Understanding Moneyness

This section will be a new addition/clarification to my paper on Understanding the Modern Monetary System.  

Modern forms of money are largely endogenous (created within the private banking system), but are organized under the realm of government law.  The specific unit of account in any nation deems what money will be denominated as.  The government therefore decides the unit of account and can restrict/allow certain media of exchange.  The unit of account in the USA is the US Dollar.  Organizing money under the realm of law increases a particular form of money’s credibility in the process of transaction.  The government also helps oversee the viability of the payments system and can decide what can be used within that payment system as a means of settlement.  In the USA the primary means of settlement are bank deposits and bank reserves.  Therefore, these forms of money serve as the most widely accepted forms of payment within the money system.

There are different forms of money within any society and they have varying forms of importance and “moneyness”.  Moneyness can be thought of as a form of money’s utility in meeting the primary purpose of money which is as a medium of exchange or a means of final payment.

In the USA the money supply has been privatized and is dominated by private banks who issue money as debt (which creates bank deposits).  Banks are granted charters by the government in the USA to maintain the payments system in a market based system.  Banking is essentially a business that revolves around helping customers settle payments.  So it’s helpful to think of banks as being the institutions that run the payments system and distribute the money within which that system operates.  Outside money (or money issued OUTSIDE the private sector – notes, coins and reserves) plays an important role in helping facilitate the use of the payments system, but primarily plays a supporting role to inside money (money created INSIDE the private sector such as bank deposits) and not the lead role.

Outside money could theoretically serve as the most dominant form of money in the system (for instance, if the government did not choose to use bank money to spend, but instead chose to simply credit accounts by issuing money directly), but takes a back seat to inside money by virtue of design.  That is, outside money always facilitates the use of inside money by serving as a support feature for inside money.  Cash, for instance, allows an inside money account holder to draw down their account for convenience in exchange.  Bank reserves help stabilize the banking system to serve interbank payment settlement.  These are facilitating roles to inside money.  Therefore, we place inside money as having the highest level of moneyness in the monetary system.

Inside money and outside money, however, are not the only types of money that exist in the money system.  It is helpful to think of money as existing on a scale of moneyness where particular forms of money vary in degrees of utility (see figure 1).  As Hyman Minsky once stated, anyone can create money, the trouble is in getting others to accept it.  Getting others to accept money as a means of payment is the ultimate use of money.  And while many things can serve as money they do not all serve as a final means of payment.

Since currencies are fungible on a foreign exchange market most foreign currencies have a moderately high level of moneyness. For instance, a Euro is not good in most stores in the USA, but can be easily exchanged for US Dollars of various forms.  SDRs and gold, which are broadly viewed as universal mediums of exchange, can be viewed similarly though they vary in degrees of convenience for obvious reasons.  Gold for instance, is widely viewed as money and can be easily exchanged for money, but is not widely accepted as a means of final payment.

Most financial assets like stocks and bonds are “money like” instruments, but do not meet the demands of money users in terms of having high liquidity or acceptability as a means of final payment.  These financial assets are easily convertible into instruments with higher moneyness, but are not widely accepted as a final means of payment.  Therefore, their “moneyness” is relatively low.

Lastly, most commodities and goods are low on the scale of money since they are unlikely to be accepted by most economic agents as a means of final payment.

(Figure 1 – The Scale of Moneyness)


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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  • GLG34

    I like this presentation of money. It’s very clear for a very vague subject. Final means of payment is good. But can you expand it to include other things?

  • SS

    Wait, does this mean gold isn’t money? Oh the horrors!

  • http://www.orcamgroup.com Cullen Roche

    No, it means some people definitely consider gold to be money. But, for most of us, gold is not an acceptable means of final payment and therefore has a lower level of moneyness than something like bank deposits which just about everyone accepts.

  • JCE

    That the money supply is privatized and it most important component is inside money was something that was designed that way? Or did that just evolve without anyone intending it?

  • http://www.orcamgroup.com Cullen Roche

    That’s a great question. My reading of it is that there was never a definitive position on this. The Constitution is so vague on who can create money, but it definitely gives the govt the right to create money. But the entire creation of the Fed system is basically a feature to support inside money so the Federal Reserve Act is a direct validation of private bank money creation within the US payment system. So, the govt has basically given itself the power to create money, but has then designed a payments system controlled by private banks in which the banks create the money in it. The money supply has been outsourced or privatized in other words. So yeah, I guess we could say that the Fed Act validated banks as the primary money creators.

  • Blobby

    Would seem to me that a hybrid approach with inside money allocating funds “efficiently” as well as outside money acting counter cyclically would be best.

    I guess deficit spending does exactly that.

  • SS

    Deficit spending doesn’t add new money. It adds new financial assets as t-bonds. As Cullen notes, these don’t have the highest level of moneyness since they must be converted into something for final means of payment. If we start calling t-bonds a bank deposit equivalent then we’d also have to start calling stocks of all types a bank deposit equivalent. I don’t think that’s right.

  • SS

    Of course!

  • Johnny Evers

    Seems to me that a Tbond has an implicit promise that it can be redeemed for cash. And we are seeing with the QE programs that the Fed is actively buying up TBonds.
    You can’t say that about stocks …. yet.

  • Geoff

    Money is an unbelievably elusive concept. Ask 10 people what is money, and you’ll get 10 different answers. Congrats, Cullen, for writing such a clear explanation of a very confusing topic. One question most readers might have is the relative size of inside vs outside money. I believe I’ve seen it quoted that inside money is typically north of 95% of the total. Whatever the number, it might be helpful to include it in your writeup, just to hammer home the point.

    My second observation is just about grammar, which I only mention because you are going to include this in your paper. Your second sentence ending with the word “as” is bad form.

  • SBG

    Does the fact that private banks execute this function led to TBTF institutions?

  • Indignado

    Cullen I have a follow up question; just for arguments sake. If the inside money supply is privatized and the inside money is also created via private banks, what would happen if one or more of the TBTF banks were allowed to fail in a new financial crisis. What ramifications would this have on the moneyness chain? Wouldn´t the inside money, created by these banks cease to exist? In fact, since money is issued by debt. Would the outside money held by the public (physical currency) in fact gain in value as inside money was liquidated?

  • SBG

    I would think T-Bills would be $ good while longer dated T-Notes would be slightly less so.

  • Geoff

    Johnny, how many times have we had this debate? I think you and Cullen are going to have to agree to disagree at this point.

  • http://www.orcamgroup.com Cullen Roche

    Stocks, bonds (of any kind) and most other financial assets must be converted into something else for settling final payments. Some of these instruments are highly liquid, but they are not money in the purest sense. I don’t see how anyone can disagree with that.

  • http://www.orcamgroup.com Cullen Roche

    Thanks, Geoff. I am not much of a writer. I appreciate the grammar tip. I changed it in the paper which is currently being edited for what I hope will be one final update before I am totally satisfied with its presentation.

    And yes, you are right about the 95%+ figure. Inside money dwarfs outside money by many magnitudes.

  • http://www.orcamgroup.com Cullen Roche

    Well, it certainly promotes private banking which is a private purpose driven institution. This is the problem most people have. You have a money system theoretically serves public purpose, but is dominated by private purpose entities. So, too big to fail is an inevitable result of such a design.

  • HankB

    This is superb. You have to start promoting MR more widely. These concepts are too important and too widely misunderstood.

  • Indignado

    Cullen, if 95% of total money is in the form of inside money, isn´t it fair to say, that physical currency (outside money) is a very safe medium of exchange in the case of deflation or a large financial crisis? By definition, inside money is a promise to pay by a private banking institution.

    *** This question comes from the perspective of a small business owner in Spain where bank solvency is a very important issue. ***

  • http://www.orcamgroup.com Cullen Roche

    Thanks. I am not here to promote or “sell” my ideas. I’d rather “teach” them and see if people accept them.

  • http://jpkoning.blogspot.com JP Koning

    What’s your definition for “means of final payment”?

  • http://www.orcamgroup.com Cullen Roche

    Yes, cash falls in the category of outside money and has a very high level of moneyness. Cash comes from OUTSIDE the pvt sector and is issued by the US Tsy to the Fed for its member banks to use (when their customers need to drawn down inside money accounts). Cash ONLY exists to facilitate the use of an inside money account.

    The private banking system is inherently unstable because the entities who control it are driven by the profit motive which is inherently competitive and can create instability at times.

  • http://www.orcamgroup.com Cullen Roche

    Means of final payment is a clear distinction that money’s purest use is in making purchases of goods, services, financial assets, pay back debt, etc. When you buy a burrito at a restaurant you must provide the restaurant with the intermediary instrument that serves as a means of payment. In the case of most exchanges, that is bank deposits.

  • Indignado

    Thanks for the explanation Cullen. I have to say that I get a bit lost on this subject. In particular, I am confused by the fact that 95% of total money is inside money and 5% is outside money while cash only exists to facilitate the use of an inside money account.

    My question basically revolves on the limitations of currency to “honor” all of the inside money obligations. If the role of cash is to facilitate the use of an inside money account then there is no limitation on the amount of physical currency as demanded by inside money accounts, right? Yet this is not possible when 95% of money is inside money and 5% is outside money and currency is a portion of outside money.

    I apologize if you have already explained this issue; but I can´t get my hands around this concept. Thanks

  • http://www.orcamgroup.com Cullen Roche

    No problem. I am happy to help.

    I think the thing that might be bothering you is the concept that a demand deposit supposedly gives you the ability to “demand” your money back when you want it. But the reality of the system is that, in the aggregate, everyone CANNOT demand their money back. The money is created by the banking system and must, to a large degree, remain INSIDE the banking system. The idea that a bank deposit gives you the right to “claim” your money is a lie because that money is directly tied to a loan that can only be destroyed if the money is paid back within the system. In the aggregate, bank deposits are not a claim giving you the right to that money in cash form. They are a loan that created a deposit and they give the user the right to access this payments within the banking system. That’s about it.

    Try forgetting cash and anything revolving around a govt centric model. Economists have been poisoning people’s minds with such nonsense for as long as economics has existed.

  • Tom Brown

    When the government regulators put an institution in receivership (after a bank failure, for example), it doesn’t necessarily mean that there are no assets left in the institution. In theory what should happen (I think!… I’m no expert) is the receiver/custodian (what do you call that person? Anybody?) put in charge of a failed bank will do his best to make the depositors whole again using primarily the assets of the failed institution (bank). Where those fall short, if the bank is a member of FDIC, then this FDIC government insurance kicks in (up to some dollar limit per customer) to pick up the tab and complete the “whole-making” of depositors. Ultimately the bank may be recapitalized, new management brought in, etc. I believe the old bank shareholders are largely left holding the bag… and a few of the bank’s management may find themselves in prison. However the new unstated policy of the US government (for the past decade or so) seems to be this is only safe to do to with very small banks… this just doesn’t happen anymore to the too-big-too-fail banks. I personally think that’s a terrible policy, but there’s all kinds of opinions on this.

    So the upshot is that very very large depositors may find that they are not made whole again because their deposit exceeded the FDIC threshold. The smart thing for those people to do is spread their deposits out so as to stay under the limit in each bank their a customer of.

    Take what I’ve said with a grain of salt, because I have no first hand expertise in this!

  • Tom Brown

    Cullen, can’t you also state that part of the Fed’s job is to satisfy the public’s demand for physical cash? I understand that there are limitations, but that 5% figure really just represents that demand in relation to the demand for the more convenient electronic deposit, correct? So if there was (for whatever reason) and aggregate increase in the demand to hold physical cash by the public, say up to 6% from 5%, the the Fed would probably satisfy that demand, correct? Especially if the change were gradual and it just didn’t happen instantaneously.

  • Johnny Evers

    A bank deposit is a promise by the bank to pay you. A Tbond is a promise by the government to pay you. Don’t you think the government’s promise has more value?
    Also, why are we defining money strictly as a medium of exchange, when most money today is a store of value — loans, securities, etc. The Fed is trying desperately to get money into the real economy and keep wealthy individuals and institutions from creating money to hoard.

  • Tom Brown

    You must buy a lot of burritos!

  • http://www.orcamgroup.com Cullen Roche

    Yes, that’s right. Although, technically, cash comes from the US Treasury and is distributed to the Fed who ships it to member Fed banks on demand. But the key here is understanding that cash is a facilitating instrument. People obsess over cash, but cash is a meaningless form of money and is going extinct in many money systems. technology is slowly proving that inside money dominates the system and cash is a relic of an era of physical money that is fast dying.

  • http://www.orcamgroup.com Cullen Roche

    I think you have it precisely backwards there. Bank loans are promises to PAY THE BANK. Loans create deposits. There is this absurd myth in the world of economics that says bank deposits are a promise by the bank to pay YOU. No, the bank deposit only exists because someone promised to PAY THE BANK. A govt bond and a corporate bond and all financial assets are just instruments that give you access to deposits and other forms of money with higher moneyness.

  • http://Macronomy.blogspot.com Martin

    Gold is now considered at thesame level as cash and deposits on banks balance sheet, so you might have to revisit your level of moneyness.



  • http://www.orcamgroup.com Cullen Roche

    Or we could take a cash note, a credit card and a gold bar into 1,000 different local retailers and test out the final means of payment theory. :-) Gold is definitely money, but it’s not very high in terms of moneyness.

  • Frederick

    Excellent explanation of a very complex subject.

  • http://Macronomy.blogspot.com Martin

    Valid point but here is another one for you from an historical point of view during the Gulf War in 1991, British SAS used to carry sewed gold coins into their clothing in order for them to have some bargaining tools should they be captured or having to negociate their escape. The British MOD did purchase 60,000 gold coins for that purpose. I am not a gold bug per se, but in relation to your “moneyness” point of view, I think it is an interesting point.



  • http://jpkoning.blogspot.com JP Koning

    “When you buy a burrito at a restaurant you must provide the restaurant with the intermediary instrument that serves as a means of payment. In the case of most exchanges, that is bank deposits.”

    So the “means of final payment” is whatever instrument appears in most exchanges. But that’s just like saying its the most liquid medium of exchange, in which case MOFP a redundant term.

  • http://www.orcamgroup.com Cullen Roche

    MOE and MOFP are redundant. Does it matter? Maybe I should just drop medium of exchange?

  • Tom Brown

    I think (and hope) you’re correct about physical cash going extinct, however, there’s a few bumps we may experience along the route. For example, the undocumented workers in this country are typically “unbanked” correct? And they seem to live a 100% cash existence. I have a renter (who came w/ my rental house) who I suspect falls in this category. I always get money orders from 7-11 as rent payment. I suppose he takes cash to 7-11 and get’s the money orders for me.

    Plus the paranoids (no small segment of society, from what I can tell) are probably against losing cash due to privacy concerns with electronic money. Also, they may be worried the government could somehow implement a “negative interest rate” on electronic cash to try and spur economic activity. (Those damn Kenyesians!! Grab your AR-15 and head to the bunker!)

    Also, aside from the undocumented immigrants, isn’t there a shockingly large % of American citizens who are un-banked or under-banked? I know there are some innovative methods that have been devised to serve this part of the public, but will they be able to truly replace cash?

    Plus what will drug dealer and tax-evaders (operating in the “gray economy”) use? Perhaps the reality is those folks are an important component of the overall economy! Won’t there be some unintended consequences there: higher gold prices and suppression of some (formerly untaxed) economic activity. Ha ;)

    Also, don’t a lot of developing countries use US currency? What will be the unintended consequences there?

  • William Bedloe

    Man – there goes my idea to pay the milkman with chickens!

  • http://www.orcamgroup.com Cullen Roche

    Well, I am probably overreaching there. Maybe cash won’t go “extinct”, but it’s becoming a lot less important these days. The overwhelming majority of transactions now occur in electronic bank deposits. But people still obsess over cash for some reason. I think it’s mainly because there’s a sense of security in a money you can hold in your hands. Which is understandable.

  • Tom Brown

    Where does an “Ithaca Hour” fall on your spectrum? Probably depends on your proximity to Ithaca I suppose.

  • Tom Brown

    Yes… I don’t normally put myself in the “paranoid” camp, but what if some hacker or “insider” were to penetrate the Fed and mess with all of their electronic records (like erase them all, for example)? Think of the chaos! I hope they have extremely good back up procedures and computer security in place! Even if they were able to restore the records from… say 10 minutes ago exactly… that would STILL be a nightmare!

  • William Bedloe

    I don’t know about you, but the idea that the companies I invest in can go bankrupt, I can end up owing more on my house than it’s worth thanks to a fickle market or the notion that my electronic wealth can disappear with the stroke of a hack means that cold hard cash will always give me the warm fuzzies.

  • http://www.orcamgroup.com Cullen Roche

    An Ithaca Hour is like a foreign currency to most of us. We’d have to exchange it for something with higher local moneyness. But, in Ithaca, it has a very high level of moneyness. Arguably as high as a regular old bank deposit. The main point of this exercise is understanding that money is what people will accept as a final means of payment. For most of us, that means using the US payments system and the deposits within that system.

  • Tom Brown

    Try eggs. I find they are more “fungible.”

  • Anonymous

    Your logic is incorrect on that one.

  • http://www.orcamgroup.com Cullen Roche

    Your cash is GUARANTEED to lose value over time. You just don’t see the numbers in the right hand corner change over time. :-)

  • Tom Brown

    Wait! Milkman? What century are you from? (BTW, the fact is I did just accept some eggs as payment about two weeks ago… don’t tell the IRS!.. also I once paid my friend’s kids with rocks (no joke) to work on my yard! I offered cash, but they wanted the rocks! they were kind of cool rocks, … but who knew!).

  • http://www.orcamgroup.com Cullen Roche

    It is not a matter of logic. It is a matter of fact. A bank deposit comes into existence because someone has promised to pay the bank back at some point. Loans and deposits are directly tied to one another through the lending process. You cannot claim that one is a promise to pay the depositor without also pointing out that the loan is a promise to pay the creditor. Therefore, the concept of deposits being access to some other form of money is misleading. A bank deposit is access to the US payments system. It is not the right for all depositors to withdraw their deposits because the system literally cannot survive if such a thing were to occur. Banks might give you the right to withdraw funds, but they certainly won’t let you take all of the aggregate dollars out. Your money is, to a large degree, trapped because it’s tied to the loan side of the bank business….

  • Indignado

    Cullen, thanks again for the answer. I appreciate your time and effort in explaining this point. I think I understand your argument, but I have to admit that I have a very difficult time in forgetting about cash and the government centric model.

    You say something in your response to my question that I think goes to the essence of this point, “In the aggregate, bank deposits are not a claim giving you the right to that money in cash form. They are a loan that created a deposit and they give the user the right to access this payments within the banking system.”.

    I live and work in Spain. I have little faith in our banking system here and its ability to honor the bank deposits given the amount of rising bad and deliquent loans. Although we are a nation that is a currency user and not a currency issuer, I can´t really see what is the difference for a holder of a demand deposit in a inherently unstable private banking institution in either of the two currency systems. In both systems there is a supposed government guarantee to back depositors. But once again, this guarantee is a lie given the proportion of inside to outside money in both systems, right? Our only guarantee is the viability of the inside money system given the size of inside to outside money.

    In the end I guess we could say it is simply a question of faith. We must believe that the private banking system has the full backing and support of the the majority of depositors at all times to insure the viability of the inside money system. I would argue this is a big leap of faith given your earlier explanation of the private banking system.

    “The private banking system is inherently unstable because the entities who control it are driven by the profit motive which is inherently competitive and can create instability at times.”

    I hope this is not getting too philosophical.. :-)

  • Tom Brown

    Wait… I think Anonymous and Johnny might have a point there Cullen.

    Yes, I agree with you that bank loans are a promise to pay the bank (a bank asset), and I agree with you that deposits only exist because someone promised to pay the bank… I agree with all that, but the deposit you hold at the bank is a bank liability. They are promising to make good on that… so when you write a check, they are promising to scurry around and find the reserves to transfer that deposit to another bank (which then credits the person receiving your check). For example, Person y here:


    Ends up with a $100 deposit and $100 of equity. They are not promising to pay anybody. Yes it’s true that person x is promising pay Bank A, etc., but Bank B, in turn, is promising to make good on the $100 for Person y.

    I view assets as either items you own or promises other people made to pay you. Liabilities are promises you make to pay other people. Thus a bank makes money on the spread between the promises made to it vs the promises it’s made to others. I don’t think that’s an invalid way to view it.

  • http://www.orcamgroup.com Cullen Roche

    Yes, there’s nothing in there I disagree with. A banking system is a payments system run by banks. The banks exist to manage that system and help settle payments for people. But they do so mainly WITHIN that banking system. Which is why it’s flawed to assume that a bank deposit exists so you can “demand” your funds and remove them permanently from the system. In the aggregate, the banking system cannot allow everyone to do such a thing because the system revolves around you having your money INSIDE the system….

  • Tom Brown

    I’m not using the word “pay” above to mean payment in physical cash, BTW. I’m taking it to mean exactly the kind of “scurrying around for reserves” I mention above.

  • http://www.orcamgroup.com Cullen Roche

    Yes, but Johnny is saying something different. He’s saying a demand deposit is the right to take your money out of the system as cash. The bank might tell you that, but they sure as hell don’t want everyone to do that and they limit your ability to do it.

  • William Bedloe

    Well, if you’re getting into “fungibility” or “fungibleness” – I prefer mushrooms

  • Johnny Evers

    If the bank is lending from reserves, and not my deposit, why would it hold my deposit hostage.

    Bank A opens, takes my 10 deposit and makes a loan of 100, making 110 in deposit. If that loan walks, then the deposit walks, but my 10 should always be there.

  • Johnny Evers

    In that case, let me buy T-bonds with my deposits. It sounds like they are more easily convertible to money.

  • http://jpkoning.blogspot.com JP Koning

    Simplicity, no? Only necessary to have one term. MOE is the more widely used.

    Working off your example…. when you buy a burrito, you settle the exchange with a deposit, which from your perspective is the MOE/MOFP. The restaurant owner is buying your deposit and settling with a burrito. From his perspective, the burrito is his MOE/MOFP. Burritos and deposits are simultaneously the MOE/MOFPs in this transaction.

    The point can be made that the deposit will be passed on hot potato-like whereas the burrito won’t, and therefore the latter isn’t an MOE/MOFP. But this isn’t an important distinction. After all, the restaurant may have bought the burrito from a supplier who bought it from a supplier who bought it… etc… in which case the burrito is also a circulating hot potato. Keep in mind that many highly liquid payments media expire immediately and don’t circulate hot potato-like (checks, travelers checks, etc) yet we still consider them to be MOE.

    I’ve written a lot on moneyness, including this recent post.

  • Tom Brown

    Johnny, I’m not sure I see your point here… The bank holds vault cash as a convenience to its customers. If it has what it thinks is too much vault cash, it sells the excess back to the Fed (I think that’s how it works) for electronic reserves, which are much better for the bank (more convenient, and they get interest on them too). Is that what you’re talking about? Physical cash? There’s no guarantee that will be held at the bank for when you need it later.

  • http://www.orcamgroup.com Cullen Roche

    That’s a nice and clean way of looking at this. Thanks.

    Would you agree with me though that a burrito has a lower level of moneyness than a bank deposit? More generally, do you agree with my scale of moneyness? Thanks JP.

  • Tom Brown

    Indignado, is there something equivalent to the FDIC in Spain (or the Eurozone in general)? In other words, an ultimate guarantee that your deposit will be made whole again by something with more authority and power than any individual bank? If not, I could see how that would be a frightening situation. It’s hard to believe that you wouldn’t have something like that though.

  • Johnny Evers

    Not talking about physical cash. But wouldn’t you say that the bank cannot limit me from taking my deposit to another institution? Or using it to buy something?
    They can take that from reserves, if they somehow don’t have it.
    Do you believe that all the money at the bank is a loan? Some of the deposits are ‘equity,’ is that the right word.

  • Tom Brown

    Ha!… highly liquid circulating hot-potato burritos! If I were Homer Simpson I’d be salivating after reading that! Sounds like they’ve got something new down at the Quicky-Mart. Burritos for people too lazy to chew!

  • Anonymous

    I hate bringing up grammar despite having a phd in English and teaching now 25 years. But Cullen systematically puts his periods and commas outside the parentheses. That is correct in Europe and Canada, but in the U.S. they always go inside. See every American print publication, NYT, etc for examples. I wish Cullen would follow the American convention instead of the euro convention. It stands out as sort of sloppy to those who notice. That said, the influence of informal blogging will eventually prevail and we’ll all be putting them outside the quotes in twenty years.

  • http://www.orcamgroup.com Cullen Roche

    I actually appreciate these kinds of things. If I am going to pretend to right part-time I might as well do it write. Grammar’s never been my strength….

  • Tom Brown

    Yes, all the money at the bank originated from a loan to someone. If all entities were to pay off all their debts right now, all our dollars would vanish!

    Re: equity: the way I think of equity is that it’s an abstract definition that comes AFTER you figure out what all your real assets and real liabilities are. Once you do that you can calculate the equity:

    equity = assets – liabilities

    If that’s a positive number, you put it on the right hand side of the balance sheet, in the same column as the liabilities. And in a sense, it is a liability, since it represents the money owed to the company’s investors. But you can also say you put it there to make the balance sheet balance: i.e. the right hand column should sum to the same value as the left hand column (assets). I’m not an accountant (just an amateur here), but that’s they way I think of it. If the company were liquidated right now, then the shareholders would end up dividing the equity (assets in excess of liabilities). In this sense it’s not a “real thing” … you just pay off the liabilities with liquidated assets, and what’s left over is your equity.

    If, on the other hand, the equity is a negative number, it goes on the left, and there’s nothing to divide up. The shareholders (in a corporation) are free of the responsibility to make good on a failed company’s liabilities in excess of its assets.

  • Geoff

    I’ve been using pretty much all cash for the past couple of months, ever since I sold a one ounce gold coin that was left over from my gold bug days. The dealer gave me 16 one hundred dollar bills, which is more cash than I’ve ever had in my life. I haven’t been to the ATM in two months!

  • micro2macro

    Sea Kullin, take it from somebody who noses. But wot do wee do in Australia?

  • Tom Brown

    Regarding the bank limiting you taking your deposit… no they can’t do that. You can have your deposit transferred, but in aggregate that doesn’t change the reserves or the deposits. When thinking in aggregate it’s helpful to think of all banks as just one big bank.

    Nor can the bank limit you from buying something. Take a look at these two examples which cover those situations (starting from empty balance sheets for everybody in both cases):



    Buying something:


    I’ve also got examples there of transfers with reserve requirements and with reserve and capital requirements enforced on the banks (also starting from empty balance sheets): examples 2 and 3, resp.

    I think what Cullen is getting at, is that there are limitations to removing money from the system in the form of physical cash. The system practically can’t support EVERYONE doing that simultaneously. Thankfully that’s really not an issue. Occasionally an ATM runs dry, but you can always find another. If ALL ATMs were to run dry simultaneously, there’d be chaos! The Fed and the banks (and Treasury) work together to make sure that doesn’t happen with some reasonable confidence. It’s not an issue, because people aren’t that interested in holding that much cash!

  • phil

    I agree the idea of “moneyness” is very interesting, but I don’t understand why you describe govt/state money (in your diagram) as being less “moneyish” than bank credit(?).

    (BTW I’m not Philip Pilkington – we’re different people).

  • Tom Brown

    Geoff, that’s interesting. Where do you live exactly, and what times are you generally asleep?

  • Geoff

    Tom, you are funny! Um, I’ve almost run out at this point, so don’t trouble yourself :)

  • Joe in Accounting

    Yes Tom, this is a good description of what happens. Depositors’ accounts are still there, they’re just at another bank. Also, loans that were created don’t disappear either. Other banks purchase these assets and assume them. Could you imagine not having to pay your mortgage because your banked failed.

    Ultimately the losses are borne by the shareholders/investors and other uninsured creditors.

  • phil

    I think “final means of payment” is a legal concept. If you pay your bill with recogized “legal tender” then your debt has been settled, period.

  • phil


  • Tom Brown

    Joe, how about if the bank is re-capitalized? Does it just start over again from scratch, or do some deposits and loans stay on the books from the old bank as a starting point? Who decides that? I guess your typical depositor wouldn’t be too keen on his demand deposit being stuck in a bank that was being restructured.

    Now for non-banks this is a totally different story, right? All those poor folks with accounts at MF Global were pretty much hung out to dry as I understand it. The “receiver” or whatever you call it (I understand there were two appointed actually in that case) were primarily concerned with making MF Global’s creditors whole again, not the depositors? Is that right?

  • Tom Brown

    Ask the chimpanzees and the bonobos… we took over their system when we evolved to a “higher” life form. Ha! ;)

    You can probably trace it all back to a banana that Kanzi gave Kasakela in exchange for a quickie!

  • Joe in Accounting

    The way you have illustrated your example, yes your 10 dollars would be there for you to withdraw. Right after the loan is made the bank’s balance sheet looks like this:
    Reserves(held at Fed, VC or combo of both)- 10
    Loans Receivable – 100
    JE’s deposit – 10
    Deposit created from loan – 100
    Capital – 0 (Now a bank would never get chartered without capital and in reality the bank would be negative equity at this point bc when you book a loan, you book an allowance for credit loss, which is a contract asset and provision for credit loss, which is a contra equity, but these are minor details. Also we are assuming that since the loan proceeds found there way back as a deposit in the bank that created the loan, they did not need to go get additional reserves to clear any deposit outflow)

    After the loan defaults, the bank has to write down the asset value to 0 and charges it to capital, so balance sheet is
    Assets – 10 in reserves
    Liabilities – 110 in deposits
    Equity – -100, ruh oh, need a capital injection, STAT!

    But let’s say before the bank comes clean about this insolvency or regulators catch wind of it, you and the other depositor come to the counter to withdraw your cash. The bank has other options of liquidity to provide you your vault cash. They can borrow vault cash from other banks or the Fed, which would raise their reserves but also their liabilities. If the bank fails, your deposit is saved by the FDIC, etc. etc. My point is that’s why banks have to apply for charters, comply with FDIC orders to get insurance for their depositors, and why the C and L in the CAMELS rating are very important when determining the safety and soundness of a bank.

  • Joe in Accounting

    If a failing bank can get recapitalized by raising additional capital, that’s great. It can continue its business if the additional capital can repair their balance sheet. Regulators may require it, but its ultimately up to those investors that are willing to provide the capital. Do they think the bank can turn it around with their additional capital, or are they throwing their money down a hole.

    Yes, their is SIPC insurance for broker/dealers, but that does not cover all losses. It’s buyer beware when it comes to which broker you chose, and the reasoning is that your investing, so you should know there is a risk of loss.

  • Geoff

    Count me as on of those folks who was f-ed by MF Global. They stole more than 30% of my futures account. The remainder was transferred to some outfit called RJ O’brian.

  • http://www.orcamgroup.com Cullen Roche

    Did you read the post? I clearly describe how all forms of outside money exist to support or facilitate the use of inside money. I gather you don’t agree???

  • phil

    Of course you could also draw up a contract with your creditor to pay your debts in something that is not “legal tender”.

    In that case your debts would also be recognized (once contractual payment is made), as having been settled “in the eyes of the law”.

    But the important point is that people don’t pay their debts by issuing IOUs. By definition, issuing an IOU creates a debt for the issuer, rather than settling their debt.

    And that’s what bank money/bank credit is – a bank IOU.

    So banks pay their debts to each other with something other than their own IOUs.

    In our current monetary system that means of ‘final payment’ between banks is government, or central bank, IOUs.

  • http://www.orcamgroup.com Cullen Roche

    Oh please stop with this convoluted MMT nonsense. Describing the Fed system as a pseudo nationalization of the money system has to be the most absurd thing in the world. Bank money is not an IOU for state money. Reserve money exists to help banks facilitate their use of inside money. This “IOU” stuff is a totally distorted view of the world of money and adds zero value to understanding the actual system. The system is designed around banks and the Fed just supports it. To describe that system as a state money system is crazy.

  • Johnny Evers

    So all money is someone else’s debt? If Bill Gates has $4 billion in his deposit account, the rest of us owe him money? No wonder the wealthy oppose a debt jubilee, it would wipe them out!
    And in order for me to get ahead and make more money, I have to make somebody else poorer?
    Hey, money is just a medium of exchange. We could make everybody start from scratch and start tomorrow with different colored pieces of paper.

  • Tom Brown

    Geoff: Wow! That sucks!… Did you ever have the feeling that the receiver (or whatever they call him/her) did not have your best interests in mind when winding down the remains of MFG? Wasn’t it a quasi-famous person, like Luis Freeh (former FBI head) that was appointed for that role?

  • phil

    “Bank money is not an IOU for state money”

    Bank money is a “promise to pay”.

    For example, if I come into your shop and buy something for $100, and pay for it with my debit card, my debit card payment is an instruction to my bank to pay your bank $100.

    But my bank doesn’t pay your bank with its own liabilities, or “IOUs”. It pays your bank with something else – i.e. central bank money.

  • phil

    I agree that the Federal Reserve system supports the commercial banking system.

    But “outside money” is just “money”. Money is money. Money in our current system is basically credits and debits, assets and liabilities – things owned and things owed.

    We spend most of our working days trying to get “money”. Banks aren’t any different, really.

    For example, if I owe you 1 trillion dollars, and you owe me 1 trillion dollars + 1 dollar, then the way we settle our acounts is that you pay me $1 dollar.

    Does that $1 dollar “facilitate” our debts to each other? No.

  • Geoff

    Tom, “Receiver” is a good word, or Liquidator, or Trustee. The Trustee in this case is James W. Giddens. It’s hard to say how fair the process has been. It is still ongoing and we retail customers do expect further compensation. But this wasn’t really case of retail accounts being caught in the bankruptcy process, and being shafted by so-called senior creditors. Before the company even went down, it was co-mingling (aka stealing) customer money for itself. By the time the company finally did go under, our money was already gone!

  • http://jpkoning.blogspot.com JP Koning

    “Would you agree with me though that a burrito has a lower level of moneyness than a bank deposit? More generally, do you agree with my scale of moneyness? Thanks JP.”

    I think your ranking and scale make a lot of sense.

    One factor to keep in mind in ranking moneyness is that it is contextual. A burrito has little moneyness from the perspective of Cullen Roche but has more moneyness from the restaurant owner’s perspective. After all, the owner’s livelihood is built around marketing burritos from a fixed location, and using marketing, glitzy signs, and pamphlets to increase his burritos’ moneyness. Cullen Roche will have a much harder time reselling burritos since he’s in a different line of business.

  • http://www.orcamgroup.com Cullen Roche

    And credits the account with inside money! Why do you not complete the flow of funds in your presentations? I know why. So you don’t have to tell the full story!

    Take your nationalization argument elsewhere. I am tired of it. MMT is nonsense. You’re spreading a myth just like the neoclassicals do. It’s not okay.

  • http://www.orcamgroup.com Cullen Roche

    No, inside money and outside money are not the same thing. The only way that would happen is if you get your nationalized banking system. That is not happening and it’s not what’s happening now so please stop regurgitating that tired argument.

    You’re literally making the same mistake the neoclassicals do by building this state centric model. Stop spreading it here. Thanks.

  • http://www.orcamgroup.com Cullen Roche

    The main reason why MMT is categorically wrong is because the Fed system exists. It’s amazing to me how you build your govt centric model around the reserve system when its mere existence invalidates your entire theory. Just think, with one national bank (with true “state money as MMT envisions) there would be no need for reserves! There, MMT debunked in one sentence.

  • Tom Brown

    Johnny: “So all money is someone else’s debt.” Yes… I went out on limb there a bit making that bold (foolish?) statement, but I’m going to stick with it… I think that’s true. Of course I said “dollars” not money, because you could have a pile of gold somewhere, which ranks on the “moneyness” scale above 0… and which isn’t anybody else’s debt (except mother nature’s… and she will get hers one day, let me tell you!).

    You can construct a system which functions like this. Steve Keen has done this in his mathematical/simulation models. I have never poured over ALL the details in his models, but his most basic ones start off like this:

    A company (firm) takes a loan from the bank for $100.
    Terms of the loan: principal never has to be repaid, but interest of 5% has to be paid each year (compounded continuously). Company hires workers, who do work for … uh, I forgot, but one entity they do work for is the bank. Thus the bank has money (interest) flowing in all the time, but also money flowing out all the time. In Keen’s simplest models those two flows are equal… but they don’t have to be. Think about it: if profits pile up in the bank, then those are distributed to shareholders in the form of dividends, and they spend it on products the company makes, who pays its workers with its income profits, etc.

    OK, like I say, I didn’t go through his model or the results in enough detail to program the same thing for myself in Matlab… but he’s got a 1000 different iterations on this same theme. Some of which are “stable” some which are cyclical, some which are unstable. The simplest models he has have ONLY this bank created money (from an initial single loan) driving the system. Later more sophisticated models he made fold in government activity (and probably outside money… I’m not sure). He probably has other models that have subsequent loans (beyond the initial one, that kick starts the whole process).

    The point is, I don’t have to have all the details to think that sounds like a plausible scenario. That you could have a system run entirely off bank created money.

    In Keen’s super simple models, it’s easy to determine where every dollar came from: that one loan event. The principal of which is never repaid.

    Of course in reality (and in his more sophisticated models with additional loans) it is much more complicated than that. But it’s not so surprising to me that all dollar money is ultimately just debt based.

    Perhaps I’ve got something wrong here… in which case, please someone let me know! But that’s the way I see it.

    Also keep in mind that in many cases the overall level of debt (especially private debt) continues to climb. Look at this chart after WWII up until just recently:


    Some of the US’s best economic decades coincided with a rising private debt/GDP ratio. What’s my point? Well, rising debt levels implies more money available in the system. If you somehow knew ahead of time that the level was going to continue to rise like that, you might not sweat your own indebtedness that much… because you’d know there’d be some new money created and circulated that you could probably catch a piece of to keep your own debt to personal income level sustainable. I’m pretty much getting into territory I shouldn’t here… not w/o really looking at some good models and data (which I haven’t — but which I’d really like to do at some point!).

    So make your own conclusions. But yes, in a sense, Gates’ dollars all came from other entities (including the government’s) loans. Of course, some of that money he’s deposited back into banks or bonds or stocks, and it’s thus being put to use by other entities.

    Here’s a way to look at it potentially (just thinking out loud here): A bank makes money on the spread between the rates it gets for its assets vs its liabilities: i.e. it grows it’s balance sheet with things others owe it vs things it owes others. Generally the assets provide a positive rate of return and the liabilities a negative rate, although tt could actually make money off the things it owes others (e.g. fees on a bank deposit. But almost always it grows its balance sheet with offsetting *principal* amounts on either side of its balance sheet: assets vs liabilities.

    Perhaps it’s possible to think of ALL of us in the same situation: If we can find an unencumbered asset (i.e. a $100 bill on the ground), great! We try to avoid “unencumbered” liabilities (i.e. we don’t generally pass out IOUs for free). But perhaps the vast majority of what we have is a balance sheet asset/liability pair arrangement: we agree to sign away our time for wages, etc. Now is it possible for ALL of us to make a living on the spread? I don’t know! I suspect “yes.”

  • LVG


    Why don’t you explain a few things. If reserves are so important then why aren’t they involved in transactions where customers have the same bank? And also, if the reserve system is the top of the hierarchy then why does it only exist in a system with competitive banking?

    If you can understand those two questions and answer them correctly you can clearly see why MMT is wrong to make reserves the top of their money hierarchy.

  • LVG

    Exactly. A one bank system is MMT’s actual state money world because there would be no reserves. The fact that reserves even exist means they’re being used to achieve some other end. And that end is the support of a private money based system designed around banks.

  • phil

    First of all, MMT is, at it root, basicaly a condensed form of PK economics with certain contentious (chartalist) concepts added, so there’s no reason to get all paranoid about it.

    “Just think, with one national bank (with true “state money as MMT envisions) there would be no need for reserves!”

    I don’t understand that argument. As I said, “reserves” are “money”, so it’s difficult to imagine any monetary system which wouldn’t involve “money”.

  • phil

    “If reserves are so important then why aren’t they involved in transactions where customers have the same bank?”

    Reserves are not “important”, they are just money.

  • phil

    “if the reserve system is the top of the hierarchy then why does it only exist in a system with competitive banking?”

    Can you promise to pay your friends $50?

    Can you make a profit from making such promises?

  • http://www.orcamgroup.com Cullen Roche

    Did you even read the post? Reserves are a very specific form of money. Just like gold is a very specific form of money. You’ve referred to gold as “outside money” so don’t make me pull up past comments to prove how you’re now trying to backpedal.

    Reserves and inside money are not the same thing. You’re just trying to move the goal posts now. They’re very specific things with different purposes. Reserves facilitate the use of inside money. Inside money is the dominant form of money in all economic exchanges at the transactional level. The Govt doesn’t count GDP in reserve flows. It counts it in inside money flows. This shouldn’t be controversial at all.

  • http://www.orcamgroup.com Cullen Roche

    reserves are a very specific form of money. Again, did you read the post or are you just trying to antagonize?

  • http://www.orcamgroup.com Cullen Roche

    No, but a bank can because the govt has made them the kings of the money system!!!!! Don’t you get it? All your MMT whining about “banksters” and “rentiers” is because you all know banks rule the system, but you won’t actually come out and explain how they make the govt their pawn in the game of money. You know it in the back of your mind, but you won’t admit it because then you’d have to admit that MMT is wrong on its face. You should stop playing games with people and tell people that a truly state money system is feasible, but not until you crush the bankers. That’s MMT’s end game. Now get to work and stop spreading the myth that we already live in an MMT world when we very obviously do not.

  • phil

    “And credits the account with inside money! Why do you not complete the flow of funds in your presentations?”

    What do you mean?

    If I have an account at bank A, and you have an account at bank B, and I come into your shop and spend $100 on my debit card, what happens?

    Answer: my bank pays your bank $100 cash (reserves)

    (all else being equal of course).

  • http://www.orcamgroup.com Cullen Roche

    And the Bank B payment settles in my bank account in inside money. I don’t get reserves. I don’t want reserves and I can’t use reserves. You don’t pay me in reserves. You pay me in inside money, not reserves. Nobody wants reserves. Shit, banks don’t even want reserves! The reserve transactions are meaningless for what the beginning and end results are. Why are you intentionally obscuring the full facts here?

  • phil

    In the old days, for a while, gold was considered to be the ultimate form of “outside money” (within relatively privileged circles of course).

    At one point in time, bank deposits were “promises to pay” gold, or silver, or government securities (or something similar, perhaps).

    Now they’re largely only “promises to pay” government securities or pieces of metal with no intrinsic physical value.

  • phil

    “All your MMT whining about “banksters” and “rentiers” is because you all know banks rule the system”

    I think there’s a difference between understanding the logical struture of a system and understanding how such a system can be corrupted by certain interests.

    As far as I can tell, MMT ‘theory’ is about describing the logical structure of the system whilst MMT ‘activism’ is geared towards expunging corruption from that system, and attempting to find a way to make it work for the benefit of the majority.

  • http://www.orcamgroup.com Cullen Roche

    Sorry, but that’s nonsense. No one actually wants or can use reserves. That whole argument is absurd. You’re obscuring the flow of funds here just like you do with tax and spending. The only reason banks use reserves is because the Fed system creates a smooth interbank settlement process. If we both bank at the same bank reserves aren’t even involved.

  • http://www.orcamgroup.com Cullen Roche

    Reserves as the center of the money system is a “logical structure”?? You must be kidding me. You’re just regurgitating the same old tired nonsense that the neoclassicals tell. MMT is an altered version of some govt centric myth built around the power of reserves. This is precisely the same sort of faulty institutional modeling that the neoclassicals use by neglecting the role of banking as the center of the entire system. I personally think it’s preposterous to build a model of the system around reserves when reserves are a mere facilitating feature of inside money.

  • LVG

    The irony is so thick. MMT claims to be an endogenous money school when their whole theory is built around exogenous money.

  • Tom Brown

    I found this in a wikipedia article on Louis Freeh:

    “Also in November, 2011, Freeh was named trustee for the MF Global bankruptcy case…”


    So is that the “2nd Trustee” I was talking about? Why do they need two?

    Here’s a Chris Whalen interview from some time back where he talks about fraud and MF Global (I’ve copied the URL at mid-stream where he starts talking about MF Global):


    This is super interesting! He talks about the difference between a trustee and a receiver and how fraud comes into play, and the authority of the courts.

  • Tom Brown

    Geoff, he also talks about “safe harbor” laws in the bankruptcy law rewrite of 2005. Lot of stuff there. Were you aware of all that?

  • phil

    “The only reason banks use reserves is because the Fed system creates a smooth interbank settlement process”

    But what does that actually mean?

    It’s like saying that the only reason I just paid someone in a shop with curency is because “the currency system creates a smooth interpersonal settlement process”.

    Well, yes, obviously it does.

    But I bought my groceries with money. I paid the grocer with money.

    That’s what reserve balances at the Fed are: Money.

    Cash. Means of payment. Clearing balances, etc.

  • phil

    “MMT claims to be an endogenous money school when their whole theory is built around exogenous money.”

    Actually, MMT’s supposed “claim to fame” is that it combines exogenous and endogenous monetary theories.

  • http://www.orcamgroup.com Cullen Roche

    Have you studied American history? I presume not since you’re from the UK. The Fed system was created (partly by bankers) to create a hybrid system that kept a market based money system in control of money creation with the support features of the govt. That’s all. It did not wrangle control from the bankers or steal the power from them. It simply added oversights and efficiencies to a private banking system. You seem totally unaware of the actual purpose of the reserve system or why it even exists. You act as though the Reserve System has wrangled control from the bankers and put the govt in control. Nothing could be further from the truth. How you glaze over this is truly astounding. You appear so blinded by the attractiveness of MMT’s obvious political agenda, that you cannot even understand the actual operational realities.

  • http://www.orcamgroup.com Cullen Roche

    No, MMT’s designed around exogenous money as you guys always state that reserves sit atop your hierarchy of money. Do not come to this website and tell your blatant lies to the readers as you try to ride the middle of the political lines when you very clearly have an agenda to spread. You are not small govt. You are not pro bank. You are not pro capitalism. MMT is a big govt, anti-capitalist, anti-banking, state centered theory of money. That’s fine, but let’s stop with the obfuscation. I am tired of it. You can spread these myths elsewhere, but it will not happen here just like I would never let an Austrian come here and tell the readers that the USA has “run out of money”.

  • http://www.orcamgroup.com Cullen Roche

    These four quotes are all anyone needs to know about where MMT really sits on every subject.

    “a currency-issuer government under flexible exchange rates sits at the top of the hierarchy” – Fullwiler stating that reserves and govt money sit atop the hierarchy and are central to the money system.

    “After all, that’s what it is all about, right? From inception, the purpose of the monetary system is to move resources to the public sphere.” – Wray stating that the entire purpose of the money system is for public purpose (ie, govt spending).

    “MMT begins with the government” – Mosler telling you who matters most in the money system according to MMT.

    “Under the metallist vision, the state takes a back seat to the market. The chartalist theory, however, places the state on center stage”. Kelton clearly stating that the state is the center of MMT.

    This is all very clear. MMT is a state centered theory. It is not designed around banking and does not balance banking with state money. It starts and ends with the state. There’s no need for you to obscure these facts when they are plain to see for anyone who cares to look.

  • phil

    “You act as though the Reserve System has wrangled control from the bankers and put the govt in control”

    Ok, but the basic fact is that these reserve balances are money. They are not something else.

    I understand your point that cash/reserve balances are not the be-all-and-end-all. I’m not trying to say that reserve balances are somehow “super important”, like they are the thing which controls the whole system – soviet style- from the centre. That is not my point.

    What I find odd about your argument is that you appear to want to dismiss money as being just ‘some sort of facilitating mechanism’.

    As I said, obviously money “facilitates”. But it is still money nonetheless. It’s what we spend our working days trying to “get”. It’s what we buy our groceries with, what we buy our cars, computers and houses with.

    Reserves are money, that’s all. As JKH noted, they are “Federal Reserve notes in electronic form”.

  • http://www.orcamgroup.com Cullen Roche

    Phil, did you even read the post? I very clearly stated that reserves are money and that reserves have a very high level of moneyness. But they are not higher in some hierarchy than inside money is. They cannot be as their entire existence is designed to support inside money. Again, I described all of this in the post so I don’t know why you’re somehow disagreeing. Although, you now seem to be wavering on the staunch MMT position that reserves are the most important form of money….

  • Tom Brown

    Cullen, some slow comment day I’m going to post as “phil” and make some statement like “M-M-T is a perfect blend of endogenous and exogenous theories” … and then sit back and watch the sparks fly! :)

  • phil

    “You are not small govt.”

    I asked MMT people about this and got different responses. Mosler said he wanted ‘a smaller government which sends out bigger checks’. Wray has a Minskian position, whilst Mitchell seems to be very much in favour of direct macro-management by the govt.

    “You are not pro bank.”

    I think the consensus within MMT is that banking and finance needs to be substantially reformed.

    There are different ideas within MMT as to how to go about this. As I have said before, the ideas range from Mosler’s particular proposals, to the UMKC/Levy Institute preference for Minskian-style reform, to Mitchell’s ideas for full or part nationalization.

    (if you want I can provide you with the relevant links).

    I’m not sure what your preferred policies would be. You have mentioned on occasion that you would like more regulation, but you haven’t been very specific as yet (it’s easy to criticize from the sidelines).

    “You are not pro capitalism.”

    Depends what you mean by capitalism, I suppose. The MMT economists are basically Keynesians. Some right-wingers would argue that Keynesian economics is “not capitalism”. I don’t know if that’s your opinion or not.


  • phil

    I never said it was “perfect”.

    The problem is you guys want all or nothing, it seems.

  • http://www.orcamgroup.com Cullen Roche

    I don’t really know how you’ve been duped by them. Actually, wait, I do know because I learned MMT from Warren exlusively and wasn’t exposed to a lot of the Marxist BS until later when I started reading Mitchell and Wray. The only MMTer who is remotely capitalist is Warren and even he says that the financial industry has never done anything positive. Wray refers to capitalists as “undertakers”. Mitchell, Hickey, Firestone and others want nationalized banking. All MMTers favor a full 10-20MM employee job guarantee. These are not capitalist positions or remotely small govt positions. They border on Marxist positions. I think it’s time to stop pussy footing around what MMT really is. MMT is a big govt state centered view of the world that would love to crush bankers, strip capitalists of their powers, and place the govt in a firm redistributive role. I am not here to be judge and jury of those ideas, but I am a bit tired of seeing you and the other MMTers describe these ideas as though they’re consistent with anything but a big govt view of the world.

  • http://www.orcamgroup.com Cullen Roche

    All or nothing? You mean like Bill Mitchell, Tom Hickey and Joe Firestone all wanting to nationalize the banks? All MR does is describe the public/private hybrid system that we have. It’s the MMTers who want to nationalize the banking system in a full govt takeover of money. I don’t know how you manage to come up with such an unbalanced view of the world. Your own people want nationalization and yet WE are somehow the ones who are unbalanced????

  • Tom Brown

    phil, … just a joke on my part. Don’t let me interrupt. I’ll just grab some pop corn and watch,… by all means continue.

  • phil

    “The only MMTer who is remotely capitalist is Warren”

    He’s been there and done that, and knows that real capitalism is not about financial casino games.

    “Wray refers to capitalists as “undertakers”

    As does Adam Smith, though with less irony perhaps (?).

    “Mitchell, Hickey, Firestone and others want nationalized banking.”

    More or less true.

    “All MMTers favor a full 10-20MM employee job guarantee”

    MMTers favor a job guarantee. But they don’t favor 10-20MM people being in a job guarantee program in perpetuity. The basic JG idea is that it will shrink itself.

    “These are not capitalist positions or remotely small govt positions”

    Again, it depends on what you mean by “capitalism”. Some extremists would say that the existence of a big-fiat money-spending government is in itself incompatible with capitalism.

    “They border on Marxist positions”

    That’s the accusation that right-wingers often throw at Keynesianism: “It’s just Marxism lite”

    “MMT is a big govt state centered view of the world that would love to crush bankers”

    I think the general consensus is that banks need to serve a real purpose – i.e. helping to develop the real capital of the economy – rather than playing silly leverage games and getting bailed out by government when it goes wrong.

    “strip capitalists of their powers”

    They are in favor of a more equitable distribution of wealth between profits and wages.

    “and place the govt in a firm redistributive role”

    The govt is already in a “redistributive” role.

    “…as though they’re consistent with anything but a big govt view of the world”

    Depends what you mean by “big govt”. MMT is ‘progressive’. Is that what you mean?

  • phil

    That’s not what I meant, Cullen.

    I guess what I meant is that you always criticize, but never really go out on a limb and state your own position when it comes to what we should do – i.e. policy ‘prescriptions’.

    You say that you don’t have, or don’t want to have an opinion, but that’s an easy get out.

    Basically it seems like you want to have your cake and eat it.

    You may disagree with the policy ideas put forward by MMT economists. but at the very least you should respect the fact that they actually put their policy ideas out there.

  • phil

    So “all or nothing” basically means that you appear to want to stay within a perfect world of pure critique and so-called pure “description” without ever having to commit yourself.

    So it seems a bit like you want to exist within the “all-and-nothing” world of the perfectly detached critic.

  • http://www.orcamgroup.com Cullen Roche

    Here’s what Warren really thinks of finance:

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

    Sorry, but that’s a big load of nonsense. Banks are an integral part of the money system and play a hugely important role in allocating money and managing the payments system. To say the financial sector produces no real value is just a political slogan that sounds good to people who don’t understand the money system.

    Who cares what Adam Smith said? Wray refers to capitalists as undertakers in a purely negative form. He hates every last thing about Wall Street and financial capitalism. Some of his criticisms are probably legitimate, but he goes overboard in exactly the same way the Austrians go overboard when they argue about how terrible govt is.

    And let’s not kid ourselves about the size of the JG. It will grow over time. Why in the hell would a 30 year old guy work in McDonalds all day when he can become a “musician” (one of the many joke jobs MMT lists) at a living wage with full govt benefits? This program won’t shrink. It will literally double the size of the govt workforce and become the largest bureaucracy in the country. Portraying it as a small govt program is absurdly unrealistic.

    Some Keynesians are Marxists. Others, like Peter and Bill just come out and admit that they’re Marxists. The rest of you are hiding under the veil of fear at how the public will respond if they ever realized what you all really thought.

    No, the purpose of a private bank is to make a profit for its shareholders. You don’t seem to understand the private sector too well. Business exist to generate a profit by supplying a product that their customers want. That’s all banks do. They give people credit cards, ATM access, bank accounts, etc. This isn’t a charity service. It isn’t purely for public purpose. It is a system designed around the profit motive. Let’s stop pretending that modern banking is something that it isn’t. Modern banking is only a charity when we go and nationalize the system as MMT would love to see.

    Big govt? How about doubling the size of the current govt workforce as MMT wants to do with the JG. Is that “big” enough for you? At some point, I have to start wondering how you take this stuff seriously. I mean, MMT explicitly calls for a massive jump in the number of current govt employees and says that they’re consistent with smaller govt? How do you manage to talk out of both sides of your mouths on so many different topics while still believing what you say?

  • http://www.orcamgroup.com Cullen Roche

    Let’s get this straight. I NEVER disagreed with MMT’s policy ideas. In fact, I said I was in favor of starting a small JG. But Fullwiler flipped out and went ballistic on me for not wanting a full blown JG. I expressed skepticism over going full bore with a 20MM person program and the MMT people all thought that was crazy. I was in favor of starting a small JG. I didn’t think that was unreasonable at all. But what the MMTers were really pissed at me about was when I started saying their basis for the JG was wrong and that the USA was not a money monopolist. That’s why they really freaked out.

    But none of that matters. I am not here on earth to provide the world with fixes to solutions. And frankly, I don’t care about MMT’s prescriptions. I care about how MMT pretends to understand the operational realities when they clearly don’t. That’s my only gripe here. And I don’t even discuss MMT except when you guys come here. Though I’ve had to correct Kelton twice in the last few weeks about how she presents the sectoral balances, but she doesn’t care because it doesn’t mesh well with the pro spending agenda. And that’s the real problem. MMT teaches a flawed operational understanding to reinforce the need for policy ideas. I think it’s a manipulative way to teach. But that’s just me.

  • http://www.orcamgroup.com Cullen Roche

    I would really like to teach the world how the actual money system works. In my opinion, that doesn’t have to involve policy at all and shouldn’t involve policy at all. I describe it like Da Vinci doing anatomical work. He didn’t want to fix the human body. He wanted to understand it. I am no Da Vinci, but I don’t think it would be fair to criticize Da Vinci for taking bodies apart just because he wanted to understand them better. That’s all I do yet you criticize me for not wanting to focus on the policy side. I think that’s unfair.

  • Andrew P

    We don’t live in an MMT country, but what about our primary competitor? As I understand it, all the official banks in China are government owned and controlled. They do have private “shadow banks”, but that would be true in any system that allows private enterprise to exist. Government owned banks could never serve all market needs adequately.

    From the looks of it, an MMT country can do spectacular malinvestments that further the cause of full employment. China’s empty cities are the perfect example. And yet the bubble does not burst because it is sustained by the power of the Government.

  • http://www.orcamgroup.com Cullen Roche

    China is probably as close to a fully MMT money system as there currently is. I’ll let other people opine on whether they think the USA should become more like China….

  • Andrew P

    A T-bill held on Treasury Direct has a maturity date of 4, 13, 26, or 52 weeks. On that date, it is paid to your bank account electronically. You can sell the T-bill before its maturity date, but that requires that it be transferred to a commercial broker, and that action requires paperwork and fees. It also takes time. So, if you have a 4 week T-bill, you have the quickest turnaround the system allows. It does also allow “certificates of indebtedness” which are temporary deposits with Treasury Direct while waiting for an auction date.

  • Tom Brown

    Is being an involuntary organ donor part of their “job guarantee?” ;)

  • Andrew P

    Cash also doesn’t go down from a system failure or communications glitch, or stop working when its batteries are exhausted. Try using electronic money during a major natural disaster, for instance. It is always good to keep some cash on hand at all times. That way, if you need gasoline when the credit card computer is down you can still get it.

  • Andrew P

    It is a job guarantee for someone. The question is who?

  • LVG

    In the MMT book they propose artist, musician, companion among other jobs. The day our government starts paying people $20/hr with full benefits to sit around drawing paintings is the day I don’t want to be an American.

  • Geoff

    Tom, I was not. Thanks for the info!

  • Geoff

    The “companion” job is interesting. But I’m not sure nationalizing the oldest profession in the world is the way to go ;)

  • Tom Brown

    At one time the gov took over the famous “Mustang Ranch” because of shenanigans by the owner. I guess they didn’t really try to run the thing, but they seized it and sold it.

  • http://www.nowandfutures.com bart

    Simple, I and others I know have used gold and other so called financial assets 100% directly to buy things like cars.

    Willing buyer, willing seller. It happens.
    There is no such thing as “must” be converted.

  • http://www.nowandfutures.com bart

    Currency as a percent of GDP just keeps going up and up.


  • Johnny Evers

    Interesting discussion.
    It does seem sometimes that we have a nationalized banking system in fact if not in name. A national bank provides reserves, guarantees loans, bails out failed institutions, makes sure the Treasury can always procure funds. I had always understood that the government backed its own loans but now apparantly it backs the loans made by the banks? Even if those loans are speculative.
    I’m instinctively small government, but at the same time, Phil’s comments are thought-provoking. Do I trust the government more, or do I trust the banking industry? Which one can I exert more influence upon?

  • http://www.nowandfutures.com bart

    Thanks for providing those MMT quotes Cullen, very “illuminating”… sad too.

  • Tom Brown

    bart, what are you counting as currency? Do you define it as the sum of all the banks’ electronic Fed reserve accounts and paper bills and coins?

    Andrew P, good point.

  • Tom Brown

    Geoff, here’s why there were two trustees:

    “Federal Judge Louis J. Freeh was named trustee for the MF Global holding company (MF Global Holdings Ltd.)”

    “Separately, James Giddens was named the trustee of the primary MF Global Holdings subsidiary, MF Global Inc., the broker-dealer.”

    from http://en.wikipedia.org/wiki/MF_Global

    What Whalen says is that a bankruptcy court is not really a court (it’s part of the executive), and doesn’t have as much power, and that the trustee’s job is really to claw money back for the failed COMPANY, not the depositors. A receiver, on the other hand, has much more legal authority (part of the court system?) and can even claw back money from Corzine himself… as well as launch criminal proceedings, etc., and you get one (a receiver) in cases of fraud. So he implied that depositors could have gone to the judge and claimed there was fraud and insisted on a receiver being appointed… although he then turns around and states that he’s not sure what would have happened in that case. He also flat out states that JP Morgan essentially took money they absolutely knew belonged to the depositors (I think he uses the word “stole”) and the bank friendly 2005 bankruptcy law rewrite states they don’t have to give it back. That’s the “safe harbor” business I think. If you kept watching, Whalen goes on to defend JP Morgan and Jamie Dimon in their criticism of the Volker Rule, etc. He’s not a “bank hater” but he thinks they essentially “stole” customer money in the MF Global case and got away with it!

  • http://www.orcamgroup.com Cullen Roche

    USUALLY must be converted. :-)

  • Tom Brown

    Geoff, if you had an attorney representing you, and he didn’t know this stuff, or didn’t represent you properly, I wonder if you can sue the attorney?

  • Tom Brown

    Joe in Accounting, would you mind taking a look at this example and telling me if it’s OK:


    I’ve modeled it on the linked-to John Carney article.

    Also, I’d like to make a variation on it where the capital is raised by the bank issuing stock. I’m not sure how the accounting works in that case however.

    Carney makes this statement:

    “To raise the $10 of required capital, Scratch Bank will have to sell shares, raise equity-like debt or retain earnings.”

    What does he mean by “raise equity-like debt?”

  • http://www.nowandfutures.com bart
  • Tom Brown

    How are you defining “currency” and “cash?”

  • Tom Brown

    Paper bills in coins in circulation? Do you include what’s in bank vaults?

  • http://www.orcamgroup.com Cullen Roche

    Here’s the bigger picture. The only reason there’s been growth since the 80’s is because of ATM machines making it easier to access cash. If you think cash is the future of money then you’re more sorely mistaken than the gold bugs. Paper bugs and gold bugs are both wrong….


  • Geoff

    Outside money as facilitator is an absolutely brilliant insight. Perhaps difficult to grasp at first, but brilliant nonetheless. It is a perfect description of the current US monetary system (like it or hate it). I’m not sure who initially lifted the veil, whether it be Cullen, Soddy, Innes, Werner or someone else, but someone deserves huge kudos. Perhaps all of them.

  • Johnny Evers

    I was trying to search and find some hard numbers on the cash economy – black market, underground, illegal, whatever. Some say it’s as high as 25 percent some places. Does the Fed have any numbers?

  • Johnny Evers

    When Greece cut pensions to 50-year-old men they called that austerity.
    When conservatives suggest we don’t pay for medical procedures for 65-year-old diabetics who smoke, they call that heartless.
    So it’s all in the way you look at it. If deficits help the economy, why not pay an young man to strum a guitar on the street corner?

  • LVG

    I fully agree. I’v read Soddy and Werner in detail and I can’t recall them describing this as clearly as Cullen does. The concept of outside money being a facilitating feature to inside money sheds so much light on the monetary system. I don’t want to slurp on Cullen here, but I think this is a paradigm shifting concept. In 20 years everyone will be describing the monetary system as Cullen describes it and we won’t be focusing so much on bank reserves, the Fed and what outside money does for us all.

  • Joe in Accounting

    Tom, the accounting looks correct for what you are trying to illustrate.

    Raising capital through share issuance is pretty simple. Investor would give the bank A a $10 bank deposit in return for $10 worth of common stock. Let’s assume investor is X with $100 deposited at bank B before any loans are issued, X purchases $10 of Bank A common stock.

    X has
    Assets – $10 Bank A Common Stock, $90 deposit w BankB
    Equity – $100 net worth

    Bank A has
    Assets – $10 reserves held at Fed
    Equity – $10 common stock

    Bank B has
    Assets – $90 reserves held at Fed
    Liabilities – $90 deposit of X

    Equity-like debt is a hybrid financial instrument that has debt and equity characteristics, like convertible debt, which is liability when issued but can be converted to equity during some specified period of time after issuance.

  • Tom Brown

    Joe, thanks so much! I guess the thing I was missing is that those shares show up as literally “equity” on the right hand side of the BS. Makes perfect sense actually. OK, I’ll fold that into a spin off example, and next time I see you here, I’ll run it by you.

  • Frederick

    Tom, Joe, Cullen or anyone,

    Can one of you provide me with a simple example showing how reserves help a bank settle payments between one another? I am still a little confused on that subject. Like, if I buy a car and bank at Bank A, but my car dealer banks at Bank B, then how does the payment settle showing the reserve changes?

    Thanks in advance!

  • Geoff

    Hopefully in 20yrs there won’t be so much confusion about “money” in general. In the meantime, whenever the money debate rears its head, and it inevitably will, I say we keep the “Scale of Moneyness” handy to help those who may still be confused.

  • William Bedloe

    For me, it’s not the question of whether or not cash is the future of money. It clearly is not. Let’s face it, you can transfer money between accounts or deposit checks from the comfort of your own phone (and with Google Glasses, all you would need to do is look at something to accept payment for it).


    The concern for me is what do I sacrifice for that convenience?

  • Tom Brown


    Try this example:


    Examples 1, 2, and 3 (on that same site) are similar but involve only a transfer not a payment. I think you could see how to fold in a payment though by looking at the above.

  • Tom Brown

    Joe, is it more typical to place negative equity (the case when liabilities exceed assets) on the left hand column of a balance sheet under “Negative Equity” (and then enter it as a positive number), or to use a negative number on the right had side of the BS under “Equity?”

  • LVG

    I just saw your comments on Twitter about M M T and Singapore and Norway. I had never thought about that. Those are amazing places to live with perpetual budget surpluses. How does M M T get away with their position that a budget deficit is always necessary? They’re just Keynesians on steroids. I can’t believe they teach this garbage and smart people fall for it.

  • http://www.orcamgroup.com Cullen Roche

    It’s not easy to understand in its entirety. MMT is extremely well presented and argued. I was convinced it was (mostly) correct when I first stumbled upon it in 2010. It wasn’t until over a year of extremely intense research into it that I realized the intricacies of the flaws in it. I’m not the smartest guy in the world, but I do spend a lot of time on this stuff and if I can’t see the flaw immediately then it’s not hard to understand how lots of people “fall for” MMT at first.

  • JK

    Can I jump in here without this turning into an anti-MMT tirade?

    LVG said: “How does M M T get away with their position that a budget deficit is always necessary?”

    My understanding is that MMT says, or Sectoral Balances suggests, that a budget deficit will be ‘necessary’ over the long term only if there is a trade deficit, and that a country could sustainably have a budget surplus so long as it also has a sufficiently large trade surplus.

    e.g. do Norway and Singapore both have trade surpluses? In that case, assuming they each trade surplus is sufficiently large, then a budget surplus could be sustainable.

    Cullen, am I misunderstanding what MMT is saying on this particular issue?

  • http://www.orcamgroup.com Cullen Roche

    I do think that is a bit of a misrepresentation of the MMT position. MMT is a fiscalist approach that is built primarily around govt spending and NFAs. MMTers are on record saying a full employment is the “only” context for a balanced budget. I can’t recall ever seeing MMTers endorse or promote a current account surplus position. In fact, MMTers always say a current account deficit is a superior trade position. So yes, I think it is incorrect to say that MMT would be in favor of a current account surplus and a budget surplus. They know it’s possible, but it would go against the fiscalist principles (ie, govt spending) that the entire theory is built around.

    I hate to say it, but MMT is a policy agenda with a warped understanding of reality built around it. That’s the sad truth of it. I’ve come to realize that MMT is a better description of the system than neoclassical econ, but suffers from many of the same issues. Primarily the policy agenda and govt/reserve centric view of the world which leads to a false understanding of the way the system works. I initially thought MMT might be different, but it’s just like all the other schools with their policy ideas poisoning the descriptive piece..

  • Bob

    This idea of “moneyness” really only applies to business/financial entities. The vast vast majority of us, including the very rich, have no access to inside money nor can we readily make final payment in commodities or financial instruments, so the only money with any “moneyness” is outside money.

    For what is likely 100% of the readers of this blog, there is no money other than outside money. Everything else has to be converted or is completely inaccessible.

  • http://www.orcamgroup.com Cullen Roche

    Inside money is bank deposits. You don’t have any bank deposits????? I am pretty sure 99% of the readers here have bank deposits.

  • Tom Brown

    Joe, I created a variation on the Example #3 (with capital requirements) to show the capital requirements being met by both a loan origination fee (and the resulting retained earnings) and through the sale of stock to raise capital. It came out a little more complicated than I’d hoped, but here it is:


    Since I wanted to keep a “closed world” for the example, I struggled to include a bank investor w/o making the scenario overly complicated (where did her money come from?). Perhaps I should have just kept track of CHANGES on the balance sheets, then I wouldn’t have to worry about having a closed world… I could assume the investor (person y) had obtained her money by some means not related to the operations at hand… but since I hadn’t been doing that before, I stuck with the old conventions.

  • Tom Brown

    To change it from services purchased from y to a car purchased from y is easy. In that case y still has +equity at the end (it just changes from a car to $100), and person x stays at $0 equity (the car replaces his $100 in the assets column, but he continues to have the $100 in borrowings in the liabilities column).

  • phil

    “China is probably as close to a fully MMT money system as there currently is”

    You’re making stuff up and completely misrepresenting MMT for some reason. It’s very unfair, annoying and insulting.

    You’re like Fox News trying to paint Obama as a “communist”.

    I’d say if anyone wants to know what MMT is they should just read it, as your comments on it have just become increasingly absurd.

    The funny thing is you now support Werner’s work and he wants full reserve banking, public banks and government-directed lending!

  • Bob

    Sorry, yes inside money as well as outside money, but that’s it. The “moneyness” of everything else is irrelevant to virtually all individuals.

  • http://www.orcamgroup.com Cullen Roche

    I actually don’t make up anything about MMT. Everything I discuss is factually based, verified with sources or quoted directly from MMT texts. For instance, when MMT says the govt is the issuer of all money because taxes “destroy” inside money, they’re wrong and I’ve confirmed it with both the Fed and the Tsy. Taxes don’t destroy money. They redistribute money by necessity. This shouldn’t even be controversial, but you are the one telling a lie about how the system works. As I’ve told you before, that concept is void of value and as silly as saying that an ATM withdrawal is destroying money because it TEMPORARILY changes the composition of money from inside money to outside money. Of course, since the money is tied to the loan that created it, money must always revert back to inside money. There is no other way for it to actually be “destroyed” except by the bank who created it. The govt, like the ATM withdrawal, must necessarily spend it back into the economy. That’s the only purpose taxes serve in the first place – to redistribute money. Can you take money out of the ATM and bury it in a hole thereby “destroying it”. Sure, but that’s stupid and irrelevant. The govt can do equally stupid things by taxing us and then not spending, but that’s stupid (some times). Funds get spent. Just like ATM money gets spent. If you understand the actual system this just becomes intuitive and obvious. I’m literally stunned that you don’t get it.

    The other stuff on the policy ideas is all fact based as well. Bill Mitchell, one of the FOUNDERS of MMT, wants to nationalize the banking system. MMT is a state theory of money centered around a govt that is the issuer of money. The USA DOES NOT have that system at present. It has a bank based system in which the govt is a self determined user of bank money and creates NFA as bonds. Again, this shouldn’t be controversial unless you make some convoluted lie about the reserve system. And I’ve confirmed this with sources at both the US Tsy AND the Fed. You are wrong and you’re spreading a myth about how the system really works. So, the only person telling lies and misrepresenting things is YOU and MMT. I know precisely what you’re doing here and why you’re doing it and I know precisely how politically motivated the hardcore leftists in MMT are. You’re EXACTLY like Austrians in that you’ll do anything to promote your policy agenda even if it means telling a total lie about how the system works. The irony here about your “Fox News” accusation is that MMT is precisely the opposite of Fox News. You’re just the other end of the spectrum pulling the same punches. I’ve had to swat Austrians away from the site for pulling this nonsense and I am an equal opportunity swatter when it comes to people on the other side of the aisle….

    Get your facts straight Phil.

  • http://www.orcamgroup.com Cullen Roche


    For PROOF that MMT is wrong just watch this video at the 4 minute mark. Mosler says:

    “If you’ve got a dollar in your pocket, where did it come from? Your first hint is it came from the Treasury Secretary. Unless it’s counterfeit, it came from the government. And they’ve spent it, and they haven’t taxed it yet.”

    That’s frighteningly wrong. All cash is created by the US Treasury, but only arrives in the system when a member Fed bank needs it to meet the demands of their customers who have accounts in inside money. The member Fed bank places an order with the US Treasury who prints up the bills and ships it to the bank (through the Fed). Then the bank will fill its vaults so people can access the cash. Inside money precedes outside money. It always does. Just as it does in the reserve system. The money does not get “spent” into the system as Mosler states. He totally misunderstands the ins and outs of inside money and how outside money always facilitates the use of inside money.

    I think this is all rather obvious. If you can be objective and apolitical in your view then it becomes clear that that MMT descriptive component is totally erroneous. Are you seeing it yet? I’m not trying to be contentious or anything. I think there is a real fundamental flaw in the MMT description and I think there’s a better way to understand how the system really works. There’s a lot of good stuff in MMT. This govt centric view of money creation is not part of the good stuff….

  • Dennis

    Why don’t folks use the terms “but” or “however” anymore. Anon PhD, you don’t mean: “That being said” (that’s BB talk); you mean “That written”.

  • Dennis

    Pardon, “That written” sic. “That typed”.

  • Dennis

    I’ve been reading you since 2010 and asked questions of you back then when I was trying to reconcile my friend Paul Grignon’s “Money as Debt” with what you were saying back then. MR and this addition are a huge help. My ultimate question “what the heck is money”? … is getting answered like I’m riding on an asymptote curve toward a line (the distance between the curve and the line approaches zero as they tend to infinity). We’ll never get to zero, but we are getting close. If you think this completes your MR write-up for all time–you’re wrong.

  • http://www.orcamgroup.com Cullen Roche

    I don’t think it “completes it”, but would you not agree that we’re getting very close to solving the puzzle??? I personally feel as though the description is becoming very clean and clear. If not, I need insights from you guys. What is missing?? As you know, this has been a huge work in progress and I absolutely need the feedback about what could be wrong and what needs work….I’m obviously very open minded about being wrong and entirely willing to change my position if I can be convinced that something else is a superior explanation. As I always say, I don’t have all the answers, but i do feel like we’re making huge progress.

  • Dennis

    I like the fact that your description of MR is “a work in progress”. Yes you are getting very close to solving the puzzle. It’s a glow-in-the-dark jigsaw puzzle. My thoughts about bank nationalization have been crushed by the fact that the understanding what actually is the status quo makes me understand that outside money facilitates our private banking and money creation system, it doesn’t need to replace it. The puzzle pieces that I think still need to be fit-in: non-debt dollars that are created by a growing company for its investors (not the traders), how currency trading around the world works in MR, how a company like Enron can be hugely profitable without contributing any intrinsic value what-so-ever. — just as a starter

  • phil

    “The govt can do equally stupid things by taxing us and then not spending”

    That’s called a budget surplus.

    CR: I like how you left out the last part where I said that was “stupid” “some times”. Typical obfuscation from a dishonest debater. Yes, and a budget surplus can be a perfectly rational position to run at times (unlike burying money and never using it). For instance, Singapore and Norway have sustained budget surpluses for over 20+ years with booming economies. But we both know MMT doesn’t advocate a trade surplus because then you can’t advocate the fiscalist approach that is essential to MMT. That’s called POLITICAL BIAS.

    “Bill Mitchell, one of the FOUNDERS of MMT, wants to nationalize the banking system”

    In his article on bank nationalization, Bill Mitchell explained that “this blog is about banking. Not a complete story, but an account of what I think should happen to banks and banking. Note that this account is interpretative rather than a statement of MMT principles. It reflects my preferences based on my understanding of those principles. But equally, someone with a similar understanding might choose a different policy path.”

    and also

    “I support bank nationalisation to resolve the tension within what is already a public-private partnership and to ensure that if the public is to socialise the losses then it should equally socialise the benefits.

    That “opinion” is consistent with but does not define Modern Monetary Theory – as a set of logical principles.”

    CR: When the founder of a very political and policy based theory expresses an opinion on a policy matter you really expect everyone to just shrug it off? Are you even serious with that position? I mean, I know there are disclaimers in almost every MMT position, but that’s just absurd. Mitchel IS MMT. Regardless, nationalization isn’t just a Mitchell position. MANY MMTers favor it. So even if it’s not a specific MMT position, there’s a clear bias towards that policy within MMT’s followers.

    My personal favorite disclaimer is the “sovereign currency issuer” disclaimer. For instance, MMTers will say that a nation with a pegged currency is not MMT. Of course, some nations MUST peg their currency or risk severe economic consequences. Switzerland is a current example of a nation pegged to the Euro for obvious economic reasons. They have no choice. But MMT would say Switzerland is not sovereign in its currency. That’s just absurd. These sorts of “disclaimers” are useless and render the theory full of holes for anyone who understands these matters.

    As I have said many times already, other MMT ‘founders’ advocate different policies, which don’t involve bank nationalization.

    CR: All MMTers hate banking except for Mosler and he just so happens to make a lot of money from a bank so throw that biased opinion out the window.

    “MMT is a state theory of money centered around a govt that is the issuer of money. The USA DOES NOT have that system at present.”

    The government does issue money at present. This occurs through the Treasury and Fed.

    “I’ve confirmed this with sources at both the US Tsy AND the Fed.”

    Some quotes would be useful.

    “I know precisely how politically motivated the hardcore leftists in MMT are”

    If Bill Mitchell and Randall Wray are too left-wing for you then maybe just stick to Mosler and Fullwiler. There are differences of opinion on certain matters with the MMT group, but they agree on the basic theory.

    Carlos Mucha has said that he agrees with Mitchell on banking, and he advocates govt spending by issuing high-denomination coins. Does that make him a “hardcore leftist”? He’s in your group.

    CR: What is your version of “left wing”? I know you don’t live in the USA, but Mosler ran for Senate as a DEMOCRAT! He is not a conservative and it’s incredibly dishonest when MMTers paint him as though he is. Mosler and Fullwiler are democrats. They’re left wingers themselves! All of MMT is left wingers. They’re not politically balanced at all and most of them are extremists. They’re the exact opposite of the Austrians with their Rothbard equivalents (WRay and Mitchell) and the lesser liberals. BUt make no mistake, they are all left wingers of varying degrees. You don’t seem all that familiar with the people you praise….

    Our “group” doesn’t attach specific political agendas to MR. There is no “policy agenda” in MR. MMT, on the other hand, has become nothing but a political agenda. The only original operational additions (in addition to Knapp’s state theory, Minsky’s ELR and Godley’s SFB) is the messy reserve accounting that totally mangles the way the US monetary system works. Their ONLY unique insight is incorrect. The theory is a political agenda. Don’t mix that up with MR’s operational approach or one of our personal opinions. MR doesn’t have policy ideas. There is simply no such thing. MMT, on the other hand, has a specific policy approach.

    “All cash is created by the US Treasury, but only arrives in the system when a member Fed bank needs it”

    Banks get Federal Reserve notes from the Fed by withdrawing their reserve balances as notes. Banks get reserve balances as the result of government spending, or by borrowing them from the Fed.

    CR: Can you access cash without have a bank account? Can that cash get into the REAL economy without someone first drawing down an account? NO. So, to say that the money “comes from” the Fed or the Tsy is wrong. And yes, it gets printed by the Tsy, not the Fed as you incorrectly stated. Banks place orders with their local Fed bank for cash and the Fed orders cash from the US Treasury where the US Bureau of Engraving prints the cash and sends it back to the banks. The banks then fill their vaults so customers can draw down inside money accounts. But the money “comes from” first having an inside money account. It’s not hard to understand. Do you see how clearly wrong it is to say that the money comes “from the Fed”? I mean, this isn’t even a debate. It’s a flat out 100% erroneous point to say that the Fed issues the money into the economy or that it comes from the Fed. This point alone debunks MMT. Do you finally understand? Or are you going to keep protecting your policy agenda over a real desire to understand the system?

    PS – you could still advocate the same policy agenda and use a MR understanding. Except, if you use MR you don’t have to use the silly myths like Mosler’s claim that taxes “destroy money” or that “cash comes from the Fed”. If you use the MR approach you can not only describe the system CORRECTLY, but you could use your personal beliefs to express whatever policy approach you want!

  • http://www.orcamgroup.com Cullen Roche

    We’ve been through all of this, but I’ll comment on these points within your comments. Hopefully you’ll understand the points better after that. If not, then I am not sure what the point of you ever commenting here again is because you’re obviously not understanding the flaws in your thinking….

  • phil

    “Singapore and Norway have sustained budget surpluses for over 20+ years with booming economies. But we both know MMT doesn’t advocate a trade surplus”

    If one country has a current account surplus then some other country must have a current account deficit.

    BTW Norway is a socialist country and Singapore is bordering on fascist, so maybe they’re not great examples for readers of Pragcap.

    CR: So, if you run a trade surplus you must be a socialist nation. Ha. Don’t say such absurd things.

    “Mosler ran for Senate as a DEMOCRAT!”

    OMG. (BTW it was “Tea Party Democrat”)

    CR: A Democrat is a democrat.

    “can you access cash without have a bank account?”

    You can cash a government check without having a bank account. But anyway that’s irrelevant.

    Yes, either because someone already has obtained the cash or the govt is effectively respending inside account money which you’re drawing down immediately in the case of a govt check. That’s both irrelevant and obvious.

    “to say that the money “comes from” the Fed or the Tsy is wrong”

    Well if the government spends or the Fed lends then the money is coming from the Tsy or Fed.

    CR: No, govt spending redistributes existing bank money. The bank creates the loan which creates the deposit. Only the bank can destroy the money. You should know this by now.

    “it gets printed by the Tsy, not the Fed as you incorrectly stated.”

    I didn’t say it gets printed by the Fed.

    CR: You said it came “from the Fed”. No, the money comes from a bank and the Tsy offers cash services so people with bank accounts can draw down accounts. But you can’t access cash without a bank account so your point is moot either way. You don’t seem to be grasping this stuff….

  • Johnny Evers

    Not getting into the debate here, but you can cash checks without having a bank account. Usually there is a fee. You can easily cash a government check in a bank. And Wal-Mart will cash your tax refund check.

  • http://www.orcamgroup.com Cullen Roche

    It appears as though the point you don’t seem to be getting is that it’s redundant and contradictory to say “loans create deposits” and “govt spending creates money”. This point is rather simple to understand. The loan creates the deposit. Nothing else creates the deposit. Only the entity that creates the deposit can destroy the deposit. So, when you state that “taxes destroy money” you’re implying that the taxes destroyed the loan, which is obviously false. This is an irrefutable fact of the monetary system. To deny it is like denying that 1+1=2. Unless you think 1+1=policy agenda which is basically how Austrians justify their description. MMT, unfortunately, is proving exactly the same as Austrian econ on this matter.

    The system is designed around repayment of the loan and the stability of the inside money system. The govt is, by necessity, a redistributor of bank money in exactly the same way that ATM withdrawals require a circular flow. I agree with MMT, in the wrong environment, that a budget surplus could be destabilizing just like a bank run can be destabilizing, but that is an obvious fact of the system once you understand it’s all designed around inside money. But what MMT gets wrong is this description of inside money being “destroyed” when you pay taxes and then created when the govt spends. That’s exactly like saying that an ATM withdrawal “destroys” money and a deposit of cash “creates” money. That’s just ludicrous. And this obvious fact renders the MMT description both redundant and contradictory. The govt can, in theory, temporarily change the composition of inside money to outside money and could in theory “save” or “bury the money”, but it’s not a sustainable process in exactly the same manner that bank runs aren’t sustainable. But this isn’t “destruction” or “creation” of money. That is totally misleading.

    Frankly, I don’t see how someone can’t understand this if they have a moderately sound grasp of the way the system works. I don’t know how much simpler I could make it for you before you begin to understand the point….

  • LVG

    You’re just wasting you time Cullen. Anyone who can’t see that we have a system by banks and for banks is clueless. Let Phil be. He’s a lost cause.

  • http://www.orcamgroup.com Cullen Roche

    I’d honestly like Phil to see the point here because it is incredibly important when understanding how the system works. He’s a smart guy so maybe my explanation isn’t clean enough. In which case this is good for sharpening and honing the points in the future (though he seems to be one of the rare people who doesn’t get it)….

  • Geoff

    Cullen, you’re at your best when you take on MMTers :)

    And I say that with all due respect to MMTers, many have whom are very smart and have their heart in the right place.

  • Johnny Evers

    When I first read that ‘loans create deposits’ it was hard to accept because it created an emotional reaction — namely, anger.
    Like, ‘What do you mean, all our money is really debt?!’
    And, ‘What do you mean, the system is designed for the banks?’
    Now, understanding the concept, it’s starting to radicalize my views about economics, because it seems to be an unfair system that is already starting to choke our society.
    Big problems I see:
    1. Most deposits are created in the financial industry to benefit those in the financial industry. Deposits are created so that banks (I’ll use banks as a stand-in for all entities in the financial system) can speculate. Deposits are created not so that people can build new houses, but so they can profit from the price appreciation of current assets.
    2. The working class desperately needs money. But money can only be created by those who can get loans.
    3. Government works for the banks. Government can only get money by issuing financial assets to the banks.
    4. Working people are crushed by debt; banks and the financial class have figured out how to spend their easy access to credit.
    5. A dollar of credit is no longer created economic growth; problematic because they only thing that allowed this credit expansion was the powerful American economy. I don’t see how we can continue to add debt without growth.
    6. I’m not a gold bug, but a gold coin has value. The dollar’s ‘value’ can be clicked away on a computer screen. People trust what they can see; if Cullen succesfully shows to people that they system is (imo) a mirage, I believe there will be trouble. Money is a social compact and the people should make the rules.

  • Luke

    Another important step of validating banks as the primary money creators was the 1971 abandonment of the gold standard. I’m not a gold bug, because the gold standard cannot address the deflation of private credit. However, one virtue of the gold standard was that it provided an external constraint on credit expansion in the form of reserve requirements, where private credit could only be extended to a certain multiple of the gold supply.

    Leaving the gold standard allowed banks more flexibility to issue money. With fiat currency, the external reserve constraint is lost since there is no limit to the amount of reserves the central bank can create. Consequently, the primary regulatory constraint became capital requirements, which allow bank assets to accumulate only to a certain multiple of bank equity. Thus, as long as banks are profitable, and equity continues growing, credit expansion can continue unabated. This works provided credit funds productive investments, boosting incomes through the time savings created by real capital formation. However, problems arise if credit funds asset appreciation, because bank asset quality deteriorates with falling income-asset ratios. Bank equity is the bottleneck to economic growth during deflation. And because I do not believe regulators are good enough to distinguish between these two types of credit expansion, I have some sympathy for gold and its external credit constraint.

    But the conventional choice offered in most monetary debates of either the gold standard or fiat currency is a false choice. Both alternatives revolve around privately-issued bank money! I’m typically pretty libertarian, and I’d like to see less government in many arenas, but I believe it makes a lot of sense to have government take full control of money issuance, which implies a ban on private money issuance. Incidentally, that’s how most people wrongly assume the system already works today.

  • Luke

    A bank deposit is more than a promise by the bank to pay you. It’s also a promise by the government that you will be repaid, which comes in the form of deposit insurance – another government-created device strengthening the position of private banks to be the primary issuers of money.

    But government deposit insurance and T-bond promises are only as good as aggregate bank equity. If the aggregate banking system has insufficient equity, then banks cannot issue the money used to collect taxes to repay government loans. If aggregate credit quality deteriorates, government solvency is contingent upon central bank willingness to boost bank equity. So it seems to me these promises are ultimately backed by the Fed’s limitless ability to create reserves.

  • Luke

    Aren’t we presenting a false choice by offering either private banks issuing money or government banks issuing money? Private money issuance is unattractive because it provides a government-granted privilege benefitting a select group of people over everyone else (e.g., the US), which is completely contrary to free market theory. However, government banks are unattractive because it encourages centralized resource allocation, which is inefficient (e.g., China).

    It seems to me that money should be issued by government, but I don’t understand why that requires China’s method of issuing debt to the private sector as a part of money issuance. Can’t T-bonds create deposits (instead of bank credit creating deposits and T-bonds transferring from Peter to pay Paul) into private banks, which would basically be operating as low margin utilities (holding deposits, offering checking, ATM and settlement services) collecting the modest spread between T-bonds and short-term interest rates? It doesn’t seem this would result in the government spending money much differently than it does today. In fact, I suspect income inequality would fall, and government social spending could potentially decline.

  • phil

    “You said it came “from the Fed”.”

    The Tsy prints notes and ‘sells’ them to the Board of Governors of the Fed for the cost of production. The Fed then issues them to Reserve Banks in exchange for collateral usually in the form of treasury securities. The Reserve Banks then sell them to member banks at face value by debiting member banks’ reserve balances.

  • http://www.orcamgroup.com Cullen Roche

    I am very aware of the procedure. But its irrelevant to the discussion.

    You’re just refusing to admit that MMT is wrong at this point so there’s really no purpose to these discussions. But thanks for commenting nonetheless.

  • phil

    “it’s redundant and contradictory to say “loans create deposits” and “govt spending creates money”

    Let’s do a little thought experiment. Imagine there are no reserve balances, physical cash or treasuries in existence.

    Now let’s say the government decides to deficit spend, so as to pay ‘Mr Smith’ $100.

    How does this happen? Here’s a simple example:

    1. The Treasury sells a bond to a primary dealer.
    2. The primary dealer borrows reserve balances from the Fed to pay for the bond.
    3. The Fed debits the primary dealer’s reserve account and credits the Treasury general account.
    4. The Treasury spends, crediting a bank reserve account (bank B) and Mr Smith’s deposit account at that bank.

    At the end of this process the primary dealer has a treasury bond and owes $100 to the Fed. Bank B has $100 in reserves and Mr Smith has a $100 deposit.

    To repay the money it owes to the Fed, the primary dealer can sell the bond to the Fed. After this step we are left with the following:

    The Fed has a Treasury bond, bank B has $100 in reserves, and Mr Smith has a $100 deposit.

    So as the result of deficit spending there has been a net increase in reserve balances and deposits.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Luke, government deposit insurance is paid for by the banks themselves. Is that what you mean by “aggregate bank equity?”

    Banks are capital constrained by regulations, this is true, but they can create some of that capital by charging loan origination fees and by issuing shares of stock (of course). Here are some balance sheet examples I put together to illustrate capital constraints:



    Many government loans are not repaid with taxes, but by rolling over the debt and issuing new debt. That’s what our deficit is.

    What do you mean by “…government solvency is contingent upon central bank willingness to boost bank equity?” If you’re saying that QE is boosting bank equity, that’s not correct (at least as far as the principal amounts of the purchases are concerned… you could argue that QE raises financial asset prices in general, but to first order, it’s not free money, and a QE operation doesn’t change anybody’s equity):


    Perhaps you weren’t talking about QE, or perhaps you were talking about the (theorized) secondary effect of raising financial asset prices in general. It wasn’t clear.

  • phil

    This is explained much better (and in much more detail) in “Modern Money Theory: A Response To Critics”, starting on page 17 of the following pdf file:


    This paper explains the general principles along with a detailed account of real-world operations.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Your proposal isn’t clear to me regarding “can’t T-bonds create deposits?” Can you sketch out what that would look like on simplified balance sheets?

    Also, when you write: “T-bonds transferring from Peter to pay Paul”… do you mean by that “T-bonds sold to Peter (by the gov), and the proceeds of the sales used to pay Paul?” … because that’s what happens.

    Banks would operate as more or less “utilities” with the right kind of regulation (I believe). Whether that means bringing back Glass-Steagall or not, I’m not entirely clear, but probably that would be part of it. Some would argue that even right now they operate as utilities. Others would say we need less regulation and more competition (Chris Whalen is an advocate of that… although he has stated that bringing back Glass-Steagall would move the banks back towards a utility status better than Frank-Dodd, the Volker Rule, and Basel III). I think that in theory at least banks do have a significantly high degree of regulation. However, there’s a lot of evidence that in practice (especially for TBTF banks) that may not be the case.

    Also there are other instances of the government granting special privileges (usually for a price) to businesses… for example granting slices of the EM spectrum to broadcasters or cell companies. So I think there’s a precedent for that kind of arrangement, that’s not necessarily terrible.

    I guess I just don’t understand your proposal.

  • Luke

    Yes, that is what I meant when I said deposit insurance is backed by aggregate bank equity. Even if the government made good on losses beyond what is in the FDIC fund, banks are creating the money the government uses to pay. And banks can only create money if equity isn’t constrained. Although your point about loan origination fees is a good one, and I agree I oversimplified.

    I agree QE does not directly boost bank equity at time zero, but in a deflationary spiral where bank balance sheets are riddled with low quality sub-sovereign debt, the central bank can replace low quality assets with newly created reserves, which by halting broad money supply contraction, boost future bank equity. Although, since central bank losses must be covered by the federal government, I suppose you still have to go back to bank equity as the final backstop.

  • Luke

    Today, in the private sector, there are bank loans and non-bank loans. Non-bank loans do not involve money creation as there is a debit from the lender’s account and a credit to the borrower. Bank loans do involve money creation because there is no debit from the lender’s account, only a credit to the borrower. I believe bank loans should be described as debit-less credit to clearly distinguish between non-bank loans.

    I think the private sector should be banned from issuing debit-less credit, which is time-delayed counterfeiting. In other words, an end to banking as we know it. Instead, the government could spend a newly created deposit into a bank account, while simultaneously issuing a T-bond to offset the deposit on the receiving bank’s balance sheet. Banks would be boring, collecting the spread between T-bonds and short-term deposits. Banks offering the best service could grow earnings through volume growth by attracting new deposits. The private sector could freely lend with no interference from the government. But private sector lending would require a debit from the lender’s account, just as non-bank lending does today. However, it probably makes sense to allow banks to acquire a regulated amount of sub-sovereign (public or private) debt to stabilize the balance against various interest rate movements. The bank just couldn’t create money to fund sub-sovereign debt.

    This differs dramatically from China’s system where state banks make micro-level allocation decisions by providing credit to the private sector as a part of money issuance. Offering debit-less credit directly to the private sector incentivizes destabilizing practices such as creating money to boost land values, which ultimately deteriorates the underlying mortgage asset quality. But sovereign debt is free of default risk, so issuing credit backed by T-bonds is not destabilizing.

  • http://www.orcamgroup.com Cullen Roche

    1. Your hypothetical is misleading and unrealistic. There is no such thing as deficit spending where there is no money or reserve previously in the system. You might as well start your example with “we have a monetary system on Mars that is run by Spock the alien….” It would be just as useful and just as unrealistic. Why do you always use examples that leave out crucial parts of the flow of funds??? It’s like you’re intentionally obscuring the reality to propagate a myth. The NY Fed has described this process before, but actually describes how spending reduces TGA reserve balances and taxing increases TGA balances:

    “An increase in the balance of that account means that funds have moved from depository institutions’ accounts at the Banks into the TGA. This movement of funds reduces the amount of reserves in the banking system. Conversely, a decrease in the TGA means that funds have moved from that account to depository institutions, thereby increasing the amount of reserves in the banking system.”

    You see how the NY Fed describes BOTH the addition and subtractions from the TGA account? There’s a flow of funds into and out of that account that starts with inside money.

    2. You distort the history of the TGA and TT&L account. These accounts didn’t arise as a matter of nationalizing the banking system or allowing reserves to “finance” tsy spending. They arose to help the Tsy manage INCOMING cash flow and to help manage reserves in a way that doesn’t put pressure on interest rates. This has nothing to do with self financing the govt and everything to do with procuring funds in a clean and efficient manner.

    If you want to read some of the background history on this you might peruse this article. It touches on many of the points. Notice, nowhere in this document does it ever discuss how reserves and the Fed account for Tsy were designed to help directly self fund the govt. http://www.newyorkfed.org/research/quarterly_review/1978v3/v3n2article7.pdf

    3. PD’s don’t borrow from the Fed to finance their t-bond purchases. Your example leaves out the reality that PDs borrow from their bank unit intra-day and repo the loan out by day end. Again, I’ve shown you the NY Fed quotes on this from my source at the NY Fed who works ON THE OPERATIONS DESK implementing these transactions. MMT never cites sources and instead just provides conjecture. Not to mention, Kelton and Mosler have conflicting stories with regards to TT&L and TGA, but I presume you don’t even understand that based on your comments here.

    4. NONE OF THIS MATTERS since tax payments don’t “destroy” money. Even if the PD’s did fund their t-bond purchases through reserve borrowing (which they don’t) it wouldn’t change the fact that MMT is categorically wrong about the idea that tax payments “destroy money”. Again, this would imply that a deposit was destroy without a loan being destroyed. That’s absurd and defies the accounting logic behind “loans create deposits”.

    End of story.

  • Jeff G


    Is it possible that “purchasing power” be a parallel for inside money and “currency” be a parallel for outside money? As I understand, when a bank makes a loan, it creates $x worth of purchasing power for the borrower. However, only the government can create currency. Is this accurate?

  • Tom Brown

    I see what you’re saying now I think.

  • phil

    “There is no such thing as deficit spending where there is no money or reserve previously in the system”

    As I said it is a “thought experiment” which serves in part to illustrate where reserves come from in the first place. Obviously reserves must come from somewhere. The answer is that they enter into the system as the result of Fed lending, Fed asset purchases, and government deficit spending. The subsequent allocation of assets between reserves, bonds and deposits is determined both by monetary policy and the portfolio preferences and requirements of the private sector.

    For the private sector to buy government bonds or to pay taxes the funds must be provided by either Fed lending, Fed asset purchases or government deficit spending. In fact the only way the private sector can own reserves (or govt currency) outright, rather than just borrowing them from (and thus owing them to) the Fed, is if the government deficit spends or the Fed purchases certain assets from the private sector.

    In your descriptions the banking system is considered to already own reserves with which it can purchase government bonds or pay taxes. But where do those reserves come from?

    My example is simplified of course, but extra detail doesn’t add much to the basic point. If we say that primary dealers “borrow from their bank unit intra-day and repo the loan out by day end” this tells us something about financing operations within the private sector, but doesn’t explain where the banking system actually gets the reserves from to buy government bonds.

  • http://www.orcamgroup.com Cullen Roche

    The only reason reserves exist is because the bankers decided to create a govt backed entity in 1913 that would support them without needing direct Congressional approval. Again, you don’t know your American history and you don’t seem to understand what the role of the Fed is. In your mythical world, reserves are some sort of nationalization of the banking system that occurred in 1971, when the reality is that the creation of the Fed system is a direct firewalling of inside money from being monopolized by the govt. As you should know by now, if there were no private banks and just one national bank (ie, truly state money), there would be no need for reserves because all money would be outside money. The only reason reserves even exist is because we DON’T have a state money system. This is so clean and easy to understand that I am surprised that you don’t seem to (want to?) get it.

    You can fudge the accounting and create all the unrealistic examples you want (like the IRS “shredding” money or falsely claiming that all money comes from the govt or that loans create deposit and then govt spending creates the money AGAIN), but none of that matters because it misrepresents the simple fact that our money system is made by bankers and for bankers. It’s not made by the govt for the govt as MMT would have us all think. You get it totally backwards and using backwards accounting (starting with reserves) isn’t going to change that reality.

  • phil

    “In your mythical world, reserves are some sort of nationalization of the banking system that occurred in 1971″

    No I don’t think that, whatever that’s supposed to mean.

  • http://www.orcamgroup.com Cullen Roche

    MMT states that all money essentially comes from the govt through govt spending because taxes “destroy money” and spending “creates money”. The money that matters most in MMT is reserves. Transactions flowing through the reserve system essentially nationalize all money since it’s a form of magically transforming all money to govt money (in MMT Theory).

    Banks are just “designated agents” of the govt in MMT as if they’re buddies or something or perfect partners. Just call it what you basically say it is – the money system has already been nationalized in MMT’s eyes. And the reserve system is central to this govt centric money concept. Of course, here on planet earth the reserve system is designed entirely to support private banking and not to nationalize the banking system or to create a govt centric money system, but hey, it’s fun to dream.

  • http://www.kctruthinlending.com The TIL Show

    Interesting take on this subject.