economy if it so chose. The Fed or the ECB could buy up all tradeable assets right now. I don’t think the problem is the size of government per se, but rather a diminishment of the ability of a person to earn an honest living in business without helping out the right politicians. It will make politics much more relevant to the allocation of capital than it is right now.

  152. Well, the “YES” you give… is that to say that “Yes the bank can use the excess reserves to purchase stuff with?” If that’s the case, that does seem to be a direct contradiction of Cullen’s statement above (although he doesn’t specify either if the reserves are “excess” or not):

    “a reserve doesn’t get spent at Wal-Mart.” — Cullen

    so then I asked Cullen, “So what does the bank use to buy printer paper at Wal-Mart then?”

  153. Hello all,
    Reading through all of this makes me think that Japan is beating us to the punch of self financing the government. When I look at Abe’s push for 100 billion stimulus and forcing the BOJ to finance it or be brought to heal it makes me think that Japan will go down this road first out of necessity. How else can they finance their demographic problems?

  154. Well, the worries over abolishment of private banking come from what I would call a fairly uneven and even unfair persistent attack on many things in the private sector. Whether it’s Mitchell wanting nationalized banking, Bill Black ripping on banks on a daily basis, Mosler saying the financial industry does “nothing productive” or Wray referring to capitalists as undertakers. There’s a heavy handed govt view in MMT that people don’t just make up. It comes straight from the top. And to be honest, it bothers me that MMTers often talk out of both sides of their mouths on these issues.

    I also don’t agree that the electorate’s views won’t change when they realize that govt doesn’t finance itself through bond sales. 95% of the electorate thinks we should run the govt like a household balance sheet so it’s not unreasonable to assume that their perspective will be altered dramatically once they realize that the govt need not sell bonds. As I stated previously, the next logical step is to start asking why the private sector has to borrow with interest when the govt can just print money? Why wouldn’t we just have the govt print all the money? It seems like a no-brainer. And it’s a move towards a govt controlled money supply.

    As I said, I don’t know what the ideal system looks like, but I am certainly not going to sit here saying that there would be no negative potential ramifications from such sweeping changes.

  155. Bill Black is MMT? I thought he was concerned exclusively with bank fraud and regulation (isn’t he a law professor?). I’ve heard him say nice things about Krugman… would an MMTer do that? ;)

  156. Tom, I feel your Pain and I share the same Issues with Cullen and Prag Cap is that Basic fundamental Questions get overlooked and disregarded. HELL even in the Damn ASK CULLEN section your question can get DISSED, which as people who are long time questioners, having their “Questions” basically ignored is somewhat disenfranchising but in reality NO BIG DEAL when the likes of ourselves can come together in a respectful way and try and figure it all out.

  157. Pierce, EXCESS RESERVES can be done with What EVER THe Heck a Bank want’s to do with them. The Govt is paying Interest on them now that’s why they have been stacking UP. But banks don’t LIKE EXCESS Reserves. they wan’t to LOAN them OUT and make MORE money than the FED is willing to pay on them.

  158. Thanks Cowpoke! … I’m super appreciative that Cullen answers ANY of my questions, but yes I do get frustrated sometimes… this one in particular seems simple to clear up. But It’s not just here… I’ve asked a LOT of folks… emailed Scott Fulwiller, Stephanie Kelton, the guy at econviz, … even a website called “Ask a banker” … and a few specific individuals on this site: you, InvestorX, bart … to name a few. Plus Midas II and Geoff gave me their two cents. Well, I’ll let you know if I hear what sounds like a definitive answer!

  159. Pretty sure that’s now true, ‘Poke. I know they don’t like excess reserves, but I don’t think they can lend them out to you and I.

  160. Pierce, It’s cash, It’s an EXCESS. The FED has REQUIRED Reserves, and EXCESS.
    Required are as they are stated. Excess are also as stated.
    Excess is simply Cash/Money that is building up on the banks balance sheet that needs a place to sit.
    OH The FED is paying INTEREST and they are a safe parking spot so let’s go there.

  161. Excess reserves are just reserves held in excess of the required levels. They can’t leave the banking system any more so than other reserves can.

  162. I don’t know why you’re getting so exercised, we’re not arguing definitions here, it’s the legality of the thing. They literally cannot lend those assets out to anyone else other than other banks. They do not leave the Federal Reserve’s liability side of the balance sheet until the Federal Reserve allows the banks to exchange those reserves for assets the Federal Reserve has.

  163. Why wouldn’t a bank have its own deposits on its own books? It can transfer those deposits to those it needs to pay its bills to.

  164. Cullen, thanks for this admission. After spending over a week and a half of sleepless nights combing over almost everything you’ve written I was sure that a bodysnatcher had taken you.

    In so much as this article expresses an opinion on what ‘might’ happen if the government paid it’s bills directly it can be disagreed with, and doesn’t seem to be in the same vein of just explaining the facts as the rest of your articles.

    I know this isn’t the ‘Ask Cullen’ section but perhaps a different article more in line with your other articles would be to explain what exactly happens with the T-Bills/Government Bonds that are issued to procure funds for the Fed to pay its bills. Since those are issued with interest they are a cost of the issuing of outside money, but maybe there is a benefit. Given the debate here on what ‘might happen’, perhaps it would be good to explain exactly what does happen with those NFA’s today? If you’ve written an article on this already I’m sure I’ll find it, but if not, for people like me still getting up to speed on the ‘facts’ it would be nice to have something about how this works exactly. e.g. ‘how do banks use these assets?’ I know they don’t use them to issue loans to people like me, I’ve read that much, so what do they use them for?

  165. Pierce my good man, It’s an EXCESS. they can do what ever the heck they wan’t with it. they just choose to park the extra cash (reserve) with the FEd because it pays interest and there is a lack of demand in the credit worthy free market.

    At least that’s my take.. :)

  166. Pierce, seems odd to me, that’s all: I think of deposits a bank holds as liabilities to the bank (i.e. money the bank owes its customers). The only other deposit is the one the Fed holds for it (a bank asset). So if a bank has its own deposit… it owes itself that money? I know I’ve seen some actual bank deposit sheet examples on the web somewhere (not fake ones like mine)… I’m going to try and find those and see if the bank hold’s it’s own deposit. OK, thanks for your thoughts!

  167. A Bank Has REQUIRED RESERVES MANDATED BY LAW of the FED’s authority.

    After the Mandate is met, any EXCESS reserves are at the banks discretion as to how they allocate them, whether a Loan to Peter to rebuild his house after Paul (used The Govt AND) Stole from him OR PARK them at the FED to earn interest. It’s thier money to do as they wish because they are EXCESS of what the law says.
    Just My Thoughts

  168. O I get that but I’m just trying to really learn the rules of the game, given that it’s clear I did NOT know them before, and so far Cullen’s articles have been great for doing that. Part of posting is expressing what I ‘understand’, depending on the responses I can gauge my level of understanding.

    So far I have partial agreement from 1 individual over only part of a statement, not a great batting average, but not discouraging.

  169. Cowpoke, I did get an email back from the person who runs econviz. I’ll email it to you as well, but thought I’d post it here for the benefit of anybody else that’s interested. Unfortunately, it’s hardly a “definitive answer” … so basically I’m still waiting! OK, here’s what “hbl” had to say:

    “Looking at your question and example you linked to below, your example with bank A and bank B is what I would expect the correct answer to be as a matter of logic (and consistency with other balance sheet operations)… but it’s possible that there is special accounting rules that banks use that classify and name things differently that I’m not aware of — I don’t have a background in accounting or banking.”

    … the links I provided hbl were these (outlining my example):

    He references Stephanie Kelton’s writings as a source in some places on econviz, but unfortunately the link he provided seemed to be broken. So I did email Stephanie directly, but have not heard back from her either.

  170. Anybody else experience their post going into the ether? … but then finally appearing a long time later?

  171. Under a pure govt system, I believe private lending would still exist. There would still be private entities that would want to lend and borrow (e.g. the bond market would still exist). It is just that the private lenders wouldn’t be creating money out of thin air like the banks do now.

  172. Great discussion. I’ve been sharing this with friends.
    I find myself agreeing with a lot of what Peter has to say here.
    Random points:
    1. Why do people assume that if the government could directly issue money, they would begin depositing money into countless accounts? They could that now, and just issue Bonds to do so. But there are strong political argument against doing that already.
    2. People aren’t using their deficit spending largesse now to pay down debt, so why would they use directly issued money to pay down debt?
    3. It’s kind of illuminating that the idea of people deleveraging fills so many of you with panic. Is the system really that dependant on us being in debt bondage? More to the point, even if I could pay off my house tomorrow, that would merely free me to borrow money for another purpose (let’s say sending kids to college.)
    4. I would rather have $15 trillion on debt-free money in the system than $15 trillion on Treausury bonds ticking away waiting to be redeemed some day.
    5. Looking at demographics and entitlement spending obligations, I think that we will come to directly issueing money sooner than you we think, as crazy an idea as it sounds.

  173. BOJ -Bank of Japan
    BS -Balance Sheet
    ECB -European Central Bank
    ETF -Exchange-Traded Fund
    Fed/PD -Federal Reserve/Primary Dealers?
    GDP -Gross Domestic Product
    HPM -High Powered Money
    IMHO -In My Humble Opinion
    IR -Interest Rate
    JG -Job Guarantee
    MMT -Modern Monetary Theory
    MR -Monetary Realism
    NFA -Net Financial Assets
    QE -Quantitative Easing
    TDC -Trillion Dollar Coin
    TPTB -The Powers That Be
    TT&L -Treasury Tax & Loan Accounts
    USG -United States Government
    UST -United States Treasury
    USTs -United States Treasuries

  174. Rev. you write “…if it were to shrink the financial sector that might not necessarily be a bad thing given the share of the pie currently taken by financial services.”

    I Agree!!

  175. How odd… is anybody else seeing indentation failing at the bottom of this list of comments?

  176. Cullen you write “At what level do people feel comfortable holding some debt?”

    … at the level that most of their paycheck doesn’t go to paying off interest on it… and that includes indirect interest if they rent (i.e. the interest of their landlords)

  177. … which brings up another point: How much of our paychecks (I assume most of us get paychecks) goes to paying off indirect interest? Interest payments that somebody else racked up? Say our city gets in trouble financially and thinks it needs to sell off a bridge to a private equity firm to stay solvent… the private equity firm didn’t have the money… they went and borrowed it. All the free market cheerleaders cheer, saying it’ll be much better and efficient now that its been “privatized” but the first thing they do is raise the prices by 3x! They have to… to pay the interst… and to settle the huge bonuses they’ve just given themselves for their “financial brilliance.” Now if they can just convince the public keep that competing bridge from being built … even if the Canadians are going to build it for FREE (e.g. the Ambassador Bridge in Detroit) then they’re in fat city!

  178. … of course the most obvious example of paying off somebody else’s interest (and principle) payments is rent. How much of your paycheck goes (if you rent) to paying off your landlord’s gambling debt, so to speak. Useless… waste of resources!

  179. +1.
    When you look at the money needed to fund entitlements, build infrastructure, deleverage the consumer, keep the working class from starving, etc., it is possible that only massive new supplies of money will solve that problem.
    We could call that new money ‘loans’ or just issue the new money directly. Or a third way — there are $15 trillion of NFA Bonds out there, mostly in the hands of rich people and foreign countries not actually using the money — who is to say that in a Depression a populist government wouldn’t just seize those assets?
    … Or maybe like the Europeans in the Age of Exploration, we could discover a new continent with massive supplies of greenbacks.

  180. …as a small time landlord myself (four tenants) I can tell you EVERY PENNY of their rent is used to pay off my gambling (housing market) debts! If they could only raise the down payments necessary to buy their own places… I’d be in real trouble… their mortgages would be cheaper for sure! (So that’s why its so important that they live paycheck to paycheck). Wow.. I guess I’m the evil one here! Awesome…

  181. Interest on borrowing is just another expense item, with its own inflationary consequences. The deficit does not become invisible – you’ll see demand pull inflation when it is excessive, which should be your guide to the size of deficit anyway (see the TC rule:

    “And without private banks being able to create money”

    So, again, I just don’t see how this is necessarily where it leads to. Why would the govt all of a sudden get into the business of consumer and corporate loans? It is true it does that to some extent today – mostly with loan guarantees, I am not aware of govt lending mortgages to individuals – but why would this trend grow? Ask anybody on the street why the govt cannot simply print money and they’ll tell you that it would lead to inflation. Why would they change their opinion all of a sudden?

  182. “As I stated previously, the next logical step is to start asking why the private sector has to borrow with interest when the govt can just print money?”

    Because the govt isn’t run to give out loans, not well equipped to assess risk and usefulness on such a great scale etc etc all the usual arguments about advantages of private enterprise. It is a good exercise for capitalism proponents to enumerate all the good reasons for not doing that.
    Again, to think that realization of self-financing will all of a sudden turn a country where most people believe in capitalism into a country where most people believe in socialism is far-fetched IMHO.

  183. So, you really think that once the govt and population realizes that money literally grows on a govt tree, that nothing will change? You see no potential risks in releasing that genie out of the bottle? You see no institutional changes in removing banks from the funding process? You see no risk of a change in the way we think of money and govt spending? You don’t think govt would expand substantially?

    I think you’re not properly weighing the risks here. You’re just looking at a simple model without thinking of any of the possible changes in the way this will impact the overall system. I’ve made my living being a risk manager for the last decade. If there’s anything I am good at, it is weighing the risks of the big picture. Like the JG, there is an alarming level of “so what” in your comments. Maybe MMT should model what the world will look like in various cases where this govt self financing is enacted rather than just running around saying “what’s the big deal”? The reason you haven’t convinced anyone that a JG works is the same reason why you haven’t convinced anyone that a world of govt self financing can work – you haven’t properly modeled the risks and rewards.

  184. Cullen: By the same token, what if your teaching is accepted, and voters realize that borrowing money by issueing bonds is not in itself a dangerous thing and that we can’t run out of money.
    The minute that becomes widely accepted then deficit spending would also increase.

  185. I don’t say we aren’t revenue constrained under MR. And I very clearly explain why we don’t “run out of money”. I say we are constrained by the public sector’s ability to procure funds via taxes. But I also explain why those structures don’t fail so long as we are productive. MR is a model designed around the importance of output, not govt authority. Resources precede taxation. Understanding the monetary system is primarily about understanding why private output leads and the public sector follows. MMT’s model is the opposite. It is a govt centric model that focuses on the powers of the govt and how an expansion of govt powers can be used for public purpose.

    MR does not directly or indirectly lead to an expansion in govt spending. In fact, if you conclude that govt spending hurts private output or that trade surpluses are superior to trade deficits then you could very well conclude that govt spending is bad for the economy. MR doesn’t force the economy to come to either conclusion. It simply describes how the system is presently designed. MMT EXPLICITLY calls for a permanent expansion of govt deficit spending.

  186. Cullen, with the qualification that I am just some obscure commenter on websites and not in any shape or form an economist, I’d say that you expect too much from an economic theory like MMT. True, economists do model behavior, but usually only with respect to people’s or businesses spending habits and such – never have I seen anything close to sociological/psychological/whatever insights you expect of MMT: “what if people knew” etc. (maybe except for Austrians and Marxists…)
    That said, and just as John rightly notes, MMT world and MR world ultimately reduce to the same: the govt can finance its spending as long as it doesn’t cause too much inflation. MR constraint is like a runner cross-tying his shoelaces: easily undone. The choice of fiat vs. fixed money supply system is like a runner choosing to run an easy level route vs a more difficult hilly one: still a runner’s choice but not as easily undone once the route is chosen. The real resources (inflation) constraint is the runners inherent ability to run – cannot be circumvented.

  187. I ask too much? You are proposing something that potentially changes the way the US monetary system is designed and functions. If I take my car into the autobody shop for an oil change and you propose a sweeping change to the machine (like a design), then I am going to demand that you show me why this is all needed. You’re just shrugging this all off saying “We can’t provide that for you, but trust me, you should change your vehicle”. You should see why I am not impressed by that.

    And no, MMT and MR don’t “reduce to the same thing”. MMT just assumes the output will always be there. You guys have almost zero focus on the importance of private output. MMT is built almost entirely around the principle of American exceptionalism and has zero explanation for why govt self financing in Latin America wrecked the economies. Inflation is a two sided beast that relies just as much on supply of money as supply of output. MMT focuses entirely on the supply of money side and has done very little work focusing on the supply of output. MR says inflation is not a monetary phenomenon. It is largely an output phenomenon.

    So yes, if you’re going to call for substantial changes to the system I’d like to see the models explaining why this is all beneficial in the long-run and superior to the current system….That’s not too much to ask.

  188. You’re saying that if the public realizes we can directly issue money, then we will directly issue too much; whereas under the present system, most of the public fears deficit spending, for the wrong reasons, which, ironically, prevents us from borrowing too much!
    Printing or borrowing — as you say, the inflation constraint is the thing.
    I suspect if you printed money, the inflation constraint would come front and center, and you would also take some power away from the banks. Both good things, imo.

  189. Is anybody else having this trouble? I seems this article, “All Your Bases…,” has exceeded some limit on the size of the comments section, and has gone onto a 2nd page… but now all the links in the RECENT COMMENTS box at the right are screwed up… you can no longer click on one to take you to the comment if it happens to be on the 1st page of comments. Same is true for “Ask Cullen” if the comment you’re trying to get to is not on the most recent page of activity.

  190. BTW, did anybody catch Stephanie Kelton as a panelist on MSNBCs’ “Up” with Chris Hayes last Saturday? (it’s on their website). They were discussing the $1T coin. Stephanie is an MMTer… and she did an OK job, but she fumbled a bit when Chris asked, “So what’s to prevent us from minting a $10T or a $100T coin!” … instead of responding “Well, wait a minute Chris… I’m not proposing that there aren’t ANY constraints [then launch into an inflation discussion]” she unfortunately said “Nothing! That won’t change anything!” .. she went on to make a good point, but OF COURSE the discussion changed direction before she could get to the inflation constraint bit… it was left to another guest to eventually bring up the inflation constraint… making poor Stephanie look a bit like a whack job I think, to your average viewer… it certainly had the two skeptics on the panel rolling their eyes. Too bad!

  191. Actually, in speaking with some of the MR guys about this, a crucial point comes up. Do you want a private sector banking system supported by private sector equity capital investment or not? Just answer that question honestly and our path forward is rather simple. Because govt self financing conveniently overlooks that question. If the answer is yes, then you need adequate ROE and you need pricing discipline to get that. You can’t just start extracting interest margins (or the oh so evil economic “rents” in MMT lingo) all over the place and get that. So, if your answer is yes then the system should remain as it is (or something closely resembling this). If the answer is no – which really is the MMT position although they won’t come clean on it – then you’re now onto the road towards nationalization. Then what? Who’s going to run it? Who’s going to make pricing decisions on everything? Randall Wray and Bill Black? Ha.

    There is almost zero appreciation for the role of private banking on all of this. MMT just plainly states that the financial sector is a big leach that provides nothing of value. It’s a stunning position to take. Especially from Mosler who has made every penny in his life from extracting economic “rents” of some sort. I’m no bank apologist, but the idea that private banking is useless is an ideology, not a fact.

    The MMT path is obvious to anyone who fully understands MMT. You don’t just all want nationalized banking. MMT NEEDS it. The above question makes that path clear. But you talk out of both sides of your mouths to make a very political position appear more palatable. It’s very frustrating for people like the MR founders who very clearly see how obviously MMT needs nationalized banking and how far you all go at times to skew your positions to make them appear more politically acceptable. It just wreaks of intentional obfuscation.

  192. Cullen, I’d try to be short. I missed the whole MMT/MR split and came back to this discussions only recently, so, my understanding of the topics is probably poor. I am not sure I understand your question “Do you want a private sector banking system supported by private sector equity capital investment or not?” or its particular significance for the choice between the institutional arrangements. As far as I remember, Mosler always liked to say that the accum NFAs (~ the debt) are the equity that supports the private credit structure and it always seemed to me a very insightful characterization. I’ve never seen him, for example, advocate abolishment of private banking but rather more regulation thereof. Maybe other “founders” did advocate it, not sure. I still claim that whatever the “founders” advocate is separate from the question of what happens once we switch to the new institutional arrangements.
    I don’t see how MMT world requires the output to always be there – if in fact it stresses that resources are the constraint. I don’t think it is built around American exceptionalism either – as it applies to any fiat issuer like Japan or Australia.
    I want to stop this comment as it got too long already and I want to do some more thinking. I get a sense that some of your accusations re: MMT as a whole are unfair and are a result of possibly some poor treatment of yourself as the hands of some MMT gurus, but I could be wrong and I don’t want to be adding any flames to the fire. Once I have something smarter to say I’ll chime in.

  193. You know, MMTers always say this to me and it’s really tiresome. They always accuse me of having an axe to grind or feeling sorry for myself because they were jerks when the split happened or that I have a political ideology that guides me. It’s a weak distraction from their points on hand. I don’t care about personal vendettas or politics. Anyone who reads my work knows that. I don’t get personal. I don’t get political. I am simply trying to understand and explain how our system is currently designed and how it works. All that other political and personal crap is stuff that MMTers are experts at engaging in on their path to trying to alter policy. That’s fine. But don’t project your own personal views on me as though they’re the lens through which I view the world. MMTers are the ones who persistently and aggressively attack everyone from behind a political ideology. To accuse everyone else of doing that is just more annoying obfuscation.

    Think about that question I asked as it’s the crucial piece here. MMT really wants to eliminate economic rents. No MMTer can deny that. It is central to the MMT view of the world and extremely well documented in the writings of the founders. So, do you want a private banking system support edby private equity capital or do you want to crush the rentiers? You can’t have it both ways. There’s a very obvious and clear path towards Bill Mitchell’s desire for bank nationalization. I am actually beginning to think I understand MMT better than all MMTers do as this is 100% crystal clear to me. If you can come clean on it then the MMT path becomes obvious. But you’re trying to play it both ways because you know that bank nationalization is a DOA proposal. Instead, you run into guys like me who understand your theory like the back of their hand and see through the blatant obfuscation. It’s not personal. I just see MMT for what it is.

  194. OK, first, I apologize for suggesting you have an axe to grid but I still think your identification of a theory with some individuals advocating it is let’s say painting it all with too broad a brush.
    Next, I submit you do understand MMT better than myself at the very least and I fully believe you when you say that you see all the unintended consequences of it (though I don’t necessarily know whether you’re right about that.) Because, for example, I can see a point in private banking that does not involve rent (loosely defined): as I said above, I don’t believe the govt is equipped to be in the business of lending to individuals or companies (not to mention investment banking, which is a separate creature altogether) and I don’t see how it – private banking – is incompatible with combined Tsy/Fed operation. Could be I just did not think it thru, sure.

  195. You’re not being consistent though. Reducing economic rents and marginalizing the role of private banking in the economy is not consistent with the existence of a private purpose based financial industry. Shadow banking and investment banking didn’t spring out of nothing due to the cruelty of bankers. It arose in large part due to economic needs and the desire for the banking sector to fill a private need. So when you say you want to reduce economic rents you’re saying you want to create an even more fragile private banking system or one whose responsibilities MUST be transferred to public domain. You can’t have it both ways on this. You either need a Fed/Tsy system that supports private banks or you have a private banking system that must be embedded in the Fed/Tsy system. MMT’s real base case is a consolidated fed/tsy/banking system.

    All roads lead to nationalization here. You don’t seem to see it yet, but that’s the path. It can be no other way. MMT must embrace bank nationalization at some point or simply accept that private banking is here to stay and that it will continue to be supported not only by private equity structures, but public equity structures. And that means having a Fed/Tsy system that feeds the needs of the banks to a large degree.

  196. I must be not in tune with your definition of “rent”, because I can see legitimate reasons for, say, investment banking to exist (even it inherently would involve somebody making money without adding anything to the output down the road – which is what I consider a rent, I guess, not being used to thinking a lot about rents in general). Sure, it might need to be properly regulated, but over-regulated, blah-blah-blah – all the needed balancing acts b/w too much govt involvement and too little. Anyway, my take is that activity that makes money without contribution to output is undesirable (although unavoidable) and if possible should be reduced. But it is pretty hard to identify such activity , I guess, and I wouldn’t volunteer to be the one saying what is and what isn’t a rent. In my limited understanding of the issues the rent doesn’t play such a central role.

  197. “And that means having a Fed/Tsy system that feeds the needs of the banks to a large degree”

    Again, I might need to think about it, but why cannot the CB-Tsy combined entity be a lender of last reserve to the banks the way the Fed currently is?

  198. Rentier capitalsm….I’m using it the same way Marx used it. MMT loves to talk about crushing the rentiers, but they don’t always talk about where these ideas came from. Economic rents, as you probably know, are inherent in capitalism and an anathema in socialism. Banks live and die by extracting economic rents. They are central to their business model and the ROE they generate that helps them maintain a stable private banking system. So when Randy and Bill go on their near daily rants about how best to obliterate the rentiers they’re speaking from what is a plainly anti-banking position. Not that there’s necessarily something horrible about that, but let’s get the cards out on the table when we discuss these matters. The definitions of these words and their origins matter enormously when confronting these ideas that formulate and influence the policy thinking within MMT.

    One need only connect the dots on where most MMTers would like to go from here. Wall Street is an anathema to the MMT world. It should be obliterated, torn down and circumvented. Govt self financing is a clear step in that direction and it 100% in-line with the MMT view of the world. Again, I am not being judge or jury. But I see the path as plainly as I see the letters on the keyboard in front of me. As I like to say, I connect the dots. I’m pretty good at it. Is a govt run money system better than a private run money system? I don’t know. But if you want to change it you should proved the evidence…..

  199. Look T-Bills are treated as cash by MMT, but its a fallacy. They are not money, they are assets with high liquidity. A car is also an asset, but has a lower liquidity. But you cannot pay by offering your car or a T-Bill unless you are engaging in barter.

    Now regarding self-financing:

    the T-bill is issued so that it takes purchasing power from a private sector entity (unless purchased by a bank issuing new inside money for it) and gives it to the govt. Basically a T-Bill is a “crowding out” instrument and the idea is that fiscal deficit is not inflationary. If the govt directly prints new money and spends it, it would be directly inflationary as opposed to the “crowding out” case. In the latter case inflation will depend on the efficiency of govt spending.

    You have the idea correct that issuing T-Bills is inflationary in the sense that it guarantees more and more issuance due to compounding interest.

    So you have the two factors described above offsetting each other and the one or the other can prevail depending on circumstances. And the efficiency of spending is a third factor.

  200. Right and racketeers provide essential “security services” against a modest insurance premium.

    I think you are personally biased, judging by your Name and attitude. So no point to discuss further.

    The financialization problem has been bemoaned often enough by Cullen on this blog.

  201. I don’t even get it all, either way. It’s like reading a Steven Colbert book title to me…

  202. Agree with your points more or less fully.

    Cullen is still to provide a mechanism by which govt printing money as opposed to issuing bonds will make the private banking sector disappear.

    He himself describes the private banking sector as intermediaries b/w govt and private bond buyers. So this is what the banks will lose – a source of brokerage profit. Probably they will also lose USTs as an instrument to lever themselves up, but this is easily replaceable by IG corp bonds. And they will lose their front running profits in trading USTs with the Fed.

    Now I have stated that the process of direct financing can be more inflationary and lead to an Argentinian situation. It is up to the population to control the govt’s spending and to decide if it wants to live in capitalism or socialism or communism or whatever. But this has nothing to do with the fate of the banking sector if the govt self-finances by printing.

  203. There seems to be a flaw in all of this. If the government spent money directly into people’s accounts how would this not be more inflationary? For instance, let’s say there’s $200 in bank deposits the economy. Let’s say I own all of it. Let’s say I form a government for fun and decide to spend $100. First, we tax $50 and then deficit spend $50. So the government takes $50 in and sells $50 in bonds which allows it to spend $100 total. After all the spending and bond issue Fred has $100 in bank deposits and $100 in t-bills. Now Cullen has $100 from the government spending.

    But I can’t spend that $100 in t-bills. I can only spend $100 in bank deposits. I have to sell $100 in t-bills to Cullen if I want to spend that $100 also. So my spending is constrained by the AGGREGATE bank deposits of $200. In theory, we can sell our t-bills for spending, but no one really does that. After all, they’re our savings.

    So think about what would happen if the government spent bank deposits directly into our accounts. We would all be without sufficient savings. We’d all scramble to find other interest bearing assets. And the private sector would be forced to supply them. Or the government would supply them thereby sterilizing (defeating) whatever the purpose of self financing was. So, if the private sector supplied the new savings bonds we’d have the private sector offsetting the decline in t-bill issuance, but we’d also have more money. How does this not lead to inflation?

  204. If you’re not going to end private banking (and central banking for that matter, which MMT really wants to do already anyhow) then what’s the point really? Tsy will have to issue bonds to satisfy private savings which will just sterilize the direct deposit issuance? What’s the point of all this then? Just to show the govt can print money? If you’re not going to redirect the spending away from the banks to some degree and support private banks then what’s the point of keeping the Fed and pvt banking system? MMT is caught in a political grind here again. Either you admit that you really want to crush private banks or there’s no point in making the changes you talk of….You can’t have it both ways. There’s an obvious motive here and if one connects the dots between Mitchell’s nationalization, Mosler’s comments about how finance is “more trouble than its worth”, Wrays vehement hatred of Wall Street, MMT’s general hatred of rentiers, then we can begin to piece this puzzle together rather easily.

    All roads lead to nationalization in MMT. Why won’t they admit it? I’ll tell you why. Because they’re trying to make their policy agenda appear more palatable. But let’s be clear. MMT is a pseudo Marxist based approach to central control of the money system. Who are we kidding about all this? Let’s get the cards out on the table. There’s no reason to be obscure about anything.

  205. Lets try it and find out! If you provide the $200, I’ll form the “government” … whadya say? ;)

    Actually I’ve thought that if you could just get enough extremely nerdy online gamers, willing to participate in a simulation game of the economy … with some hierarchy of prizes to win … combined with an entry fee (in an attempt to just let the serious folks participate) then we might be able to test some of these ideas out.

    We could have several different ideas, and you’d be randomly assigned to a world: Austrian World, Free Banking World, Neo-Liberal World, MMT World, MM World, etc. Then evaluate a lot of measures of economic health at the end of the simulation. Maybe you’d have to carry the simulation forward for a few decades though…

  206. “The government issued bank deposits would act like a hot potato bouncing around until they reached someone in debt who would then use it to pay off their loans. This would cause an economic stagnation until most of the debt was paid off and private banking was ended”

    Yeah gee, that would be terrible. Economic stagnation as people try to pay off debt! Sounds like……….. NOW. In THIS system!!

  207. Frederick, you don’t have to sell the T-Bill to Cullen at all, your the government “here’s my t-bill, please give me my $100″…by definition of a T-bill you’d have to ‘print the money’, since you were ‘deficit spending’ this implies you don’t have cash on hand so you’d have to “print”(execute an exchange for a bank deposit) it, but since you are the government you have infinite power to do that. Unfortunately I’m more than a little confused by the math in your example, for instance I don’t see how you got to $100 in T-Bills when you only sold $50 worth.

    But I can’t see how government ‘spending’ directly in to an account could possibly be ‘more inflationary’, it has to be less OR at the very least ‘equivalent’ but it’s hard for me to see the latter..

    Example: Size of Budgeted Deficit: $100 (say a birthday cake for the President’s secretary just to make it a ‘consumable’)

    First ‘Direct Spending’

    Government spending Direct (via ‘printing’ of money) in to Bakers account: $100
    Amount ‘spent’ in to the economy: $100

    Now by ‘issuing of T-Bills’

    Value of T-Bill that matures ‘tomorrow': $110 (Could be $108 or $104, I don’t know the ‘going rate of return’)
    Currency Acquired: $100
    Amount ‘spent’ in to the economy: $100
    Amount ‘removed’ from the economy; $100 (from whomever bought the T-Bill)
    Amount ‘financed’ for T-Bill: $10 (someone’s savings)

    The $100 ‘budgeted to be spent’ is EXACTLY same in both cases. But in the T-Bill case the government owes $110 ‘tomorrow’ to the purchaser of the T-Bill. $100 to ‘replace’ the deposit used to buy the T-Bill plus the $10 ‘extra’ that was promised. So if ‘tomorrow’ they want to buy another birthday cake, say for the White House janitor the government has to ‘deficit budget’ not just $100 but $110 because they now ‘owe’ $10 from financing of the T-Bill ‘today’. When ‘tomorrow’ comes they issue a T-Bill not for $110 but $210 dollars, from the proceeds they deposit $110 in to the original T-Bill purchasers account because they owe it to him, he now has $10 extra compared to ‘yesterday’ & they have $100 for buying another birthday cake. But now the government owes $210 NOT $110! Rinse & Repeat.

    So, there is 0 way that I can see that ‘direct deposit'(self financing/printing of money) by the Fed can be MORE inflationary, at worst it is ‘equivalent’ but that’s only as long as the ‘savers’ do not cash in the T-Bills & spend the proceeds, in the example above if the original T-Bill purchaser takes his $10 & goes & buys a meal rather than reinvest it then the exchange has resulted in increased inflation in the economy beyond that with ‘self financing’.

    Yes the T-Bill is ‘savings’ but the government can and does promote savings in many other ways (e.g. tax breaks for deposits in to a 401k, part of which may in fact be a Treasury Security if they are available). If the goal is to promote ‘savings’ there’s many ways to do that and as you’ve indicated the private sector would certainly step up & provide them, in fact isn’t that the ‘US Capitalist mentality’? They would be of higher risk than a T-Bill of course, but coming from the Private Sector I presume the securities are being issued to get funds for investment in capital or something like that…but now I’m well passed the original point of the example.

  208. It finally occurred to me what was really wrong with Cullen’s article & all the ‘doom & gloom’ scenarios about nationalizing the banks etc. The premise used to produce those scenarios is NOT just ‘government self financing’, they all consistently ignored the government’s primary ‘fiscal’ responsibility to ‘control inflation’…so in all the negative arguments against ‘self financing’ the ‘paradigm shift’ was not only self financing but that the government would further ‘ignore it’s responsibility to control inflation’ that in fact would be one hell of a paradigm shift.

    But as Cullen’s primary treatise on MR makes clear the government’s primary responsibility IS inflation (not Debt = Private Savings). So sure, if you also add this to the arguments then ‘doom & gloom’ is the result, but if you add it to ‘self financing’ you have to add it to the current situation and therefore the T-Bill ‘financing’ will lead to hyperinflation & all kinds of ‘bad things’ too.

    I have read no negative scenario with regard to ‘self financing’ that does not ultimately end with the government ignoring it’s inflation responsibilities.

    Now, what I’d like to know is why the government would ever promise to pay someone $1.04 tomorrow for the dollar it can make itself today? From a purely business perspective that’s not just dumb that’s fiscally criminal. Yes the government isn’t a ‘household’ and isn’t a ‘business’ but that doesn’t mean that government should be inefficient profligate spenders. Sure, it can ‘promote savings’ but there are many other ways for the government to do that (tax incentives), and besides that if I understand correctly the majority of those ‘savings’ are going to China & the Banks…I haven’t read enough to entirely understand why China needs US dollars as savings (so I’ll cut them slack until I do) but since Banks don’t lend their savings increased Bank savings does nothing for increasing Bank loans. Why shouldn’t banks have to save money out of their profits like everyone else? What makes them so special that the government should just GIVE banks ‘savings’ for nothing? Especially when they have also given them the power to create money from nothing by virtue of issuing loans.

    Furthermore, maybe there is a benefit to promoting savings but that doesn’t always have to be the case. The government could do either at different times or do both at the same time, it’s not an ‘exclusive either or’ forever decision. It would seem to me that right now would be a perfect time to ‘self finance’, I don’t see any reason to ‘promote savings’ right now, in fact isn’t part of the problem that companies & individuals are not spending their ‘savings’ thus the desire for the government to spend more then it otherwise might have to?

    If there is an article on this site or elsewhere that explains the benefit for the government promoting bank savings in the context of MR I’d love to know about it…

  209. Sure, if you assume that self financing won’t result in other institutional changes then there’s no big difference. But then what’s the point? If we all know the govt can’t run out of money as is then why change anything?

    I don’t think you realize what self financing would mean. It would mean that the institutional structures would change completely. The Fed’s role in the economy would be substantially reduced. There would be no need for banking involved in the govt clearing process. No Primary Dealer system. And on and on. We’re not talking about some small minor change. We’re talking about sweeping changes to the way the banking system works and the way the institutions are designed and operate. MMT’s ideas are even more extreme. They’d consolidate the Fed into Tsy and would love to see the role of pvt banking reduced substantially. Many of them want nationalized banking. That all sounds fine in theory, but it’s far more complex and sweeping than most make it sound.

    You all make this sound like it’s some minor change. Anyone who says that doesn’t understand the design of our system.

  210. Thanks for the reply, and again, thanks very much for the ‘education’ it’s been most valuable.

    Why change anything? Well how about to stop paying for ‘money laundering’ of government money? Money the government could use directly in the economy instead of being filtered through the financial markets to ‘who knows what end?’

    I’m not an ‘MMTer’ (I don’t even ‘know’ what that is other then what the initials stand for and your railing against their ‘theories’. :-).), I’m a ‘macroeconomic illiterate’ trying to learn. And yes admittedly I do not know exactly the Fed role in the economy due to it’s involvement in government money laundering. But you’ve explained extremely well that there are 2 types of money & that it’s the ‘inside money’ that ‘rules the roost’, so unless your saying that the institutional changes involved in ‘government self financing’ (all other things being equal, e.g. no ‘government spending like a drunk pirate’ etc.) are such that the private banking system will be fundamentally, irretrievably altered then the Fed still has a substantial role to play in the economy managing the effects of banks making poor credit worthiness decisions.

    I’m not suggesting it wouldn’t be a significant change, and I’ll go back & read your original treates on ‘how the monetary system works’, but frankly, from my point of view, the bigger ‘paradigm shift’ is in what you are doing to educate people about how the monetary system works, when it’s recognized that ‘debt = Private Savings’, the government can’t go broke & the primary duty of the government in managing the economy (other than social reasons..) is to control inflation…that itself changes the discussions drastically in my opinion, as more people understand MR, the less time wasted fighting over ‘debt ceilings’ and the less people will fall for scare tactics over ‘debt’.

  211. You’re welcome.

    My point is that I think there are a lot of people who run around on blogs and the internet just throwing out baseless rants about the banking system without really knowing much about it. I’m not a bank apologist and I’ve been plenty critical of the banks, but I think we have to be careful about calling to tear down the whole thing and reduce it to nothing. Banks and shadow banking didn’t just evolve into the entities they are today for no reason. We have a really really complex financial system that requires some pretty sophisticated designs. The rise of shadow banking is largely the result of the rise of the GSEs, commercial paper funding, REITs and mutual fund growth, money market mutual fund growth, broker dealer growth, securitization and a really complex and enormous economy. Traditional bank lending is becoming a more modest portion of our economy because it doesn’t serve the needs of all these complex entities. Further, regulations have been woefully behind in catching up to all these changes. So it’s not surprising that the banking system is still pretty fragile.

    If we’re going to move to govt self financing then we have to be mindful of the ways that will likely ripple through this complex web of structures already alive in the financial sector. You can’t just tear them down like some people think. They serve a real purpose for the most part and are instrumental pieces of the economy. Once we start picking the Federal Reserve apart and removing the need for Primary Dealers and other pieces of this puzzle we’re heading down a road that is, BY DEFINITION, more state controlled. Do you want the govt trying to manage all of these complex financial transactions through some silly bureaucracy? If not, we need to better understand what we have, regulate it properly and not go all overboard saying we should permanently self finance and head down a road that is, by definition, a marginalization of the private banking system.

  212. Cullen, reading the comments, I’d say, you have a job cut out for you. Forgetting about MMT and all the history associated with it, and imagining a total outsider coming and suggesting consolidated Fed/Tsy entity (or govt self-financing not with issuance of bonds but with direct deposits of funds into the payee accounts) try to convince us why this is very likely result in the end of private banking. Again, MMT or its founders opinions are irrelevant here. Here’s the proposed institutional change, what are the likely consequences?
    Meanwhile, Krugman and Waldman are having a really important debate about whether self-financing with reserves that pay IOR vs financing with bond sales bonds are the same thing even outside of today’s conditions (that PK likes to call liquidity trap.) I used to think like PK that IOR is just the same as bonds and I now realize I was most probably wrong. The difference is not only in the fact that reserves – unlike bonds – are convertible to cash on demand at par (the plastic apples and the real apples in Waldman’s example) but, more importantly, the fact that reserves never leave the banking system and the banks are not in the business of spending. Basically, the banking sector will absorb any increase in reserves (with or without additional IOR) and it will not lead to increased spending because as we know money multiplier is a myth and demand for loans is endogenous. This by the way in line with explanations here and here of the broken mechanism of QE.

  213. Cullen, don’t sound like a conspiracy theorist. MMT is promoted on the internet by a bunch of dilettantes like myself who never had a chance to coordinate their efforts to abolish private banking. Maybe we’re all stupid and indeed don’t appreciate all the unintended consequences like you do, but then it is just the job for you to convince people of that.
    You ask why the change? Frankly, that’s precisely the point, to some extent. MMTers have been saying all along that the current system and the self-financing system are basically the same – they result in the same ultimate constraints. So, you can keep the current system if you get rid of the stupid additional self-imposed constraints like debt ceiling, explain to people what debt really is and it will be fine with most MMTers. Yes, some will complain about rent accruing to some bond holders, but this is not an inherent MMT position. And Mosler actually complains of the income removed from the economy when bonds are swapped for reserves in QE.

  214. I have my job cut out for me? I think you’re confusing our positions. MMT is the one arguing for a huge job guarantee, permanent budget deficits, the end of the Fed and other policies that are so far to the extreme end of the spectrum that there’s almost no chance we’ll see any of them enacted in our lifetimes. All I spend most of my time doing is telling people how the world currently operates.

    You seem to think that govt self financing and the current system are the same thing. As if MMT already exists. But we both know that’s not really true. A world of govt self financing would look very different than the one we currently live in. And realizing that there’s no solvency constraint really isn’t as eye opening as you and the MMT world seem to think. What do you think will happen when conservatives learn MR and understand that the govt harnesses the banks to fund spending? They’ll start worrying about inflation! Nothing will change. Literally, nothing. Their argument will change slightly, but nothing else really will.

    MMT needs bigger changes. You know it. I know it. So, I am afraid you’re the one who has his work cut out for him. Luckily, you guys are persistent and appear to have an army of people stationed on certain websites screaming out the message….Which, might be counterproductive, but whatever.

  215. It’s a conspiracy theory that MMT hates private banking and wants to wreck it?

    Mosler says:

    “I don’t agree that the financial sector produces real value. at least I’ve never seen any come out of it in the last 40 years.”

    And signs all his emails with:

    The financial sector is a lot more trouble than it’s worth.

    Wray says he’s interested in a way to “obliterate” Wall Street”.

    Mitchell calls for nationalization.

    These aren’t “conspiracy theories” and things I make up. They’re the rantings of politically motivated theorists. That’s what they are.

    And again, I don’t believe you’re right on the change front. If conservatives understand MR they’ll just change their worry from solvency to inflation. Big deal. You think that’s some monumenal change? It’s not. MMT needs more. It needs to convince the world of a permanent budget deficit positions, job guarantees, and end the Fed. You know it, I know it. You’re trying to downplay the changes to make MMT appear more politically palatable. You’re not fooling me. I’ve been all the way down the MMT rabbit hole. I know where it leads and what the founders envision.

  216. Re: Govt. self-funding deficits leading to the end of private banking ….
    If the government got out of the business of issueing bonds, wouldn’t that *increase* demand for privately issued bonds. Wouldn’t there be a huge pool of investors who currently buy treasuries who would now be willing to lend to corporations or other entities?

  217. This discussion starts getting counterproductive. You believe I am coming from some secret MMT rabbit hole with a hidden agenda and there isn’t anything I can think of that I could say to you to disabuse you of this idea. So, anything I say is seen as some sneaky maneuver to promote the hidden agenda.
    Just one more thing. There isn’t really an MMT founding text or manifesto or whatever, but if anything comes close it is the 7DIF by Mosler. This is what got a lot of people like myself exposed to MMT, learn MMT etc. The whole book is dedicated to showing how today’s institutional arrangements reduce to govt self-financing. There is not a mention of consolidation of the Fed and Tsy there. Go to the end of the book for the specific proposals. Nothing like that. Why? Because for Mosler the current arrangements minus the self-imposed constraint of debt ceiling are already good enough. He dedicated the whole book to explaining it. Job Guarantee is a separate thing – not a liberal idea per se, by the way, if seen as a substitute for unemployment benefits (beowulf can supply all the history of conservatives calling for something very similar) – but regardless of what Wray or anybody else says, JG is a prescriptive component of MMT, not descriptive, a distinction that I’ve seem made many times.

  218. O I know all about people running round ‘the internet spouting baseless claims’…I’ve been ‘on’ the internet long before anyone knew what it was, I’ve seen more than my fair share…

    I assure you I have no intention to ‘bring down the banks’, I recognize there is a need for them in a capitalist society. A government that can ‘print’ it’s own money has no incentive to make proper ‘credit worthiness’ decisions so we don’t want them being ‘the bank’…and no I don’t want more bureaucracy that’s totally inefficient so regulation it is. But even with regulation there can be issues if the regulators have no incentive to not ‘game the system’ (e.g. make it less efficient & less transparent).

    Having said that, I simply didn’t(and still don’t) see the leap made in your article from ‘government self financing’ for it’s spending to the money supply becoming totally exogenous. It replaces how ‘outside money’ is created it doesn’t (absent any other information) affect the supply of ‘inside money’. So I’ll accept that it’s a ‘huge change’ & perhaps a ‘paradigm shift’ while reserving judgment that it includes replacement of banks as the creators of ‘inside money’…again, I’ll keep reading, perhaps it will become obvious.

    Ultimately for someone who had spent very little time reading about this previously I felt I was able to ‘keep up’ pretty well in understanding every other article you’ve written, in this case though I simply couldn’t & can’t make the leap suggested in the conclusion of your article.

    Again, thanks very much & keep up the great work. MR is ‘about the facts’, facts can’t be argued with.

  219. Cool. So we already have a MMT world according to you guys. What’s the big fuss then? Once everyone gets on the inflation constraint bandwagon then we’re all good, right? Is that what you’r telling me?

  220. Yes, it would be cool. Because it is a big change. Once you stop believing in bond vigilantes you can focus on the real constraint – ask you friend (and hopefully, still mine as well) Mike Sankowski. He had some posts on that on TC (like this for example). Because it is much harder to convince people that govt deficit is too big now because of non-existent inflation. Because it is much easier to explain to people that output gaps means there is a lot of room to move before inflation becomes binding. Because if you’re concerned about inflation then your guide is inflation and not some abstract fear that interest rates would go up.

  221. I disagree. Once the world realizes that it’s inflation that’s a constraint then the argument will be that govt causes misallocation of resources, inefficient spending, inflation, etc. It won’t change anything. In order for MMT to have a real impact, you need to start shuffling the institutional changes. You need a JG bureaucracy, Fed/Tsy consolidation, permanent deficit spending and a convincing argument that govt spending doesn’t hurt via inflation. You need much more than simply what we have now….I am surprised you don’t see it that way….

  222. We can agree to disagree at this point. Re permanent govt deficit, by the way, it was well before MMT and even I guess sectoral balances that Kaleki realized that govt deficit is the source of business profits in aggregate (absent of unsustainable trade surpluses or leveraging of private balance sheets).
    MMT does not advocate deficit no matter what. It advocates deficit like a normal modus operandi, sort of like pressing mostly on gas when driving a car. It doesn’t mean you don’t ever need to press on brakes – but movement forward implies more gas than brakes in aggregate. This is MMT position, aka Functional Finance, as you well know.

  223. Peter,

    You’re not going to mislead me on these things. I am way too familiar with MMT to be misled by such nonsense. MMT explicitly states that current account deficits are good. MMT also states that CAD is a demand leakage that must be offset by govt spending. You are trying to have it both ways when you claim MMT doesn’t propose permanent deficits. Not only has Wray explicitly stated that permanent deficits are good, but he says they are necessary. Which is 100% consistent with the view on a CAD being a good thing. You can’t have it both ways. Again, you’re trying to mislead people here by being politically correct, but anyone familiar with MMT sees through the smoke and mirrors. Unfortunately, most people don’t understand MMT well enough to see that it’s a political agenda masquerading as a set of principles.

    Also, budget deficits don’t always drive corporate profits. Historically, private investment is the primary driver. See here.

  224. Here’s a quote from Wray on this. You either don’t understand the MMT position or are being intentionally misleading:

    The only problem with Friedman’s analysis is that he did not account for the external sector: he wanted a balanced budget at full employment, but if a country tends to run a trade deficit at full employment, then it must have a government budget deficit to allow the private sector to run a balanced budget—which is the minimum we should normally expect.

    So, when Mosler says “the higher the trade deficit the better” one need only connect the dots to the fact that MMT implicitly states “the bigger the budget deficit the better”.

    Sorry, but the obfuscation on these matters really needs to stop. You might slide this stuff past the unwitting novice, but not me.

  225. Saw it, sort of enjoyed it, but those things are always too clipped to sway the masses. Interviewers always seem to ask the wrong question at the wrong time or break in with a contra-argument before the full point is made. MMTers seem to always end up sounding a little fantasmic. Too bad. But she is getting quite a bit of air time lately.

  226. Uh-oh… more have popped up in this discussion:

    ROE -Return On Equity?
    GSE -Government Sponsored Enterprise
    REIT -Real Estate Investment Trust
    IOR -Interest On Reserves?
    PK -Paul Krugman?

  227. Cullen, please, accusing me of misleading, when you simply are not even reading my comment correctly, is bad form. I specifically said that absent of trade surplus (and private leveraging) corporate profits are impossible – without anywhere implying whether I though having trade surplus is good or bad (except that by accounting it cannot accumulate forever – because the foreigners would simply run out of your currency). This is easy to see: even if the businesses expected all the wages they paid to return as spending – so, no wages are saved – even then the businesses in aggregate at most break even. Where would the profit come from? It could come from trade surplus, private sector spending more than it earns (leveraging) or govt deficit. This is simple accounting. No position is taken on desirability of leveraging or trade surplus at any given point in time, except to note that both are unsustainable in the long run. This is also the gist of Wray’s quote. As it is, it is neutral; whatever Wray or Mosler prescribe regarding trade surplus is prescriptive not descriptive. I for one think persistent trade deficits have many negative consequences and imagine that ideally trade surpluses and deficits should cancel each other in the long run. But obviously any demand leakage such as trade deficit or saving has to be offset by something or the businesses in aggregate cannot make profits. Not because some businesses are inherently not profitable – no! because there is simply no way for it to happen by accounting (which is also why fixed money supply regimes are doomed to experience periodic recessions). I imagine you are well aware of that. So, yes, normally you’d need to run a deficit just to offset those deficits or you get recessions. Nothing new here – the usual sectoral balances/functional finance stuff (this is for me basically the core of MMT, without any other prescriptive parts.)

  228. That really has nothing to do with what we were discussing. What I was referring to primarily was this quote:

    “MMT does not advocate deficit no matter what.”

    That is misleading. “Bad form” is implying that MMT doesn’t advocate something when everyone who understands MMT knows that MMT thinks the govt should run “at minimum” a balanced budget at full employment (which never happens, ie, we should always run budget deficits).

  229. Oh, gosh, really? The govt should offset demand leakages, as mentioned above. If there are no demand leakages, the govt can run balanced budget or even surplus – it never actually controls the tax receipts so it could find itself running a surplus without even intending to, as I think to some extent happened under Clinton, although I am not sure. Under conditions of too much demand the govt should even increase the surplus. So, when you have, say, a trade surplus and a healthy private leveraging, the govt should try to run a surplus. Best to have most of the deficit controlled with automatic stabilizers. some sort of a TC rule, to avoid corruption and misallocation of resources. But keep govt in the areas where there is private purpose but no real way for private businesses to operate – huge infrastructure projects, long term research, defense, things like that. All is not new and can be found regularly in MMT comments. One point I am not sure about is what happens when private sector leverages in response to insufficient deficits – if such unhealthy leveraging can be recognized and tried to be reversed with increased deficits or some other solution, I don’t know.

  230. The funny thing is that everyone seems to look at this utopian idea as the solution to all problems. The alarming fact is that the same people, who seek to live in cuckooland do not realize that the situation is more serious than it looks. When somebody starts issuing imaginary money, you would end up granting an ‘imaginary’ status to the dollar. Do you think the Chinese, Indians, Brazil, EU, etc all would be interested in trading in US$? They produce, export and would not want to be paid by ‘imaginary’ money minted at will.
    That is not how capitalism is supposed to operate. Maybe that is the root cause of all this mess?

  231. I don’t think that Chinese, Brazilian, Indian, Korean, Japanese, Swiss, Russian, Canadian, British, Euros, etc. etc. etc. currencies are any less imaginary than our dollars. They all have a similar floating exchange rate fiat money system, which is similar to ours. In fact the Chinese are always trying to devalue their money in relation to ours. … well, OK, perhaps that’s an oversimplification, but generally the idea. Look at Japan… they have been deficit spending for decades, and have a much greater public debt to GDP ratio than we do… and yet they’ve been on the verge of DEFLATION (having their “imaginary money” GAIN value!) now for a long time in spite of it. Just recently (with Abe again as PM) I think their strategy is transitioning to targeting a higher inflation rate (a devaluation of their currency).

    I’m not sure your concerns about “imaginary” money is really valid. That’s the way it is the world over! If China were to truly let their currency float, their trade surplus would push their currency up in value, and make their exports less attractive (at least that’s the way I understand how Milton Friedman envisioned this floating exchange rate system to work). That fact that that doesn’t happen is what has people up in arms about China being a “currency manipulator.” Of course there’s another way to look at that situation … that sees China and Brazil, etc. as NOT really wanting to buy any more dollars, and thus looking to trade amongst themselves w/o $.