Government is Not Like a Household

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Joe Leote

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Nov 11, 2019, 8:12:28 AM11/11/19
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This article argues why the government deficit is different from a household deficit:


The article promotes an idea that government deficit spending creates money and efforts to spend all income on goods and services would generate a volume of tax payments that destroy all of that money assuming no one wants to save. Those outside government would not want to save, and the government would have to stop deficit spending for a while, so tax payments would drive savings to zero at some point in the future. This idea reminds me of the rocket impulse engines where a burst of fuel goes into the chamber for combustion at a relatively large fixed interval instead of a steady flow of fuel and steady process of combustion in the chamber.

We live in the steady flow world where government deficit or surplus is caused by the tax, spend, and credit policies set by government and the desire to save is constrained by bankruptcy laws, government and market credit creation decisions, and market factors in a complex market action and policy mix. The simple way to state it is that the fiat government creates money when it spends or extends credit and drains money when it taxes or charges a fee for government services.

Joe

Jean Erick

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Nov 11, 2019, 2:06:22 PM11/11/19
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         The private, quasi governmental Fed is the only entity which can create or destroy fiat base money. The derivations of the essential

Fed activities might be derived into the issues of your post, but it is even more complex than the issues in my previous post.

  As such, I think your post delivers a false scenario and confusion.  The government does not create money when it spends.  Extant money is transferred from the gov’s Fed account to the receiver.

    Your German pulse buzz bomb (or Area 51 ram jet) scenario is IMHO, entirely inaccurate, as proved by the Great Depression and our

Latest 2007 crash.  I suspect the paper is from a neo-liberal source., therefore misdirecting information.

 

   One way to display the field is to enter (or reenter) the sound money vs inflationism argument.

From the sound money position, a policy which allows inflation of the money base allows an oligarch more latitude and opportunity

To confirm and gain power over a society, as has happened to ours.

 

 

James

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Joe Leote

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Nov 11, 2019, 2:38:26 PM11/11/19
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In rocket applications and other systems of motion the impulse is a force that acts for a period of time. In the absence of resistance this impulse would accelerate the mass of a rocket, so its velocity goes up, and when the force goes to zero the velocity stops increasing. The solutions to such problems in basic physics are via an impulse-momentum integral. But if there is resistance to motion in the surroundings or any force opposing motion then velocity will decrease after force goes to zero.

So if the government provides money by spending once, and then collects enough taxes to drain all the money over time, the money supply goes to zero as time goes to infinity. A modern government makes payments and collects payments over time in a continuous operation. Each payment could be considered in isolation as a single tiny spending impulse, and each collection of taxes or fees could be thought to drain money created by the previous spending impulse, but I doubt anyone can specify a model to match aggregate spending and income of the government in that fine detail.

The Fed is an agency within the federal government authorized by Congress to manage monetary policy. The arguments about Fed independence or dependence on the Treasury relate to how decisions are made about monetary policy and to operational realities in which Treasury must often assist Fed in its efforts to manage monetary policy.

One must consolidate the roles of Fed and Treasury to understand the argument in the article which states that the fiat government does not borrow on a credit card like a household. William Hummel argues that the federal government effectively purchases goods or serves or otherwise covers the deficit between spending and receipts over a period via the net new issue of Treasury securities. The mix of high powered money, which are Fed liabilities, and Treasuries, which are liabilities of the federal government, would be under the control of Fed via monetary policy whether or not one consolidates the balance sheets of Fed and Treasury.

Joe

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Jose Carneiro

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Nov 11, 2019, 3:04:04 PM11/11/19
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The Gov issues securities. They may be bought by the non bank sector with extant money in their banking accounts. Or they may be bought by commercial banks with newly created money. In both cases that money is deposited in a TT&L account. The treasury calls this money to its account in the Fed, debits the TT&L account in the commercial bank and reserves disappear at the Fed (reserves belonging to the commercial bank). When the Gov spends, disbursements come from the Treasury account at the Fed, fattened by the sale of securities paid in part by newly created money.
When the Gov spends new money is created               Jose

Joe Leote

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Nov 11, 2019, 5:23:37 PM11/11/19
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Follow the creation and destruction of the money on the balance sheets.

Suppose a bank buys a Treasury at auction for 100 by making a credit entry in TT&L for an increase of funds due to Treasury. So Treasuries assets go up 100 and TT&L liabilities go up 100 expanding the bank balance sheet. The bank does not receive or pay reserve balances or transaction deposits so the "new money" Jose refers to would not be an increase in monetary base and would not be an increase in M1 money supply. So the official measures of money supply would not increase at this point.

Next the Treasury calls for the bank to transfer the same 100 funds from TT&L to its Treasury General Account or the TGA at Fed. This is in anticipation of spending the 100 following the prior sale of 100 Treasuries to the bank. The bank records a decrease in reserve balances -100 and a decrease in TT&L -100. Fed records a decrease in reserve balances -100 and an increase in TGA +100. Treasury records an increase in TGA +100 and a decrease in TT&L -100. Now we see that the bank has purchased the 100 Treasuries not by an increase in TT&L, which went up +100 and then down by -100, but by a reduction of reserve balances which has gone down net -100. The bank has spent existing reserve balances down by -100 and gained a Treasury security asset of equal amount +100.

If Treasury spends funds 100 out of TGA matched to the prior sale of 100 in Treasuries then the reserve balances in the aggregate bank first go down by -100 and then go up by +100.

So when a deficit is covered by the sale of Treasuries no new money is created in the monetary base and no new money is created in the M1 money supply when banks buy these Treasury securities on auction from the Treasury. The customs of Treasury debt and cash management with TT&L accounts as buffers evolved to help the Fed open market desk retain control over the level of reserve balances in the aggregate bank so it can more easily manage monetary policy.

Joe

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Jean Erick

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Nov 11, 2019, 6:35:34 PM11/11/19
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From: Joe Leote
Sent: Monday, November 11, 2019 11:38 AM
To: Money Group
Subject: Re: Government is Not Like a Household

 

In rocket applications and other systems of motion the impulse is a force that acts for a period of time. In the absence of resistance this impulse would accelerate the mass of a rocket, so its velocity goes up, and when the force goes to zero the velocity stops increasing. The solutions to such problems in basic physics are via an impulse-momentum integral. But if there is resistance to motion in the surroundings or any force opposing motion then velocity will decrease after force goes to zero.

 

So if the government provides money by spending once, and then collects enough taxes to drain all the money over time, the money supply goes to zero as time goes to infinity. A modern government makes payments and collects payments over time in a continuous operation. Each payment could be considered in isolation as a single tiny spending impulse, and each collection of taxes or fees could be thought to drain money created by the previous spending impulse, but I doubt anyone can specify a model to match aggregate spending and income of the government in that fine detail.

 

        Apply the integral to financial flows.

 

The Fed is an agency within the federal government authorized by Congress to manage monetary policy. The arguments about Fed independence or dependence on the Treasury relate to how decisions are made about monetary policy and to operational realities in which Treasury must often assist Fed in its efforts to manage monetary policy.

 

I think the more realistic  arguments discuss the degree of capture of government by the private.  It’s not a matter of the Fed being

Independent of the government.  It’s the other way around.

 

One must consolidate the roles of Fed and Treasury to understand the argument in the article which states that the fiat government does not borrow on a credit card like a household. William Hummel argues that the federal government effectively purchases goods or serves or otherwise covers the deficit between spending and receipts over a period via the net new issue of Treasury securities. The mix of high powered money, which are Fed liabilities, and Treasuries, which are liabilities of the federal government, would be under the control of Fed via monetary policy whether or not one consolidates the balance sheets of Fed and Treasury.

 

     If you don’t have the money to pay, you borrow the money to pay.  This is not tremendously complicated.

Rome killed Jesus because he was declaring the Jubilee, and made the credit favorable environment “official”.

 

BTW  I’m thinking of focusing on the whole financial system as based in the destruction of the integrity of collateral.  Could effective,

Simple parameters of collateral integrity be established as per example distinguish MBS’ from Treasuries.  That is, more rigorous than

The current system which demonstrated its lack of resistance to corruption.  Perhaps quantum levels of distance from collateral could be recognized.

 

James

 

 

Joe

Joe Leote

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Nov 11, 2019, 6:55:38 PM11/11/19
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Financial deals and transactions have the properties of discrete time (DT) systems. The equations for DT systems are finite difference and summation equations using difference and summation notation. Integral calculus applies the assumption of continuous time (CT) systems. The differential and integral equations apply calculus notation.

What I meant regarding the effort to follow ever spending event is that one cannot track the tax collections associated with any individual act of government spending. Congress sets some tax policy in an effort to offset specific spending policies. But in general Congress does not allocate a tax policy to finance every authorized spending policy. Furthermore the taxes are a percentage of transactions in the market economy and Congress can only estimate a flow of taxes over time based on future projections of economic activity.

The Fed-Treasury battery ensures that fiscal policy of Congress works for any reasonable tax policy and provides some effort to implement monetary policy or long term price stability in the complex market and government finance system.

Joe

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John Hermann

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Nov 11, 2019, 9:42:36 PM11/11/19
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 Joe is not confused.   According to the principles of functional finance, when a central (sovereign) government
deficit spends, net financial assets are created for non-banks operating within the economy.  Bank deposit money
is created in the commercial bank account of each government's payee, and the central bank (Fed) commensurately
creates new state fiat money - in the form of banking reserves (exchange settlement balances) - which is deposited
in the Fed accounts of the associated commercial banks.  The net money supply necessarily increases.  The increase
in net financial assets, which has its origin in government deficit spending, is absolutely required by non-government
sectors in order that they may have the means to save, invest and spend, and that the overall economy will prosper.   
-- John Hermann

*********

Joe Leote

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Nov 12, 2019, 4:26:07 AM11/12/19
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Although I agree with John and appreciate the comment these concepts are still somewhat confusing because the official "money" and "net financial assets" are defined differently. Government fiscal operations (spending, taxes, fees, credit ops)  do not, on average, increase the official measures of monetary base MB when Treasury uses debt management to cover the deficit or dispose of the surplus. What goes up in the portfolios of the bank and nonbank sector is only the float of Treasury securities. The net financial assets originate as Treasury securities when the government runs deficits on average over many periods and then the central bank or Fed can swap high powered money in the monetary base for Treasury securities. But the short term Treasury securities, which bear interest and have little interest rate risk, have almost the same properties as bank reserve balances which earn interest under interest on reserves policy. One can see that reserves which earn interest at a bank are similar forms of high powered money and securities as Treasuries in the system. However banks and nonbanks can own Treasuries but only banks and GSEs can hold reserves. The reserves held by GSEs do not earn interest under IOER policy.

Joe

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Jean Erick

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Nov 12, 2019, 4:26:31 AM11/12/19
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   I think that TTL money are reserves.  The fact that it is noted that they lose that status on entering the Fed held gov account is an

Indication they are reserves while in the TT&L account.

 

James

 

 

From: Joe Leote
Sent: Monday, November 11, 2019 2:23 PM
To: Money Group

Joe Leote

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Nov 12, 2019, 4:30:06 AM11/12/19
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I use the term reserve balances to refer to items which are liabilities of the Fed, assets of banks, and used by banks to clear interbank payments, including payments with Fed and other government agencies or GSEs via Treasury records.

Reserves in general are officially defined as currency in circulation outside the Fed and reserve balances at banks.

TT&L are not reserve balances or reserves under the official definitions because these items are liabilities of banks and financial assets of Treasury.

Joe

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Jean Erick

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Nov 12, 2019, 12:48:03 PM11/12/19
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     Exactly.  Treasury spending does not, and cannot, directly create MB.  But Treasury CAN borrow, and THAT enables the Fed

To monetize that borrowing by purchasing that debt by creating MB to pay for it.

Joe Leote

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Nov 12, 2019, 12:56:55 PM11/12/19
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When Treasury appears to borrow it issues secure savings instruments known as Treasury securities. The debt of the Treasury does not have to go down at any time in the future because the country is not saving for retirement or to give an inheritance to a family. When a family goes into debt in youth there must be an effort to repay debt and save for retirement or to gift net worth to others upon death. The government is just a set of political-economic relations that survives from generation to generation until it dissolves and transforms into some other set of social customs or the world comes to an end. So government spending provides net saving instruments in the form of a mix of Treasury securities and the monetary base. In a counter-factual experiment if Fed provides the monetary base via the purchase of Treasuries exclusively then the net savings instruments are the monetary base plus Treasuries owned by banks and nonbanks except for Fed.

Joe


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Jean Erick

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Nov 12, 2019, 12:58:30 PM11/12/19
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     One of the things that I learned early on in this forum was that the TGA was kept small so that its operations would

not have a large affect on the measure of reserves.  So taxes were not paid into the non reserve TGA, but into the TT&L reserve

accounts.   Do you find what I learned reasonable, or misinformation?

 

   The reason that money can be so confusing is that we don’t have money anymore.  We have a financial system of credits and credit

Which has replaced money as the clearing mechanism for the exchange of goods.

John Hermann

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Nov 13, 2019, 1:24:32 AM11/13/19
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  I agree that government deficit spending does not create any net change in the MB.  What it does
create is an increase in the money supply. That increase in monetary assets owned by the non-bank
sector is unmatched by any liabilities, which is what is meant by the term "net financial asset".  Note
that commercial banks do not , and cannot, create net financial assets. And in such deficit spending
the holders of the newly created Treasuries exchange currency for those securities (denominated in
the same unit of account), so there is no short-term change in the value of financial assets held by
the borrowers.     - John 

Jean Erick

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Nov 13, 2019, 6:54:37 PM11/13/19
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       Your post displays intelligence and awareness in its use of contemporary verbiage.  The problem is that contemporary

Verbiage places itself as distant from an accurate description of reality.

 

From: John Hermann
Sent: Tuesday, November 12, 2019 10:24 PM
To: understan...@googlegroups.com
Subject: Re: Re: Government is Not Like a Household

 

  I agree that government deficit spending does not create any net change in the MB.  What it does
create is an increase in the money supply.

   No.  M1 is increased by banks issuing non collateral loans and, mainly, borrowing from foreign sources.

Most of M1 is debt owed to foreign states.  Which, BTW and according to Hudson, matches our so called

“defense” budget.

 

That increase in monetary assets owned by the non-bank
sector is unmatched by any liabilities,

No.  It carries the liability to the foreign lenders.

 

which is what is meant by the term "net financial asset".  Note
that commercial banks do not , and cannot, create net financial assets.

I think that the non collateral loans made are regarded as assets.  There may be a lack of understanding

Here about any differences between commercial and retails banks, generally conceded as moot.

 

And in such deficit spending
the holders of the newly created Treasuries exchange currency for those securities (denominated in
the same unit of account), so there is no short-term change in the value of financial assets held by
the borrowers.     - John 

The wording does not distinguish between (1) change in the nominal and (2) change in unit value of the nominal.

 

James

John Hermann

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Nov 13, 2019, 8:37:59 PM11/13/19
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On 14/11/2019 3:56 AM, Jean Erick wrote:

       Your post displays intelligence and awareness in its use of contemporary verbiage.  The problem is that contemporary

Verbiage places itself as distant from an accurate description of reality.

 

From: John Hermann
Sent: Tuesday, November 12, 2019 10:24 PM
To: understan...@googlegroups.com
Subject: Re: Re: Government is Not Like a Household

 

  I agree that government deficit spending does not create any net change in the MB.  What it does
create is an increase in the money supply.

   No.  M1 is increased by banks issuing non collateral loans and, mainly, borrowing from foreign sources.

Most of M1 is debt owed to foreign states.  Which, BTW and according to Hudson, matches our so called

“defense” budget.

     Banks cannot create net financial assets. MMT economists like to distinguish between horizontal
     money (bank created money) and vertical money (money created by government). The aggregate
     of vertical money equals the net money supply.

 

That increase in monetary assets owned by the non-bank
sector is unmatched by any liabilities,

No.  It carries the liability to the foreign lenders.

     Nothing to do with foreign lenders.

Jean Erick

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Nov 14, 2019, 4:07:06 AM11/14/19
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From: John Hermann
Sent: Wednesday, November 13, 2019 5:38 PM
To: understan...@googlegroups.com
Subject: Re: Government is Not Like a Household

 

On 14/11/2019 3:56 AM, Jean Erick wrote:

       Your post displays intelligence and awareness in its use of contemporary verbiage.  The problem is that contemporary

Verbiage places itself as distant from an accurate description of reality.

 

From: John Hermann
Sent: Tuesday, November 12, 2019 10:24 PM
To: understan...@googlegroups.com
Subject: Re: Re: Government is Not Like a Household

 

  I agree that government deficit spending does not create any net change in the MB.  What it does
create is an increase in the money supply.

   No.  M1 is increased by banks issuing non collateral loans and, mainly, borrowing from foreign sources.

Most of M1 is debt owed to foreign states.  Which, BTW and according to Hudson, matches our so called

“defense” budget.

     Banks cannot create net financial assets. MMT economists like to distinguish between horizontal
     money (bank created money) and vertical money (money created by government). The aggregate
     of vertical money equals the net money supply.

                         We are in disagreement on  the first sentence,  I was doing preparatory reading before reading on MMT

                          and haven’t gotten to it so I can’t apply to its terms  Von Mises wrote in 1910 that bank lending starts

                         out as intermediary and then ads “fiduciary” lending.  I don’t know if you missed late discussions about how

                        persons who write that banks create accounts out of nothing.  Again, as von Mises, it’s not one or the other.

                       It’s usually both.

 

That increase in monetary assets owned by the non-bank
sector is unmatched by any liabilities,

No.  It carries the liability to the foreign lenders.

     Nothing to do with foreign lenders.

              If we borrow, we have to pay back.  Sometimes ($8 trillion worth) we have to pay foreigners back.

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