When Silly Analogies Go Viral….

Maybe you’ve seen this image going around the internet?  I saw it on Facebook the other day and then again today on Twitter.  It shows the US government budget and compares it to a household:



Now, ask yourself the following questions:

  • Has your household been alive for 237 years?
  • Does your household have the ability to print US dollars?
  • Does your household have the ability to sell debt denominated in the same money you print?
  • Does your household have the ability to tax other people to generate revenues?

If you answered no to all of the preceding questions then you should also realize that the analogy above is a complete misrepresentation of the way our monetary system functions.


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

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. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  1. “Does your household have the ability to print US dollars?”

    Good question. Does the US gov have the ability to print? Is the fed a separate entity?

  2. The US Tsy literally mints coins and technically prints up the paper notes issued to the Fed system. So yes, the US govt most certainly does create currency. How influential that is in the actual money creation process is a different matter as the system is really designed around banks, but it doesn’t mean the govt doesn’t create the currency.

  3. Galbraith’s super smart. I disagree with the notion that the govt creates money when it spends. In fact, I think this can be proven empirically false as the legal process does not currently allow the US tsy’s TGA account to be credited before it has debited a private bank account for sale of bonds, but whatever. I don’t fully embrace MMT, but we know MMT is 10X closer to the truth than most of the economic schools out there today so who cares who he supports as long as he’s not supporting the real bad guys.

  4. You don’t think it’s strange that a prominent economist claims “Government Doesn’t Have to Borrow to Spend”? Legally, it does have to borrow when it spends. Saying government doesn’t have to borrow is like saying that President Obama doesn’t have to get Congressional votes before going to war. You know, because those laws are things that “don’t really have to” be there.

    How can anyone take that position seriously?

  5. But is the treasury legally able to just directly appropriate the money created by the bureau of engraving to itself or does it have to hand it over to the fed?

  6. Well, technically, Tsy has to tax or sell bonds to procure funds for spending. It doesn’t have the legal authority to just spend. Unless you consider the platinum coin loophole a valid funding mechanism, which I think is highly questionable. And no, the Fed is not a pure govt entity. It’s a hybrid public/pvt entity which serves the banking system and the govt. Either way, the US govt has powers that render it totally different from a household.

  7. I like to think of this distinction as follows:
    Think about the current institutional funding arrangements in the same way as you would think about the so-called SS Trust fund. Sure, technically, there is a pool of T-bonds the SSA owns. But when those run out, have we really lost the ability to fully pay for SS? Of course not, you could remove the payroll tax entirely and just pay for SS out of the TGA like everything else. We could raise the payroll tax rate and leave the cap the same. We could keep the rate the same but remove the cap. We could keep all the taxes the same and just cut benefits. None of this is written in stone, so its a meaningless distinction, we make our own rules. The same thing goes for Govt spending, whether taxes are $1 or $10 trillion, the authority and physical capacity of the US govt to credit bank accounts at the Federal Reserve is obviously unchanged. T-bonds can be issued with a deficit, they can be issued without a deficit (like they were during the Clinton surplus for SS). We’ve been on the gold standard, then off the gold standard in 1934, then back on the gold standard in 1946, and then off again in 1971. I think by now you get my drift.

  8. Yes that analogy keeps popping up everywhere and is very damaging to the discussion…

  9. Therefore its correct to say the gov can run out of money if it has to get it from borrowing and tax wouldnt you agree?

  10. This has been covered here ad infinitum. If the government just started issuing deposits when it spent then there would be no need for banks. We could just create all money through government spending. So its the difference between government completely controlling the money supply or letting the banks do it. Right now the banks do it. Changing it to a government system would be pretty different politically and operationally.

  11. The US govt can always call upon its primary dealer banks to buy US treasuries, or even Fed as a last resort buyer so in that sense it’s not correct to say the US govt can run out of money.
    Not to mention its ability to raise funds via taxing and scenarios where this would not be viable are highly unlikely.

  12. Are the primary dealers forced to buy treasuries directly off the gov in the primary market? I think they are only forced to place bids in OMO’s with the fed.

  13. Fed states on the part of its website regarding primary dealers: “Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.”

  14. One way out of the looming debt ceiling crisis is to not count the U.S. government debt owned by the Fed. That debt is in a completely separate category from U.S. government debt owned by the private sector or foreign entities. The Fed could simply forgive the debt it owns and nobody would be out a dime. In fact, Americans would all be that much richer!

  15. So then, who CANT run out of money?

    There must be someplace where money originates. We didnt discover money like some vein of gold in the ground, we created money from our own minds. It is an invention.

    So where is the source?

    I would argue that in most developed countries its clearly within the govt/legal structure that the predominant money originates. There are hierarchies of money and the hierarchy can be fluid but why do some sit at the top at a given time?

  16. So the PDs are forced to buy treasuries and that is why the gov can print.

    But how enforcable is this? What is the defintion of required to participate I wonder?

    What if the debt ceiling isnt raised or PD’s renounce their position as PD.

  17. Fed forgiving the government debt it owns, if this action is even legal, would have catastrophic consequences for the financial sector and the economy.
    The reason Fed holds US treasuries is to set the federal funds rate, and is holding them in huge quantities right now in order to keep that rate 0-0.25%. I think eliminating these holdings would have the FFR skyrocket. The rates on US treasuries would increase uncontrollably, as well.

    I think it’s one thing for a private sector entity to give up its profits by forgiving debt it owns, but completely another for a central bank to simply erase the debt it holds because its a mean to conduct monetary policy.

  18. despite the analogy being flawed the solution to the analogy is fitting. They are mad that they pay most of the bills for the family despite having most of the income. They propose to kick grandma and there youngest child to the curb to save money so they don’t cut back themselves.

  19. So dont worry, when push comes to shove, the gov can always steal (tax) money or blackmail banks to buy their debt. :)

  20. Obviously you haven’t covered this before because what you just described is totally false. The Govt spends only with reserves. Thats why deficit spending drives interest rates down not up without T-bonds “interfering” with the natural rate of zero percent. And since regular people don’t have accounts at the Fed, those reserves force the banks to credit people’s private bank accounts.

    The entire banking system is a private market based money supplying machine. If their were no banks, who would assess risk when extending loans. I could go on, but I’m sorry you are wrong. If the Govt spent without issuing T-bonds, and the Fed maintained its monetary policy by adjusting the interest it pays on reserves. Almost nothing would change, and certainly it wouldn’t make private banks obsolete.

  21. “You don’t think it’s strange that a prominent economist claims “Government Doesn’t Have to Borrow to Spend”?”

    It doesn’t have to borrow bonds to spend them. It creates them out of thin air and effectively pays for spending by giving tgem out. And in presence of the Fed bonds are like money, exchangeable to cash at any time. So yes, the government creates money (bonds) out of thin air by acts of spending and does not borrow the bonds from anyone. You can self impose gimmicks on yourself to hide the logic but that is it.

  22. Greg, see Cullen’s primer which suggests that a hierarchy is probably not the best way to view money. See the horizontal scale of moneyness in which bank deposits have the most “moneyness”. Bank deposits are used as the primary source of money in today’s economy. There is no ultimate “source” of bank deposits. They originate endogenously and organically based on millions of daily decisions by borrowers and lenders.

  23. You believe the federal government can continue to borrow 40 percent of its spending, based on an idea which has truly never been implemented. Eventually, the Fed will be required to buy debt directly, which is pure monetization.
    This is our trajectory. Your idea is very alluring and reassuring but it requires you to make a case that something that hasn’t been done before will work this time.

  24. The Fed sets the Fed Funds Rate through policy decision/vote. Not counting the government debt that the government holds (which is kind of insane when you think about it) would not effect the Fed Funds Rate unless the Fed board members chose to allow it to effect their votes.

  25. I agree, what Fed has to do is merely state their target FFR and the market will adjust for the stated level for the most part.
    It will then use Open Market Operations to adjust its balance sheet so it’s consistent with federal funds rate target.

  26. This is not an economic theory, but an object lesson in responsibility something they do not teach in our schools of “higher” learning…

    College grads = debtors
    Federal government = debtors

    If Rhodesia can do it – yes can we…

  27. Well, legally, it does have to borrow & tax to spend. The debits from pvt accounts must precede the credits to the TGA. That’s how the law is presently designed. Laws matter. I wish MMT people wouldn’t just gloss over that with the inane “self imposed” comments. All laws are “self imposed” and they dictate how things work at an operational level. Glossing over laws is dismissing the actual reality of the system, which is silly.

    Also, I don’t think you can call bonds money. Bonds are financial securities which are not a very good medium of exchange. That’s not the same thing as money. It’s money-like, but not money in the same sense that a bank deposit is. And if you think t-bonds are money then why aren’t private stocks and bonds money as well? They’re extremely similar after all….I think MMT calls t-bonds money because it’s a convenient way to blur the reality that banks, central banks and the Treasury are quite different entities designed with specific rules and roles.

    The thing about our system that is very specific is that it gives the banks the power to create deposits. You’ll notice that even QE works by going THROUGH the banks to have them create deposits. There’s a distinct and specific power structure here where banks are the primary money creators. This is a very specific institutional and legal construct which makes the govt a huge subsidizer of the banking system. Your description implies that the banks subsidize govt and merely serve it. I don’t think that’s right by a long shot.

    Were our govt to just issue deposits through the banking system then the entire loan business would be altered. Politically, we might even realize there’s no need for banks and that the govt could just control the entire money creation process. That’s very different from the system we have. The current system we have is centered around banks as money creators and uses the govt as the facilitator. The one you describe is the opposite. That’s not the system we have today.

  28. You really don’t think the power structure of who creates the medium of exchange would be influenced? If people realized that the govt really just can print deposits into people’s accounts you don’t think that would change anything? Why would we need a banking system with money as debt if the govt can issue all the money debt free? You would be creating a dual deposit system where banks have competition from a govt to create deposits. I think it’s rather naive to assume “nothing would change”. You’re changing the entire institutional and legal structure that presently gives banks so much monetary dominance….

  29. Most money in our system originates as credit within the banking system. It’s not a chicken and egg story. Banks create and destroy money all the time. In the aggregate, the credit system just grows and grows. There isn’t an initial source. That’s the wrong way to look at it. In fact, if there’s a source then it’s probably real collateral. In banking, that collateral was usually gold or some real asset. That was the “real” money source. Credit is something that has become money over time as we realized that money didn’t have to be real things and could just be records of account.

  30. Thanks for sharing this Cullen. I shared it with my Facebook friends (which is strictly social for me — I don’t use FB in my work as a financial advisor). It will be interesting to see what sort of comments I get.

  31. Just for fun, in these ways the household and government entities are similar.

    Has your household been alive for 237 years? …. Irrelevant.
    Does your household have the ability to print US dollars? No, but it can borrow money the same way the U.S. government does. Does the U.S. government print dollars — not really, not yet. It doesn’t do this and nobody know what would happen if it did. It is believed that the U.S. government can harnass the primary dealers to borrow whatever it wants, but again, we simply don’t know what would happen if the government tried to borrow more than the market would bear.
    Does your household have the ability to sell debt denominated in the same money you print? See previous, the household can borrow ever easily, unless it goes Rhodesia and loses its income base.
    Does your household have the ability to tax other people to generate revenues? Yes, the household in this example could theoretically earn (tax) enough money to pay down its bills. Both entities in this example must earn or tax more to pay debt service.
    One advantage the government has is that the central bank can purchase its debt, thus allowing it to issue unlimited debt. The buyers can always pass the debt along to the Fed. The Fed can also buy some private debt, if it is government guaranteed (MBS, etc.) If the Fed were given the latitude to buy credit card debt, for example, then the household would be very similar to the U.S. government. Once more people understand the Fed is effectively buying distressed debt from financial institutions, there may be demands for the Fed to buy distressed debt from individuals. That might be the best way to deleverage the consumer.

  32. The govt is a redistributor of bank deposits. That’s how it legally works. It sells bonds or taxes people to achieve this. Operationally and legally, this is irrefutable.

    Saying that govt spending “creates deposits” or that “taxes destroy” deposits is operationally incorrect as it pertains to this system.

  33. I liked this example about budget surpluses which highlights the redistribution point. If money is created by a bank through a loan then that loan can only be repaid when that deposit is refluxed. Loans create deposits and deposits destroy loans. But if the government ran a surplus they would be removing deposits from the private sector. They’d be hoarding the deposits. If they did this in perpetuity it would cause a banking system default because there wouldn’t be enough deposits in the system to repay the loans. Hence, the government must redistribute the deposits it takes in because they’re attached to a loan that needs to be repaid.

  34. Cullen it looks like you’ve taken a step back in your interpretation of the monetary system in an attempt to distance yourself from MMT. Now you think government bonds are not a form of money? Like money, government bonds are issued and backed by the government, they are a riskless asset. Private stocks and bonds are not, which is a huge difference. The reason why MMT classifies govt bonds as money is because, operationally, that’s how the fed sees it. Govt bonds are interchangeable with reserves. In essence government bonds are a form of money with higher coupons. You’ve said this before.

    The classification of government bonds as a different form of money was pivotal in helping me to understand the nature of QE and monetary operations. By attempting to define monetary operations in as literal a way as possible you are making it more difficult for the laymen to understand things like QE. Thinking of government bonds as money that pays a coupon helps the laymen understand that exchanging one for the other is merely an operation designed to influence interest rates.

    And your last two paragraphs seem like a complete 180 from where you stood before.

    Don’t the primary dealers have to create a market for government bonds? So this is in essence subsidizing the government. You’ve stated this fact hundreds of times. So when it comes to fiscal operations yes the banks do serve the treasury and subsidize it.

    Also the banks, treasury, and fed work in unison to perform fiscal and monetary operations. When it comes to these operations these three units are in essence different branches of the same organization.The same can be said for the three government branches (executive, legislative, judicial). They are separate branches but part of the same organization. So I don’t think this glosses over or confuses things at all. I think trying overly hard to distinguish banks, the fed and treasury when it comes to monetary and fiscal operations makes things more confusing to the laymen.

  35. Isn’t a budget surplus neutral.
    You tax Peter and give Paul a deposit (redeem his bond).
    No net change in deposits.
    You subtract a NFA, but you also remove the NFA’s liability.

    Now if you see the NFA as ‘money’, then you have reduced the money supply, but you haven’t reduced anybody’s net wealth.

  36. Yes, we created Monetary Realism 2 years ago because we disagreed with MMT.

    1. “government, they are a riskless asset”. This is not true. Govt bonds fluctuate in price just like corporate bonds and stocks. They are not “risk free”. They are a type of financial security just like corporate bonds. Further, they lack the monetary component of a bank deposit in that they cannot be used for the purchase of goods and services. Govt bonds are money-like, but they are not pure money.

    2. The PD’s do business with the govt because they get paid. That’s what Dealers do. They make markets and get paid. The US govt subsidizes the US banking system to the tune of billions of dollars every year. The Fed and Tsy are two of the banking system’s best customers.

    3. The Federal Reserve Act was created specifically to legislate monetary control AWAY from the Executive Branch. When you consolidate the Fed into the Tsy you are simply ignoring the laws that exist. You might be comfortable doing that, but I am not.

    The bottom line is that there’s really no need to do what MMT does. There’s no need to create this “new paradigm” and explain things that are 180 degrees opposite from the rest of the field of economics. We can understand the system entirely by looking at it for what it is while maintaining the actual instutional and legal structures in place. There’s no need for the “taxes destroy money” stuff and “bonds are money” nonsense. They’re unnecessary concepts. I can explain EVERYTHING MMT does without having to try to pass off these myths. I can explain a rationale for the Job Guarantee, why the US govt doesn’t run out of money, etc. I can explain all of these things without all the unnecessary add-ons. So I just don’t see any need for MMT. It just adds to the confusion by trying to create an unnecessary new “paradigm”.

  37. Actually, that’s wrong — you’ve reduced the taxpayer.
    If you see NFA as money, you only want to run surpluses during inflation.

  38. Johnny, in a surplus you tax more than you spend. So you tax Peter $10, spend $5 into Paul’s account and keep $5 for yourself. If you then decide to retire outstanding debt then it’s neutral because you’d give the $5 to the bond holder. But that assumes you retire your debts.

  39. We’re talking about deficit spending, right? You think that the fact the treasury needs to issue government debt to fund deficit spending is a constraint on government spending? Its not. You’ve said it before! Primary dealers have to make a market for treasury securities. They have to! And if they dont the fed does! So how is this different from issuing money “debt free”?

    “If people realized that the govt really just can print deposits into people’s accounts you don’t think that would change anything? Why would we need a banking system with money as debt if the govt can issue all the money debt free?”

    I honestly have no clue what this quote means. Joe Schmo getting his 1000 dollar government paycheck deposited directly into his account has no idea if the government procured the funds by issuing a t-bond or just pressing a button and creating the money out of thin air. All he knows is that presto, the money is there!

    What we are talking about here is how the government deficit spends. Banks will always play an important role in money creation. Their job is to lend money to willing and responsible parties for productive purposes. That will always be the case. Whether the government funds its spending by pressing a button and creating money out of thin air or issuing bonds, that doesn’t change the function of banks.

  40. Thanks, SS
    Even if you’re not retiring debt, government keeps the $5 and spends it a month or a year or so out.
    States do this all the time and it’s very helpful in managing the business cycle.
    Think of the $5 as being placed in a private account held by government.
    I know economists like to keep the public and private sectors separate but the lines are so blurred I don’t think this is necessarily helpful.

  41. I didn’t say it was a “constraint”. I am saying that understanding the actual institutional design of our monetary system is important in understanding how it actually works and who is in control of certain things. The system we have today is designed around private banks as money creators, not the govt as the money creator.

    I also don’t think it’s right to claim that the govt creating deposits on its own would change nothing. If we alter the power of money creation from the banks to the govt then we’re creating a fundamental shift in the way the system actually works. Why would we even need banks if the govt can create all the money debt free?

    MMT is basically the AMI proposal of debt free money without realizing that the govt doesn’t actually create the bank deposits we all use….

  42. No, the reason my example is useful is because you should assume that the surplus stock grows over time.

    Assume a bank issues a loan for $10 which creates a $10 deposit and the govt in year one runs a surplus where they tax $1 out of the private sector. Then there’s a $10 loan and $9 in deposits in the private sector. If someone else doesn’t take on a new loan then you create instability. Keep on adding $1 to the surplus every year without growing debt and deposits and you get a private sector that eventually can’t pay back the loan. Therefore, the govt under the current monetary design is an inherent redistributor of bank money.

  43. Here’s your example in visual form. Notice the two times in the last 50 years that the loan:deposit ratio went negative. Crises ensued almost immediately. It’s a credit based monetary system. Anyone who tells you the govt creates the money is downplaying the key variable – the banks who really create the money through the loan process:

  44. By the way, I am not just “distancing myself from MMT”. I actually think I was wrong to use the MMT framework. I think the MMT description is actually wrong. And I think that the way MR describes it is the right way. So, I am not just rejecting MMT because I don’t like parts of it. I am rejecting it because I actually think parts of it are incorrect….

  45. You’re assuming the surplus would grow.
    Let’s say it does — then the surplus is basically public savings that could be used to retire private debt in your example.
    But why make assumptions. If the government runs a surplus it doesn’t destroy money, just puts it into a different account — from private savings to public savings.

  46. I think the point he’s trying to make is that a public surplus is the equivalent of taking deposits and burying it in a hole that can then never be used to repay the pvt loans that created the deposits in the first place. So, if the govt doesn’t redistribute the deposit then it essentially bankrupts the private sector by removing the very deposits that the monetary system is centered around.

  47. It all goes back to endogenous money. You can’t say “loans create deposits” and also say that “government spending creates money”. It’s either one or the other. MMTers try to have it both ways which doesn’t make any sense. And when you point out that the govt just redistributes deposits then they claim bonds are money which they definitely are not. MMT is really an exogenous money view that centers around govt. They try to blur the lines by claiming their theory isn’t inconsistent with endogenous money, but it definitely is.

  48. Well, sure, if the government puts the money in a hole it would be destroying the private sector.
    But government is basicallly in the business of redistributing existing money, so why would it do that. That’s not realistic.
    Any surplus in Year 1 would just be redistributed in Years 2 and out when the need was higher.

  49. On a much simpler level: this also ignores the fact that the government can borrow all its money at rates that best what a family can get for just their mortgage. Likening government borrowing to a family loading up its credit card (with its double digit APR) is not exactly a fair comparison

    At 2%, that family making $21,700 a year could easily borrow their full year’s income and make only the debt payments for under $40/mo.

  50. I think my comment above is a perfect rebuttal to your comment here. Laws and structures change all the time. Before the crash the Fed didn’t pay interest on reserves. On the gold standard off and on and off again. Would you rather we let SS payments be cut when all SS’s T-bonds have been redeemed solely because of the artificial construct of payroll taxes and a trust fund exist? That doesn’t make any sense. We change tax rates fairly regularly. We just overhauled our entire health care system. Its totally fine with me that you don’t advocate making any changes to the current system, you’re neutral that way and I enjoy it. However, to think that our current laws are strict physical barriers to progress that can’t be changed or change even being advocated for is less than an ideal position in my humble opinion.

  51. Seriously Cullen? I just answered that question in the last paragraph above and you’ve completely ignored it. It is not at all logical to assume that just because the Govt doesn’t issue T-bonds that all private banks will be eliminated. Thats the type of logic I hear from right wingers. “If you make people get background checks for gun purchases, then the Govt is going to form a database and take all our guns away.” Its just non-sensical. Why do you think its better for the general public to live in a fantasy land where they think the Govt is revenue constrained? I mean you made this post specifically because you think that analogy is ridiculous. I just don’t understand your position here at all.

  52. And you also always gloss over the fact that when only reserves are used to buy T-bonds, the Govt definitively forces the creation of net new bank deposits. Yes, I know you are going to respond that banks only own 3% of T-bonds, but what does that matter. You are regularly stringent with technicalities and definitions, and so the fact that you don’t acknowledge this simple accounting reality in your MR framework and dislike of MMT means you are being little hypocritical here.

  53. As you know, I don’t operate on mythical laws. I operate on the laws in place. If MMT becomes legally relevant at some point in the future then I’ll say so. Until then, it’s just a theory.

  54. And one more thing about aggregating the Fed and TSY. We aggregate sectors and individuals all the time to conduct analysis. Why is it Ok when the discussion fits your personal opinions and somehow illegitimate simply because you don’t like the way MMT describes the monetary system?

  55. I didn’t say the banks would all be eliminated. I said it’s a major shift in the power structure. In order to make the govt an issuer of deposits you have to wrestle the power of deposit creation away from the banks. You don’t think that’s a major power shift. I do. I think it totally changes who controls money in this country.

  56. Thats fine for you to think that, but the MMT claim that the Govt is the issuer of the US dollar and is not revenue constrained still holds.

  57. Fine, MMT is relevant 3% of the time and irrelevant 97% of the time. I have no problem admitting that.

    What I don’t understand is why you feel the need to so fervently defend something that you know is wrong 97% of the time. What’s the point? Why not just describe things how they actually work? It just looks like you guys are being intentionally deceptive.

  58. “Why would we need a banking system with money as debt if the govt can issue all the money debt free?”

    I interpret this sentence to imply what I wrote. Why do you think banks deserve to have so much power and control of our money again?

  59. AB, it’s legally wrong to say that the fed is part of the Tsy. It’s not legally wrong to say me and you are part of the private sector.

  60. Depends on what you mean by issuer of the US dollar. If you mean that the US Tsy issues notes to the Fed system for use in the banking system then yes. If you mean that bonds are money then no. And if you think that deficit spending creates money then you’re wrong 97% of the time.

    The details matter here AB. I am surprised you’re so willing to gloss over them….

  61. I didn’t say banks “deserve” to have the power. I am saying they do have the power. The system is designed around a free market money creating banking system. What you advocate is something quite different with public sector control of the money supply. They’re two fundamentally different things with very different political and operational workings.

  62. Because of our conversation yesterday. You agreed that T-bonds are functionally equivalent to CD’s, they are savings accounts. If you think its necessary to say that the Govt creates savings accounts for people to deposit their accounting notations into. And then the Govt spends different accounting notations while your T-bond accounting notations never leave the Fed;s ledger. Then fine, thats one way to look at it. I just don’t look at it that way. If I buy a T-bond, my “money” never leaves my T-bond account. So the Govt can’t possibly be spending my money and giving it to someone else. Just like when the banks make new loans, my deposit is never debited. Thats why the loanable funds model is bunk. And its also why saying the govt is redistributing my money is also invalid IMO.

  63. Lets start from the top. The idea that the Govt would compete with private banks for deposits is all wrong. If the Govt just issued reserves to the commercial banks when it spent and they in turn credited my bank deposit. Nothing would change as far as the system goes. Perceptions will change, power will change, but functionally every thing will be the same. As an individual, I would still not be able to bank at the Fed.

  64. When you buy a T-bond the govt can then credit its TGA account. THAT’S HOW THE LAW WORKS! Just like when you buy a corporate bond the corporation uses those funds to credit its bank account. It cannot legally just credit its own account! It’s really no different unless you try to create some alternate reality where the bond purchase “destroys” money. It’s just nonsense. It defies the logic of accounting. Money does not get destroyed every time it’s debited and then credited somewhere.

  65. Just the other day, you were saying, and I agree, that private banks create private “money” (tradeable liabilities). The reason they exchange for US dollars (cash and reserves) at par is because of the Fed. Thats what I mean by US dollars

  66. No the Fed and Tsy are part of the Govt. thats the aggregation that MMT uses.

  67. I am more than familiar with the accounting. Functionally, it works exactly as I’m describing it. My accounting notations have the same value regardless of it they are in my checking account or my CD account

  68. If the govt actually created deposits the outstanding deposit:loan ratio would skyrocket and the loans would slowly all get paid off. This would kill the banking system’s business model over time as its net interest margins would slowly get crushed. Or, if you didn’t nationalize the banks you’d be forcing them into other operations which is not what MMT advocates….

  69. The Fed is a public/private hybrid entity. You can call it the govt if you want, but it’s really just a clearinghouse for the private banking system. It’s not a lot more complex than that. The fed works for the banks, not the Treasury.

  70. “the fed works for the banks, not the Treasury.”

    your kidding right? bernanke just the other day said “we are an agent of Congress so of course we will do what we are instructed to do” when being asked about a possible change in the dual mandate. Conspiracy theorists say the Fed is a private banking cabal (obviously I’m not saying you think that, its just a rhetorical flourish). but to say that the Fed is not 100% a creature and creation of Congress and totally dependent on the rules that Congress sets for it is wrong

  71. You have much more knowledge about banking operations than I so I wont argue about what you said down below. However, just like all other businesses, if the banks couldn’t evolve, then they would deserve to die. And with that said, I don’t personally care if the Govt issues T-bonds withe deficit spending. Functionally, thats pretty much irrelevant. But clearly Congress could choose to do that.

  72. How do you think the Fed achieves its dual mandate? By keeping the banks healthy. The Fed is a big subsidy for the banking system. We’ve spent trillions of dollars in resources to keep the banks alive over the last 30 years. You think the Fed works for you? The Fed is only there to keep the banks from imploding on themselves. That’s really the only reason it even exists. It’s there to support private banks. Study the history of the Fed. It doesn’t work for the Tsy no matter what Ben says. Ben does whatever he must to keep the banks healthy and then turns around and calls that “public purpose”.

  73. I don’t understand this part, why would the banks still not be able to make loans? People would still need to take out loans to buy houses, cars, or start businesses. I would think that whenever there were loans to be made, a profit would be possible

  74. In the sense that keeping banks from crashing is healthy for the economy, that is good for me and serves me and public purpose. I guess it just depends on what level of abstraction you want to analyze it from

  75. No, the banks could evolve from this. And they are right now. QE is essentially a mini version of what you’re proposing where the loan:deposit ratio is surging and people are paying down debt and killing bank net interest margins. Banks are evolving by doing all of the things MMTers hate and call them criminals for. Your proposal, to have the govt issue deposits, would only exacerbate all of this.

    It would eventually lead to full scale nationalization. That’s the only logical endgame there. MMT is a bank nationalization theory once you think it through logically. It can be no other way. State money will drive out credit money. It’s that simple. Unless you’re cool with having a payments system that is run by a bunch of hedge funds, which I am sure you don’t….

  76. They would be able to make loans. But the banking system wouldn’t be able to expand its loan base because the govt would be issuing competing deposits that would be destroying loans. So, at best, the banking system stagnates and they reinvent their business model as super hedge funds. And then you have a payments system that is run by hedge funds. Do the math. Think forward. This is the only logical endgame under a true MMT world.

  77. Anyways, this was fun Cullen. Thanks for the dialogue. I’m in Chicago so its time for some dinner. Have a good weekend.

  78. You too. And don’t get me wrong. I really like MMT as a theory. It’s SOOO much better than the neoclassical crap we all have to deal with. But think this through logically when you have some time. I really think MMT has some fundamental flaws in it. If the govt issued deposits you’d drive out credit money. For instance, issue $500B in deposits via the deficit next year and that money has to compete with, say $600B in new loan issuance. At best, you cause the banking system to stagnate or contract. And if you leave them as private profit driven entities then you are basically forcing them into shadow banking and trading and all that good stuff. In other words, state money kills private money. It has to! In the long-run there’s no other way this can work. A hybrid just won’t be stable.

  79. One more before I go.

    “Or, if you didn’t nationalize the banks you’d be forcing them into other operations which is not what MMT advocates….”

    Mosler talks about doing it this way or by the Treasury issuing only 3 month T-bonds at essentially 0% (plus inflation I’m assuming). I’ve never heard him advocate for specifically nationalizing the banks, do you think that because he already views them as agents of the Govt through their Govt backed subsidy of allowing them to issue money that guaranteed by the Govt? I have heard him say something to that effect.

  80. There is a limit somewhere on how much debt a government can take on. As the pile of debt continues to grow faster than the GDP and interest payments on that growing pile of debt continue to eat a bigger share of government revenues you reach a point where the interest on the debt exceed the government revenues and eventually the GDP. When we reach the point where we are not actually producing anything and just circulating paper, people will figure it out and confidence in the system will be gone. I suspect it will fall apart long before interest on the debt exceeds government revenues. The household might reach its limit before a government but they both have limits. As far as the country being around for 237 years, no one living in this country has been. I doubt people today would still honor debts from 1776. It seems you are suggesting its ok to burden our children with this pile of debt.

  81. It’s indeed a silly analogy. In the second analogy, if one would “remove the shit” then that would constitute a default of the US on its debts. In effect, a bankruptcy of the US. Then A LOT OF investors would never lend any money to the US gov’t.

    The first analogy is spot on. The US needs to generate – one way or another – an income to pay the interest & roll over the debts.