Read of the Day: The Biggest Myth About the Fed

David Beckworth has a nice post over at his site in which he argues that the Fed is not monetizing the debt.  He makes arguments that are similar to the ones I’ve previously made.  But I think the debate over monetization is even simpler than David notes.  The purpose of the fear mongering over the term “monetization” is to imply that the Fed is funding the US government.  The term is used with an intended negative connotation that implies some sort of solvency constraint, as if the government couldn’t fund itself without this back stop which would result in us looking more like Greece with yields surging and on the brink of bankruptcy.  This is just patently wrong and those fear mongering over “debt monetization” have seen their scary inflationary or default scenarios fall flat in recent years.  In other words, they’ve been wrong because they’ve misinterpreted what the Fed is doing.

In the end, this debate is rather simple and has already been won by those of us who predicted the market reactions in real-time .  If the Fed were needed to fund the US government then the fear mongers would have all been right when QE2 ended and yields would have surged because there would not have been enough demand for US government debt.  Investors like Bill Gross called the end of QE2 “D-Day” because he was concerned about a lack of funding when the program ended.  I said, in real-time that he would be wrong and that yields would not surge and that there would be no lack of buyers.

Of course, Bill Gross wasn’t the only one saying this.  It was a common refrain back in 2010.  And despite their dire predictions, the exact opposite occurred when QE2 ended.  Yields declined!  The Fed was not directly funding the US government and the Fed was not needed to fund the US government.  After all, the US government always harnesses its banking system to fund its bond sales.  To argue that the Fed needed to back stop the Treasury is to misunderstand the dynamics at work between the Primary Dealers and the US government.  This is just one of the many misunderstandings surrounding QE2 and despite having already been thoroughly proven wrong, the myth somehow still persists….

Read David’s piece here.


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.

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  1. The latest JG letter provides excellent food for thought. (free registration required). Unfortunately, the analysis there doesn’t bring a lot of good news. Basically, he says the future will most definitely not be like the past. Forecasters predicting limits on growth have been wrong before, but, IMHO, it is agood idea to consider the vision from this smart man as a nonzero probability scenario and plan accordingly.

  2. yields declined after QE2 because the economy was weakening and the market was expecting the next round of asset purchases.
    even if the fed did nothing for a period of time they always communicated that they´d be willing to do more if necessary. add the countless rumors leaked by the Hilsenraths. there was never any doubt that the fed would not allow yields to rise significantly.

  3. And the primary dealers get juiced with $40billion a month of new base money…the Fed buys their mbs junk, they buy Treasuries. Nice bit of back scratching.
    It’s all a big ponzi.
    Take away all QE for a few years, see what happens.

  4. “it doesn’t matter how many apples (reserves) the Fed puts on the shelves. It doesn’t result in more apple sales (loans).”

    Nice quote.

  5. The US government doesn’t need the Fed to fund its debt. True. But I would argue that the US government does need the Fed to fund its debt at levels of interest rates the Fed desires to have. Take away the Fed purchase backstop (QEx and the threat of QE(x+1)) and see what happens to long rates.

  6. The Fed is like the grade school bully who extorts quarters from the other kids. He doesn’t even have to beat them up anymore to get the money.
    Same thing here — the Fed can get whatever it wants from the primary dealers, because if they don’t play they lose their business. And investors buy T-bonds because they know the Fed will buy them back in a crisis.

  7. I get this entire debate about monetization or non monetization.

    I guess either way I remain puzzled about what the Fed is then trying to achieve under either framework (other than creating risk free profit for banks).

    Will the losses on defaulted MBS also not be monetization?

  8. Also posted this at David’s site:

    Warren Mosler on monetization

    The Myth of Debt Monetization

    The subject of debt monetization frequently enters discussions of monetary policy. Debt monetization is usually referred to as a process whereby the Fed buys government bonds directly from the Treasury. In other words, the federal government borrows money from the Central Bank rather than the public. Debt monetization is the process usually implied when a government is said to be printing money. Debt monetization, all else equal, is said to increase the money supply and can lead to severe inflation. However, fear of debt monetization is unfounded, since the Federal Reserve does not even have the option to monetize any of the outstanding federal debt or newly issued federal debt.

    As long as the Fed has a mandate to maintain a target fed funds rate, the size of its purchases and sales of government debt are not discretionary. Once the Federal Reserve Board of Governors sets a fed funds rate, the Fed’s portfolio of government securities changes only because of the transactions that are required to support the funds rate. The Fed’s lack of control over the quantity of reserves underscores the impossibility of debt monetization. The Fed is unable to monetize the federal debt by purchasing government securities at will because to do so would cause the funds rate to fall to zero. If the Fed purchased securities directly from the Treasury and the Treasury then spent the money, it’s expenditures would be excess reserves in the banking system. The Fed would be forced to sell an equal amount of securities to support the fed funds target rate. The Fed would act only as an intermediary. The Fed would be buying securities from the Treasury and selling them to the public. No monetization would occur.

    To monetize means to convert to money. Gold used to be monetized when the government issued new gold certificates to purchase gold. In a broad sense, federal debt is money, and deficit spending is the process of monetizing whatever the government purchases. Monetizing does occur when the Fed buys foreign currency. Purchasing foreign currency converts, or monetizes, that currency to dollars. The Fed then offers U.S. Government securities for sale to offer the new dollars just added to the banking system a place to earn interest. This often misunderstood process is referred to as sterilization.

  9. Warren should update it because it’s no longer correct in the world of QE and IOER.

    “Once the Federal Reserve Board of Governors sets a fed funds rate, the Fed’s portfolio of government securities changes only because of the transactions that are required to support the funds rate.”

    The Fed absolutely does change its balance sheet size without regard for the FFR because it has set the IOER. Still, it’s not monetization, but not for the specific reasons MMT cites.

  10. Perhaps the best way to think about QE operations when the FED is buying (trading) bonds for money is:

    Normal non-QE bond operations — US Treasury Bonds sold through the PDs and either retained by the PD bank or sold into the secondary market.

    * US Bonds interest bearing to the Bond Holder (Interest expense to the UST, taxpayer)

    QE Operations – US Treasury Bonds “laundered” through the PDs onto the FED BS.

    * US Bonds effectively non-interest bearing (interest expense to the UST, returned to the UST by the FED)

    So, QE operations are effectively the US Treasury issuing debt free money, whether physically printed dollars or electronic account credits; Much like the Lincoln “Greenbacks”

    … fuel for thought.

  11. The Fed has the option to expand the monetary base with a number of different assets. Tsys are a high quality liquid asset so it would not be surprising for them to hold X% of their assets. What X is reasonable? Well, most central banks seems to think nearly 100% in their USD asset allocation seems reasonable. US pension funds, probably at least 30-40% of their fixed income slice. So what’s the big deal?

  12. What am I missing, I did not think he was saying the Fed balance sheet cannot expand. Also it seems he is referring to purchases direct from the Treasury here, versus asset swaps of MBS for reserves with banks. Either way no monetization.

  13. Mosler knows this cold, but that statement is old. The Fed isn’t supporting the FFR through the expansion of their balance sheet. So that comment is a bit dated because the new situation with interest on reserves. Either way, yes, the Fed isn’t monetizing because they’re buying on the secondary market. Saying they’re monetizing is like saying that I funded Apple’s IPO from 198? because I just bought their shares on a secondary market. That’s obviously wrong. The Fed’s actions are no different.

    From a really anal retentive position, one could argue that the Fed is turning assets into money in that they’re exchanging bonds for bank reserves (outside money). But this form of outside money is not held in the private sector so the balance sheet change has no meaningful inflationary impact on the actual supply of inside money (the money we all use) so either way it’s a moot point.

  14. No, this all started during the JG debates primarily because I disagreed with the idea that the govt was the “monopoly supplier of money”. They said I was being political, when the reality was that I was trying to explain operational reality (ironically, they were the ones being political and defending the JG at any cost). It was at this point that I realized I wasn’t MMT and that my views weren’t consistent with MMT.

    In short, MMT builds a govt centric view of the world where all money essentially comes from the govt. They say banks “leverage” what I call outside money (bank reserves). They reject the money multiplier, but use this strange terminology which implies the same concept. It’s not correct. Banks don’t leverage anything. They have been outsourced the right to create money. Banks are the primary issuers of money in our system. Banks issue what I call inside money (bank money – the money we all use daily) and the govt has designed a facilitating system around the banking system to protect it (the reserve system, regulations, etc). So the money supply is controlled by an OLIGOPOLY of private entities. It is absolutely positively not a state run “monopoly” controlled by the govt.

    So, MR starts with the private sector. MMT starts with the govt (ironically, just like of neoclassical econ does). I think the govt centric view of the monetary system is not correct.

  15. Very correct. I have argued that here long before you switched from MMT to MR. Actually I learmed it from Mish who learned it from Steve Keen. I think the latter has a lot to offer.

  16. Cullen,

    I’m curious, two simple questions…….

    1. What was total 10yr and higher issuance by treasury in the last year?

    2. What was total 10yr and higher purchases by the Fed in the last year?

    Thanks, krb

  17. Inflation will resolve much/most of the inevitable MBS losses, it’s the mantra of the Fed and bankers.

  18. The Fed supports the FFR primarily via the Securities Lending OMO and sentiment affecting PR type releases & speeches.

  19. Someone else who HAS pieced it together says that #2 above was 90% of #1 above….I was hoping to get some confirmation or not.

    In my view, we all practice diversionary, contorted, cherry-picked games of semantics and definitions to support the view we want to hold about fed and treasury behavior……and I respectfully think that includes you.

    IF the above claim about fed purchase of 90% of treasury issuance is correct, it would seem to be an indication of a couple possible things…..

    1. not enough interest in the secondary market for the primary dealers to resell to?

    2. primary dealers in such bad shape that fed buying back to raise bank reserve levels to improve bank health, and allow capital previously tied up in reserves to be used for other uses like market and commodity speculation in a balance sheet shell game?

    Reselling to the secondary market would not improve bank reserves and health like fed buying back would do….correct?

    You and other sympathetic voices claim #1 isn’t or can’t happen…..maybe you’re right. But if fed actions don’t meet the definition of #1, do they fit #2?

    I personally don’t find fed behavior to be at all redeeming because they don’t meet the Webster’s definition of monetization, if it represents instead a massive bank handout paid for by the middle/lower classes and elderly in 0% interest earned on safe investments and higher weekly expenses from commodity speculation.

    Please go beyond the persistent argument that the fed is NOT monetizing govt debt, to a thoughtful analysis of what they ARE doing……Bernanke’s job program charade takes us all for fools or idiots. Thx, krb

  20. What the Fed is doing is rather simple. They’re removing t-bonds and MBS from the private sector with the hope that this will force investors to replace lost yield by reaching for price. This, in theory, will drive down long yields and induce a portfolio rebalancing effect which supposedly has a wealth effect in addition to an interest rate effect. That’s the theory. Whether it works as expected is highly questionable in my opinion.

  21. I understand, and it all sounds so benign when described that way. My view is more critical, or at least more cynical…..

    It HAS helped the banks.

    It has NOT helped the economy, middle/lower classes & elderly… the percent on food stamps and total un- and under-employed (accurately measured) goes up it may have even HARMED each. And save me the typical unprovable claims by the political class that “things would be worse if we didn’t do it”.

    The more challenging question…..

    You’ve said it is “questionable” whether Bernanke’s theory will work. My question is whether it is even possible for it to work, and the context for my question factors in other relevant parameters….

    The middle and lower classes represent the bulk of the economy’s buying power and revival power, and the consuming segment that would have to feel “wealthier” for Bernanke’s theory to work. But this same segment has a lower relative share of their wealth in the markets, and a higher percent of their income consumed by food and energy commodities…….increases in their relatively smaller equity portfolios are offset by the rise in their relatively larger weekly food and energy expenses as Bernanke fosters or enables the speculative rise in both equities and commodities.

    Bernanke’s economic revival theory is in reality…..
    1. helping banks
    2. helping the wealthy who have higher relative percents of wealth in markets and lower relative percents of income consumed by food and energy
    3. leaving the middle/lower classes and elderly at best stagnating, at worst falling into worse condition
    4. making the gap between wealthy and poor even wider, at an even faster pace than before

    Objectively, this doesn’t seem like much of an economic revival theory.

    Cynically, I don’t think it was ever meant to be… my view, from day one this has been a bank bailout plan masquerading as a jobs or economic revival plan. I wish more people with economic credibility, like you, would take a more critical or cynical look at the real or even possible efficacy of ideas being fed to us as solutions by our govt leaders. And I’m aware and agree with your wish to avoid politics, but I don’t think this analysis has to be political… is science, both economic and behavioral. I believe we can remove rep or dem labels, cons or lib labels, and thoughtfully debate the science of these ideas and outcomes. Stopping the discussion where we do doesn’t seem to help solve anything….if anything it provides cover for too much bad policy. Your thoughts? Thx, krb

  22. Help. Does MBS mean Municipal Bonds? If so, the capital S only means plural, and should not be capitalized, as in MBs. Or am I just ignorant of what is referred to? Life of a nitpicker.

  23. Many of the MMT guys I have read don’t believe that banks lend reserves, and that they are only capital constrained so they do in essence create money from thin air. I guess there is a nuance here if banks are agents of government. But really, it seems at least MMT and MR are still more correct than many monetarists I have talked to.

  24. Well looks like some weekend reading the differences between MMT and MR. Obviously, JG is one.

  25. MMT doesn’t say bank lend reserves. But they contradict themselves by making a very strange argument that is similar to the money multiplier. Wray says:

    “the bank-money-supply process is horizontal; it can be thought of as a type of ‘leveraging’ of the hoarded vertical fiat money”

    This is a very bizarre comment from people who reject the money multiplier. It makes no sense unless you twist the actual operational realities of the system. It’s an attempt to create a relationship between outside money and inside money. But it’s confused. Banks don’t leverage their reserves or “vertical fiat money”. They create new money out of thin air via loans. And they hold a % of their deposits at the Fed so they can settle payments in an orderly fashion. There is absolutely no leveraging. But MMT creates this false relationship in order to rationalize the state theory and the myth that all money comes from the govt. It’s not correct.

  26. I am wondering if the FED does monetize govt debt but via only outside money.
    It is almost as if there are two separate systems working here.
    Different rules apply, but semantics and vernacular cause the confusion.
    Outside money has a Different Rule Book than Inside money..

    I think we need some NEW analogies in this field of (^%&$^%$#@!) study.

    The workings of the way the inside vs outside monetary instruments flow seems to be a root source of confusion.

  27. Very well argued, KRB.

    Cullen, I’d reiterate KRB’s suggestion – you are a commentator with credibility and I agree with KRB here that you should take a more critical view of a monetary experiment that is arguably (I’d say patently), as you agree, not achieving its ostensible economic goals but IS achieving massive distortion of asset markets.


    Endogenous money creation or destruction is the concept that each participant in the economy has their own version of a ‘printing press’ for money. This concept was explained by Irving Fisher in his treatise on The Theory of Interest (1930) in terms of the value of currency being affected by two (potentially opposing) movements – expected growth in the money supply reducing the real purchasing power of money and expected increases in productivity increasing the real purchasing power of money.
    This means that participants can affect the value of currency in a number of ways:
    Investment choices to invest in ‘non productive’ money equivalents rather than to invest directly in productive assets effectively increases the money supply, reducing the real value of currency.
    Demands for higher wages or supplier payments can increase the financing requirements of firms, creating a risk of ‘supplier led inflation’, effectively reducing the real value of currency.
    Choices made about the level of contribution to productivity can increase the real value of currency, (in fact this is the only mechanism which provides any basis for the real value of currency.)

    Anyone got a take on this Irving Fisher Cat ( seems pretty knowledgeable) ?

  29. I get lots of people telling me to be more vocal regarding problems in the system, etc. But I don’t think we’re at a point where problems can be solved because we are not at a point where people actually understand the system. So it has always been my goal to educate. Who knows. Maybe at some point in the future I will be a bit more vocal on the policy side and all. But I don’t think that’s the appropriate stance to take now.

  30. Good explanation Cullen…….I better understand where you’re coming from now……it’s still frustrating, but I understand.

    As for Geoff above…….do you believe every explanation from every Washington politician and policy maker? Or just the ones from your party?

    Bernanke’s actions and outcomes do not at all align with his explanations of what he is doing, or how he will determine if it has been a success……pointing out that credibility gap doesn’t make a person a conspiracy theorist. Of course, a sympathizer would try to undermine the messenger instead of addressing the message……

  31. It cannot be correct to say the banks have been outsourced the right to create money.

    Anybody can create a valuable money if the money we create claims our own wealth, and that is all the banks are doing.

    Even if i just write you a cheque i am creating my own money. Such a money is only valueable amongst people who know and trust me and the same is true for any bank.

    Generally speaking governments take away money creation powers rather than give them out.

  32. Mike Norman who says he is a MMTer says it is clear that deficit spending is currently being done via monetization.

  33. Not correct. Banks are outsourced the right to create deposits in the banking system denominated in USD. You can’t do that. And when you write a cheque you are simply issuing a note that gives someone else a claim on your bank deposits.

  34. “do you believe every explanation from every Washington politician and policy maker? Or just the ones from your party?”


  35. If i issue claims to my USD dollars then I *am* creating a useable money that is denominated in USD.

    Banks are not given rights by government. Mostly rights are removed so that people do not issue more claims than they have reasonable backing for.

  36. I am assuming the mike norman i saw you mention in the comments was the same mike norman who talks about MMT on his blog and produces videos on MMT.

  37. Deposit money or inside money is something that anybody can create. Banks settle using outside money or they are ok to be owed new inside deposits. There is no reason why a loan shark could not operate just like a bank does, with the exception the banking system would not allow him to operate the existing banking payment systems.

    But if it were legally allowed then an alternative network of banks could operate with deposits denominated in us dollars that could receive us dollars and via accounts held with the main banks could make payments in us dollars to people with accounts with the main banks

    All the main banks have accounts with each other or have accounts with the principle players so there would be no effective difference.

    Banks do not have special rights. The rest of us have rights removed.

  38. This is not accurate. Banks can issue loans which provide people with deposits and new purchasing power denominated in USD. The bank doesn’t use its money to issue you new money. If I issue someone an IOU they will then expect me to deliver them USD. Those USD’s to be delivered to them can only come from banks or via the government in a cash note or coin form. In other words, I have to issue money in some form for my IOU to be transferable as money. In this regard, you cannot issue money in the same sense that a bank or the govt can.

    Of course, you could create your own form of money to compete with the USD, but then you need to deal with the secret service and probably jail at some point. :-) Banks receive charters that allow them to issue loans/deposits denominated in USD.

  39. Apologies. I saw the name mike norman on warren moslers site. It must be the same man.

  40. False, you cannot create new USD denominated purchasing by issuing a loan. If you loan someone USD denominated money you are simply transferring purchasing power. A bank doesn’t transfer purchasing power. It creates it.

  41. You are agreeing with me! I can issue my own inside money as deposit money that is denominated in USD but you agree “but then you need to deal with the secret service and probably jail at some point. :-) Banks receive charters that allow them to issue loans/deposits denominated in USD.

    Exactly! The government grants the right for the banks to do what i could do if it were not illegal.

    Bank money or deposit money or inside money is not USD. It is though denominated in USD because each inside money amount claims a USD

  42. No, I am not agreeing with you at all. You agree you can’t issue money. That contradicts what you originally wrote….

    Bank money is not a claim on USD. It is USD. In fact, it represents 97% of all USD denominated purchasing power in the USA. To say this is not money is false. And to say it is a “claim” on outside money is to imply the money multiplier exists. That’s also wrong.

  43. What you are saying is that i cannot build a big building and call it a bank and advertise for depositors and issue loans and allow my customers to buy and sell from each other. where the money i create for them is denominated in USD. There would be nothing fraudulent about it.

    I can do that.

    But you agree i will face jail if i do it

  44. You can’t do what banks can, but in theory you could do what banks can. I don’t operate in theory. I operate in reality. And in reality, you are not a bank and will never have the capabilities of a bank.

  45. If bank money is USD then why if i have more than 250,00 of bank money do i face losses if the bank fails??

    Why talk about bank money or deposit money or inside money if they are outside money???

  46. I an not saying bank money is not money! :-)) Of course it is money! It is used as the means of exchange across the banks books. It is by definition money. But is bank money rather than government money.

  47. You cannot say the money multiplier exists simply because bank money claims government money. The bank may have no government money and yet have assets that can be converted to government money as required. There is no obvious connection between the two monies just because one is a claim for the other.

  48. It is odd that you believe that when a private bank fails that the USD dollar gets vaporised! :-)

    Come on! :-)

  49. Sigh. You are saying that my position implies the money multiplier exists and therefore i am wrong.

  50. thanks for the fuel for thought, it prompted me to read up on demand Notes and differing Notes, I thought this part interesting:

    “The Legal Tender ActsThe beginning of 1862 found the Union’s expenses mounting, and the government was having trouble funding the escalating war. U.S. Demand Notes—which were used, among other things, to pay Union soldiers—were unredeemable, and the value of the notes began to deteriorate. On January 16, 1862, in a private meeting with President Lincoln, Edmund Dick Taylor advised him to issue greenbacks as legal tender.[5][6] Congressman and Buffalo banker Elbridge G. Spaulding prepared a bill, based on the Free Banking Law of New York, that eventually became the National Banking Act of 1863.[7] Recognizing, however, that his proposal would take many months to pass Congress, in early February Spaulding introduced another bill to permit the U.S. Treasury to issue $150 million in notes as legal tender.[8] This caused tremendous controversy in Congress, as hitherto the Constitution had been interpreted as not granting the government the power to issue a paper currency. “The bill before us is a war measure, a measure of necessity, and not of choice,” Spaulding argued before the House, adding, “These are extraordinary times, and extraordinary measures must be resorted to in order to save our Government, and preserve our nationality.” Spaulding justified the action as a “necessary means of carrying into execution the powers granted in the Constitution ‘to raise and support armies,’ and ‘to provide and maintain a navy.’”[9] Despite strong opposition, President Lincoln signed the First Legal Tender Act,[10] enacted February 25, 1862, into law, authorizing the issuance of United States Notes as a legal tender—the paper currency soon to be known as “greenbacks.”

  51. You said banks issue a claim on outside money. No, the only reason outside money exists at all is to facilitate inside money. If there was one bank for the whole nation there would be no “outside money” because all money would be the same type of money. The only reason we have outside money to begin with is because we have a system of private banks who are outsourced the ability to issue inside money. The interbank system is simply the place where banks settle interbank payments. In fact, if a bank issues a loan and the deposit and payments are made at that bank then no outside money even enters the equation.

    You’re basically saying what MMT says which is that banks “leverage” outside money because inside money is a “claim” on outside money. It’s wrong. Banks issue inside money independent of the govt and only hold outside money because the Fed system has been designed to facilitate smooth payment settlement for interbank payments.

  52. >>When Zimbabwe had hyperinflation everyone who held money lost money. If the issuer of money fails then the users of money lose money….

    So the depositors have actual US dollars and the bank fails but they are not allowed to get the USD they own.

    But a person who has one USD can get his USD because the bank pays into an insurance fund called the FDIC

    And you think that makes sense?

    Come on! :-)

    By law the USD can only be created by the federal reserve and be backed by gold certificates or debt of the US government.

  53. If I buy a house with a loan from Bank of America and the seller deposits the funds at Bank of America the govt and outside money never even enter the equation. But you’re saying that no money creation occurred here because outside money wasn’t involved. Sorry, but that’s just not correct.

  54. >>If I buy a house with a loan from Bank of America and the seller deposits the funds at Bank of America the govt and outside money never even enter the equation. But you’re saying that no money creation occurred here because outside money wasn’t involved. Sorry, but that’s just not correct.

    I am not saying that no money is created!!!!!!

    That is what you are claiming i am saying!!!!!!

    Bank money is created!!!!!!!

    Come on man. Dont keep putting words into my mouth like this.

  55. In one series of comments you’ve stated that you can create money. Then you admitted you’re not legally allowed to create money. Then you stated banks don’t create money. Then you said banks are legally allowed to create money. You’ve contradicted yourself so many times that I don’t even think you know what you’re saying. :-)

    Anyhow, it sounds like you agree with me (now) that banks create money. Therefore, your original comment that banks aren’t issued the right to create money, was wrong.

    So we’re all good. :-)

  56. No money is created by that BofA loan. BofA used money already in existence (and deposited in BofA), and loaned it to the borrower. If the borrower deposits the money in the bank, he returns the same money to its previous location.

  57. The reason that banks appear to create money is the asymetrical treatment of the bank balance sheet for measuring money supply. So, the officially measured value increases because the offsetting values are ignored.

  58. Sigh

    I can also create money. But if i do that i get arrested.

    Bank money is only money because it can be used across the banks books.

    Money is by definition the means of exchange

    Anybody can set up a book keeping system that enables their depositors to transact using a created money that operates only via accounting across the money creators books

  59. You are unable to understand me because for some reason you believe that bank money denominated in USD is actually USD

    So i say bank money is not USD and you for some reason think i am saying it is not money.

    You are warping everything i say because of your existing belief system

    I was assuming that since the last time we discussed this topic that you had changed your views somewhat

    It seems though best that i wait another year before we continue.

  60. How can the depositors money be in their deposit account and be in the loan customers account at the same time? The deposits are legally identical. One deposit cannot be empty while the other is full.

    The depositors money becomes owned by the bank. Both depositors only have an IOU

  61. Anybody who knows me and wishes to invest with me will of course accept Judd notes.

    You dont come to bank with Judd unless you want to. Instead you bank with Morgan or whoever you trust.

    Banks go to huge efforts to build a reputation that is trusted.

    Without trust a bank will quickly fail.

  62. You do not seem to realise the implications of what you say

    Most certainly everyone will *not* accept bank issued deposits unless they are written by their own trusted bank.

    And yet you force me to be trusted by everybody so your existing belief system can be maintained.

    What to do?

  63. Okay, issue me a Judd Note and I’ll see how many places and people accept them. 99.9% wont. So, as Minsky said, the problem with money is not crea ting it, but finding others to accept it. Banks dont have that problem.

  64. Sigh. I was agreeing with you and wondering if the other guy would be influenced by what i said.

    I was replying to him.

    By the way your software is not very good for a conversation like this. Forum software is best

  65. If i issue you with a note that says this claims 10,000 dollars with my name and address on it then it would be surprising if somebody does not contact me to see if I will settle that note.

    How many places will take an unknown cheque?? How many cheques fully clear immediately upon receipt when offered to a bank??

    You seem very determined to put barriers in the way of your understanding.

    to understand what i am saying you need to go back to the early days of banking when it was very different from todays electronic commerce where only post and messengers could keep the money flowing.

  66. Andrew is pointing out some major flaws with MR, and I think the reason that you two are having so much trouble communicating is because of the narrow definitions that MR forces on the monetary world. “Inside” and “outside” money are not a sufficient framework to describe the role of money as 1) a medium of exchange and 2) a store of value/unit of measurement.

    In its role as a medium of exchange, all interbank transactions (the majority of all transactions) are ultimately settled with “outside” money, which MR de-emphasizes.

    As a proxy for store of value and a unit of measurement, Andrew is clearly recognizing the same things that I’ve been pointing out for several weeks: MR forces all money to start and stop at the deposit level, which is extremely limiting.

    Cullen, you have agreed before that anything that is a unit of exchange (e.g. even ipods) can technically be money. So when Andrew says he can create money you implicitly agree.

    However, when you define outside and inside money, you assign special properties to deposit dollars, for reasons that remain unclear to me.

    Empirically Americans only hold a tiny fraction of their net worths in deposit dollars and also conduct a growing plurality of transactions via credit card, which is a non-deposit transaction.

    Because of these facts, we’ve discussed many times why deposits are best thought of as Assets just like securities or homes. They are only ONE component of the net worth of an average American family. They are functional in that they are money at zero maturity and therefore can easily be converted into “outside money” to facilitate exchange. However, beyond this there is NOTHING special about deposits.

    This simple acknowledgement clears up so many logical barriers faced by MR, pointed out by Andrew.

  67. Surely you can see that a bank can operate without government?? All it needs is to be trusted.

    Without government the money is only the banks created money that claims gold

    When fiat is introduced the system remains essentially the same system. The BOE has had reserve balances from 1878.

  68. Lots of things wrong there, Scott.

    1. All transactions do not “ultimately” settle in outside money. As I said before, a loan made at BAC, deposited at BAC and payment settled at BAC does not “ultimately” settle in the interbank market. This is a simple fact of banking that disproves just about everything Judd has stated thus far.

    2. When I discuss “money” I am referring to USD’s. So you’re just changing the point when you start referring to Judd Notes or Ipods as “money”. Obviously, anything can be money. The problem is getting others to accept it.

    3. Deposit dollars DO have special properties because anyone will accept them (unlike Judd Notes or ipods as payment). If you don’t think so, I’d love to have your deposits. And so would anyone else. Not so for Judd Notes.

    4. Banks and finance companies use credit card branded cards to allow transfers to be processed. Credit cards facilitate transfer of inside money between banks. So your point there is not correct in any sense. But more importantly, when you go to dinner, final payment is settled in whatever the restaurant accepts (which will not be Judd Notes or ipods). The restaurant gets paid in bank deposits in most cases, not reserves. In fact, it cannot be paid in reserves and could not use the reserves even if it could be paid in reserves. Further, if this transaction occurs at the same bank then the bank will not even alter its reserves.

    Not sure you guys actually understand MR….

  69. Again, a bank could operate without a govt. But that’s not the system we have. So you’re just creating alternative realities. I don’t describe alternative realities. I describe what we have.

  70. now I see, if the facts don’t align with my position (or party) then it must be a conspiracy …

    Again I have to say it, Geoff validates Lincolns quote and long standing truism:

    Better to remain silent and be thought a fool than to speak out and remove all doubt.
    Abraham Lincoln

  71. I am saying that banking is fundamentally the same no matter if it operates with government or without it

    That is my reality

    What is your reality? What is a bank according to you? I have no idea because you you are refusing to allow the existance of banking as described by central bankers who generally speaking are the source of knowledge for operational realities about banking as described by MMT

    Earlier you said this:

    1. All transactions do not “ultimately” settle in outside money. As I said before, a loan made at BAC, deposited at BAC and payment settled at BAC does not “ultimately” settle in the interbank market. This is a simple fact of banking that disproves just about everything Judd has stated thus far.

    I am at a loss to know why you think that disproves anything I have said.

    i have repeated talked about settling transactions across the banks books where by definition money is the means of exchange

    What aspect of that do you not understand???

    You must surely be aware that in the early days of banking the bank clerks would meet at the clearing house which in london was a room above a pub and work thru their various transactions without any use of an outside money until they had resolved it down to who was owed outside money and who had to pay outside money.

    And today a very similar system system is used in many countries for debit cards where for example in Australia transactions are netted the next day at 9am and then settled using reserve balances.

    I really am at a loss why you keep inventing reasons why i am wrong

    MR does not have to fundamentally change once you embrace the fact of life reality that deposits are only IOUS issued by fundamentally very dangerous organisations that are prone to failure.

  72. you can only create the concept of money when you write a check (promise to pay from your deposit at the bank, the check is indeed a claim on said deposit) and there is no requisite deposit held at the bank which the check is drawn on … so you will have created only a TEMPORARY instrument of exchange; once you have been caught, you will be prosecuted for check kiting.

  73. Cullen,

    I’ll respond to your bullets and have read through your MR manifesto a couple of times now, so I feel I have a decent understanding of your framework, but if there are specific points that I’m missing I would love to understand them better.

    1) I stipulated INTERbank transactions are settled in outside money. I agree that INTRAbank transactions can be settled by exchanging BAC deposits for BAC deposits.

    2) Ok. Thank you for clarifying and I agree. This discussion isn’t about what is “money” but instead really about what is “USD.” I’ll come back to this.

    3) Anyone will accept deposit dollars from a bank that is a member of the Federal Reserve system, and, as Andrew pointed out, reputation is a major factor. If I were Bill Gates, people would probably take an IOU from me and not worry too much about it. Importantly, people wont ALWAYS accept any deposit from any bank, even FDIC insured. That’s why people were pulling deposits from WaMu, Wachovia and IndyMac in 2008 and that’s why those banks failed. Their depositors were not accepting (and therefore selling/redeeming) their deposit dollars at those institutions (at 1-1 fixed convertibility to USD).

    4) Again, if my credit card bank is BAC and the Restaurant banks with WFC then it is an interbank transaction so the payment has to be cleared through “outside” money before the restaurant is ultimately credited with a deposit at WFC.


    I think your 2nd point helps to more clearly define this discussion. This is about what is a USD not “money” broadly. Thanks for clarifying.

    I think when we define the discussion in this way it makes it even more obvious that deposits are NOT USD, but instead a wholly different type of security.

    The point I made in response to number 3 provides all the evidence that you need to support this fact. If deposits are definitionally USD, then there could be no arbitrage opportunity for a depositor at IndyMac to cash out his deposits in receipt of USD. A bank run is a circumstance in which depositors recognize that the value of their deposits is worth less than the value of $1 and therefore as long as the bank maintains fixed convertibility, the bank will be broken.

    The deposits at IndyMac were not worth $1. Even with deposit insurance ~$200m of deposits were lost. This is because the value of a deposit is based on the value of the assets/loans that back them. This is also why deposits are directly linked to the issuing institution and are of different value at different institutions (of course never exceeding $1). This is also why definitionally a deposit dollar is NOT USD, and why MR provides an incomplete description of what IS USD.

  74. Andrew,

    I did not “invent” a reason why you were wrong. You started this conversation by boldly stating:

    “It cannot be correct to say the banks have been outsourced the right to create money.”

    Then, just after we had hashed out a few issues you said:

    Bank money is created!!!!!!!”

    So it seems we agree that banks do in fact issue money. And in our system, banks are the most important issuers of money. In fact, the primary form of money. So your initial comment is wrong by your own admission. I am only stating the record of commentary here. Not “inventing” anything. It seems to me you are backpedaling from an initially inaccurate comment. Which is fine. I don’t care. I am only trying to help people understand how this all works so if you agree then great.

  75. Yes, you said interbank. My fault. That was an unfair criticism.

    I am not even sure what you’re arguing because outside money is just a deposit at the Fed that helps facilitate interbank settlement. If inside money is not USD because it’s a “deposit” (your definition) then neither is outside money. So, according to you, nothing in our banking system is actually USD. That’s obviously wrong.

    And of course a USD can lose value. I have never said otherwise. Inside money could be worthless. So too can outside money. So I don’t see what the insight is there.

  76. Scott

    >1) I stipulated INTERbank transactions are settled in outside money. I agree that INTRAbank transactions can be settled by exchanging BAC deposits for BAC deposits.

    It is not really true to say that interbank transactions are settled in outside money. Banks will hold accounts with each other so if AAA has a payment to make to BBB then the account of AAA at BBB can be reduced by the deposit amount. It all depends upon the relationship the banks have with each other and the particular settlement system they are using for a particular type of transaction.

    Settling each transaction in outside money is expensive. So systems are designed to minimise the number of actual outside money payments particularly when payment amounts are relatively small.

  77. Incorrect,

    What I’m arguing is that outside money is the ONLY type of money that IS USD, because it is the only type of money that is explicitly issued by the government. It’s not about whether it’s a deposit or not. It’s about the fact that it’s a deposit at the Fed. The US government is the sole issuer of USD.

    My deposits at BAC are not USD, although they can be converted to USD at 1-1 (as long as BAC is solvent). They are not USD for the reasons mentioned in the previous post. If they were USD there would be no ability to arbitrage those deposits against USD. The currency in my wallet is USD because it’s issued directly by the Fed.

    The value of USD therefore is defined by the dynamics of the USD market, which is what you call outside money.

  78. Just wanted to respond to the last part of your statement because I just saw it.

    It’s not about whether USD can lose value, it’s whether one USD can lose value against another USD, which of course it can’t if they are the same.

    One dollar bill cannot lose value against another dollar bill, but an Indymac deposit can lose value against a JPM deposit and can also lose value against a USD.

  79. Cullen

    I am not back peddling.

    You are saying that the government gives a bank the right to create money.

    I am saying the government takes away the right from the rest of us.

    I am saying anybody can create a useable money.

    You are simply putting endless numbers of obstacles in the way of your understanding where for some reason when i create a bank it has to be known by every person on earth who automatically will have deposits with it.

    We only bank with our own trusted bank. They are the only bank that creates deposits for us.

  80. I was using your definition that deposit money is not USD. But you’re obviously changing the story now. Fine.

    If I asked 100 people on the street if they think their bank desposits are USD they’d all say yes. If I asked any merchant in the country if they want my USD in bank deposits for free they’d say yes. What is not money to all of these people is outside money because none of them can use bank reserves. You’re pulling the old MMT trick where you claim that only outside money is real money. It’s wrong.

    You’re directly contradicting yourself here as well. You say the value is defined by the fact that the govt issues it or backs it up. But that power is only enforced via the ability of the US govt to tax the output of the private sector. So no, the value of the USD is not defined by what the govt does as the “issuer”. It is defined by what the private sector does via its output. If the output of the private sector were to collapse then the value of outside money AND inside money would be reduced. See any hyperinflation.

  81. It’s a totally irrelevant point to claim that banks don’t issue USD because they can fail. A govt can fail also. No one cares if $1 Zimbabwean dollar is $1 Zimbabwean dollar when the money system has broken down. Your currency is just as worthless as your bank deposits.

    MMT creates this false govt centric version of the money multiplier that is just as wrong as the rest of neoclassical econ. Money is almost purely endogenous in our system. Govt is just a support mechanism. These discussions that try to place the govt at the center of everything get the entire idea of money and the purpose of the monetary system backwards.

  82. Money is a concept.

    If I write down an iou to the holder for 100 and use it to buy something from you then i have used my own privately created money to buy something.

    Bank money is like foreign currency with a promised 1:1 conversion rate.

  83. >>Okay. So we’re saying the same thing in different ways. Sorry for the unnecessary back and forth then.

    How can we be saying the same thing when

    1. you are clearly saying the government gives the bank the right to create USD??

    2. I am saying the private banks do not create USD and anybody can create their own private inside money if they are not prevented from doing so.

  84. First off, I’m not an MMTer, I don’t know anything about MMT.

    I do know the structure of the banking and monetary system though and that’s the only position I’m arguing from.

    You redefined the discussion about USD and not money and I totally agree because anything can be money but not anything can be USD.

    The only thing that can be USD are securities of zero maturity issued by the US government as a means of exchange. The US dollar is backed by the full faith and credit of the US government.

    MR holds that banks have been given the power to issue USD. My contention is that they have not been given the power to issue USD. They can issue deposits that are priced at USD based on their own full faith and credit. They have been also given the opportunity to buy deposit insurance, but they do not issue securities that are explicitly backed by the US government, which is why banks fail and why that is important to the discussion about what is USD.

  85. The full faith and credit of the US govt is only as good as the value of the output it can tax. You’ve created a govt centric view of the world. The USD is not valuable because our govt can tax. It is valuable because of the output we create.

    Govt supports this endeavor including its creation of the interbank market and support of inside money, but it doesn’t mean they give the USD value simply by issuing outside money.

  86. >>It’s a totally irrelevant point to claim that banks don’t issue USD because they can fail.

    In your *opinion* it is an irrelevant point. I just cannot work out what your point is. Bond yields are inverting in some countries. Is that irrelevant?

    Presumably you do not think that in the event of widespread bank failure that if the government announces that the deposits are national currency it will make absolutely no difference to peoples desire to hold deposits???

    Obviously such a statement amounts to a government guarantee of all deposits.

    Prior to this crisis the uk insured deposit amount was only 25,000 pounds and it was similar in the EU. There is a reason for that.

    The government is not automatically liable for the money creation activities of private banks

    Each person is expected to do their own due diligence and ultimately never put all of their eggs in one basket.

    A deposit holder is a financial speculator in a private enterprise.

  87. So, if govt guaranteed all money then money could never fail? That’s obviously false.

    The ability to tax doesn’t mean the govt rules the monetary roost.

  88. Cullen, you’re trying to have it both ways. Is this a discussion about money or USD? I have not created a government centric framework for money but have created a government centric framework for USD.

    USD is the domain of the government!!

    That doesn’t mean government can’t fail or that people can’t convert USD to other assets if it does. In fact I believe the government can fail (although I’ve seen you argue in other posts to the contrary).

    The point is that USD is a specific type of money because anything can be money (for the purposes of our discussions) all assets are priced against all other assets as long as there is convertibility there is a price of exchange!

  89. Scott,

    Banks dont convert inside money to outside money. They also dont arb outside money. That concept is meaningless in the actual banking system.

  90. >>So, if govt guaranteed all money then money could never fail? That’s obviously false.

    You are putting words into my mouth

    If the government guarantees bank deposits then when the bank fails the government has to do something about paying the depositors

    In the US the banks were supposed to be paying a significant amount into FDIC but they lobbied against that. Either way the government does not guarantee all deposits will be paid out.

    Evidently some deposits are more like USD than others.

    Central banks create two types of money. Reserve balances and banknotes. Nobody else can create the governments money, which is why they are referred to in the UK as commercial bank money and central bank money. Money is created we are told by the deputy governor of the BOE by the private bank writing a cheque upon itself.

    Why do you think deposits are called the banks liabilities??

  91. And central bank money is increasingly insignificant. The Swedish banking system has close to zero cash. And a well managed banking system needs no reserve requirement and little reserves on deposit….

  92. Cullen,

    I think you misunderstand what I mean by “convert.” Banks absolutely do covert inside money to outside money every time I withdraw USD from an ATM. I think you’ll agree.

    The reference to arbitrage is that in a failing bank the depositor realizes that his deposits are not worth $1 but he can still receive $1 from the bank in exchange for redeeming his deposits. It is the depositor who is arbitraging the bank’s promise to value his deposits at 1 to 1 even when it is not the case.

  93. Thats not arbitrage at all, Scott. You know that. Using that term is an abuse of a specific type of financial transaction. That’s like saying that selling a stock is an arbitrage if you believe it’s going down. Or that buying gold before a hyperinflation is arbitrage. That’s obviously not arbitrage. Dollars don’t get accepted at par just because the government supports the system in various ways. That is a component, but the dynamics at work here are much more complex here and the govt plays an important role, but not even the most important role.

    And cash is becoming irrelevant in todays economy.

  94. “Better to remain silent and be thought a fool than to speak out and remove all doubt.”

    Guilty as charged.

  95. The money supply is endogenous. I don’t know why everyone tries to imply that the government is the only entity that creates US dollars. It’s not that hard to understand.

  96. Cullen

    >>And central bank money is increasingly insignificant. The Swedish banking system has close to zero cash. And a well managed banking system needs no reserve requirement and little reserves on deposit….

    You are using statements that are true to create a conclusion that is totally wrong.

    And most of the time here you have been unable to follow the simple statements I have made to correctly understand what i am talking about.

    Demonstrably you have a habit of creating realities that you believe are real but which are a total fabrication by you.

    I give up. Only when your theories are tested and found to be unable to describe the real world will you be able to see you are wrong. Meanwhile you see unable to see what exists without transformation to fit your existing beliefs

  97. Interesting set of charts. They certainly contain some interesting new info.
    The fact remains that the FED has monetized a certain (increased) amount of debt since 2009.
    The monetisation of (a significant) amount of long term debt has led to a FED who has painted itself into a corner. When/If the FED would sell those bonds then (long term) interest rates will go up.

    The fact that the FED has monetized an amount of T-bonds is proof that interest rates would be higher without monetization.

  98. To give my salt to the discussion:

    1. On FRL: The banks are allowed by govt to create counterfeit USD so to say. In the past, people doing FRL were hung. The Fed’s primary role is to protect FRL banks (instead of doing the opposite – hang them) and pretend it is managing the economy (one example is that the Fed does not care about real GDP growth, but about nominal GDP growth).

    2. Monetization: focusing on monetization as a quantitative increase of money is wrong. It is both monetization (reserves created out of thin air, purchase govt paper – no matter if directly or via a middleman) and not monetization, because purchase is not from non-financial sector, but from banks receiving reserves, so as the money multiplier is a myth, there is no real increase in spending power in the economy. The effect is psychological (because of wrong economic understanding) and wealth / portfolio effect as CR describes it. An importnant question no-one is asking (and thus it could be seen as “monetization”) is, is QE lowering the UST yield than it would otherwise be and thus allowing the high UST issuance to be better absorbed by the market? In normal conditions I would think yes, but currently demant for USTs is high anyway and one could see that yields actually rose after QE started and dropped after it stopped (although yields potentially dropped in anticipation of QE before it started).

  99. Andrew,

    No need to get defensive. You have made no verifiable claims and have consistently contradicted yourself. You originally stated that money is not created by banks. Then you later stated that banks do create money. Now you’ve changed your comment to claim that banks don’t create USD. Then you started saying what I was saying (except in a totally different way). And then you started agreeing with Scott who is making the same mistake you are making by claiming that we live in a govt centric monetary system (where deposits aren’t USD, but reserve deposits are USD which makes absolutely zero sense if you actually understand what reserves are – which you clearly don’t). Inside money is not a “claim” on outside money and does not get converted into outside money (except in the case of removing cash, which, technically, is just a facilitating feature offered by the central bank to allow removal of inside money from the banking system. Not to mention, that’s an increasingly insignificant transaction that is literally becoming extinct). And now you don’t like the fact that cash and reserves are increasingly insignificant so you’ve just started claiming I don’t know what I am talking about. That’s fine, but it doesn’t justify or rationalize your many contradictory stances.


  100. AS I say, banks are outsourced the legal right to create USD. Judd says the same thing in a different way (everyone else is relinquished the right to create USD) which is precisely the same thing. The Fed’s interbank system is designed to support private competitive banking. It is not a psuedo nationalization of banking and it does not give outside money prominence over inside money. Outside money exists to support inside money.

  101. Everyone is trained to believe that the government is the source of all money either through the money multiplier or similar teachings about the importance of “high powered money”. It’s a monetarist myth that ruins the true understanding of the monetary system.

    So the idea that banks have all this power is scary, counterintuitive and unfair to some people.

    Keep up the fight Cullen. You’re slowly exposing all these myths.

  102. The USD is government centric!

    Article I Section 8 of the US Constitution: “The congress shall have the power to coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;”

    As we’ve established, there are LOTS of things that can be called money, but the USD is one subset of all those things. The USD and only the USD is the direct byproduct of congress’ powers defined in the Constitution. They’re liabilities of the Government via the Fed.

    Everything else is a liability of another entity (i.e. deposits are a liability of the issuing bank ALONE) and these liabilities are just denominated in USD.

    When you understand this, you realize that it doesn’t matter how many transactions are actually conducted in USD, only that the USD has its own marketable value which is then used to define the value of other assets/goods/services.

    If a foot is defined as the length of a king’s forearm, it doesn’t matter if there is only one forearm or if the king dies, only that it is fixed at that length. By accepting that unit of measurement we are now able to define how many feet of “stuff” there is in existence. IMPORTANTLY, this does not mean we can’t also define how much stuff there is in terms of: meters, Scott-defined-feet or Cullen-defined-feet. The King merely sets a unified standard that we all use to measure our stuff so that we are all on the same page.

    It’s not coincidental that the power to coin money is included in the same statement as the power to set weights and measures. The USD is a yardstick, and the “forearm” that it’s measured against is the Federal Government’s (even more specifically the value of the Assets on the Fed’s Balance sheet which back the Fed’s Liabilities).

    This is only a government centric view to the extent that the USD is the central unit of measurement. But that does not change the fact that the USD is the sole domain of the Federal Government (note that I did not say money in general).

  103. Also, perhaps you need a refresher as to what reserves are at the Fed as well, because one of the basic characteristics of those reserves is that they can be converted to currency at the owner’s (bank’s) discretion.

    So if banks wanted to lend based on their reserves, there is nothing stopping them. Obviously loan demand is currently weak though so there’s no need to.

  104. Also, I guess I should respond to the arbitrage comment even though it’s just semantics and largely irrelevant.

    In a strict sense arbitrage is a risk-less transaction involving the simultaneous purchase and sale of the same good in two different markets at two different prices.

    Obviously in practice there is no such thing as a pure arbitrage because there is always some risk in any transaction, even if its primarily counter-party risk. Unless you are buying and selling to yourself you can’t guarantee anything. Also, I would define arbitrage as extending not just to the same good but also to very similar goods.

    Anyways while there is no such thing as pure arbitrage, I believe that all transactions are a result of an actor attempting to perform arbitrage by trying to make an exchange at a value that he or she believes results in a net benefit to him or herself.

    So, yes, I actually would define selling a security to avoid a falling market as an attempt at arbitrage on the part of the seller because the seller believes that he or she is selling the security, purchased in one market (time) at one price into another market (time) for a different price in an attempt to profit (more specifically avoid loss). He or she implicitly believes that the market value and true value of the security are incongruent and therefore there is an arbitrage opportunity.

    In the case of the deposit example, the situation is a little clearer (IMO). At a failing bank the depositor sells the deposit (a dollar-like asset) to the bank for $0.8 (for argument’s sake) and receives $1. He can then sell the dollar into the market in exchange for goods/services and receive more value than he would have for the deposit. That’s arbitrage in a broad sense (but I’m not sure I explained that as well as I wanted, and really don’t want to go off on a tangent about what is arbitrage).

  105. No, banks are given the exclusive right to create purchasing power denominated in USD. This is not govt centric in any sense. If you want to claim bank deposits arent USD then you’re making a totally irrelevant point for all practical economic purposes.

    The govt has even designed the money system so that it borrows these very bank deposits!

  106. Perhaps you need a lesson in debating without being condascending.

    Banks dont lend on their reserves and I very clearly stated the same point you made regarding currency so no thanks on the “refresher”. You’re regurgitating all the neoclassical talking points that expose a misunderstanding of endogenous money.

    Im done debating with you on this matter.

  107. Never tried to do anything but have a spirited debate–definitely feel bad if you felt I was being condescending at any point. I have a lot of respect for you and your opinions even if I disagree with some.

    Hopefully no hard feelings.


  108. I wasn’t referring to you saying IOU, I was referring to your comment about a Bank Check, which is a claim on money on demand deposit at a Bank in a demand checking account.

    A check is a completely different instrument than an IOU …

    sorry you say so many things it is hard to keep up with your chaos of thought … which may be entertaining for some to spar with you, but I am now done …

  109. Cullen

    >>You originally stated that money is not created by banks. Then you later stated that banks do create money. Now you’ve changed your comment to claim that banks don’t create USD. Then you started saying what I was saying (except in a totally different way).

    You have invented that belief. I never said what you are claiming i said. Many times i have tried to tell you i never said these things that you attribute to me. I have not changed my position.

    However, apart from inside money being USD, as far as I can see we agree on all points. Banks are levered with respect to their capital rather than the small amount of USD currency they hold. They need hold no USD to create a loan providing when they are required to pay USD they are able to source it. USD however is the glue that ties the whole thing together. Without the external item of value which today is USD the depositors money would have no value.

  110. Cullen

    >>if you actually understand what reserves are – which you clearly don’t)

    Another invention by you.

  111. Cullen

    >>you don’t like the fact that cash and reserves are increasingly insignificant so you’ve just started claiming I don’t know what I am talking about. That’s fine, but it doesn’t justify or rationalize your many contradictory stances.

    I have spent years talking to an Australian going by the name of Wulfgar/Count du Monet who has a peculiar fixation with the importance of cash. Your comment is unjustified.

    Your habit is to answer your own questions rather than seeking to find out why I think you are wrong. Many times in this conversation you have said I am wrong because of the existance of facts that I am not in dispute with you about.

    Elsewhere you have said that if deposits are USD or not makes no economic difference. It seems though there must be a very important economic difference for you to decide you cannot agree with me.

    My observation would be that if deposits are USD then the US government has a responsibility for all deposits. Currently it appears rather like the pre crisis housing agencies that support for deposits is implicit and untested rather than cast in stone, since if FDIC failed there is no direct legal protection for any depositor and currently larger deposits have no protection above the FDIC limits.

    In this crisis there have been at least one odd insurance practice revealed. For example CDS where the risk holder cannot pay out if payment is required. FDIC could not pay out if all banks failed which then undermines Moslers idea of FDIC insured deposits being USD.

    Where did you get the idea that deposits are USD? If i knew more about that it would help me to see where you are coming from and better understand your position. But currently with deposits only being partially insured by an unstable entity called FDIC which for years has been underfunded, due to the actions of the banks themselves, I just cannot see where you are coming from.

  112. Here’s your very first comment here:

    “It cannot be correct to say the banks have been outsourced the right to create money.”

    Then, just a few comments later you said:

    “I an not saying bank money is not money!”

    Those are direct quotes from you. I don’t just make things up. Your terminology is incredibly imprecise and your way of explaining things is very unclear. You keep claiming I am lying or misconstruing your comments, but the record is clear. And I am not the only one here who has said you’re being imprecise or unclear….

    Either way, I understand your point. You’re stating what all neoclassical textbooks claim. Which is that bank money is just a levering, multiple or claim on outside money (all variations of the same govt centric view of the world). It’s fine for you to believe that, but there’s no verifiable proof behind that claim. And it contradicts your other statements which are consistent with money being endogenous.

  113. “My observation would be that if deposits are USD then the US government has a responsibility for all deposits.”

    I have no idea where this idea comes from. Money has existed long before govt’s ever existed. Why would a government have a “responsibility” to insure all deposits? If govt were competent in overseeing these entities and regulating their actions there would be no need for insurance. Govt is merely a facilitating entity in our monetary system. It is not the center of the monetary system, the driver of the monetary system or the insurer of money. Its power to tax gives it some powers that no one else has, but that doesn’t mean it should just become the insurer of everything and the center of everything. This is some bizarre govt centric view of the world that has been spread. Govt supports the money system via various mechanisms. For instance, the primary form of money in our system is inside money. Inside money is inherently unstable because it is created by private competitive entities. Sometimes, those firms fail. And when they fail the money system becomes fragile and unstable. If you study the history of the Fed and the interbank market you’ll notice that it was created to support the system of inside money. As the Fed has explained:

    “By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1907. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system.”

    This is a support system. It is not the center of the money system. You and some other people commenting here have this myth embedded in your brains that the interbank market is the center where all USD actually exist. That’s totally backwards. Inside money is the primary money. Banks have been outsourced the unique right to create money. Outside money simply supports this system built on inside money. Don’t take it from me. Just study the history of the Fed system and they explain it all for you plain as day….The Fed serves the banks and inside money. Not the other way around. You’ve been fooled by an econ degree.

  114. Anybody can drive a car.

    We are licenced to drive a car

    We are alive. The government does not give us the right to be alive because it removes that right for others.

    Anybody can operate a private bank

    Banking is licenced.

    I said:

    “It cannot be correct to say the banks have been outsourced the right to create money.”

    What meaning would be created by saying we have been given the right to live by government?

  115. The fact that inside money came before USD must surely say something to you???

    At what point in time did deposit money become USD?

    You realise already that when deposits were a claim for gold that deposits were not Gold.

    But for some reason you now believe that deposits are not a claim for USD

    And please spare me your belief system that i am talking about exogenous money. At least one time spare me. Please.

  116. You cannot create USD denominated purchasing power in the US payments system. So, your analogy is like saying that you live in the middle of nowhere and drive your car up and down your driveway, but don’t drive on any other roads because the govt does not allow it. If you want to call that “driving” then be my guest. I call it moving your car on your driveway. A totally different thing. But I know you’re loose with definitions. :-)

  117. You’re creating a reserve system where reserves are multiplied or something similar – you’re just claiming banks need to convert inside money to outside money which is a totally meaningless concept for a modern bank with the exception of providing customers with the convenience of taking out cash (though that’s going extinct). Comparing our system to the gold standard is totally wrong. Banks don’t go to the government and turn in their inside money for something “real”. They keep outside money on deposit only for two purposes – meeting reserve requirements and settling interbank payments.

    It’s easier to understand this if you take the interbank system out of the equation because you’re equating the interbank system to something like holding gold bars in vaults (that’s not an apples to apples comparison!). If the nation had just one big bank, there would be no need for the interbank system as it exists today. Then, all money would be loaned out by this one big bank. In this case, all money would be the same thing (no outside or inside distinction). If this bank was called the US Govt Bank then all money would be outside money. If this bank was called JP Morgan this money would be called inside money. If this bank named JP Morgan had support systems that utilized the US govt’s ability to tax (to keep JP Morgan from imploding on itself at times and wrecking the economy) then you can envision how a system of inside/outside money is created to support JP Morgan in their private endeavor to issue money. That’s what we have today except it’s obviously not one bank….

  118. I hate it when people use the Constitution to claim the US government can create its own money. It has the power to COIN money. Otherwise, our government is designed as a borrower using the government’s credit:

    “To borrow money on the credit of the United States;”

    The government must borrow on the credit of the USA. Where does it obtain this credit? It obtains credit from its ability to tax output. That’s the only reason the US government has any credit.

    Coining money is very different from saying the government can just print money or creates all of our money. I don’t think Cullen’s point here is even that controversial, but some people refuse to understand it. Misconstruing the constitution is not a justifiable defense.

  119. LVG,

    I don’t think it’s as simple as you’re portraying it. At the point when treasury sells it’s issuance you are correct in that it is …”“To borrow money on the credit of the United States;”…

    But if the buyer is the Fed, and whether directly or through an intermediary who holds it for as little as a few days makes no practical difference, and who is creating reserves electronically out of thin air to “buy” it, is NOT what the writers of the constitution were referring to. There is plenty of documentation of their thoughts and later actions, and defenses of those actions, to make it clear what they had in mind……current govt behavior isn’t it.

    Our wise and strong “leaders” don’t want to…..

    **…just create Lincoln “greenbacks” to fund our profligacy for fear of the inflation we’d create (without judging worthiness whether it be for war, entitlements, or gifts to wall street and other voters and donors)

    **…just borrow per the constitution at market rates for the interest we’d have to pay and budget busting death spiral it would cause

    ….so we’ve created this contorted process for muddling down the middle that has equally devastating consequences for the middle/lower classes and elderly…….its just not out in plain site for everyone to see and be easier for holding govt leaders accountable for. krb

  120. Saying the Fed is funding the US Govt is like saying you funded Apple’s IPO by buying shares on Friday. That’s totally false. The US govt borrows from US banks. It does not borrow directly from the Fed.

  121. We’ve been through this many times before Cullen and I’m not starting over with you now at the end of 140 comments. I stand by what I said in my earlier posts on this string and others. I think its dangerous to take comfort interpreting govt actions using semantics and narrow definitions without even contemplating the practical implications of those govt actions….which you refuse to do. I appreciate and respect your explanation of that refusal (see above comments), but buying up 90% of treasury issuance means something. I tried to describe as clear as I could above what possibilities I thought could be at work……and I acknowledged your view that monetization/govt funding may not be at play. If you think those possibilities are inaccurate, or that there are more, please let us know. krb

  122. Please tolerate me for another moment, a question came to mind…..

    Setting aside for a moment the many non-investment reasons global entities buy and sell US debt and foresee the day when global demand dries up…

    Therefore foresee the day when the resale market for primary dealers dries up and what they buy under agreement with treasury they would have to hold on their own inventory and therefore might now wish not to participate….

    Then here’s my question….

    If the Fed bought up, let’s say, 90% of treasury issuance because otherwise the PDs wouldn’t participate, would it look ANY different than what it does right now?

    Thanks, krb

  123. Cullen

    >>I know you’re loose with definitions. :-)

    You are the one who choses to minimise to zero importance the reality that all banks are liable to have all of their deposits converted to USD

    Do you want to talk about monetary realism??

  124. Cullen

    >>Banks don’t go to the government and turn in their inside money for something “real”.

    One moment you imagine I am talking about exogenous money and you know what i am talking about and the next you imagine I am totally clueless.

    Whatever are you going to imagine next?

  125. It is not realistic to imagine that banks are not liable to redeem all depositors money as USD upon demand – even if thru various ways they can avoid that unless you really cause a stink.

    That is the reality.

    Anything else is in the future.

    Why do you want to distort reality to support your thinking?

  126. >>If the nation had just one big bank, there would be no need for the interbank system as it exists today. Then, all money would be loaned out by this one big bank. In this case, all money would be the same thing (no outside or inside distinction).

    This fantasy has never existed at any time in the past.

    Banks have always had outside and inside money even when there was no government that was involved with their operation

  127. And it’s realistic to imagine everyone taking their deposits out in cash form? Please, show me ONE example where everyone has removed all of their deposits in cash form in a modern money system. You’re creating a totally unrealistic scenario. Even in a hyperinflation this would not occur because 1) it’s impossible because there is literally not enough cash to sustain it; 2) because the system cannot sustain it because it would wreck the banking system that the entire economy is built on.

  128. No, banks have absolutely not always had outside money. You clearly don’t even understand what outside money is since your comment makes no sense. Outside money comes from OUTSIDE the private sector so it makes ZERO sense to say there was outside money without government. That’s literally impossible. Like saying that banks don’t create money and then saying they do create money just 3 comments later (which is how you started your entire circular reasoning in this comment thread)….

    This is really getting rather pointless. I’m beginning to question whether you understand even the very basics of banking here. You’re just changing definitions and your points in order to backpedal out of previously erroneous statements….And apparently you don’t even understand the terminology here….

  129. Every single bank is faced with the possibility of a run even if the whole system is unlikely to face it.

    A realistic money system description is going to recognise this is the reality and not down play it to the point if it is mentioned a person is accused of living in the past.

    You need to deal with it instead of insulting me.

  130. I never said that banks do not create money. It just appears to suit you to throw it at me like i am a moron.

    Gold is outside money. Deal with it and stop the nonsense.

  131. >>And apparently you don’t even understand the terminology here….

    If you want to create a private language then you need to provide a dictionary before you start throwing around abuse

  132. The Earth is also confronted with the possibility of being smashed by a meteor every day. But I know the odds of that are close to 0% so I am not designing theories based on this. What you’re doing is even less realistic than that though. The modern banking system literally could not sustain a full cash run on it. It would literally never occur because the system is not designed to sustain it. Cash is a facilitating feature to inside money. By definition, it cannot rule the monetary roost because the system is not designed to sustain it. So your example is not only improbable. It is impossible and therefore totally irrelevant.

  133. Gold was created “outside” the private sector? That’s weird because I am pretty sure that gold miners (private companies) extract gold from the earth every single day without their governments being involed. Again, you’re misconstruing the basics here and trying to apply some gold standard based view of the world that is totally inapplicable.

    And no, I am not insulting you, but you keep saying I am distorting your points or being dishonest in debate when in fact, it’s plan as day that you’re contradicting yourself and misunderstanding very basic points. Sorry if you think I am being offensive, but I would expect someone who is so confident in their position to (at the very least) understand the basic definitions here.

  134. The Pragcap glossary is right here.

    I created it so people would understand the terminology. You’re very welcome to use it. But you’re not welcome to claim I am debating in a dishonest form when you’re very clearly not that familiar with my work.

    I’m sorry to sound tough on you, but it’s very frustrating to debate with someone who is so confident and at the same time so misinformed about my work.

  135. Cullen

    Why are you behaving like this?

    Why talk about a meteorite smashing the earth when i was talking about the expected likelyhood of a bank run which we can assume will be likely from time to time?

    Did you chose to distract the conversation for a purpose? Can you not face the reality of bank runs??

  136. Judd,

    You said the system is potentially threatened by a full cash run. But you clearly haven’t thought that through because it’s literally impossible. Even more impossible than a meteor hitting the planet. The system of inside banking money literally cannot sustain a full cash run on it. It is no designed to facilitate such a thing. Therefore, it would never be allowed to happen and CANNOT happen. So your example is a distraction and irrelevant.

    And yes, bank runs can happen, but are becoming increasingly less likely and cannot occur in our system on any sort of wide scale that would be permitted or possible. We just had the biggest financial crisis in 100 years and the bank runs were practically irrelevant on any wide scale. That should give you all the clues you need about your hypothetical full cash run. It ain’t happening. So why create these irrelevant hypotheticals?

  137. Humans have only recently been able to convert other metals to lead with the advent of nuclear reactors

    Arguing that humans can create gold when banking has been around for thousands of years is a bit lame.

    Outside money is a reference money for the bankers created out of thin air money.

  138. Up to this point in time i have assumed you were talking about a description of our current money system rather than the creation of a new theory which apparently you are saying is your work

    If that is the case then i am sorry. I was assuming that MR was just a variation on MMT in that it was claimed to be a description of modern money.

  139. Where did I say the entire system is threatened by a bank run?

    I said every single bank is or can be threatened by a bank run. There are no banks that cannot find that suddenly they are faced with account errors, mismanagement or fraud leading to loss of confidance

  140. MR has very little to do with MMT. In fact, it’s an almost entirely opposite view of the world starting from the private sector. Again, you’re obviously debating things you haven’t taken the time to understand….Maybe read my primer again? I am trying to help clarify my position, but you obviously have no desire to understand my positions so this is likely not going anywhere….

  141. We agree there. Not sure what your point is though if you’re not referring to wide scale runs. Of course banks are susceptible to runs. You’re just stating the obvious now.

  142. Well obviously i do not agree with your definition of outside money.

    Outside money is simply the reference money that is not created inside the banks accounting system

    We do not need government for there to be banks

    But according to you if here was no government and only one bank there would be no outside money.

    This way of viewing banks is totally wrong. people only hold deposits created by the banks because they know the bank is going to be good for the item of value they know is associated with their deposit.

    And evidently (so far anyway) it seems you struggle with the reality of a bank run in a fiat system.

    No bank can survive without the confidance of the people who are owed the item of value associated with the deposit.

  143. I read the critique of MMT from a MR perspective

    I got the impression you mainly kept the bits we are talking about and rejected the more philosophical parts. I had not realised you were so strongly against the technical aspects of MMT? Are you are actually saying you are?

    Do you recall you were defending MMT against me about 18 months ago?

  144. I am sorry. I was not debating anything to do with your work since i do not know anything about it at all. I was just wanting to talk about the nature of money, where i assumed you had modified MMT to make it more realistic.

    Outside money has obviously been nothing to do with government for thousands of years.

  145. I said

    “You are the one who choses to minimise to zero importance the reality that all banks are liable to have all of their deposits converted to USD

    Do you want to talk about monetary realism??”

    Cullen Roche
    11/24/2012 at 1:21 PM

    You live in the past. Your cash economy is dead.


    the fact is that cash accounting is the glue that holds our modern banking system together and each and every bank is liable to produce USD for their deposits upon demand when due.

    Your desire to reduce that to insignificance is beyond me to understand.

  146. That comment doesn’t actually prove or conclude anything. It’s just a bunch of loosely strewn together comments. I don’t even know what you’re saying here.

  147. You’re obviously way out of the loop here. We created MR because MMT was an incomplete undertstanding of the monetary system. I am very sorry, but I don’t have the time or the patience to catch you up on where I stand on all these matters. Maybe reread my understanding paper and then my MMT critique?

  148. Why are you criticizing something you “do not know anything about”? So, after 50 comments you basically admit you’re just wasting each other’s time? “SIGH”….Andrew, this conversation is 100% over. Sorry, but I don’t have the time for this. I am generally very open minded and helping to people who make an effort to understand my positions and express a desire to learn, but you’re not making any effort to understand my positions to begin with. So there’s no point to this.

    Have a nice weekend.

  149. Until there are no longer reserve balances I cannot see how you can say I will be wrong. A bank still had to find ways to enable depositors to exit that bank where the bank cannot create the national currency.

  150. I am sorry too.

    I genuinely thought you were talking about our current money system rather than some kind of theoretical possible system that would require me to study your work.

    As a suggestion please make that clearer in your critique of MMT from a MR perspective

  151. The only reason reserves even exist is because the banks are independent and settlement across banks occurs most smoothly and orderly across an interbank market. So, you have it exactly backwards. As long as there is private competitive banking there will need to be an interbank market and reserves for settling SOME payments. Even so, in many modern banking systems reserves are minimal and reserve requirements are gone.

  152. I would suggest reading my primer again as it’s changed some since we had the MMT debates and created MR.

    Here’s my MMT critique:

    Honestly, I am here to try to help and educate if I can. I believe our evolution from MMT to MR has shown great flexibility and openness to criticism where many MMTers proved inflexible. I don’t pretend to have all the answers, but I do think MR is one of the clearest and most accurate portrayals of the system that currently exists.