When the Government Debits Our Bank Accounts….

I woke up to a not so lovely email this morning:

“There has been a large withdrawal from your bank account”.

I won’t joke around about what “large” is in my world because it’s probably “small” in many other people’s worlds, but that’s beside the point.  The point is, that withdrawal was part of a very necessary flow of funds that precedes government spending.  After all, it was the US Treasury debiting my bank account.  Those of you who understand Monetary Realism know how important it is to understand the flow of funds in the economy.  The flow is the lifeblood.  It keeps revenues going, incomes going, spending going, etc.  No flow, no economy.  It’s that simple.

The interesting part of the withdrawal I noticed this morning is that the government doesn’t really need to withdraw money in order to be able to spend.  After all, it has deemed the US dollar as the unit of account in the USA and can create currency at will.  In theory, our government could just print dollar bills right into our bank accounts.  This was the true message of the Trillion Dollar Coin discussions.  Unfortunately, most commentators didn’t even understand that.  Our government, if it wanted to, could just start crediting bank accounts without procuring the funds first.

But what really happens is due to specific bank centric design.  Our government has essentially outsourced the money supply to private banks.  So money creation starts when a bank makes a loan and money destruction occurs when a bank loan is repaid.  Between this start and finish are nothing more than a sequence of flows.

So, when the government taxes Peter they debit Peter’s bank money (what Monteary Realism calls “inside money” because it comes from inside the private banking system), resulting in a credit to the government bank account so they can then debit the account and credit someone’s account with inside money via government spending.  If they don’t procure enough inside money they will sell bonds and again use the inside money system as an intermediary.  That is, if Peter buys a t-bond the government debits his inside money account, credits their account, credits Peter’s account with a t-bond, and will eventually debit their account so they can credit someone else’s account via government spending (notice the government doesn’t “print money” when it taxes or sells bonds!).

As you can see, there’s a specific flow of inside money that occurs.  Why?  Because the whole system is built around the stability of the inside money system.  It’s all a flow of funds occurring in inside money and understanding that flow is crucial to understanding the modern monetary system.

* To learn more please see the following:

1.  Understanding The Modern Monetary System

2.  Understanding Inside & Outside Money

3.  Understanding Moneyness

4.  The Disaggregation of Credit


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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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  • Johnny Evers

    ‘In theory, our government could just print dollar bills right into our bank accounts. … Our government, if it wanted to, could just start crediting bank accounts without procuring the funds first.’

    *In theory* … Interesting choice of words.
    That seems to be the assumption of MR — no need to worry about solvency, because the federal government will someday print dollar bills right into bank accounts to redeem T-bonds?

  • SS

    Right to the point. Nice article CR.

  • SS

    You have to tackle the bank lobby before that ever happens. They don’t want competition in the money issuing business. Definitely not from the government.

  • http://www.highgreely.com jldasch

    If you work through the model you also realize that if the economy grows the amount of debt in the system has to increase, even at zero inflation, because the mechanism of money creation is only via debt, specifically bank loans. The bank created both an asset (the loan) and a liability (the deposit) when it originated the loan and the system records this as there being more money in the system. But when the loan is payed back the money is removed from the system. Since in the loan process, the borrower pays back more than was loaned, the money supply of individuals (M2 or better MZM) decreases in this process. There are millions of loans in the system at any point and the system is pseudo-stable when the net money creation (the difference between the money creation via loans and the money destruction via loan repayment) is equal to the net real productivity change (plus a bit more because a little bit of inflation makes the markets work more efficiently).

    Our system is inherently unstable because the real productivity required to survive (food, shelter, clothing) is far greater than available productivity. Very poor isolated economies, like rural Nepal where I lived for a while a few decades ago, are inherently stable (without exogenous shocks) , because almost all productivity is required for survival. Without exogenous inputs economies like this have been stable for thousands of years throughout human history because they are operating near equilibrium. When people, like Cullen, talk about the potential for dis-equilibrium in financial markets due to QE or other factors they are confusing equilibrium with apparent stability.

    MR is a well thought through model for describing the monetary system. It is not, however, a model for macro economics. It is useful in understanding how our system treats what is one important part (money) of the current macro economic system.

  • http://orcamgroup.com Cullen Roche

    Interest repayment is retained earnings for the bank. I think you’re confusing loan repayment with loans + interest.

    MR is just a description of the current system. There’s no such thing as saying it’s not a model for macro. It is THE base model for understanding macro.

  • Stephen

    So in effect money supply is in the hands of the banks and they wish to constrain that supply then you will also constrain growth potential.
    Perhaps the answer to low growth is how do we motivate banks to actually stop constraining moneysupply ? Does current Fed and BOE policy do the opposite? Does it allow them to make too good a risk adjusted return for them to actually be motivated to change their tight lending T&C?

  • Boomer

    Stephen, that’s a great point. Why would a bank loan money to a potential deadbeat to buy a house when they can just amble on up to the discount window and borrow as much as they want at virtually no interest rate and turn it around and park it in treasuries at 2 or 3 percent. Works for me!!

  • LVG

    Better yet, why would a bank make a small business loan (which requires tons of paperwork, vetting, costs, etc) when they could just loan money to a hedge fund where they know the funds will be used to purchase some collateralized securities? Our banks are incentivized to make loans that aren’t productive. And in fact, since FDIC insurance rewards banks with the high interest rate structure the whole system is designed to reward the riskiest institutions.

  • Johnny Evers

    But if those collateralized securities fall in value? Nah, that could never happen! And if it does, the Fed will step in and buy them at a premium.

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

    I’m not sure that’s really true. First of all, borrowing from the discount window requires the bank to have collateral. For example, T-bonds. If the bank doesn’t have the collateral, I think special provisions can be made but there will almost certainly be fees or fines involved and this activity (I understand) is “frowned upon” by the Fed and other banks (who may see this as a bad sign and will thus be less willing to loan to such a bank).

  • Geoff

    Don’t feel bad, Cullen. When it comes to tax time, I always say it’s better to owe than be owed.

  • http://orcamgroup.com Cullen Roche


    Yeah, I often have that discussion with clients when we discuss capital gains. Hey, owing the govt a tax liability means you did something right!

    Of course, then the politics come into it and I have to start thinking about where the money actually goes during this “flow” of funds….That’s usually when my head explodes.

  • Adam P.

    The BASE model to understand macro is understanding the energy supply future outlook. There is no economy without plenty of energy and energy policy needs objective information. Money is the grease, energy is the fuel.

  • http://orcamgroup.com Cullen Roche

    True, resources are the fuel, but understanding the monetary machine is about understanding how the fuel and grease work within the system. MR is based on an institutional understanding of the economic machine that gives you a better understanding of how the various pieces come together to help use resources within that system. I only describe how the machine is designed. How its pedals work, how its engine is designed, how its bumper works, etc. Money is the grease as you say and the fuel is human innovation/output in using the resources available.

    I actually use this very analogy in my big MR paper….

  • farthing

    Not to get all snarky, but as Yogi Berra said (at least, attributed to him) “In theory, there is no difference between theory and practice: in practice, there is.”

  • beowulf

    “no need to worry about solvency, because the federal government will someday print dollar bills right into bank accounts to redeem T-bonds?”

    Someday? How do you think the Fed buys T-bonds?

  • beowulf

    Yeah, that’s one reason I’ve always been a fan of Fiege’s Automated Transaction Tax. It would go down easier since its the same business model Richard Pryor used in Superman III, a fraction of a penny at a time.

  • http://www.chpc.biz Brian_Ripley

    Thank you Beowulf for mentioning Dr Edgar Feige’s APT.

    I have an attempt to sell tax payers on this very simple idea on my blog here: http://www.brianripley.com/1/post/2011/11/apt-tax.html

    It would do away with all taxes (and tax like fees) and do away with tax filing and paying expensive accountants and lawyers to keep us inside the law.

    I have also sent the link to various media outlets and cannot get any interest generated.

    Election after election we get the same old tax arguments for and against…. taxes.

    We have computers and we have software that can handle big data. The APT is doable. Hopefully a new generation of economic majors will seize the idea and bring it into reality.

    I must say I have the greatest respect for Cullen who has emerged as one of the best bloggers on the financial market scene. I wish I had his depth of ability to tackle the “prescription” of taxes with the same tireless drive that he has directed towards the “description” of the banking scene.

    Feige’s thesis needs new blood.

  • http://orcamgroup.com Cullen Roche


    I am not that familiar with that idea. It sounds like a sales tax, no? How is it different?

  • Windchaser

    “Interest repayment is retained earnings for the bank. I think you’re confusing loan repayment with loans + interest. ”

    To expand on this, I often hear from libertarian types that the money supply *has* to grow by the amount of interest that’s paid each year, or our financial system would break down.

    It’s a puzzle to me. It’s as if they believe that the money you pay on interest is consumed; that it goes away, so you have to keep creating more money to feed that ‘money consumption’.

    But as CR said, the money that goes to pay interest doesn’t disappear – it goes to the lender, and it’s treated just like earnings in any other corporation (i.e., it’s either spent or retained).

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


  • LVG

    Ironically, I see MMT people make the same mistake all the time also. Except they think the government has to create more money to fuel the interest repayment. Kinda funny when you see how lefty MMT types and rightly libertarians make the same mistakes sometimes in making their obviously ppolitical aargument.

  • LVG

    righty. Stupid auto correct.

  • Android

    Hahaha, I remember a few years ago I would read carefully and contemplatively an article like this. Now, I just skim through to see if I missed anything. I got the message; thank you Cullen for the education.

  • beowulf

    Every bank transaction would be levied a fraction of 1% user fee. Ironically, its the one tax Congress doesn’t have to vote for– the Fed governors already have authority to levy a user fee on any transaction moving through the Fed system (and where does the Fed’s net earnings go…).
    If you’ll recall, I’ve suggested harnessing the inflationary universal Medicare to the deflationary APT tax and letting the Fed governors adjust fiscal policy via the APT rate to keep them in equipoise

    “In perhaps the most wonderful example ever of “its a feature, not a bug”, economist Bruce Barlett complained of Feige’s plan, “Since GDP equals the money supply times the turnover of money—what economists call velocity—a fully effective transactions tax will presumably reduce velocity. Consequently, it would be severely deflationary unless the Federal Reserve​ substantially increased the money supply to compensate. It also means that the tax base will shrink as soon as the tax is imposed.”
    So this is the plan, the unstoppable force of $1 trillion in inflationary Medicare spending would meet the immovable object of $1 trillion in deflationary transaction fees


  • http://www.chpc.biz Brian_Ripley

    From Feige’s Executive summary: http://www.apttax.com/execsummary.php

    “The APT concept would REPLACE the entire federal and state tax system – including income, corporate profits, excise and estate taxes – in favor of a tiny tax on all transactions. The tax would be automatically deducted from special taxpayer accounts, linked by software to all accounts at financial institutions capable of making final payments to the government seamlessly in real-time. A transaction tax therefore eliminates the need for individuals and firms to file income and information tax returns. This is estimated to save citizens and the government roughly $200 billion per year in administration, enforcement, evasion and compliance costs, roughly seven times the amount currently being spent on homeland security.”


    “As individuals and businesses use their new found economic freedom, transactions naturally grow over time, suggesting that future tax rates could be even lower.”

    So yes, it is a “sales tax” but the collection scale is immense and the “tax” becomes a micro fee.

    Feige’s 41 page PDF:

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

    2nd paragraph, did you mean “far greater” or “far less?”

  • Vivek

    Hi All,

    As per my understanding the chain of events goes something like this:

    1. Fed sells a bond for USD 100
    2. Fed takes USD 100 from Peter
    3. Peter gets a bond of USD 100
    4. Govt. spends USD 100 and gives it to Paul
    5. Paul has USD 100
    6. Peter sells the bond back to fed in OMO for USD 100
    7. Peter also has USD 100 now

    What I am not able to understand is if in steps 6 and 7 Peter also gets back his original USD 100 and Paul also has USD 100 in his bank account, is it not “printing money”? Is it that the Fed also has its bank accounts with commercial banks which is already included in the calculation of inside money?

    Thanks in advance,