Monetary Realism

Understanding The Modern Monetary System…

A Possible Rule for Government Money Creation

We’ve had some discussions within the MR team on the costs of minting a coin vs. the costs of borrowing. It turns out it’s more expensive for the U.S. government to mint a coin than it is for the the government to borrow money. It sounds crazy, but it’s true.

If the U.S. mints a coin, the coin will be deposited at the Fed. As the Treasury spends this money, the money will find it’s way back to the Fed through the banking system. The Fed pays interest on reserves at .25%

If the U.S. borrows money, the government pays the market interest rate for the specific bills, notes, or bonds it issues when borrowing. Here is the curve:

We can borrow money out to 1 year for cheaper than we can mint the money!

It’s possible this provides us with an easy way to determine if we should be minting/printing money or borrowing it. Here’s the proposed rule: The larger government should do whatever is the most expensive. The Treasury should print money if the Interest on Reserves is higher than the cost of borrowing. The Treasury should issue bonds if Interest on Reserves is lower than the cost of borrowing.

So today we should be printing money, minting coins. The market will tell us when it’s had enough by raising the cost of borrowing higher than the Interest on Reserves.

It’s a handy little rule, something we can use to determine when to mint and when to borrow. Today, we don’t have anything in place at all. Zero.

It’s become clear the division between fiscal and monetary policy isn’t as clear as it once was.

As has become more clear in the last few years, monetary and fiscal policy are closely intertwined. It’s hard to tell where fiscal policy stops and monetary policy starts. When the Fed swaps short-maturity government debt for long-maturity government debt, or purchases mortgage-backed securities with reserves, are those monetary policy actions or fiscal policy actions? You tell me.”

JKH pointed out we are speeding towards a combined monetary and fiscal policy institution in his classic Contingent Institutional Approach. Fiscal and monetary policy are two sides of the same coin (Ha! please forgive me!)

If the Treasury and Central Bank are linked at deep levels of accounting, it follows that monetary and fiscal policy should be linked and used as a combined policy tool.

Right now, we don’t have a combined policy. We just badger the government for spending too much and use the fed to try and clean up the mess after. Here is a rule which might help us just a little bit, and give us just a little more structure on what to do. It doesn’t tell us how large to set the overall budget deficit, like the Strong Economy Rule (formerly the TC Rule) does.


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118 Responses

  1. Greg says

    Supply and demand for resources and funding are different things, linked to a degree, but different.

    • vimothy says

      That’s not really how other schools of thought see it!

      Funding costs are the costs of acquiring resources. If everyone wants access to available resources at the same time, then the price ought to be going up, cet par.

      • Greg says

        Except everyone’s isn’t wanting access to all resources at the same time. Yes there are certainly conditions when a govt acting to acquire a resource would make that resource unavailable to private sector or at least drive the price too high, which is another way of expressing the loan able funds theory, but that condition is NOT now

        • vimothy says

          Everyone wanting access to resources at the same time and causing the price to rise is a conditional prediction: IF antecedent, THEN consequent. If, on the other hand, less people want to access resources, then the price ought to be coming down versus the counterfactual.

        • Greg says

          “Everyone wanting access to resources at the same time and causing the price to rise is a conditional prediction: IF antecedent, THEN consequent. If, on the other hand, less people want to access resources, then the price ought to be coming down versus the counterfactual.”


          How does this relate to loanable funds theory though?

          One antecedent to loanable funds theory is that savers are funding borrowers. This is demonstrably false since banking is where most everyone does their borrowing and banks are NOT simple intermediaries of savers and borrowers, ie playing a zero sum game. Banks dont need anyone to save in order to lend. So banks and govt are not competing for funding, however you wish to think of funding

        • vimothy says

          Banking doesn’t necessarily add to the quantity of real savings that can be put to use in the loanable funds model. When the government wants to consume more resources than it possesses, it has to borrow them. If the supply of resources available in this way is low, then the price it has to pay in terms of the resources that it has to put back in return will likely be high, other things equal.

        • Greg says

          ” When the government wants to consume more resources than it possesses, it has to borrow them. If the supply of resources available in this way is low, then the price it has to pay in terms of the resources that it has to put back in return will likely be high, other things equal.”

          No, it doesnt “borrow” them it buys them. It wants to consume something and the producer has something it wishes to offer for consumption.

        • vimothy says

          If it replaces the resources, then it borrows them. If it does not replace them, then it appropriates them outright.

        • Jose Guilherme says

          When there are unemployed resources, there wiil be neither replacement nor appropriation.

          The idle resources will simply be used – whereas previously they weren’t.

        • Jose Guilherme says

          Another way to see it is this one:

          When there is full employment the economy can produce extra restaurant meals only at the cost of giving up producing something else. Deficit spending in said conditions would just shift resources from one sector to another – from the spa sector to restaurants, say – likely putting upward pressure on the price level in the process.

          Below full employment, however, we can afford those extra meals without giving up on anything. Said meals, if lunches, are really free lunches.

          And for the meals to be served the government will deficit spend. In Canada, where the NCB can buy debt in the primary market, the government may even simply credit its account at the NCB and then proceed to transfer the deposits to the restaurants. The meals can then be served having been “paid” for by mere computer keystrokes.

          Opportunity cost: zero. The lunches were free.

        • vimothy says

          In my example, by assumption there’s no desire to spend the money, it’s just going to stay stuffed in the mattress or invested in some kind of fund. It’s just an example and it’s not terribly important, but it’s supposed to pose a choice between something and nothing. So the opportunity cost of something is nothing.

          The point is that cost and opportunity cost are not the same thing. Just because something has no opportunity cost does not mean that it has no cost. Think about what it means if the effect of government spending is to raise GDP by an equivalent amount: it means that the effect on output is equal to the cost of the spending programme. Say that the effect is less. Then cost is greater than the return. In neither case are costs zero. Costs are whatever they are, regardless of the multiplier on spending.

        • Jose Guilherme says

          Oops, my answer showed up way above this line at “In order to buy the $1000 investment I have to give up the possession of valuable dollar bills …” :)

        • vimothy says

          The fact that costs are non-zero is the reason why you need to have idle resources (or maybe more accurately, a fiscal multiplier at least equal to unity) for your example to work. Otherwise, the cost will exceed the return.

        • vimothy says

          Imagine that you have $1000 stuffed in your mattress. Say that there’s a $1000 investment that pays out $1050 with certainty. Then the _opportunity cost_ of the investment is zero, But the _cost_ is still $1000.

          Say that the government can spend $1000 and raise output by a $1000, and that otherwise, output would be $1000 below its long run potential. Then the opportunity cost is zero, but the cost is going to be around $1000, depending on how the spending is financed.

        • vimothy says

          I don’t understand why you keep saying “by definition”. If the economy is below full employment, then government spending, deficit or otherwise, still has a cost. Being below full employment might make it easier to meet that cost (for instance, if you think that multiplier is always greater than or equal to one when the economy is below potential, which you implied earlier). But it might not. It certainly doesn’t follow from the definition that there is *no* cost.

        • Jose Guilherme says

          Opportunity cost: the cost of the alternative foregone to pursue the chosen action.

          At full employment, for the government to deficit spend (chosen action) someone else will have to give up on consumption of goods and services. Goods and services that have a value for that someone.

          At below full employment no one has to give up on anything. The alternative forgone was inactivity, not the making of other goods and services of value. Opportunity cost is zero.

          So it all follows from the definition of opportunity cost.

        • vimothy says

          If the multiplier is zero, then government spending has no effect whatsoever. It’s probably possible to imagine some scenarios where that would be the case, but there’s no reason to think that this is true for _every_ conceivable spending programme at potential or full employment output, as far as I can see.

          I don’t agree that the economy can’t produce at above its full employment level. At any rate that’s not how I define full employment. It can produce above it or below it, and we would like to minimize those deviations. It’s also possible for GDP to increase over time, which is why we have economic growth.

          How this relates to our discussion, I’m not totally sure. From where I’m sitting, the point is that if you have a multiplier of one (or greater), then the government can offset its costs against the new gains to national income. You and Greg seemed to be arguing that the government has no costs whatsoever, in which case the multiplier would seem to be irrelevant.

        • vimothy says

          Your case has a multiplier of one. That’s what it means to say that when the government spends, GDP increases by the same amount: dY/dG = 1. (Simply assuming that the economy is below capacity will not get you there, incidentally. It is an additional assumption.)

        • Jose Guilherme says

          In order to buy the $1000 investment I have to give up the possession of valuable dollar bills presently stuffed in my mattress, worth a total of $1000 in goods and services at market price. So the opportunity cost of said investment is $1000.

          If the government deficit spends $1000 on goods and services that would otherwise not be produced – say, meals for poor kids served at a restaurant lacking in clients due to a deficiency in demand – the opportunity cost of doing so is zero. After all, the alternative to serving the meals is not serving the meals. And “not serving any meals” at a restaurant is worth exactly zero at market price.

        • Jose Guilherme says

          Yes, deficit spending below full employment – either via borrowing or “money printing” – has no cost in the sense that there is no waste of resources, by definition. If the government hadn’t spent, said resources – land, labor, capital – would have stayed put, idle, non-used (yet waiting to be used).

          And when the government taxes-and-spends nothing substantial happens. The government is just “taking (some would say robbing) from Paul to pay to Peter”.

          Taxes destroy; spending creates.

          That’s the great lesson we’ve all learned from the likes of Keynes and Kalecki.

          And why, oh why, can’t the likes of Obama and Merkel simply apply it? :)

        • Jose Guilherme says

          With the economy at full employment the multiplier is zero, in real (inflation-adjusted) terms. By definition, said economy cannot produce extra goods and services, so government spending (indeed, any new spending) simply crowds out other spending. Real GDP CANNOT increase in said situation.

          Btw, that’s the point made by Krugman during the Clinton boom, when the American economy was near full employment. Clinton claimed his export-promoting trips abroad would serve to “create jobs” for Americans. Krugman countered that said trips could only create jobs in the export sector at the cost of destroying the same number of jobs in the sectors producing for the domestic market. The net creation of jobs would have to be zero, since the economy was already at full employment.

          Clinton probably didn’t like it. But Krugman was – simply and unimpeachably – right.

        • Jose Guilherme says

          My case doesn’t even consider possible multiplier effects.

          The government spends one dollar, commands services produced by previously idle producers and GDP increases by one dollar, immediatly. What happens next – after the producers receive that one extra dollar of income – need not concern us here.

          The only assumption we need is that the economy be below full employment of resources.

          However, if an economy is at full employment there are no idle producers available to offer extra goods and services for bidders. In such situation, the government can only spend by forcing someone else in the economy to “not spend”. That will likely mean bidding for resources at a price higher than the prevailing one, generating an increase in the price level.

          With full emloyment, there are no free lunches available for anyone. :)

        • vimothy says

          I don’t think we need to worry about “operations” here, we can say this in much simpler language: the fiscal multiplier is greater than one. (The fiscal multiplier is the ratio of a change in income to the change in government spending that caused it.)

          That multiplier is invariant to the source of government financing. If the fiscal multiplier is one, then however the government takes hold of the resources, it’s exactly offset by the increase in resources available to the economy.

          In your example, the multiplier is greater than or equal to one. The government can send some money and it will cause national income to grow by at least an equivalent amount. Then the government can either borrow (your example) or tax (equivalent counterfactual case) that increase. Any net increase over and above that is pure stimulus.

          None of that contradicts what I’ve said, as far as I can see. It’s not pulling those resources out of thin air. It’s either borrowing them or it’s appropriating them outright. If it’s the former, then the expected marginal effect on the price of borrowing resources (i.e. the _real_ interest rate) should be positive, other things equal.

        • Jose Guilherme says

          “”It’s hard to keep track of these threads!

          Let’s assume arguendo the best, most restrictive case from your point of view: Say that there are idle resources that the government can put to use on some project”.

          Say U.S. spas are idle because of lack of demand.

          The government (worried about the recession and also its possible effects on the general health condition of citizens) deficit spends $3 bilion ($10 per American citizen) on Spa vouchers mailed to the population – that the receiveing Spas may later on exchange for U.S. dollars.

          The government goes to the markets for financing. Institutional investors buy $3 billion in bonds, paying for them with their bank deposits.

          Then, after the vouchers are spent the Spas see their bank deposits increase by the very same $3 billion.

          The final results of this operation will be the following.

          Net creation of bank deposits for the private sector: zero (decrease for investors exactly matched by increase for Spas).

          Net creation of Financial assets for the private sector: $3 billion in T bonds.

          Net increase in U.S. GDP (abstracting for possible multiplier effects): $3 billion in “Spa services”.

          Previously idle spa resources have been deficit spent into the economy.

          Everybody’s happy (Spa consumers and Spa employees: the government, who’s just improved the health of the population; and the new bondholders, who freely chose to exchange their deposits for U.S. securities).

          And no one lost anything in the process :)

        • vimothy says

          And the resources will still have to be paid for, so it looks like a non sequitur as far as my argument goes. What you mean is that the return is greater than the cost, which might be right, but is an assumption that cannot be taken as given in every case.

        • vimothy says

          That’s an *extremely* strict condition!

        • Greg says

          Right. The producer of those resources produced them to be used in most cases. If the private sector aint using them the govt can without any ill affects

  2. Jose Guilherme says

    How does that lay to rest loanable funds theory?

    The loanable funds approach claims a higher government deficit will mean a decrease in the supply of funds for the private sector that will determine an increase in the rate of interest.

    The opposite of Mosler’s conclusions.

    One or the other will have to give.

    • vimothy says

      Surely all you are saying is what I said upthread: if the government increases the supply of money, then the return on close substitutes must also come down, to lower the opportunity cost of holding it. However that increase is brought about–CB OMP, financing a deficit, or whatever–the two variables are jointly determined, so changing one means changing the other.

      That doesn’t lay to rest the loanable funds theory, though–at least as far as I can see. Loanable funds is about the supply and demand for real resources. The relationship you describe between the nominal interest rate and the nominal quantity of money doesn’t reflect anything counterintutive about *this* particular market.

      • Greg says

        “Loanable funds is about the supply and demand for real resources”

        Since when? Its always been a discussion about available funding when I see it discussed

        • vimothy says

          It *is* a discussion about funding.

  3. JKH says


    Interfluidity has posted on a subject that has a very interesting connection to your post.

    My comment there:

    • Michael Sankowski says

      That’s a great point about short term debt being more liquid than bank reserves. It’s an inversion of what we typically expect. For individuals, cash is more liquid. But for banks, this isn’t always the case. Cash that becomes bank reserves is less liquid than plain old cash or short term debt.

      Essentially, borrowing money “should” be cheaper than just minting it, because the home for printed/minted money is bank reserves, and bank reserves are not that liquid compared to short term debt.

      • wh10 says

        Speaking of the liquidity trap…. haha

        JKH and Mike – but what about taking this one step further, where Scott Fullwiler goes with it, and saying “we were always at the zero lower bound,” even before IOR? (Which is also to say, unfortunately, that SRW doesn’t totally get it.). Fullwiler essentially says that to believe IOR signaled a major shift in how to think about the relationship between base money and inflation reflects a misunderstanding of how the Fed always conducted monetary operations. That is because “you can’t have discretionary open market operations beyond that which is consistent with the Fed achieving its federal funds rate target unless an interest-bearing alternative to reserve balances is offered. ”

        Fullwiler made this point when debating Sumner ( and he also made it when debating Krugman ( ;

        Do you guys agree with Fullwiler here? I think this is a very important point of contention. On one hand, it’s nice having SRW make the point he is, but on the other, I think we need a bit more intellectual clarity, as Krugman puts it.

        • Cullen Roche says

          Fullwiler is right, but I am not so sure the MMT description is balanced. MMT says we have a natural rate of zero because of deficit spending. But that’s not really true. We have a natural rate of zero because the Federal Reserve system exists and private competitive banks are required to use it. The Fed system is a burden for banks who I am sure would rather operate as totally independent entities so they could monopolize the money system on their own. Banks hate Federal oversight and the need to comply with certain orderly institutional structures because it impedes their ability to profit from the system. But the point is, the natural rate of interest is zero because the Fed system even exists at all, because, in essence, all reserves are “excess” to a private profit seeking bank. So yeah, the Fed always has to push rates up in essence. The Fed has to bully the banks to some degree.

          To me, this all circles back to the same point. The Fed only exists to protect and support the existence of the real money issuers who do so via their private oligopoly. If the Fed wants to impose its will on these entities it has to actively raise rates from their natural rate. BUT, the impotency of this all in influencing the broader money supply proves one thing – it is not the Fed or even the Federal govt who controls the monetary system (mainly by choice). We’ve outsourced control to this private oligopoly and they do as they please with it despite some of the regulations we put in its place. I don’t know the historical record here, but my guess is that bankers realized inevitable Federal control some time after 1907 and decided that this “Fed system” was far better than their businesses being crushed and nationalized. The Fed system in essence protects the private competitive oligopoly….The coin has exposed another option to leaving the banks in control. It’s a debate we should all see coming because the rest of the world is slowly coming around the realization that the real debate is about govt self financing vs a system that is controlled primarily by private banks.

        • Jose Guilherme says

          “MMT says we have a natural rate of zero because of deficit spending. But that’s not really true. We have a natural rate of zero because the Federal Reserve system exists and private competitive banks are required to use it”.

          I suppose MMT might answer here that it’s simply describing the monetary system as it is – not as it might be in some alternative universe.

          Or, to put it slightly differently, that it’s engaging in monetary realism. :)

        • Cullen Roche says

          I think you misinterpret the key takeaway from this point. MMT makes the same mistake that all the neoclassicals do. They build a govt centric model around “high powered money”. If MMT were engaging in “realism” they’d describe the Fed for what it is. A system that is designed to support a private oligopoly of banks who dominate the money system. The Fed, by its mere existence, CANNOT support public purpose entirely because it engages the economy through a system of entities who are only serving one master – their PRIVATE owners. Instead, MMT builds this strange reserve settlement concept where they claim that all money is actually state money just because a reserve system exists. That description is backwards. MMT doesn’t really want to eliminate the Fed’s role just because they don’t like monetary policy. MMT NEEDS to consolidate Fed & Tsy and eliminate the reserve system because a single cohesive money issuing entity (the govt) is the base case for MMT. The mere existence of a reserve system invalidates many of the MMT ideas because its existence is there for one primary purpose – to serve and support private money issuers.

          To me, the coin is a super interesting discussion. It’s an invaluable concept to MMT because it illustrates that we’re not THAT far from achieving a MMT world of govt self financing. The only roadblock is that oligopoly. And I can guarantee you one thing. If you’re a bank CEO, lobbyist or consultant who understands all the things being discussed in this comment section, the coin scared you sh$tless because it was a brief glimpse into the world where modern banking dies at the hands of govt self financing.

        • Jose Guilherme says

          But the MMT world of government self-financing has already existed in the past and has achieved impressive results in terms of economic growth and full employment.

          here is former Prime Minister of France Michel Rocard, speaking to French radio in late December, 2012 (my translation):

          “From the foundation of the Banque de France in 1801 to January, 1973, the French government always benefitted from direct financing from its NCB at a rate of interest of zero percent”.

          To this direct financing one must add the abandonment of the gold standard in the period 1945-1973 – the “30 glorious years” of unsurpassed growth in the French economy.

          Perhaps the time has come to reinstate this form of direct financing on behalf of general prosperity and economic development?

        • Cullen Roche says

          Perhaps. I am not here to serve as judge and jury over that decision. As I like to say, I describe what is. What we absolutely don’t have at present is a system where the govt serves as a “money monopolist” in the way that MMT describes. We’ve had it in the past and we could certainly choose to go back to that system. That’s the interesting facet of the coin idea. But there’s a difference between “theory and reality”….As I said when I first parted ways with MMT’s “descriptive” aspects 12 months ago.

          The coin raises an important potential alternative that few people appear to be grasping onto. MMT has done so to some degree, but the mainstream has seen this go right over their head. Frankly, I don’t think the bankers missed it. I’ll bet you a million bucks they lit up Federal Reserve phones like crazy in the last 10 days telling them to do exactly what they did this weekend – kill the coin.

        • Jose Guilherme says

          I agree that the bankers didn’t miss it and that’s likely the reason why the idea never had a chance to begin with.

          But Pandora’s box has been opened by the discussion around the idea.

          Krugman became a convert and we should not underestimate his influence. The “MMT scenario” for deficit financing has (at last!) gained a valuable foothold inside the left wing of orthodox neo-keynesianism. How long will we have to wait before a major country reverts to the system of direct financing that served France so well in the post-war era?

        • JKH says

          The only way we can have a natural rate of 0 is if the central bank chooses to pay a rate of 0.

          0 is a number – like 25 basis points, or 10 per cent.

          Or a negative rate – in la la land (substitute preferred sample school of thought)

          That’s a central bank choice

          And if its a choice, its not natural



        • Jose Guilherme says

          The use of the word “natural” in economics is unfortunate and should be dropped.

          Economics is a social science, not a natural science. In a sense, it’s all about human actions and free will. The “natural” rate of interest, the “natural” rate of unemployment et alia should simply be sent to the dustbin of the history of political economy – the expression rightly used by Adam Smith to refer to the object of his studies.

        • vimothy says

          What Mosler means by “the natural rate of interest is zero” is just that, if the economy is flooded with base money, the nominal interest rate on very close substitutes for base money will fall to zero. That seems like a rather unexciting and conventional idea to me, but I don’t see how you can derive any kind of normative prescription from it without some extra theoretical leaps that I would have thought were anathema to MMTers.

        • Jose Guilherme says

          “That seems like a rather unexciting and conventional idea to me”.

          Really? I might agree – but only in the sense that Columbus’ egg may now appear to be “unexciting and conventional”.

          The fact is that until Mosler came out with his “Soft Currency Economics” in 1994 virtually every economist, orthodox or heterodox, believed in the loanable funds fantasy where goverment deficits raise interest rates.

          But I prefer to use the words of the master of SFC models (Marc Lavoie) in order to describe the importance of Mosler’s discovery and give him his due:

          “…as Mosler (1994, p. 12) puts it, “deficit spending … would cause the fed funds rate to fall”. I must admit that when I first read this back in 1995, when Pavlina Tcherneva, who was then Mosler’s assistant, sent me his 1994 paper, I thought that Mosler, despite his use of T-accounts, was another one of these monetary cranks that Keynes talked about in the General Theory. We are so much accustomed to the loanable funds approach and to the IS/LM framework, where an increase in government expenditures tends to drive up interest rates, that it is difficult to get away from this. However, a proper understanding of the payment system reveals that it cannot be otherwise”.

          (Marc Lavoie, “The Monetary and Fiscal Nexus of neo-chartalism, page 13).

          As the French would say: “A Tout Seigneur, Tout Honneur” :)

        • vimothy says

          How does that lay to rest loanable funds theory?

        • Jose Guilherme says

          To be fair, Lavoie also writes that

          It is interesting to note that Joan Robinson made the same point many years ago, so that Robinson could be considered as an honorific developer of modern monetary theory

          and that

          Similarly, Godley and Cripps (1983, p. 158) were very much aware of the relationship between the government, the central bank and reserves

          So, one might agree with Ramanan that Mosler already stood (perhaps unknowingly) on the shoulders of giants :)

        • Jose Guilherme says

          “The statement that deficits lead to a fall in the Fed Funds rate is ridiculous”.

          I’m sure there must some misunderstanding at the level of language and expression here.

          Surely, economics – the PK school, in this case – must agree on such basic issues, otherwise it won’t deserve the label “intellectual construct” and even less that of “science”.

          Let me quote Lavoie again, to check whether we can at least agree on the following statement:

          “When the government pays for its expenditures through its account at the central bank, settlement balances (reserves) are added to the clearing system. This tends to reduce the overnight rate, as banks are left with excess reserves that no other bank wishes to borrow. Keeping the rate at its target level requires a defensive intervention of the central bank…”

          What do we find that is wrong here? It all seems pretty straightforward to me.

        • Ramanan says

          “Well, perhaps you should ask him”

          Not needed. The statement that deficits lead to a fall in the Fed Funds rate is ridiculous. Bad phrasing to begin with.

          In a hypothetical world where the government has an open line of credit at the central bank, and where the central bank is aiming at a zero rate, deficits do not lead to a fall in Fed Funds rate because it is already zero.

          In the other case – the real world case, the framing of the statement itself is wrong. The way to say this is to identity factors affecting reserve balances. A movement of funds from the government’s account creates reserve balances and the central bank neutralizes these effects (talking pre-crisis system). Now the government can be in deficit or surplus but during a day can have movement of funds leading to creation of reserves. So it is incorrect to say that government deficits cause Fed Funds to fall.

          Let us say you were to write a macroeconomic model. Would you say Fed Funds rate is inversely proportional to deficits? No! You would simply state that the Fed Funds rate is closely targeted by the central bank unrelated to the budget balance.

        • Jose Guilherme says

          “Plus I don’t know why Lavoie says that…”

          Well, perhaps you should ask him.

          I just happen to read my sources attentively – only to be later on unexpectedly labelled as a card-carrying member of the neo-chartalist school :)

        • Jose Guilherme says

          “…discovering the wheel on your own desert island when it’s been in existence elsewhere for years and years doesn’t make you the inventor of the wheel”

          Well, at least he realized, while living on a desert island, that the wheel exists.

          So sad that mainstream, car-driving economists living in large urban centers failed to notice said existence :)

        • Cullen Roche says

          Agreed! :-)

        • Ramanan says

          “You forgot to include the following disclosure”

          Well whatever.

          Anyways typical Neochartalist attitude – as if they discovered everything and the rest were muddled. It’s the opposite dude!

        • Jose Guilherme says

          “Clearly you do not know the history of PK Monetary Economics”.

          You forgot to include the following disclosure: that the “you” in the sentence refers to Marc Lavoie (whose passage was cited above) :)

        • Ramanan says

          Plus I don’t know why Lavoie says that because in his book Foundations of Post Keynesian Economics, he clearly says deficits don’t lead to increase in interest rates.

        • Ramanan says

          “I don’t know how much there is to the idea that deficits cause interest rates to fall.”

          Yes Vimothy, that notion deficits leading to a fall in rates is nonsensical. That is not to say deficits raise interest rates. The government expenditure and taxation have an effect on banks’s reserves at the central bank but the central bank neutralizes the effect.

        • Ramanan says

          “I’m just saying that Mosler deserves full credit from having laid to rest, once and for all, the metaphysical, unscientific loanable funds theory that prevailed unchallenged for so many decades in the history of economic “thought” (inverted commas intended).”

          TOTAL NONSENSE. Clearly you do not know the history of PK Monetary Economics.

          “IMO, Mosler would deserve a “Nobel” economics prize for this – at any rate much more than 99% of its recipients since the time of Wassily Leontieff.”

          If his policies starts to get adopted nations will soon run into balance of payments crises. Plus the man still confuses the definition of saving. Sorry!

        • vimothy says

          I don’t know how much there is to the idea that deficits cause interest rates to fall. Presumably, there are a range of effects, but the direct effect on the interest rate seems unlikely to be positive.

          But the idea that when the quantity of money goes up, the rate on close substitutes goes down is conventional, yeah, I think so. That’s why interest rate and money supply instruments are largely equivalent in theoretical terms.

          [Full disclosure: I actually think the loanable funds is quite a useful way of looking at the world!]

        • Jose Guilherme says

          I’m just saying that Mosler deserves full credit from having laid to rest, once and for all, the metaphysical, unscientific loanable funds theory that prevailed unchallenged for so many decades in the history of economic “thought” (inverted commas intended).

          That model has certainly produced many nasty consequences at the level of economic policy, where it still refuses to die because very influential circles stand to benefit from its application.

          IMO, Mosler would deserve a “Nobel” economics prize for this – at any rate much more than 99% of its recipients since the time of Wassily Leontieff.

        • Cullen Roche says

          I don’t think that’s totally accurate. MMT has a tendency to take old ideas, repackage them and then claim they are a new development. I don’t think the founders would say this necessarily, but MMT’s users definitely do it. In reality, MMT is a combination of old ideas that have been applied to a modern system. Personally, I think they’ve jammed a square peg in a round hole thereby misconstruing some of these old ideas to force fit them to the current system. It’s messy resulting in the need for “general” and “specific” cases and a rather confused commingling of “description” and “prescription”. No doubt Mosler’s findings are brilliant. Even more so when you consider that he didn’t read Keynes or any economics before realizing this stuff. But, discovering the wheel on your own desert island when it’s been in existence elsewhere for years and years doesn’t make you the inventor of the wheel. :-)

        • Ramanan says

          “The fact is that until Mosler came out with his “Soft Currency Economics” in 1994 virtually every economist, orthodox or heterodox, believed in the loanable funds fantasy where goverment deficits raise interest rates.”


        • Cullen Roche says

          Mosler’s description is not totally accurate. The only reason the Fed has power over the overnight rate is because there is a reserve system to begin with. It is the existence of the reserve system that puts pressure on the overnight rate. Not merely govt spending. The Mosler description brings it back to govt issuing money. But the real reason why the overnight rate is zero is because we have designed a reserve system that helps support an oligopoly of private banks who would prefer not to engage in this system in the first place thereby rendering all reserves “excess” to them.

        • JKH says

          That seems right to me.

          And at the second level, the conflicting use of the word by conventional mainstream versus Mosler MMT, while slightly amusing (as Mosler probably intended), is substantially confusing

          (e.g. Nick Rowe was certainly annoyed by it)

          – either use of it is controversial enough

        • Geoff says

          JKH, I believe Mr. Mosler says that the natural rate is zero because that is where it would naturally fall if the Fed does nothing. I suppose you could say that doing nothing is a choice, but the Fed has to actively intervene in the “market” to ensure a positive rate.

        • JKH says

          It doesn’t have to intervene in the market at all

          It has to set the rate on excess reserves, which is a choice – 0 or otherwise

          Rate setting is the responsibility of the issuer of the instrument in question

          It doesn’t require market “intervention”

        • Geoff says

          “Rate setting is the responsibility of the issuer of the instrument in question” Does that apply to 30yr Treasury bonds?? I would say yes.

        • Jose Guilherme says

          “The Fed can’t set the market price on 30 year treasuries – without massive 2 sided OMO intervention”.

          Point taken – especially if it’s about setting the precise price, instaed of the overall market tendency.

          On the other hand, consider what a central bank can do to Tsys prices just by raising its humble voice (no market intervention needed): let’s remember Draghi mentioning the possibility of OMTs – a mere pronouncement followed, as intended by its author, by massive drops in bond yields all over the eurozone.

          NCBs rule the roost. Compared to them, private markets are just junior partners in crime.

        • Jose Guilherme says

          “The issuer decides whether to set an administered price or let the market determine the price

          Its still a choice, whether for reserves or 30 year Treasuries”.


          And this also demonstrates the shallowness of those who claim that “the government has to finance its deficit in the private markets”.

          If the Fed decides on a specific yield for 30, or 10, or 2 year tsys the “private markets” will simply adjust to said decision.

          The Fed – a branch of the “government”, though not of the Treasury – is the master and sets price; the “private market” is just its humble servant.

        • Cullen Roche says

          The Fed sets rates based on economic expectations. Traders front-run the Fed by gauging their commentary and reading the economic tea leaves. As I like to say, the fed can control rates, but it can’t control the economy. It’s important not to put the cart before the horse here.

        • JKH says

          I wouldn’t go too far with that.

          The Fed can set the price on excess reserves in a standard way – without any further market intervention.

          The Fed can’t set the market price on 30 year treasuries – without massive 2 sided OMO intervention.

          In normal procedures, however, the market determines the price on Treasuries, notwithstanding a lot of nonsense broadcast around to the contrary.

          That’s not to say the Fed couldn’t do it differently, but they generally don’t. Excess reserve pricing is pretty standard by comparison.

        • JKH says

          Good point

          The issuer decides whether to set an administered price or let the market determine the price

          Its still a choice, whether for reserves or 30 year Treasuries

          There’s nothing natural about either choice

          And nothing natural about forcing both to be either type of choice

        • wh10 says

          Meaning, if the Fed system didn’t exist, then banks would just make money without having to borrow reserves (thus no fed funds rate at all)?

        • Ramanan says

          Banks used to settle among each other in Gold or perhaps assets of a third party. The thing about Gold is that one usually tends to think of them as exogenous but the amount of gold is exogenous only to the extent that it is a heritage of the past. Gold production is demand-led and if there is more activity, more gold is produced. Also if there is any scarcity, the system would find alternatives to gold.

          Now governments created central banks to manage its debt and to get banks to settle in their books. Banks would have been happy to settle in the books of the most creditworthy institution. Now there are good reasons for acceptability of the State’s liabilities but this has to be tested. So while the floor system exists, I don’t think it can have any permanence to it. It is based on an idea of a reverse in the future. You cannot force banks to accept the State’s liabilities. It is a two-way thing. The Fed hasn’t moved to a permanent floor system. I think the Fed has plans to move into a zero reserve requirement system ultimately.

        • JKH says

          I couldn’t find much new in the Duy post.

          Waldman is basically predicting permanent zero bound conditions and a floor system for excess reserves – either or both of those is required for him to make his claim about pricing equivalence between bills and base money.

          Krugman implicitly isn’t necessarily claiming these things.

          Waldman’s essay depends on the expectation that one way or another, we aren’t going back to pre-2008 pricing differentials between excess reserves and bills.

          That’s either/both an economic call and a system design call.

          Haven’t looked at the material, but Fullwiler knows how the system works, and may also be addressing the function of base money in addition to its pricing. Don’t know.

          The classification and term “base money” is a travesty and should be abandoned.

        • Michael Sankowski says

          Ashwin says we get “liquidity trap” style conditions when we have interest bearing money.

        • wh10 says

          I hate doing this, because I love so much of what he does, but… massive, pain-inducing face-palm.

          There needs to be another blog-debate on this.

    • Michael Sankowski says

      Thanks for the tip. That’s a great post and very closely related to the posts on Money like instruments I wrote last year.

      We need to get Ashwin and Frances more involved over here. That post by Ashwin is great.

  4. Greg says

    Love your point about real estate and monetary policy Michael, youve been making that connection for a long time and I think its important. Why is it never talked about anywhere else in those terms?

    Since we are talking about possibilities, lets get really creative. If we cant leverage off real estate in perpetuity (without periods of severe depression)what can we leverage off of? Seems to me our planets biggest asset is US!! What is the equity within a human at birth? Seems to me we could find some way to monetize that. Everywhere we hear people talking about human worth blah blah blah. Lets come up with a number and then everyone has a stack of chips to go to the casino with.

  5. Geoff says

    I’m not sure I’d pay too much attention to what the so-called Treasury “market” is telling us. I don’t think I’d even call Treasuries a “market” in the sense that they aren’t really subject to regular forces of supply and demand.

  6. jt26 says

    Mike, I like your real-estate backed money description. I wonder if we should be targeting gross private investment, not only for the long-term returns but also encouraging creating a real private asset to lend against.

  7. wh10 says

    Also, if you think the market wants more cash vs bonds, then why not just have the Fed do it via asset swaps?

    But like I said, it seems the mkt always has what it wants if an interest rate exists, so I don’t know how much this accomplishes.

    • Michael Sankowski says

      Every single one of these is a good question. That’s the entire point – these questions have not been asked, much less answered.

      We’re just trusting the fed to do the right thing, or maybe not.

  8. wh10 says

    I am struggling with this because I think we need to unpack what the interest rate on govt debt (r) is a function of. It’s largely a function of investor expectations of future interest rates (which is intermediated by expectations of inflation, since investors believe that is built into the Fed’s reaction function). But there are also other elements, such as the supply and demand for govt debt – Warren has called these ‘technicals.’

    So I would think that if r < IOR on really short-term debt, that’s a clear signal that, for whatever reason, there is a REALLY high demand for govt debt. But can we extrapolate that to mean that what the market really wants is cash? There’s a tradeoff between the literal default free nature of cash and the near risk-free but income generating nature of bonds. Why can’t r < IOR mean there is a really high demand for the near risk-free but income generating nature of bonds?

    Also, let’s take the case that IOR < r. Putting aside expectations of higher IOR in the future or default concerns, that would suggest to me that the demand for govt debt is actually a bit weak. But this rule says the govt should borrow. What’s the logic there, and what signal are you looking to receive?

    Another question is, what does it mean to give the market what it wants? Doesn't the existence of an interest rate mean that the market is getting what it wants?

    Moreover, is our ultimate goal not full employment and price stability? How does giving the market what it wants play into this?

    Continuing along my train of thought, if it is at all valid, I would think the market would be most useful for gauging expectations regarding inflation (if you trust it), because that could be useful information for policy makers. The tough part is figuring out what part of interest rate movements signal inflation expectations. Perhaps 'giving the market what it wants' could mean eliminating the effect of 'technicals' on interest rates, such that you know movements in interest rates reflect only investor expectations of future short rates. I don't know how you could ever confidently tease that apart though, and if you could, the point is moot, because then you'd already know what's driving the market, and there'd be no need to eliminate the 'technicals.'

    • Geoff says

      What Mosler describes as “technicals” usually refers to what’s happening in the repo market where Treasuries are used for collateral.

    • Michael Sankowski says

      Well, I don’t think it matters so much what is driving the note market at any given moment in this context. It just matters what the rate is at that point in time.

      All of those factors interact, and they work in concert to produce the rate. If the rate is high, we need to do something no matter what the reason behind it is. If the rate is low, we need to do something no matter what has driven it to those low levels.

      Also, I suspect the fed should set IoR at some rate, and then let the market tell it what to do. Set IoR at 2%, 4% or something, and then mint/borrow according to the current interest rates. So this rule would be in conjunction with a rule, probably some NGDP targeting rule which uses both fiscal and monetary policy as a unit.

      There needs to be an interlocking system of rules on this. As Ramanan points out, this assumes there is not a supply constraint, and there is no BoP constraint. But we can’t fix those with rules at the fed. Those need to be addressed by other points of the institutional infrastructure.

      The rule would be somehting like an NGDP level target, with the NGDP level decided by something like a TC rule, with monetary policy stance given by IoR rules and leverage ratios, the export sector auctioning off export certificates, and government money creation or borrowing decided by something like this rule.

      Alone, these rules are worthless, because there is a path around them. All together, the rules make a massively strong economy.

      I have something coming out on how we operate our private money system on something like a real estate standard.

      We have the best comments section on the web, btw. Those questions are just fantastic. Thanks! :)

    • wh10 says

      I guess I would highlight: “Another question is, what does it mean to give the market what it wants? Doesn’t the existence of an interest rate mean that the market is getting what it wants?”

      And that ultimately, we’re trying to get to full employment and price stability, or whatever your goals are. You ask Ramanan above – “There would be need to be other rules telling the government how much money to print.”

      Well, that would be how much you need to get to FE and PS. To simplify, say that’s a fixed number. But you could spend that same amount via printing or via bonds. The govt has discretion on how to use all of the printed money. But they don’t with all the money raised on bonds, since some has to go to interest income. So I guess it depends on where you want that money to go and how much discretion you want to give the govt.

  9. JK says


    What does cost matter when you’re minting new money out of thing air?

    When you say “cost” are only you referring to interest payments?

    So said another way: minting the coin, over time, would lead to more NFA creation than borrowing? Is that it?

    If that’s the case, why should the government do what’s ‘less expensive’ i.e. why does it matter?


  10. Ramanan says

    “Here’s the proposed rule: The larger government should do whatever is the most expensive. ”

    This rule is the exact opposite of Tobin’s 1963 rule!

    I am not sure what the rationale for your rule is. It assumes that the economy is neither supply constrained nor balance-of-payments constrained. Also assumes an equality of citizens of the society. An interest payment on the government’s debt is a transfer to the bond holder. Hence given supply and demand side constraints implies the government actually reduce interest payments as much as possible and rather increase “pure government expenditure”.

    • Michael Sankowski says

      “I am not sure what the rationale for your rule is. ”

      My rationale is to get a discussion going! Well, that’s at least one reason for talking about this rule. :) I figured you would know 100x more than I did about possible rules like this.

      Real Comment:
      Well, if the government chooses the cheaper of the two choices, then usually, the government will just be printing money. There would be need to be other rules telling the government how much money to print.

      My proposed rule only provides completely default free money when the market demands it. Other times, it goes to the market to get the money, which gives the private sector some control over the level of money creation.

  11. Michael Sankowski says

    You can probably tell this was written in a few minutes!

    The logic is when it’s more expensive to print money, the market is telling us we are not borrowing enough. It’s a clear market driven signal. We could borrow more to push the rates up, but is more borrowing what the market really needs.

    What the market really desires is default risk free assets. The demand for more borrowing is can (and should) be interpreted as a market demand for more default risk free assets.

    The most default risk free asset possible is cash money, not bonds. There is always some possibility the government will default on a bond. The government cannot default on cash. It can debase cash through inflation, but it cannot default on cash.

    So, when the market is begging for a default risk free asset and demonstrates this by offering to give it to the government more cheaply than the government can create it itself, give the market what it wants!

    I guess I should put this up into the post.

    • Michael Sankowski says

      Note, when interest rates are lower than IoR, the market is telling the entire planet:

      “We desire default risk free assets so much, we are willing to create these assets and give them to you more cheaply than you could do it yourself. But we can’t do it ourselves. Help us, Government. You’re our only hope.”

      • Oilfield Trash says


        One other point I forgot to make

        “But we can’t do it ourselves. Help us, Government. You’re our only hope.”

        Is this really true prior to 2008? Is not the point of financialization to reduce any work-product or service to an exchangeable financial instrument like currency or bonds, and thus make it easier for people to trade these financial instruments? When you really look at how some of these financial instruments were developed weren’t they credit enhanced and used as a synthetic risk free treasury.

        • Michael Sankowski says
        • Oilfield Trash says


          Thanks for the post, it greatly improves my thinking. I could be wrong but after reading this and assuming he is correct; I doubt the debt ceiling will not be raised.

          The golbal FIRE sector could not survive if the haircut on Treasuries were increased due to possible default; since there is not enough non interest bearing money in circulation to pay for it, which would trigger huge deleveraging.

        • Oilfield Trash says


          I almost fell out of my chair on the reported Kochs brother quote “Focusing on [the debt ceiling] makes the messaging more difficult.””

          This caught my eye,

          “The reason that was significant isn’t so much that it would affect bond yields (the Fed has been keeping a lid on them of late) but that the possibility of a downgrade by a second rating agency could widen repo haircuts on Treasuries and government guaranteed bonds, and the effects would ripple through the entire financial system.”

        • Jose Guilherme says

          The opportunity cost of resources that are idle because of lack of demand for them is effectively zero.

          The government wiil exchange a bond for a bank deposit of the private sector. Then it wiil spend that deposit to command the use of idle resources. The beneficiaries wil gain a deposit in exchange for the goods and/or services that they will sell.

          Net cost of the whole operation in real economic terms: zero.

        • vimothy says

          It’s hard to keep track of these threads!

          Let’s assume arguendo the best, most restrictive case from your point of view: Say that there are idle resources that the government can put to use on some project. Say that this project _only_ requires idle resources (the project organises itself, so there’s no administration or management needed; the only capital used is idle capital, etc, etc). Finally, say that the output produced by the project is strictly positive, so that the net effect on real income is strictly positive. Great!

          But it doesn’t turn over basic facts about consistency. Where did the resources for this project come from? Wherever it was, they came from somewhere. The government can either pay for these resources by taxing a now greater aggregate income, or borrowing from it.

        • Michael Sankowski says

          Prior to 2008, you are correct. Ugh, I need a beta level sim to write more on this.

      • Oilfield Trash says


        I think you on to something here, if one accpet your agruement

        “Note, when interest rates are lower than IoR, the market is telling the entire planet:

        “We desire default risk free assets so much, we are willing to create these assets and give them to you more cheaply than you could do it yourself. But we can’t do it ourselves. Help us, Government. You’re our only hope.””

        as accurate why would the market desire a risk free asset so badly that they would be willing to create these assets and give them to the goverment more cheaply than the goverment could produce.

        Also if the goverment does create the risk free asset does it matter who gets it, and how it is used?

        • Michael Sankowski says


          Great points.

          We operate under a real estate standard. Banks create money against real estate. That’s the underlying collateral. Just like under a gold standard where money is backed by gold, and money is created against gold, private banks use real estate to back the money they create.

          We’ve run out of real estate. That’s the meaning of a balance sheet recession. We’ve run out of real estate to back privately created money. There is not anymore real estate to leverage up, or people don’t accept the leveraging up.

          So the private banks beg the government for something risk free. I’ve had a few glasses of wine with my wife, and so please forgive me for the disjointed and out-of-left field response.

          I’ve been working on alonger post about this, but that’s what has happened. It has more about the real estate-capital goods (yeah, 60% real estate, 30% cap improvements) standard we’ve been operating under for the last few decades, but everything makes sense if you view our money supply as being on a real estate standard.

          So when monetarists say they want to use monetary policy to hit an NGDP target, they want to raise the price of real estate – through some government program – to a level where banks feel safe to lend against real estate. But they can’t do this because real estate is valued either by cash flows or replacement value, and people know they can buy the wood for pretty cheap. So pushing up the value of real estate is a Sisyphusian battle against reality.

          The monetarists are fighting a losing battle against the common-sense value of real estate. It’s like accelerating to the speed of light, the closer you get, the greater the resistance to acceleration.

        • Oilfield Trash says


          “Banks create money against real estate.”

          Do you think it might be more correct to say as I have suggested before “Banks create money for profit using loans supported by a corresponding level of internal and external credit enhancement of collateral.”

          Real estate was the flavor of the day, because banks could make the most profit using financialization conduits, which provided credit enhancement of the collateral

        • Michael Sankowski says

          It’s more correct, I do think so. Real estate is the only asset class large enough to provide enough collateral. There is no other asset class which can provide trillions in collateral.

          And thats the issue I am trying to raise here. There is not some infinite collateral pool out in the real world. It’s entirely possible the economy will demand more money than the available collateral pool can realistically provide, or will want to provide.

          The rule I proposed allows the private banking system to create money when there is available collateral. When the system runs out of collateral, it needs to go somewhere else, and it needs to tell us when the overall system requires this money out-of-thin air.

      • wh10 says

        When you say “create,” are you referring to private banks buying bonds using funding from the interbank market? Cullen has been pretty adamant about making clear that this isn’t the way it’s done the vast majority of the time. Mosler has said this as well in the past.

        And if it’s non-banks using debt to fund purchases of govt securities, this doesn’t seem to make economic sense. Why would you be taking on more debt if you want the safest possible assets?

        In any case, please see my response below. It’s more on-point I think.

        • Jose Guilherme says

          Well, in that case we’d have to conclude there is a split, with Mosler/Roche on one side and Wray/Kelton/Lavoie on the other side of the issue.

          The former apparently insist that private commercial banks don’t lend to governments (only non-depository institutions or private individuals do) while the latter always start their accounting tables describing the process of deficit financing with the government selling bonds to the commercial banks – and the banks will create government deposits ” out of thin air” at the same time.

          Cullen Roche often cites an unnamed Fed source in support of his thesis. That is interesting but insufficient, IMO. Both sides of the argument should present hard quantitative data in support of their position.

          What happens in reality in the U.S., today? How much government debt is financed by the banks in the primary market? 0%, 10%, 50%.? This question should have a clear answer and be settled by recourse to available data.

          What is certain, in any case, is that deficit financing by the banks would mean new deposits (new “money”) held by households and firms at the end of the process of government spending. While deficit financing via non banks will translate to bonds being held by non depository institutions and/or households at the end of the same process.

        • JKH says

          “while the latter always start their accounting tables describing the process of deficit financing with the government selling bonds to the commercial banks – and the banks will create government deposits ” out of thin air” at the same time”

          Whenever you see a t-table explanation like that, you should know that it is at minimum an incomplete presentation of what happens from a stock/flow accounting perspective – and probably worse than that.

          The fact is that banks hold very little in the way of their share of total Treasury bonds issued in their own portfolios. This is easily discovered by studying the Fed Flow of Funds report.

          Fiebiger in his paper identified a historic secular change in this regard – it wasn’t always this way, but it is now.

          The Treasury security dealers – primarily bank owned dealers – act primarily as …dealers … in distributing Treasury securities – not as portfolio owners.

          That means for the most part that they satisfy pre-existing orders for securities from clients – and/or sell them to clients from short term hold inventory – usually fairly quickly.

          That means that on auction settlement day, non-bank clients end up the day owning most of the auctioned securities on their own books, without the banks ever having held them – other than on an intra-day clearing basis.

          It is on this basis that the idea of banks creating new money when they buy Treasuries is misleading – as a confusion of immediate flows and normal end of period stocks.

          (Bank owned) dealers do engage in some inventory positioning and trading – which accounts for fluctuations in their stock position of Treasuries – but this is small stuff relative to the total flow and stock of Treasury securities.

          The net result is that, in general, Treasury bond financing does not affect the various measures of money supply, other things equal. It normally recycles money that is already on the books, other things equal.

          Now, regarding QE:

          QE has increased the broad measure of money supply – compared to a rationally constructed counterfactual that would depict the result had QE not occured.

          This is because most bonds sold to the Fed were originally held by non-banks – for the same reason as in the explanation above of what happens at source.

          You can’t judge QE simply by examining a time series of realized data.

          You have to consider the counterfactual to make a thorough assessment of its effect.

          Simplified, QE has increased money supply from what it might have been without QE.

          But there hasn’t been much change on an actual time series basis – because the system has been deleveraging – with both loan and deposit destruction apart from the marginal QE effect.

          The gross QE money supply effect gets submerged in the examination of realized time series data – because it has been offset by a gross money supply contraction due to the deleveraging component.

          The net result of the two in combination is not so much change.

        • Fed Up says

          Now regarding QE:

          Fed buys treasury from a member bank. Member bank buys treasury from Apple. Apple takes the demand deposit and buys a CD from the member bank. Did the medium of exchange supply increase? If it did, did the new medium of exchange have a velocity of zero in the real economy?

        • Jose Guilherme says

          “The fact is that banks hold very little in the way of their share of total Treasury bonds issued in their own portfolios”.

          This may well be true for the U.S. but is certainly not the case in the eurozone, especially in its periphery where banks’ balance sheets are or have recently been awash with government securities.

          “Whenever you see a t-table explanation like that, you should know that it is at minimum an incomplete presentation of what happens from a stock/flow accounting perspective – and probably worse than that”.

          Well, I was citing t-table explanations from the great master of stock/flow consistent models himself – Marc Lavoie :)

          So it saddens me to find out that even good (the best) teachers of economics sometimes forget that readers may well decide to investigate on their own whether the explanations presented in said teachers’ papers have a correspondence in real life practice – or are more like obfuscations designed to make a purely theoretical point.

        • JKH says

          The Lavoie book is a painstaking modular development of hypothetical financial system architecture – he is specific about different assumptions and adjustments made in successive chapters – the book is very logical and instructive in that way. It is institution design based – which reminds me of something less accomplished that I’ve written myself.


        • Jose Guilherme says

          Well, I was not really quoting the Lavoie/Godley Treatise – no doubt a chef d’oeuvre in consistency – but rather the Lavoie paper on neo-chartalism where his starting point is the “Treasury selling bonds to the banks” scenario imagined by the MMT authors he is engaging.

          I think that Lavoie could simply have introduced a footnote explaining that such a scenario, while not arising as a rule in the U.S., could often happen in practice in the eurozone countries. That would have been quite helpful to his readers.

          As for institution design based papers I found the particular one that introduced the distinction between operational and strategic issuers of the currency quite well accomplished indeed. :)

        • Jose Guilherme says

          I realize that where I wrote “obfuscations” I should perhaps have written “virtual reality exercises” instead.

          And point taken on time series.

        • JKH says

          Good point – I’m describing the Fed system – as in my reference to the Fed Flow of Funds, and as in reference to your discussion for the most part with Cullen, and as in reference to the typical use of T tables as produced by those to whom you refer otherwise.

          As far as Lavoie is concerned – he is the master of consistency – and his book fully integrates and accounts for differences in the US system and the Euro system. Read closely and I doubt you’ll find much in the way of specific errors there.

        • Cullen Roche says

          I haven’t run the numbers but the data is readily available in the flow of funds report. Bank on-sell 80%+ of their inventory here. Brett Fiebiger has previously discussed this point in his critique of MMT where he cited depository institutions as holding 3% of bonds and total banks at 19%.

          The description from my Fed source is completely in keeping with Brett’s findings and description.

        • Jose Guilherme says

          Fiebiger says that “…the share of US Treasury bonds held by the domestic banking sector has fallen from over-half in 1945 to between one-tenth and one-fifth in recent years”.

          This is what has happened, in practice.

          Fiebiger does add that “from a theoretical perspective” banks can “create fiscal receipts via borrowing operations which can then be spent”. In theory, then, a situation could arise where most or even all of deficit spending is financed by commercial banks. And ends up as deposits (“money”) held by the non bank sector.

          Let’s just imagine, for the sake if argument, that said situation corresponds to reality: the banks buy all bonds to finance deficit spending,

          Then a logical question would be: this money creation for deficit spending represents how large an amount, compared to all net deposits created by commercial banks as they provide financing for the private sector?

          And the quantitative answer to this question would provide us with a glimpse of the relative importance of money creation as a result of government activity (in a “MMT world”) vis-a-vis money creation by commercial banks.

        • Cullen Roche says

          That would be a lot of money. For instance, in the USA, this would have amounted to about 1.2T per year for the last 4 years. Or a 30%+ rise in M3. Obviously, that’s not occurred. So something else is occurring. Which is why I think my Fed source’s explanation is spot on. The reason the money supply hasn’t exploded in recent years is because the govt doesn’t actually “print money”. They print NFA as bonds and redistribute existing money. The real money is made via bank loans though QE has muddied the waters there a bit due to deposit creation via non-bank sales….Does that not all sound correct to you?

        • Jose Guilherme says

          In a sense, it all seems to depend on the private (non bank) sector’s behavior.

          If household and firms buy a lot of T bonds then government spending will result in a relatively minor increase in the money supply (deposits).

          If they don’t buy bonds (or eventually sell them to the Fed in response to QE policies) then deficit spending will ultimately mean more “money” – a huge increase in M3.

          So your explanation for the non increase in the money supply in recent years – that governments print bonds instead of “money”, with waters somewhat muddied by QE – surely provides an interesting perspective.

          However, it should be complemented by the plain fact that during a recession (especially if it’s a balance sheet one) the private sector’s demand for loans goes down while banks themselves also become wary of supplying credit to households and firms because the risk of default on loans increases dramatically when the economy is in the doldrums.

  12. JKH says

    “If the Treasury and Central Bank are linked at deep levels of accounting, it follows that monetary and fiscal policy should be linked and used as a combined policy tool.”

    That’s a very interesting comment that’s worth thinking about.

    Perhaps the depth of the accounting linkage is telling us something.

    Also – its very possible to conceive of a single institution with delineated monetary and fiscal functions – this is very roughly analogous to liquidity and capital management functions in big commercial banks – the delineations are complex – but hard to see them being more complex that what exists in separate institutions

    • Michael Sankowski says

      This is your idea. I’ve just been riffing on it. The CI approach post is a deep document – there is so much in it.

      I keep coming back to this paragraph from the original CI post:

      “The entire liability structure of the CTRB is now intra-convertible, in terms of the fluidity with which reserves, currency, bills, and bonds can be issued or redeemed according to a fused and seamless fiscal and monetary machine. Similarly, the gross asset strategy in terms of inventories of bills and bonds or otherwise is fully flexible under this institutional arrangement.”

      We require that seamless fiscal and monetary approach even if the current structure of our institutions are completely separate.

      • JKH says

        appreciate you having read it so closely

        the thing is – all those asset and liability categories can be subject to risk limits, etc. which can be dynamically managed according to different monetary and fiscal environments – QE for example simply becomes a liability management shift – as does your type of rule in the post here – and its all subject to a more blended macro risk management discipline – and the comparison of IOR with bill and bond interest and the analysis of term structure etc. all becomes much more transparent

  13. wh10 says

    I have a comment or two, but first, what’s the logic behind wanting the govt to do the most expensive thing, rather than the least expensive thing?