Re: Money creation flow charts

[George Chandler]

A good example of problems caused by calling credit, "money". If you want to clarify use term "credit" if you mean credit. Following are some terms used for "money" on this site:
Base money > Bank credit money > M1, M2, Etc (Useless for productive discussions) > Free money > Currency > Encumbered money > Hard money... and the non productive jabber goes on and on ...  And I still need more money :)

 

On Mon, Aug 6, 2012 at 6:32 PM, John Hermann <her...@picknowl.com.au> wrote:

(a) It is newly created bank credit money (which is part of M1, and therefore is money by definition), but that money is not created in association with lending;

 

I disagree.  All retail lending by commercial banking institutions increases the magnitude of the money supply.

On 7/08/2012 1:48 AM, Jean Erick (James) wrote:

So, (statement one) that money is NOT created in association with lending and .... (statement two) it IS associated with lending.  You seem to be disagreeing with both of us.

No James, there is no contradiction.  You are confusing two two different mechanisms by which new bank credit money can come into existence.  It can occur by bank lending and it can occur by bank spending.  One of the above statements refers to lending and the other statement refers to spending.

John

[John Hermann]

George, anything can be used as a "money" (medium of exchange), irrespective of whether it has physical form or is insubstantial (eg, a computer entry).  What are the criteria for using the word "money" legitimately?  I would say that the legitimate use of the word "money" only requires that the medium of exchange (a) is widely accepted in society and used as such, (b) is acceptable for the payment of government taxes, and arguably (c) is accounted by the central bank as being part of the monetary aggregates.  The creditary form of retail deposits held within banking institutions fulfils all of these criteria.

John

[John Hermann]

It has been argued that only state fiat money is acceptable for the payment of taxes.  This is debatable, because we have a dual monetary system in which state fiat money tags along (in principle) after all retail deposits.  Thus in practice any bank check (representing bank credit money owned by the non-bank taxpayer) delivered to the internal revenue department in fulfilment of tax obligations will be accepted as payment. 

Some relevant points:
(a) Non-banks do not have direct access to state fiat money, which is exclusively owned by banks.
(b) Neither bank credit money nor state fiat money have permanent existence -- as a matter of accounting, both are cancelled from their respective holding accounts whenever Treasury's operating account with the central bank increases.
(c) When central government spends -- new bank credit money is created, new state fiat money is necessarily created on a matching basis, and Treasury's operating account decreases.

John.

[Mr Economy]

To see if the money supply is growing we need to have the right definition of money. The most accurate money supply metric currently around are the ones based on the Austrian School of economics definition of money. Michael Pollaro's, Contrarian Take blog at Forbes provides a monthly update of changes in the money supply based on the Austrian definition. Currently it's up 10-15% at an annualized rate.

The Austrian definition of money includes currency in circulation, all demand deposits whether they be accounts of US government, government institutions, private individuals, banks, etc and savings accounts (because you can make six withdrawals per month and overnight a lot of demand deposits are reclassified as savings deposits which is done to help reduce reserve requirements). CDs, Travelers Checks and MMMFs should not be included because somewhere along the line they have to be redeemed in either currency or demand deposits. By including money substitutes in the Money supply it distorts the money supply metric which is why in period of rising interest rates it could show M2 and M3 rising because more people are placing their money in CDs and MMMFs that offer high interest rates while currency and demand deposit growth maybe slowing which means a credit crunch could be right around the corner.

It's important to note that credit is not the definition of money. Credit is the transfer of purchasing power from one individual to another. When credit gets created out of thin air it goes hand in hand with an increase in demand deposits.

 

References:

True Austrian Money Supply

http://blogs.forbes.com/michaelpollaro/austrian-money-supply/

 

Does a Fall in Credit Lead to deflation?

http://mises.org/daily/3810

 

Good and Bad Credit

http://mises.org/daily/3151

From: John Hermann <her...@picknowl.com.au>
To: understan...@googlegroups.com
Sent: Tuesday, August 7, 2012 10:52 PM
Subject: Re: Money creation flow charts

[William Hummel]

John, I would put a different slant on your remarks. Mine are in blue.  /William

 

 

From: John Hermann

To: understan...@googlegroups.com

Sent: Tuesday, August 07, 2012 8:46 PM

Subject: Re: Money creation flow charts

It has been argued that only state fiat money is acceptable for the payment of taxes.  This is debatable, because we have a dual monetary system in which state fiat money tags along (in principle) after all retail deposits. 

 

The expression "tags along" implies state fiat money is of little consequence in the payment system, whereas retail bank deposits are merely claims on state fiat money and have no independent value.

 

Thus in practice any bank check (representing bank credit money owned by the non-bank taxpayer) delivered to the internal revenue department in fulfilment of tax obligations will be accepted as payment.

 

A bank check to the internal revenue service will be accepted only if it ends up by transfering a claim on state fiat money. It will bounce if there are insufficient funds in the taxpayer's account.   

Some relevant points:
(a) Non-banks do not have direct access to state fiat money, which is exclusively owned by banks.

 

I doubt that you meant this because the wording implies that state fiat money is exclusively owned by banks. Non-banks obviously don't have direct access to money owned by banks, but they can hold currency which is state fiat money. 

 

(b) Neither bank credit money nor state fiat money have permanent existence -- as a matter of accounting, both are cancelled from their respective holding accounts whenever Treasury's operating account with the central bank increases.

As a matter of policy, the Treasury maintain a fixed balance in its Fed account. De facto the quantity of state fiat money is not a function of Treasury transactions. Rather it is the central bank which determines the quantity through its lending and open market operations.

(c) When central government spends -- new bank credit money is created, new state fiat money is necessarily created on a matching basis, and Treasury's operating account decreases.

 

As noted, the Treasury maintains a fixed balance in its Fed account. As it spends, it transfers funds from its commercial bank accounts to its Fed account. Thus in effect, the Treasury spends out of its commercial bank accounts.

[Jean Erick]

     The disagreement, as this point, seems to originate from our using the same phrase to describe different entities.

 

     There are two commonly accepted explanations of US money creation.  (1) FED buying Treasuries and (2) fractional reserve lending by banks.  I think the term

"newly created bank credit money" is a term that most would believe is used to describe that money created relative to bank lending.

     I am not familiar with bank spending being regarded as a creation of money, and if it was ever mentioned here, the mention has been so slight as to excape my

notice and recall.

     I suggest that most people with some slight education in this paradigm, in our known universe, would associate the phrase "newly created bank credit money"

with fractional reserve lending.

 

James

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Monday, August 06, 2012 6:32 PM

Subject: Re: Money creation flow charts

[John Hermann]

Thanks William.   My response is in red.   John

On 9/08/2012 1:09 AM, William Hummel wrote:

John, I would put a different slant on your remarks. Mine are in blue.  /William

 

 

From: John Hermann

To: understan...@googlegroups.com

Sent: Tuesday, August 07, 2012 8:46 PM

Subject: Re: Money creation flow charts

It has been argued that only state fiat money is acceptable for the payment of taxes.  This is debatable, because we have a dual monetary system in which state fiat money tags along (in principle) after all retail deposits. 

 

The expression "tags along" implies state fiat money is of little consequence in the payment system, whereas retail bank deposits are merely claims on state fiat money and have no independent value.

It was not my intention to imply that state fiat money is of little consequence.  However "tags along" seemed to be a useful description because it seems that there is a lag between the operations of retail bank lending (of bank credit money) and acquiring any reserves considered necessary in support of that lending.

Thus in practice any bank check (representing bank credit money owned by the non-bank taxpayer) delivered to the internal revenue department in fulfilment of tax obligations will be accepted as payment.

 

A bank check to the internal revenue service will be accepted only if it ends up by transfering a claim on state fiat money. It will bounce if there are insufficient funds in the taxpayer's account.  

That may be so, however note that the "funds" in the taxpayer's account are composed of bank credit money, not state fiat money.  The associated fiat money resides in the bank's vaults and in its account with the central bank.

Some relevant points:
(a) Non-banks do not have direct access to state fiat money, which is exclusively owned by banks.

 

I doubt that you meant this because the wording implies that state fiat money is exclusively owned by banks. Non-banks obviously don't have direct access to money owned by banks, but they can hold currency which is state fiat money.

Yes, you are correct William.  I should have said reserves (= state fiat money held by banks).

(b) Neither bank credit money nor state fiat money have permanent existence -- as a matter of accounting, both are cancelled from their respective holding accounts whenever Treasury's operating account with the central bank increases.

As a matter of policy, the Treasury maintain a fixed balance in its Fed account. De facto the quantity of state fiat money is not a function of Treasury transactions. Rather it is the central bank which determines the quantity through its lending and open market operations.

I agree.  And I see no inconsistency between this with what I wrote above.

(c) When central government spends -- new bank credit money is created, new state fiat money is necessarily created on a matching basis, and Treasury's operating account decreases.

 

As noted, the Treasury maintains a fixed balance in its Fed account. As it spends, it transfers funds from its commercial bank accounts to its Fed account. Thus in effect, the Treasury spends out of its commercial bank accounts.

That is one way of looking at it, however I don't think it is a technically correct description.  Technically, the money held in the commercial bank accounts is not transferred.  The reason being that Treasury's operating accounts with the central bank - whose existence serves to authorize government spending - lie outside both the supply of fiat money and the supply of public money.  These operating accounts are not money because they are only accessible to Treasury, not to a wider body.  Their manipulation is therefore largely a sterile accounting exercise, designed to ensure that government spending is suitably constrained.  This logically implies - according to the accepted rules of accounting - that any increase in those accounts (overall) implies the destruction of money, while a decrease in those accounts implies the creation of money. 

And looked at objectively this is what actually happens.  When Treasury spends, a check (or other transfer) is made out to the payee and is drawn on the central bank (I'm not sure if this is the U.S. practice, however in my country the Treasury does all of its banking with the central bank, not the commercial banks).  When the check is presented to a commercial bank a creditary deposit is created in the payee's account. And after the check is sent back to the central bank for clearing, at some stage (without wishing to dwell on the complicating details) a new deposit of state fiat money is created in the bank's account with the central bank to match the creation of bank credit money by the commercial bank.  Once again, there is a lag between the creation of bank credit money and the matching creation of state fiat money.

[George Chandler]

Mr Hermann wrote in part: "What are the criteria for using the word "money" legitimately? "

John, also consider that use of the word money involves using a word that makes it clear what you are talking about. For instance, "Money supply". Do you mean credit supply or currency supply? I assert that you would say very different things about credit supply. Such as, how do we control the supply of credit? What deterrmines the demand for credit? The term "Money supply" has been talked about for ages, by some very intelligent men and, in my opinion, we are making very little progress. You and Mr. Hummel are important players in the economic arena.

[William Hummel]

John, my latest comments below are in green.

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Wednesday, August 08, 2012 10:09 AM

Subject: Re: Money creation flow charts

Thanks William.   My response is in red.   John

On 9/08/2012 1:09 AM, William Hummel wrote:

John, I would put a different slant on your remarks. Mine are in blue.  /William

 

 

From: John Hermann

To: understan...@googlegroups.com

Sent: Tuesday, August 07, 2012 8:46 PM

Subject: Re: Money creation flow charts

It has been argued that only state fiat money is acceptable for the payment of taxes.  This is debatable, because we have a dual monetary system in which state fiat money tags along (in principle) after all retail deposits. 

 

The expression "tags along" implies state fiat money is of little consequence in the payment system, whereas retail bank deposits are merely claims on state fiat money and have no independent value.

It was not my intention to imply that state fiat money is of little consequence.  However "tags along" seemed to be a useful description because it seems that there is a lag between the operations of retail bank lending (of bank credit money) and acquiring any reserves considered necessary in support of that lending.

I consider the lag to be of no particular significance. In my view what is important is that all payments involve a transfer of claims on government fiat money, and an actual transfer of fiat money except when the payer and payee use the same bank.

Thus in practice any bank check (representing bank credit money owned by the non-bank taxpayer) delivered to the internal revenue department in fulfilment of tax obligations will be accepted as payment.

 

A bank check to the internal revenue service will be accepted only if it ends up by transfering a claim on state fiat money. It will bounce if there are insufficient funds in the taxpayer's account.

That may be so, however note that the "funds" in the taxpayer's account are composed of bank credit money, not state fiat money.  The associated fiat money resides in the bank's vaults and in its account with the central bank.

That's true but I don't see how that relates to my point, that the transaction involving a bank check will not succeed without sufficient funds.

Some relevant points:
(a) Non-banks do not have direct access to state fiat money, which is exclusively owned by banks.

 

I doubt that you meant this because the wording implies that state fiat money is exclusively owned by banks. Non-banks obviously don't have direct access to money owned by banks, but they can hold currency which is state fiat money.

Yes, you are correct William.  I should have said reserves (= state fiat money held by banks).

(b) Neither bank credit money nor state fiat money have permanent existence -- as a matter of accounting, both are cancelled from their respective holding accounts whenever Treasury's operating account with the central bank increases.

As a matter of policy, the Treasury maintain a fixed balance in its Fed account. De facto the quantity of state fiat money is not a function of Treasury transactions. Rather it is the central bank which determines the quantity through its lending and open market operations.

I agree.  And I see no inconsistency between this with what I wrote above.

(c) When central government spends -- new bank credit money is created, new state fiat money is necessarily created on a matching basis, and Treasury's operating account decreases.

 

As noted, the Treasury maintains a fixed balance in its Fed account. As it spends, it transfers funds from its commercial bank accounts to its Fed account. Thus in effect, the Treasury spends out of its commercial bank accounts.

That is one way of looking at it, however I don't think it is a technically correct description.  Technically, the money held in the commercial bank accounts is not transferred.  The reason being that Treasury's operating accounts with the central bank - whose existence serves to authorize government spending - lie outside both the supply of fiat money and the supply of public money. 

 

The term "government fiat money" simply refers to money created by government fiat. It includes credits issued by the central bank regardless of who holds them. The "monetary base" is government fiat money held by private agents, which includes banks but excludes the Treasury. I think your discussion applies to base money.

 

These operating accounts are not money because they are only accessible to Treasury, not to a wider body.  Their manipulation is therefore largely a sterile accounting exercise, designed to ensure that government spending is suitably constrained.  This logically implies - according to the accepted rules of accounting - that any increase in those accounts (overall) implies the destruction of money, while a decrease in those accounts implies the creation of money.

 

The Treasury's account at the Fed holds government fiat money but not base money, by definition. I would also note that the real purpose of that account is to isolate government spending from affecting total bank reserves, thereby enabling the Fed to control the interbank lending rate in Fed funds. For that reason it is not a sterile accounting exercise. 

 

The so-called creation and destruction of money by the Treasury is a Mosler concept which I don't agree with. Regardless of how one defines money, the Treasury must recapture what it spends on average or its general fund will be depleted. If that is so, then calling spending the creation of money and its recapture the destruction of money is a purely semantic game.

 

And looked at objectively this is what actually happens.  When Treasury spends, a check (or other transfer) is made out to the payee and is drawn on the central bank (I'm not sure if this is the U.S. practice, however in my country the Treasury does all of its banking with the central bank, not the commercial banks).  When the check is presented to a commercial bank a creditary deposit is created in the payee's account. And after the check is sent back to the central bank for clearing, at some stage (without wishing to dwell on the complicating details) a new deposit of state fiat money is created in the bank's account with the central bank to match the creation of bank credit money by the commercial bank.  Once again, there is a lag between the creation of bank credit money and the matching creation of state fiat money.

Again I will say that the lag is of no particular significance. One can always trace the balanced reciprocal flow of funds between Treasury and the private sector. It's purely arbitrary to call a particular step in that process money creation or destruction.

[Joe Leote]

On 8/8/2012 8:31 AM, Mr Economy wrote:
> Does a Fall in Credit Lead to deflation?
> http://mises.org/daily/3810

The link above has only one accurate concept: money should be defined as
checkable deposits (transaction accounts) at Banks and currency in
circulation, which is roughly the Official Federal Reserve definition of
M1 money supply.

The rest of it is based on some false assumptions about inflation or
deflation being tied directly to the money supply. The reasoning is
backward ... the transaction account money is a residual of Fed and Bank
credit operations ... so credit deals on two sides of the Bank balance
sheet drive the residual levels we call "M1 money supply." I think
Nonbanks can influence aggregate demand even without increasing bank
credit, but my model is less well developed in the Nonbank credit
markets at this time.

Joe

[John Hermann]

George, my response is in brown color.   John.

On 9/08/2012 3:15 AM, George Chandler wrote:

Mr Hermann wrote in part: "What are the criteria for using the word "money" legitimately? "

John, also consider that use of the word money involves using a word that makes it clear what you are talking about. For instance, "Money supply". Do you mean credit supply or currency supply?

Neither of those George.  The word "money supply" has a specific meaning, which is well understood by economists.  It refers to money which is accessible to, accepted by, and used by the general public.  Thus it consists primarily of currency (coins and notes) held by the public plus retail deposits in commercial banking institutions.

I assert that you would say very different things about credit supply. Such as, how do we control the supply of credit?

Credit is not money.  And bank credit money is not credit.  I agree that one needs to be quite precise in defining terms, in order to avoid confusion .  Credit refers to the funds which are potentially available to a borrower -- if that person chose to take out a loan contract.

[John Hermann]

William, my latest response is in purple color.  John

On 9/08/2012 3:38 AM, William Hummel wrote:

John, my latest comments below are in green.

(c) When central government spends -- new bank credit money is created, new state fiat money is necessarily created on a matching basis, and Treasury's operating account decreases.

 

As noted, the Treasury maintains a fixed balance in its Fed account. As it spends, it transfers funds from its commercial bank accounts to its Fed account. Thus in effect, the Treasury spends out of its commercial bank accounts.

That is one way of looking at it, however I don't think it is a technically correct description.  Technically, the money held in the commercial bank accounts is not transferred.  The reason being that Treasury's operating accounts with the central bank - whose existence serves to authorize government spending - lie outside both the supply of fiat money and the supply of public money. 

 

The term "government fiat money" simply refers to money created by government fiat. It includes credits issued by the central bank regardless of who holds them. The "monetary base" is government fiat money held by private agents, which includes banks but excludes the Treasury. I think your discussion applies to base money.

Yes, you are right -- I meant base money.

These operating accounts are not money because they are only accessible to Treasury, not to a wider body.  Their manipulation is therefore largely a sterile accounting exercise, designed to ensure that government spending is suitably constrained.  This logically implies - according to the accepted rules of accounting - that any increase in those accounts (overall) implies the destruction of money, while a decrease in those accounts implies the creation of money.

 

The Treasury's account at the Fed holds government fiat money but not base money, by definition.

OK, fair enough.  However I think it is debatable whether it should be called "money" at all, because the word "money" is usually taken to mean an entity which is widely acceptable as a means of exchange.  Thus the term is certainly appropriate for the things we describe as base money (a subset of state fiat money) and for bank credit money. 

I prefer to think of Treasury's deposits in the central bank as simply entries in an operating account.  The most obvious analogue is a commercial bank's operating account, and I have not heard the deposits of a bank in its own operating account described as money (it is possible that I am wrong on this matter - but I don't think so, and in any case would appreciate any relevant information).

I would also note that the real purpose of that account is to isolate government spending from affecting total bank reserves, thereby enabling the Fed to control the interbank lending rate in Fed funds.

If that is its primary purpose, then this would seem to support my case that it is inappropriate to describe the entries in this operating account using the term "money". 

For that reason it is not a sterile accounting exercise.

What I meant by "sterile accounting exercise" is that an alternative to spending in this way would be to allow Treasury to do its banking with the commercial banks who hold its accounts (containing the monies collected from tax receipts and the issuance of securities).  Thus the checks and other transfers effected by Treasury could be drawn on these commercial banks.  Such a scenario would conform to the concept of spending without creating money, and total bank reserves would not be affected. 

And if this spending mechanism is a viable alternative -- for the purpose of isolating spending from affecting total bank reserves -- then there would seem to be some other reason for maintaining Treasury's operating account with the central bank.

The so-called creation and destruction of money by the Treasury is a Mosler concept which I don't agree with. Regardless of how one defines money, the Treasury must recapture what it spends on average or its general fund will be depleted. If that is so, then calling spending the creation of money and its recapture the destruction of money is a purely semantic game.

I agree that Treasury must recapture what it spends on average.  However it seems to me that whether or not the association of government spending with "money creation" amounts to semantics depends indeed on how one defines money.  I am trying to view this issue in as logical a manner as possible.  And for this reason I have no particular dislike of the MMT concept of money creation and destruction.  However if the words "creation" and "destruction" do not appeal, I am happy to replace them with something else, such as "addition" and "subtraction".

[John Hermann]

My definition of "bank credit money" is any money which exists in the form of a deposit in a retail banking account.  The qualifying word "credit" in this mix does not imply lending, but rather, it implies that the depositor is being credited with a claim on base money.  Thus the depositor may withdraw currency if desired (either immediately for a demand deposit, or after a specified period of time for a time deposit), in exchange for the bank credit money.

John

[Tom Paine II]

When you write of “government fiat money,” do you more precisely mean the present “government-fiat bank money”?

 

Which presently operates as a hidden tax, directly allocated to and collected by big banks?

 

I don’t think that’s too complex to model. 

Nor is imaginative modeling involved. 

Merely add, by observation, the flow of coins to all of your charts, as they are presently put into circulation.

 

The point of the addition is completeness, if nothing else.

That flow should appear somewhere, because it represents a distinct option that could be expanded upon.

Omitting that option forecloses it.   IMHO

 

From: John Hermann

Sent: Tuesday, July 31, 2012 8:08 PM

To: understan...@googlegroups.com

Subject: Re: Money creation flow charts

 

Thanks for these comments George, Helge and Terry.  The diagrams are intended to accompany a talk on the subject of money creation in a few months from now.  I agree with Helge that money creation is a very convoluted and subtle picture which very few people have an adequate grasp of  (I don't think that Bernanke and Geithner are in that select group -- and neither is any economist whose theoretical framework is based on equilibrium).  Also I have only attempted to portray the basics. 

What has been avoided in the diagrams is definition of the words "creation" and "destruction".  I have disregarded operations involving the simultaneous creation of one form of money (eg, bank credit money) and destruction of another from of money (eg, currency held by the public).  Thus handing currency (cash) into a bank and requesting a deposit does not produce any change in the money supply, nor does it produce any change in the supply of government fiat money. 

It might be argued that government spending does not create new money overall because those funds are recaptured by taxation and the issuance of sovereign public debt.  I do not subscribe to that view for two main reasons - (a) there is a substantial time delay between the respective operations, and (b) it is not correct to say that ALL of the funds spent are eventually recaptured in these ways, because under "normal" circumstances - which does not apply at present - a net deficit needs to be maintained in order to accommodate economic development (i.e., in line with positive changes in productivity and population).

A related aspect of this matter is that Treasury's operating accounts with the central bank (whose existence serves to authorize government spending) lie outside both the supply of fiat money and the supply of public money.  This logically implies - according to the accepted rules of accounting - that an increase in those accounts (overall) implies destruction of money, while a decrease in those accounts implies creation of money. 

John


On 1/08/2012 11:01 AM, Terry Hammonds wrote:

Looking at the debt levels of students, families, local, state and national governments around the world, I believe these economies are one big Ponzi scheme. There is not enough "money" (liquidity) in the world  to pay off all the debt, or even pay it down to a manageable level. We simply pass debt around to each other hoping for a good outcome. It is like musical chairs and we have run out of chairs.

Sent from my iPad

On Jul 31, 2012, at 5:16 PM, George Chandler <lante...@gmail.com> wrote:

Helge wrote in part "...if we substitute "credit" for "money", a lot of credit/debt creation takes place outside the system, based on central banking,..."

 

That suggests to me that it may be interesting to see a flow chart on "Currency Creation " and one on "Currency Creation".

On Tue, Jul 31, 2012 at 12:44 PM, helge nome <helg...@hotmail.com> wrote:

The charts came through fine on my iMac as well.
I would suggest that if we substitute "credit" for "money", a lot of credit/debt creation takes place outside the system, based on central banking,
that John suggests in his diagrams. I'm sure a lot of speculative activities are based on credit/debt not encompassed in the diagrams.
The system is so complex and convoluted that nobody really has a handle on what is going on, least of all Ben Bernanke.
Helge

---

Date: Tue, 31 Jul 2012 10:50:17 -0700

Subject: Re: Money creation flow charts

From: lante...@gmail.com
To: understan...@googlegroups.com

Thanks for the flow chart, John. Glad to see someone is trying to make sense of our money system.Your charts came in fine for me...top quality. Is there anyway you can show in this flow chart where the seignorage gain occurs? (Seignorage defined as the difference between the cost of printing and the face value.)

On Mon, Jul 30, 2012 at 6:36 PM, John Hermann <her...@picknowl.com.au> wrote:

I don't know if the images I have pasted here will be transmitted and received correctly, however they are seven slides that I prepared yesterday on the subject of money creation.  If they cannot be received in this format, I will be happy to forward them as an attached file.  I would greatly appreciate constructive  criticism and suggestions for change or improvement.    John
 

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<clip_image014.jpg>

 

 

 

[Tom Paine II]

perhaps more convenient pdf of slides

 

From: John Hermann

Sent: Monday, July 30, 2012 6:36 PM

To: understan...@googlegroups.com

Subject: Money creation flow charts

 

I don't know if the images I have pasted here will be transmitted and received correctly, however they are seven slides that I prepared yesterday on the subject of money creation.  If they cannot be received in this format, I will be happy to forward them as an attached file.  I would greatly appreciate constructive  criticism and suggestions for change or improvement.    John

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[Tom Paine II]

“retail bank deposits are merely claims on state fiat money and have no independent value”

 

I can’t conceive of utterly-impossible-to-simultaneously-satisfy claims as “mere” claims on any form of property.

A “mere” claim is a mere claim, not a complicated claim that is conveniently called a mere claim and so conceived by the multitude to whom it is published.

 

Although it is true that the Chicago Fed’s famously unique “Money Mechanics” financial literacy tract categorically states that $1 in the bank is the same as a $1 bill, it is perfectly obvious that this educational gem is categorically false.

From: William Hummel

Sent: Wednesday, August 08, 2012 8:39 AM

To: understan...@googlegroups.com

[Tom Paine II]

“As a matter of policy, the Treasury maintain a fixed balance in its Fed account.”

 

I have read somewhere authentic that the fixed balance is the minimum amount deemed safe to avoid risking even a temporary shortage of funds in that account, in the reasonably conceivable course of business.  Is that correct, and is because the funds otherwise can be far more productively applied, e.g. in retiring loans to China, if not Iran.

 

 

From: William Hummel

Sent: Wednesday, August 08, 2012 8:39 AM

To: understan...@googlegroups.com

[Tom Paine II]

Ooops—my question as to what sets the limit is answered:

As a matter of policy, the Treasury maintain a fixed balance in its Fed account. De facto the quantity of state fiat money is not a function of Treasury transactions. Rather it is the central bank which determines the quantity through its lending and open market operations.

 

However, this raises another question.  You seem to impute that the amount is merely incidental to the Fed’s collateral monetary policy decisions.  That the Tsy simply computes how much it must hold so that the Fed can do whatever monetary policy operations it chooses without overdrawing on that account.  Is this the case?

 

If it is, it contradicts something you seemed to be saying in another context, that the Fed does not adjust Tsy balances to stabilize the total amounts in circulation and in reserves.   You disagree, right?

 

I thought you disputed this on the ground that the Tsy, not the Fed, decides all transfers between its commercial and Fed accounts.  But if that decision is in auto-response to Fed actions, then that explanation is specious. 

 

So, to understand the process, can you elaborate what are the specific Fed actions that cause the Tsy’s Fed account to go up and down?  Are you merely saying that when the Fed buys bonds, the Tsy must have more in its Fed account to keep pace with the interest payments?  If so, isn’t this in essence a money/reserves totals stabilizing act?

[Tom Paine II]

“I consider the lag to be of no particular significance. In my view what is important is that all payments involve a transfer of claims on government fiat money, and an actual transfer of fiat money except when the payer and payee use the same bank.”

 

Hmmm...it seems not so much absurd as obviously untrue, to say every one of the huge volume of such inter-bank transfers that cancel each other in the clearing process correspond to “actual” transfers.  Since only a generally small fractional residue is thereby actually transferred.

[John Hermann]

William, a further response to your most recent comments.  Firstly, I take note of your distinction between state fiat money and base money (the latter being a subset of fiat money). 

I would like to pursue a little further the issue of whether Treasury's FED account is actually a form of money in any sense.  Because if it is not, then logically it also would be inappropriate to describe it as a form of fiat money.  So lets follow the logic of the situation.

The proposal being made is that one form of fiat money is simply exchanged for another form of fiat money when Treasury's FED account changes (i.e., in response to gov't spending).  One way of approaching the issue is to identify a monetary analogue (in which two forms of state fiat money are exchanged), and look for any differences. 

An obvious analogue is the exchange of currency in the hands of banks (class 1) for exchange settlement funds (class 2), each being a different form of base money.  A large number of banking institutions are simultaneously members of each class.  The entities which comprise each class may be regarded as money because each is held and used by a large number of members of that class, each entity may be transferred and borrowed/loaned between all of its class members, each entity may be distributed according to the operation of market forces, and each entity may be used for purchasing assets.  These are some of the hallmarks of anything which may be used as money.

Treasury's deposits within its FED account (which we will call class A) are not base money - we agree on that - therefore these deposits are in a special category, and are different in this respect from the deposits of registered banking institutions with the FED (which we will call class B).  There are no institutions apart than Treasury holding class A deposits, so there is a lack of class diversity in regard to transference, borrowing, lending, distribution etc within that class.  The limitation of this class of deposits to a single member does not satisfy the class diversity requirement - which in my opinion is an essential property for any entity which may be used as money. 

As mentioned previously, the implication of all this is that if Treasury's deposits are not regarded as a form of money, then there is no monetary exchange as such when government spends.  In which case one may be justified in describing sovereign government spending as a process entailing the addition of new base money to the economy. 

I fully expect that many people will reject this argument, not necessarily because they disagree with the logic but because they prefer a different definition of money. 


















  John

[Tom Paine II]

The "monetary base" is government fiat money held by private agents, which includes banks but excludes the Treasury. I think your discussion applies to base money....The Treasury's account at the Fed holds government fiat money but not base money, by definition,

 

By the Fed’s definition of “monetary base,” right?

 

The Fed’s designer-definition is worse than clumsy, it is characteristically collaterally conclusory.

Unless otherwise specified, “the base” of a supply by its singularity imputes all of the base sources of that supply, wherever assigned.

Thus, the Fed’s term “monetary base” most misleadingly imputes that the Tsy’s money isn’t properly part of the public money supply.

Which is ridiculous, in functional terms.

It is instead the very opposite -- the most public part of the money supply. 

 

 

 

 

From: John Hermann

Sent: Wednesday, August 08, 2012 9:27 PM

To: understan...@googlegroups.com

Subject: Re: Money creation flow charts

 

[John Hermann]

Hi Tom,

Thanks for your critique.  I aim for precision of thought.  So pointing out any errors of logic or expression is greatly appreciated.

William has corrected my account, by pointing out that when I used the term fiat money I really should have said base money (which is a subset of fiat money, but not generally the same entity).

John

[George Chandler]

Thanks for your posting. Good stuff. I look forward to more and better flow charts. By the way....you said you planned to use the flow charts for a meeting. How'd it go? Were they well received?

[William Hummel]

John,

 

At its root your position is that Treasury spending automatically creates new fiat money while taxes and bond sales destroy fiat money, which is also the MMT position.

 

My position is that all fiat money (aside from coins) is created by the Fed and the Treasury can only spend what it has acquired through taxes and bond sales. The Treasury must therefore recapture what it spends on average, which I believe you have agreed is true. Does it really matter whether the Treasury's account at the Fed is in base money or in the broader fiat money? The definition of the monetary base itself is arbitrary and could logically have included fiat money held by the government. The choice made was by economists for their own purposes.

 

Frankly I don't see any merit to the MMT view that fiat money is created and destroyed as it circulates between the government and the private sector. In fact I think it weakens their position because it is nonsensical to many excellent economists, and entirely unnecessary in respect to their main arguments.

 

William

 

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

[Jean Erick]

     Well, fiat money itself has no "independent value".

If I deposit currency into the bank, has not my fiat money just changed form?   It is immediatley changeable back to cash.  The amount of fiat money has

not changed.  If it is a loan account, then debt, your "claim on state fiat money", has been created.  The amount of M1 has changed, but not the amount of fiat money.

 

Fiat: Fix It Again Tony

 

James

----- Original Message -----

From: William Hummel

To: understan...@googlegroups.com

Sent: Wednesday, August 08, 2012 8:39 AM

Subject: Re: Money creation flow charts

 

The expression "tags along" implies state fiat money is of little consequence in the payment system, whereas retail bank deposits are merely claims on state fiat money and have no independent value.

 

[Jean Erick]

     If you want to clarify it, you use the term "debt".

The basic paradigm of group to group behavior is slavery.  "Freedom" is the unusual, historically.

Can you deny that money liberates?

Can you deny that debt indentures?

"Credit" is the enticement to indenture yourself to debt.  It is the suggestion that you can accumulate more money via the debt, then the debt itself.

But the burden is entirely on you.  Those behind the banks prefer that you indenture yourself into serfdom.

 

Private "debt" is the issue.  Not private "credit".

 

Read Steve Keen, Michael Hudson, both on the internet.

 

James

 

----- Original Message -----

From: George Chandler

To: understan...@googlegroups.com

Sent: Tuesday, August 07, 2012 12:33 PM

Subject: Re: Money creation flow charts

[Jean Erick]

      Money is an intangible concept which is expressed tangibly in different ways.

     Money is that which functions as generic good.  That one real good which is liquid in exchange transactions with all other real goods.

Fiat money is that which officially solely has the sole function of being the generic good.  It is compelled to that postion via being legal tender in payments

of taxes and debts.

 

Money is a subset of value and debt is a subset of money.

 

     Debt is a result of the rental of money.  Debt is the attachment of liability to someone who receives rented funds.  Just because debt can --function-- as money

secondarily does not mean that it --IS-- money.  Just as if you take a run, you are still a human being, who is running.  You are not "a run".  Again, this is not

economics.  This is the english language.

 

 

James

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Tuesday, August 07, 2012 7:52 PM

Subject: Re: Money creation flow charts

[Jean Erick]

      Again John.  You need to establish a more rigorous definition of new bank credit money.  Your statements below are very confused.

 

For ex: (a)  If non banks do not have access to state fiat money then what is that cash in my pocket?

           (c) new federal fiat money is created when the the FED buys T's to pay for Treasury deficit spending.  NBCM needs defining.

 

James

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Tuesday, August 07, 2012 8:46 PM

Subject: Re: Money creation flow charts

[Jean Erick]

     I agree about travelers checks but the Austrians are making the same mistake by not distinguishing between loan demand deposits and personal checking account demand deposits.

     Mine would be savings, and demand deposits created by inflow to bank, currency & coin.  CD & MMMF would be included because they are input to bank.  They are money or records of money that carry no libility to the account owner.  Bank loans EXCLUDED. Most of them are debt, not money.    They have liability attached to the owner.  Travelers checks are out as per your description.

     Debt, not credit.  Banks do not create nor change the amount of money.  They increase debt with each transfer of the same money as debt tally increaes, and they just create debt out of thin air because they have the legal authority to do that.  They create and distribute drawing rights on a finite pool of money.

     BTW.  Thanks for your posts.  I think I'm getting to understand them better.

 

James

----- Original Message -----

From: Mr Economy

To: understan...@googlegroups.com

[Tom Paine II]

I should have been more precise in being more precise. 

 

To also replicate the distinct flow of fiat-coins would by contrast highlight the hidden tax in fiat Fed notes and QE-added reserves. 

 

I wonder, what sort of fiat money are QE-2 style bank reserves (described as mere accounting edits by Bernanke), while they remain, as designed, held at the Fed? 

 

There’s no Treasury seal of any sort attached to them, is there?  Does the open market ops statute conceive such issues?  The Constitution?  Money created not for loans, but simply to refill bank coffers?

 

They would seem pure Fed-fiat (versus statutorily printed therefore gov’t-fiat) issues, albeit take-outable  as (and so convertible to) regular gov’t fiat money at the destination bank’s will.

[John Hermann]

Thanks William.  My responses are in brown color.   John

On 10/08/2012 1:49 AM, William Hummel wrote:

John,

 

At its root your position is that Treasury spending automatically creates new fiat money while taxes and bond sales destroy fiat money, which is also the MMT position.

Well, not exactly my position (which is certainly not fixed or inflexible, and I am always willing to learn).  What I am attempting to do is to look at the issue in a detached manner, free from the influence of contemporary economic opinion. The reason being that it has become increasingly obvious to me over the past few years that most economic commentary is unmitigated blather.

My position is that all fiat money (aside from coins) is created by the Fed and the Treasury can only spend what it has acquired through taxes and bond sales. The Treasury must therefore recapture what it spends on average, which I believe you have agreed is true.

The relationship of spending to tax receipts plus bond sales is important, in the context of keeping inflation within desirable bounds and allowing the volume of money to change endogenously (in response to the needs of the private sector).  This appears to be the only restraint on government spending, and it is a voluntary restraint (although in the U.S. it is my understanding that there is also a legal restraint, however in extremis - as in a major war or a major depression - I would expect that law to be quickly overturned).  In every other respect it may be said that government is free to spend.  Don't forget that there must remain an ongoing small unmet deficit, as at least the secular trend -- something which is absolutely necessary if the economy is going to remain healthy consistent with growing productivity and growing population.  And the latter implies that not quite everything which is spent is recaptured.

Does it really matter whether the Treasury's account at the Fed is in base money or in the broader fiat money?

With respect, that is not the issue.  The central issue here is whether it is money in any sense at all.

The definition of the monetary base itself is arbitrary and could logically have included fiat money held by the government. The choice made was by economists for their own purposes.

I am not sure that I can agree with that.  The primary purpose of the monetary base is to provide for the banking system's needs, and the primary purpose of Treasury's FED account(s) is to provide for the government's needs.

Frankly I don't see any merit to the MMT view that fiat money is created and destroyed as it circulates between the government and the private sector. In fact I think it weakens their position because it is nonsensical to many excellent economists, and entirely unnecessary in respect to their main arguments.

Well, if eminence in one's profession is to be the criterion of what is true or false, I would simply say that many "excellent" economists, including some "Nobel" laureates, have been shown to have feet of clay. 
I agree with you that the MMT story about money creation (and destruction) is unnecessary to the main MMT arguments.  However this does not, in itself, imply that their money creation story is misconceived.

[John Hermann]

I have already defined bank credit money, and will repeat it here for your benefit James.  I define "bank credit money" as any money which exists in the form of a deposit in a retail banking account.  The qualifying word "credit" in this mix does not imply lending, but rather, it implies that the depositor is being credited with a claim on base money.  Thus the depositor may withdraw currency if desired (either immediately for a demand deposit, or after a specified period of time for a time deposit), in exchange for the bank credit money.    John.

[Mr Economy]

Hello,

 

 

When banks grant new loans it shows up as asset on balance sheet and a demand deposits on liability side. So when demand deposits are counted as part of money supply it also includes loan demand deposits as well as personal checking accounts. A lot of personal checking account its important to note might have come about from past credit expansions. When it comes to CDs, they are just transfers of purchasing power from one individual to another so are not money unless they were all going to mature  immediately. MMMFs on the other hand are really just money substitutes because to use funds from these accounts shares of MMMFs have to be sold for cash. As Ludwig Von Mises has stated in past, money substitutes cease to function as money when the monetary brakes get applied which explains why during the financial crisis MMMFs had to be propped up. Even though trillions were invested in MMMFs before the financial crisis; when the crisis hit investors value perception of them changed and these funds would have lost considerable value if it weren't for gov't intervention.

 

In regards to the Austrian calculation of the true money supply, its very accurate I believe but would be even more if there were published statistics on the amount of funds sweeped overnight into Repos and Eurodollar deposits that could be added to the aggregate.

From: Jean Erick <jean...@sbcglobal.net>
To: understan...@googlegroups.com

[William Hummel]

John, my latest comments are in green.

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Thursday, August 09, 2012 8:09 PM

Subject: Re: Money creation flow charts

Thanks William.  My responses are in brown color.   John

On 10/08/2012 1:49 AM, William Hummel wrote:

John,

 

At its root your position is that Treasury spending automatically creates new fiat money while taxes and bond sales destroy fiat money, which is also the MMT position.

Well, not exactly my position (which is certainly not fixed or inflexible, and I am always willing to learn).  What I am attempting to do is to look at the issue in a detached manner, free from the influence of contemporary economic opinion. The reason being that it has become increasingly obvious to me over the past few years that most economic commentary is unmitigated blather.

My position is that all fiat money (aside from coins) is created by the Fed and the Treasury can only spend what it has acquired through taxes and bond sales. The Treasury must therefore recapture what it spends on average, which I believe you have agreed is true.

The relationship of spending to tax receipts plus bond sales is important, in the context of keeping inflation within desirable bounds and allowing the volume of money to change endogenously (in response to the needs of the private sector). This appears to be the only restraint on government spending, and it is a voluntary restraint (although in the U.S. it is my understanding that there is also a legal restraint, however in extremis - as in a major war or a major depression - I would expect that law to be quickly overturned). 

 

In extremis the government can do anything it chooses within constitutional limits. However I think we have been discussing how things work on a continuing basis in quasi-normal times. That would exclude financial operations since the crisis of 2008. With that in mind, the Treasury cannot spend more than it acquires from taxes and bond sales on average. That is an accounting constraint, and is not related to inflation control. I rule out the Treasury borrowing directly from the Fed because that cannot be done on a continuing basis without a new monetary regime, as yet undefined. For the same reason, I reject those MMT arguments which assume the consolidation of the Fed and Treasury into a single entity they call "government".

 

The Treasury simply has no way to create the money it spends. It can accumulate more money than it needs, but that would be at the expense of the private sector and have a dampening effect on the economy. Normally the Treasury targets a fixed amount on average in its general fund, which includes both what it holds in its Fed account and its commercial bank accounts.

 

In every other respect it may be said that government is free to spend.  Don't forget that there must remain an ongoing small unmet deficit, as at least the secular trend -- something which is absolutely necessary if the economy is going to remain healthy consistent with growing productivity and growing population.  And the latter implies that not quite everything which is spent is recaptured.

 

Here you seem to have changed your view on the need for the Treasury to recapture all it spends. Then how is it going to avoid a steady drain on its general fund, ending in its depletion?

 

The transaction money supply growth is not dependent on Treasury spending. It increases endogenously through bank lending, and its growth is enabled by the Fed when it targets a fixed short-term interest rate.

 

Does it really matter whether the Treasury's account at the Fed is in base money or in the broader fiat money?

With respect, that is not the issue.  The central issue here is whether it is money in any sense at all.

 

In my view, what we call the stuff in the Treasury's account at the Fed is irrelevant. It is accounted for as though it were a bank deposit, and we can trace the inflow and outflow relative to bank reserves. It acts like fiat money regardless of what it is called.

 

T

he definition of the monetary base itself is arbitrary and could logically have included fiat money held by the government. The choice made was by economists for their own purposes.

I am not sure that I can agree with that.  The primary purpose of the monetary base is to provide for the banking system's needs, and the primary purpose of Treasury's FED account(s) is to provide for the government's needs.

 

What would be lost if the monetary base were defined to include what the government holds?

[Jean Erick]

         Your forte is generating confusion.

1. You bring in a "claim on base money".  So then we're into the argument on what that is where you have proved by just engaging in a discussion on that, &

done well there BTW.  And that is further confusing because credit is the term commonly used when lending IS done.  One phrase having two points of confusion.

2.  Retail:  Haven't commerical banks and retail banks each taken on both types of accounts nowadays?

     The common language is demand deposits (which is bad enough) and reserves.

3.  "Deposit in a retail bank"  Retail again and how else can it exist in a bank?  As a non-deposit?

4. A depositor may also withdraw currency on a demand deposit loan account, can't they?

     I'm not saying I'm that good at the english language but I think the idea is to include that which you want and exclude that which you don't want.

Preferably in a concise fashion.

     You're are simply using to many terms that are not exclusive enough.

    I think, to pay you a compliment, you know a lot of stuff but you like to push the envelope, which is great.  But you, yourself are not distinguishing when

you're pushing the envelope from not.

[Jean Erick]

     Is that a mere claim or a mere cat?

 

Alex Pollock:  "If the debtor cannot pay, there is default."

 

James

----- Original Message -----

From: Tom Paine II

To: understan...@googlegroups.com

[Jean Erick]

     The rabbits go from TT&L accounts in commercial banks into the FED held Treasury hutch.  Upon crossing the threshold, the rabbits are free, free, free

of their reserve coating.  They are free to be essential rabbit.  It's a special experience for them.  Then, upon decison of Treasury, the little rabbits are spent

back into the economy.  Upon crossing the spend threshold, they lose their all to short, but wonderful experience in being just rabbit, and again are coated

with the traint of reserves.  IF the Treasury happens to spend a nickel to much now and then, only by accident mind you, they borrow the money by selling T's.

    Now we've gone a whole paragraph, including incredients for rabbit stew, and the FED still has it finger up it's nose.  But NOW the FED gets into the action by

buying or selling T's in the OMO.  The FED cannot do anything unless the Treasury creates T's for them to buy in the first place.

 

   It's Peeeter Raaabbit!

 

James

----- Original Message -----

From: Tom Paine II

To: understan...@googlegroups.com

[Jim Blair]

On 8/10/2012 11:42 AM, Jean Erick wrote:

     Is that a mere claim or a mere cat?

 

Alex Pollock:  "If the debtor cannot pay, there is default."

 

Hi,

If you owe the bank $1000 and can't pay, you have a problem.

But if you owe the bank $100,000,000 and can't pay, the bank has a problem.

Who says size doesn't matter?

Jim

[George Chandler]

Size matters. Too big to  fail...oh yes! By the way, the Consumer Financial Protection Bureau in July 2012, was to define who is too big to fail. Hasanyone heard what they decided?

[Tom Paine II]

If you owe the bank $1000 and can't pay, you have a problem.
But if you owe the bank $100,000,000 and can't pay, the bank has a problem.

 

Unless it’s the central bank that’s owed the $100,000,000.

 

[Tom Paine II]

“...the FED gets into the action by buying or selling T's in the OMO. The FED cannot do anything unless the Treasury creates T's for them to buy in the first place.”

 

Untrue.  The FED is not constrained to purchase only Treasuries.  It chooses to buy Treasuries because they are the safest-best investment.  The statutes that authorize the purchase of Treasuries limit those purchases, they do not require them.  Am I right?

[Tom Paine II]

In extremis the government can do anything it chooses within constitutional limits. However I think we have been discussing how things work on a continuing basis in quasi-normal times. That would exclude financial operations since the crisis of 2008.

 

In the above, does your use of the term “government” include the Fed? 

 

In any case, I am not happy with the presumed limitation of scope.  The system’s broke, and we need a new and better societal tool.  These are not quasi-normal times, and to debate money creation as though a return to old practices were inevitable would be to make the discussion more hypothetical, not less.  And even assuming that limit, I have a problem with the discussion.

 

In that I am a petitioner of (limited and experimental, but substantial) new issues of true United States notes (a la Lincoln’s greenbacks), I find discussions and models of present currency creation fatally flawed, where they disregard the ongoing creation of money by coinage, and the already statutorily allowed printing of true U.S. currency (even if presently statutorily limited to $300 million, is it?). 

 

 

[John Hermann]

William, my further responses are in purple color.   John.

On 11/08/2012 1:48 AM, William Hummel wrote:

John, my latest comments are in green.

From: John Hermann

Thanks William.  My responses are in brown color.   John

On 10/08/2012 1:49 AM, William Hummel wrote:

John,

 

At its root your position is that Treasury spending automatically creates new fiat money while taxes and bond sales destroy fiat money, which is also the MMT position.

Well, not exactly my position (which is certainly not fixed or inflexible, and I am always willing to learn).  What I am attempting to do is to look at the issue in a detached manner, free from the influence of contemporary economic opinion. The reason being that it has become increasingly obvious to me over the past few years that most economic commentary is unmitigated blather.

My position is that all fiat money (aside from coins) is created by the Fed and the Treasury can only spend what it has acquired through taxes and bond sales. The Treasury must therefore recapture what it spends on average, which I believe you have agreed is true.

The relationship of spending to tax receipts plus bond sales is important, in the context of keeping inflation within desirable bounds and allowing the volume of money to change endogenously (in response to the needs of the private sector). This appears to be the only restraint on government spending, and it is a voluntary restraint (although in the U.S. it is my understanding that there is also a legal restraint, however in extremis - as in a major war or a major depression - I would expect that law to be quickly overturned). 

In extremis the government can do anything it chooses within constitutional limits. However I think we have been discussing how things work on a continuing basis in quasi-normal times. That would exclude financial operations since the crisis of 2008. With that in mind, the Treasury cannot spend more than it acquires from taxes and bond sales on average. That is an accounting constraint, and is not related to inflation control. I rule out the Treasury borrowing directly from the Fed because that cannot be done on a continuing basis without a new monetary regime, as yet undefined.

Agree.

For the same reason, I reject those MMT arguments which assume the consolidation of the Fed and Treasury into a single entity they call "government".

This was never an issue for me.  That is why I use the term "state fiat money", and try to avoid using the more confusing MMT expression "government fiat money".

The Treasury simply has no way to create the money it spends.

Agree.

It can accumulate more money than it needs, but that would be at the expense of the private sector and have a dampening effect on the economy.

Agree.

Normally the Treasury targets a fixed amount on average in its general fund, which includes both what it holds in its Fed account and its commercial bank accounts.

 

In every other respect it may be said that government is free to spend.  Don't forget that there must remain an ongoing small unmet deficit, as at least the secular trend -- something which is absolutely necessary if the economy is going to remain healthy consistent with growing productivity and growing population.  And the latter implies that not quite everything which is spent is recaptured.

 

Here you seem to have changed your view on the need for the Treasury to recapture all it spends. Then how is it going to avoid a steady drain on its general fund, ending in its depletion?

 

The transaction money supply growth is not dependent on Treasury spending. It increases endogenously through bank lending, and its growth is enabled by the Fed when it targets a fixed short-term interest rate.

Yes, I agree that it does not depend on Treasury spending in a direct way.  However it seems to me that the open market operations designed to achieve interest rate targets entail (within the context of a normally developing economy) buying and selling securities with a secular trend for net purchases to exceed net sales. This may be interpreted as a trend for the net transfer of securities to the economy to fall short of the difference (net spending - net taxing). This long-term mini-deficit represents the increment by which base money needs to grow in concert with money supply growth -- which accommodates the needs of the private sector for credit funding.

Does it really matter whether the Treasury's account at the Fed is in base money or in the broader fiat money?

With respect, that is not the issue.  The central issue here is whether it is money in any sense at all.

 

In my view, what we call the stuff in the Treasury's account at the Fed is irrelevant. It is accounted for as though it were a bank deposit, and we can trace the inflow and outflow relative to bank reserves. It acts like fiat money regardless of what it is called.

The issue is not the name, but whether Treasury deposits in the FED behave like money (fiat or otherwise).  In my view a workable money system is one in which the entity we call "money" possesses the following characteristics:

(a) It can be manufactured (created) in a reproducible manner, consistent with its acting as a unit of account;
(b) It has some unique quality or property which distinguishes it from other "non-money" entities;
(c) It behaves as a medium of exchange within a well-defined marketplace context, thus it may be used for purchasing desired assets;
(d) It is accepted, accessed and used by a "sufficiently large" number of members of the class of marketplace players;
(e) It may be transferred, loaned and borrowed between any of those marketplace players;
(f) It may be distributed amongst the marketplace players according to the operation of market forces;
(g) Its existence does not exclude the existence of other forms of money, operating within different types of marketplace,
(h) Its existence does not exclude the possibility of an association with other forms of money; and
(i) A "sufficient number" of marketplace players (class members) is defined to be that number which ensures that the above operations work in a meaningful and viable manner.  It is obvious that a single member cannot fulfill this requirement.
(j) In order to avoid corruption and conflict, the creator of any particular form of money is prohibited from taking ownership of it, and is also prohibited from being a member of the marketplace class which it serves.

I think taking the trouble to define money has relevance to this issue because the argument of some of the MMTers for base money creation seems to hinge upon whether Treasury's CB deposits are actually a form of money, or alternatively are mere accounting entries in an operating account.

The definition of the monetary base itself is arbitrary and could logically have included fiat money held by the government. The choice made was by economists for their own purposes.

I am not sure that I can agree with that.  The primary purpose of the monetary base is to provide for the banking system's needs, and the primary purpose of Treasury's FED account(s) is to provide for the government's needs.

 

What would be lost if the monetary base were defined to include what the government holds?

Good question.  Presumably if there was a good reason for doing so, then it probably would have happened already.  But I am interested in learning what you think are the economists' purposes.

[William Hummel]

John, I have deleted the non-controversial parts, and my responses are in red.

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Saturday, August 11, 2012 9:03 AM

Subject: Re: Money creation flow charts

 

In every other respect it may be said that government is free to spend.  Don't forget that there must remain an ongoing small unmet deficit, as at least the secular trend -- something which is absolutely necessary if the economy is going to remain healthy consistent with growing productivity and growing population.  And the latter implies that not quite everything which is spent is recaptured.

Here you seem to have changed your view on the need for the Treasury to recapture all it spends. Then how is it going to avoid a steady drain on its general fund, ending in its depletion?

 

I didn't find a response to this question.

 

The transaction money supply growth is not dependent on Treasury spending. It increases endogenously through bank lending, and its growth is enabled by the Fed when it targets a fixed short-term interest rate.

Yes, I agree that it does not depend on Treasury spending in a direct way.  However it seems to me that the open market operations designed to achieve interest rate targets entail (within the context of a normally developing economy) buying and selling securities with a secular trend for net purchases to exceed net sales. This may be interpreted as a trend for the net transfer of securities to the economy to fall short of the difference (net spending - net taxing). This long-term mini-deficit represents the increment by which base money needs to grow in concert with money supply growth -- which accommodates the needs of the private sector for credit funding.

 

Yes, there is a secular trend in the net acquisition of Treasury securities by the Fed, but that is unrelated to Treasury spending and its recapture through taxes and security sales. There ican be no long-term mini-deficit in Trreasury inflows versus outflows for reasons already cited. 

 

In the long run, the government budget deficit will increase total outstanding Treasury securities. Net open market purchases by the Fed will slightly reduce the total held by the private sector, and that reduction results in an increase in base money needed to support growth in the transaction money supply.  

I think taking the trouble to define money has relevance to this issue because the argument of some of the MMTers for base money creation seems to hinge upon whether Treasury's CB deposits are actually a form of money, or alternatively are mere accounting entries in an operating account.

The definition of the monetary base itself is arbitrary and could logically have included fiat money held by the government. The choice made was by economists for their own purposes.

I am not sure that I can agree with that.  The primary purpose of the monetary base is to provide for the banking system's needs, and the primary purpose of Treasury's FED account(s) is to provide for the government's needs.

 

What would be lost if the monetary base were defined to include what the government holds?

Good question.  Presumably if there was a good reason for doing so, then it probably would have happened already.  But I am interested in learning what you think are the economists' purposes.

 

I have no reason to redefine the monetary base other than to counter the proposition that the Treasury's account at the Fed may not be "money" all. It's worth remembering that the word "money" can also be defined in different ways. However I'm more interested in acquiring a useful and coherent understanding of how the monetary system works.

[Jean Erick]

     The size of the construct of this confusion is a bit pleasing.

[Jean Erick]

     It's my position that money is not created according to the "Modern Money Mechanics" explanation.  I see a little bit of money being lent and a lot of debt

being created.  Debt is the basic money substitute.  You have noted others also.  It's more direct and accurate to identify it as debt.  As it is easliy accepted

that debt acts as money.  When things get tight, the accumulated tally of debt suddenly finds money alacritously attractive.

     So any explanation of money supply that includes the loan created demand deposits is simply incorrect.  I cannot understand why you don't see that.

M1 counts both money and debt and calls it the "money" supply.     It's even more important when you realize that private debt is the probelm in the first place.

Money, debt, money-debt conflation.  Three peas make a shell game.

[Tom Paine II]

In the long run, the government budget deficit will increase total outstanding Treasury securities. Net open market purchases by the Fed will slightly reduce the total held by the private sector, and that reduction results in an increase in base money needed to support growth in the transaction money supply...

I'm more interested in acquiring a useful and coherent understanding of how the monetary system works.

 

I believe such a useful understanding should turn a blind eye to the matter-of-habit choice of the Fed to purchase Treasuries, rather than, say, Chinese or corporate bonds.  In particular, the Fed IS in the private sector, there is no change in Treasuries held by the private sector when it buys bonds.  And over recent years, the Treasury would have got better returns from Fed profits, if the Fed had the nerve to put dollars into circulation by buying Chinese corporate bonds. 

 

 

[John Hermann]

Responses are in purple color.  John

On 11/08/2012 2:12 AM, Jean Erick wrote:

Your forte is generating confusion.

Confusion is not something that one should be frighted of or irritated by.  Confusion is a necessary precursor to discovery and learning.

1. You bring in a "claim on base money".  So then we're into the argument on what that is where you have proved by just engaging in a discussion on that, & done well there BTW.  And that is further confusing because credit is the term commonly used when lending IS done.  One phrase having two points of confusion.

I like do distinguish between "credit" and "bank credit money". And I think the term ":credit" is frequently misused in the modern world.  Its real meaning does not refer to money which currently exists, but rather, it refers to funds which would be available for use if a decision was taken to activate a loan.

2.  Retail:  Haven't commerical banks and retail banks each taken on both types of accounts nowadays?

All commercial banks engage in retail operations. In the context of banking, the word "retail" simply refers to business activity with the general public and non-bank businesses. Whereas "wholesale" refers to business activity exclusively within the financial system (whether local or foreign).

The common language is demand deposits (which is bad enough) and reserves.

Some central banks (like in Australia) refuse to use the word "reserves", and seem to get along quite happily using the terms "currency", "exchange settlement funds", and "monetary base".  Personally I like to use the word "reserves". 

3.  "Deposit in a retail bank"  Retail again and how else can it exist in a bank?  As a non-deposit?

Banks have deposits in other banks and financial intermediaries, and in their own operating accounts, and also in the central bank.  None of these are retail deposits.

4. A depositor may also withdraw currency on a demand deposit loan account, can't they?

The word "demand" surely suggests that legal tender may be withdrawn at any time as an entitlement.

I'm not saying I'm that good at the english language but I think the idea is to include that which you want and exclude that which you don't want. Preferably in a concise fashion. You're are simply using too many terms that are not exclusive enough.

I think, to pay you a compliment, you know a lot of stuff but you like to push the envelope, which is great.  But you, yourself are not distinguishing when you're pushing the envelope from not.

I accept both the compliment and the criticism (which is just criticism, and noted for action).

From: John Hermann

My definition of "bank credit money" is any money which exists in the form of a deposit in a retail banking account.  The qualifying word "credit" in this mix does not imply lending, but rather, it implies that the depositor is being credited with a claim on base money.  Thus the depositor may withdraw currency if desired (either immediately for a demand deposit, or after a specified period of time for a time deposit), in exchange for the bank credit money.

On 9/08/2012 2:29 AM, Jean Erick wrote:

The disagreement, as this point, seems to originate from our using the same phrase to describe different entities.

There are two commonly accepted explanations of US money creation.  (1) FED buying Treasuries and (2) fractional reserve lending by banks.  I think the term

"newly created bank credit money" is a term that most would believe is used to describe that money created relative to bank lending.

I am not familiar with bank spending being regarded as a creation of money, and if it was ever mentioned here, the mention has been so slight as to excape my

notice and recall.

I suggest that most people with some slight education in this paradigm, in our known universe, would associate the phrase "newly created bank credit money" with fractional reserve lending.

[Jean Erick]

    LOL.

----- Original Message -----

From: Jim Blair

To: understan...@googlegroups.com

Sent: Friday, August 10, 2012 12:42 PM

Subject: Re: Money creation flow charts

On 8/10/2012 11:42 AM, Jean Erick wrote:

     Is that a mere claim or a mere cat?

 

Alex Pollock:  "If the debtor cannot pay, there is default."

 

[Jean Erick]

     OK.  I think I see how I could have worded it better.  I did not mean to convery that the FED has to do it.  Just that they --can't-- do it if there are no T's to buy.

Treasury has to produce some T's for any to exist for FED to buy if FED chooses to buy.

 

FED  "If I only had a Treasury, Treasury.  I would buy it, buy it."

         "It I only had a Chinaman, Chinaman.  I would sell to him, sell to him".

         "If I only had an interest rate, interest rate. I would alter it, alter it."

         "If I only had aaaann economeeeee, I would cycle it, cycle it".

[Jean Erick]

      Well, Tom, the system's broke, but not in the way you think.  Wall street took over the FED at its inception.  Over time, the tax code has

been turned on its head, moving from taxing land and money making money to taxing labor (income, FICA, etc).  Calif's Prob 13 is the strking example.

It benefited commercial entities who are longholders of land and then they started the income tax to replace the land tax money lost.

Move taxing the rich to taxing the poor.  Thomas Jefferson is purported to have said that putting banking in private hands is worse than an invading army.

225 some years later, Michael Hudson describes the current taking by money as an improvement, for big money, over  ...... the classic of using an

invading army.

 

James

----- Original Message -----

From: Tom Paine II

To: understan...@googlegroups.com

[Jean Erick]

     The Law of Accounts recognizes intangibilities in money.  Curency, coin, obviously money.  A tally record held on a banks hard drive?

Do I charge you differently if you lose my cash or lose the tally record of my money?  How do you get a sunspot in court?

 

The problem is similar to (b).  There, you want to distinguish money from non-money.  But that is not the problem.

The problem is that you do not make the same demand for money when it is rented.  You do not distinguish money

according to how many times it has been lent.  Now, it must have been lent serveral times because debt amount greatly

exceeds money amount.  But then, you don't even get to here because you refuse to accept the simple definitions

which make them distinct.

     Furthermore, you will not percieve the true nature of lending, and distinguish between renting of money and credit (debt)

creation out of thin air.  So, we will continue to be in absolute agreement that the other is hopelessly lost.

 

      Treasury CB deposits are tally records of the intangilble concept of money.  They are, in effect, money.

 

James

[John Hermann]

Response in light blue color.    John.

On 12/08/2012 3:43 AM, William Hummel wrote:

John, I have deleted the non-controversial parts, and my responses are in red.

From: John Hermann

In every other respect it may be said that government is free to spend.  Don't forget that there must remain an ongoing small unmet deficit, as at least the secular trend -- something which is absolutely necessary if the economy is going to remain healthy consistent with growing productivity and growing population.  And the latter implies that not quite everything which is spent is recaptured.

Here you seem to have changed your view on the need for the Treasury to recapture all it spends. Then how is it going to avoid a steady drain on its general fund, ending in its depletion?

 

I didn't find a response to this question.

See my comments below.

 

The transaction money supply growth is not dependent on Treasury spending. It increases endogenously through bank lending, and its growth is enabled by the Fed when it targets a fixed short-term interest rate.

Yes, I agree that it does not depend on Treasury spending in a direct way.  However it seems to me that the open market operations designed to achieve interest rate targets entail (within the context of a normally developing economy) buying and selling securities with a secular trend for net purchases to exceed net sales. This may be interpreted as a trend for the net transfer of securities to the economy to fall short of the difference (net spending - net taxing). This long-term mini-deficit represents the increment by which base money needs to grow in concert with money supply growth -- which accommodates the needs of the private sector for credit funding.

 

Yes, there is a secular trend in the net acquisition of Treasury securities by the Fed, but that is unrelated to Treasury spending and its recapture through taxes and security sales. There can be no long-term mini-deficit in Treasury inflows versus outflows for reasons already cited.

In the long run, the government budget deficit will increase total outstanding Treasury securities. Net open market purchases by the Fed will slightly reduce the total held by the private sector, and that reduction results in an increase in base money needed to support growth in the transaction money supply.

It seems to me that there is an arbitrary element in the perspective one adopts about the overall funding scenario.
What appears to matter here is the fact that a normally functioning economy requires maintaining a small unmet deficit of magnitude (spending - taxing - public debt) every financial year, or at the very least as a secular trend.  That differential can be effected by adjusting the three components, either individually or in combination. 

If OM purchases exceeding sales is the preferred mechanism for achieving this unmet deficit, then the central bank will accumulate securities in its asset portfolio commensurately.  In operational terms, this is exactly equivalent to Treasury selling newly-created securities to the central bank and spending the base money received from that sale into the economy.  In regard to this equivalent operation there is no net impact on the general Treasury fund.  What I am saying is that the necessary increase in base money to support money supply growth can be interpreted from either a monetary perspective or a fiscal perspective.

And if the preferred mechanism for achieving the unmet deficit were to be Treasury sale of securities directly to the central bank, then there would be an advantage in being able to better target the distribution of that additional purchasing power. This argument seems to provide a good case for simply eliminating the middle men (bond dealers) in order to achieve the purpose of monetary targeting.

What would be lost if the monetary base were defined to include what the government holds?

Good question.  Presumably if there was a good reason for doing so, then it probably would have happened already.  But I am interested in learning what you think are the economists' purposes.

 

I have no reason to redefine the monetary base other than to counter the proposition that the Treasury's account at the Fed may not be "money" at all. It's worth remembering that the word "money" can also be defined in different ways. However I'm more interested in acquiring a useful and coherent understanding of how the monetary system works.

I'm unsure what the word "useful" is referring to in this context.  And in regard to "coherent", it seems to me that the MMT story (theory) of money formation and cancellation is just as coherent as the orthodox story.  It seems to me that the overall process is well described not in terms of the net effect [and I agree that the net effect of spending and (taxing + bond issuance) essentially is to cancel each other out], but rather as a dynamical process in which money formation and money cancellation occur together, as processes pulling in opposite directions.

[Tom Paine II]

William wrote: “As a matter of policy, the Treasury maintain a fixed balance in its Fed account. De facto the quantity of state fiat money is not a function of Treasury transactions. Rather it is the central bank which determines the quantity through its lending and open market operations.”

 

To be specific (“Modern Money Theory and the Real World Accounting of 1-1<0:  The US Treasury does not spend as a Bank” page 4):

 

“In practice, the Treasury tries to manipulate its accounts so as to maintain a closing balance of $5 billion each day”

[footnote]  There is a straightforward reason why the Treasury’s account at the Fed is usually kept at a low and stable level: the Treasury

would retire an interest-bearing debt [rather?] than allow a non-interest-bearing deposit balance to expand beyond that required to ensure its

checks do not bounce.

 

 

[Tom Paine II]

A slight change of tense and sense is even better (in red)

 

From: Jean Erick

Sent: Sunday, August 12, 2012 9:50 AM

To: understan...@googlegroups.com

Subject: Re: Money creation flow charts

 

     OK.  I think I see how I could have worded it better.  I did not mean to convery that the FED has to do it.  Just that they --can't-- do it if there are no T's to buy.

Treasury has to have already sold some T's to someone else for FED to buy if FED chooses to buy.

[Tom Paine II]

If OM purchases exceeding sales is the preferred mechanism for achieving this unmet deficit, then the central bank will accumulate securities in its asset portfolio commensurately.  In operational terms, this is exactly equivalent to Treasury selling newly-created securities to the central bank and spending the base money received from that sale into the economy. 

 

I disagree.  Operationally, this requires that the Treasury create new securities to sell.  Suppose the Treasury decides not issue new securities for a few months?  They might still be bought on the open market, but they can’t at that time be bought directly.  In addition, by buying on the open market, “in-between” maturities can be obtained, e.g. bonds can be bought with 3 and half months to maturity.  All I’m saying here is that there are highly significant differences in the procedures.  If and when for sale, I agree that direct purchases would be far better – and worth waiting for, if there are any scheduled, as is usual, of course.

 

I'm unsure what the word "useful" is referring to in this context.  And in regard to "coherent", it seems to me that the MMT story (theory) of money formation and cancellation is just as coherent as the orthodox story.  It seems to me that the overall process is well described not in terms of the net effect [and I agree that the net effect of spending and (taxing + bond issuance) essentially is to cancel each other out], but rather as a dynamical process in which money formation and money cancellation occur together, as processes pulling in opposite directions.

 

“Coherence” with current practice per se isn’t enough (for me).  There must be consistency with ownerships and asymmetrical legal obligations at all transaction points.  The “net effect” approach, based on current practice, can all too easily be blind to and suppress presently unexercised monetary options.

[John Hermann]

On 13/08/2012 11:34 PM, Tom Paine II wrote:

If OM purchases exceeding sales is the preferred mechanism for achieving this unmet deficit, then the central bank will accumulate securities in its asset portfolio commensurately.  In operational terms, this is exactly equivalent to Treasury selling newly-created securities to the central bank and spending the base money received from that sale into the economy. 

 

I disagree.  Operationally, this requires that the Treasury create new securities to sell.  Suppose the Treasury decides not to issue new securities for a few months?  They might still be bought on the open market, but they can’t at that time be bought directly.  In addition, by buying on the open market, “in-between” maturities can be obtained, e.g. bonds can be bought with 3 and half months to maturity.  All I’m saying here is that there are highly significant differences in the procedures.  If and when for sale, I agree that direct purchases would be far better – and worth waiting for, if there are any scheduled, as is usual, of course.

Yes there are possible procedural differences involving time lags.  However to put this into proper context, consider also that there is an inevitable time lag of at least six months (some people say up to a year) between the application of changes to monetary policy and the full realization of their intended effects. 

John

[William Hummel]

My comments are in dark red.

 

From: John Hermann

Response in light blue color.    John.

On 12/08/2012 3:43 AM, William Hummel wrote:

In the long run, the government budget deficit will increase total outstanding Treasury securities. Net open market purchases by the Fed will slightly reduce the total held by the private sector, and that reduction results in an increase in base money needed to support growth in the transaction money supply.

It seems to me that there is an arbitrary element in the perspective one adopts about the overall funding scenario.
What appears to matter here is the fact that a normally functioning economy requires maintaining a small unmet deficit of magnitude (spending - taxing - public debt) every financial year, or at the very least as a secular trend.  That differential can be effected by adjusting the three components, either individually or in combination.

 

I agree, but I think how the needed increase in base money is effected matters, as explained below.

If OM purchases exceeding sales is the preferred mechanism for achieving this unmet deficit, then the central bank will accumulate securities in its asset portfolio commensurately. 

 

Agreed.

 

In operational terms, this is exactly equivalent to Treasury selling newly-created securities to the central bank and spending the base money received from that sale into the economy. 

 

Since the budget deficit is typically far larger than the amount of base money needed to support growth in the money supply, I assume the Treasury would sell securities to the public to cover all but some small amount of the deficit. The amount sold to the Fed to cover the balance would be immediately spent into the economy. The Treasury would still have to maintain a fixed balance in its Fed account.

 

In regard to this equivalent operation there is no net impact on the general Treasury fund.  What I am saying is that the necessary increase in base money to support money supply growth can be interpreted from either a monetary perspective or a fiscal perspective.

 

A fiscal perspective involves decisions regarding the fraction of government spending to be covered by taxes. What you are describing is just another way of implementing monetary policy. It is not clear whether Fed officials or Treasury officials would set policy in terms of the short-term interest rate and determine how much base money to add or subtract. However I think the Fed is far better equipped to set and implement monetary policy. In any case, I don't see anything new here in principle.

And if the preferred mechanism for achieving the unmet deficit were to be Treasury sale of securities directly to the central bank, then there would be an advantage in being able to better target the distribution of that additional purchasing power. This argument seems to provide a good case for simply eliminating the middle men (bond dealers) in order to achieve the purpose of monetary targeting.

 

The amount of base money involved is trivial compared to total spending in a given period. I don't think your scheme would give the government any more flexibility in targeting the spending. It is Congress and not the Treasury that determines who receives the benefits.

[Jean Erick]

     HOLD EVERTHING.  I'VE CORRECTED MYSELF.

    I have been incorrect to state that banks do not create money and M1 is a conflation of debt and money.

     It's ticklish though.  I have corrected via seeing the implications of the rule that --I-- created.  My rule, of late, has been that funds

received without an accompanying liability is money.  If a bank creates a loan account for me and I spend out of that account, not loan it, then any receiver accrues no libability with it, so it is money as per my own rule.  Oh me, oh my.

     I'm still seeing two processes though.  The lending of extant money and the lending of created money.  Debt is created

by banks as they lend or create and lend the money.

     This means that I have to alter a premis I have held almost since I started here.  I have to alter the premis that debt is a sub set of money.

It cannot be a subset of money but I think it will be a subset of goods.  That brings me more alined with Leote's fine offerings of the possible pre-emminence of debt to money.

 

     More comments in body of post.  Today, it ain't easy being green.

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Saturday, August 11, 2012 7:52 PM

Subject: Re: Money creation flow charts

Responses are in purple color.  John

On 11/08/2012 2:12 AM, Jean Erick wrote:

Your forte is generating confusion.

Confusion is not something that one should be frighted of or irritated by.  Confusion is a necessary precursor to discovery and learning.

     Kudos.  I stand corrected.  I think that is the best thing that has ever been said in this forum.

1. You bring in a "claim on base money".  So then we're into the argument on what that is where you have proved by just engaging in a discussion on that, & done well there BTW.  And that is further confusing because credit is the term commonly used when lending IS done.  One phrase having two points of confusion.

I like do distinguish between "credit" and "bank credit money". And I think the term ":credit" is frequently misused in the modern world.  Its real meaning does not refer to money which currently exists, but rather, it refers to funds which would be available for use if a decision was taken to activate a loan.

     I agree about the misue of the word.  I'm seeing "credit" as derived from the classic "letter of credit"  wherein goods

are provided to an agent by a seller who trusts that the agent's employer (buyer) will pay.   But clarity is most important here.  I think it's best to sacrifice a bit,  and try to use words that are not context sensitive.  It helps alleviate MY confusion.  ;-)

     (written before correction and then corrected)

      But my own explanation is repeled because it makes the statement that the loan process is not just one mechanism.  I say it is

composed of two mechanisms.  1. Straight renting of money and 2. creation money.

     A bank has $1000 in reserves.  It creates loan accounts of $900 which goes into another bank and they create loan accounts of

 $810.  $710 of money and $1710 of liability has been created.  Effectivley, $1000 extant money has been rented and $710

has been created and rented.

 

Note:  It's not takng my font instruction.

2.  Retail:  Haven't commerical banks and retail banks each taken on both types of accounts nowadays?

All commercial banks engage in retail operations. In the context of banking, the word "retail" simply refers to business activity with the general public and non-bank businesses. Whereas "wholesale" refers to business activity exclusively within the financial system (whether local or foreign).

The common language is demand deposits (which is bad enough) and reserves.

Some central banks (like in Australia) refuse to use the word "reserves", and seem to get along quite happily using the terms "currency", "exchange settlement funds", and "monetary base".  Personally I like to use the word "reserves". 

3.  "Deposit in a retail bank"  Retail again and how else can it exist in a bank?  As a non-deposit?

Banks have deposits in other banks and financial intermediaries, and in their own operating accounts, and also in the central bank.  None of these are retail deposits.

     In the US, there are $13 Trillion in home (retail) mortagages.  Retail IS the problem on the bottom end, gambling on the top.

4. A depositor may also withdraw currency on a demand deposit loan account, can't they?

The word "demand" surely suggests that legal tender may be withdrawn at any time as an entitlement.

I'm not saying I'm that good at the english language but I think the idea is to include that which you want and exclude that which you don't want. Preferably in a concise fashion. You're are simply using too many terms that are not exclusive enough.

I think, to pay you a compliment, you know a lot of stuff but you like to push the envelope, which is great.  But you, yourself are not distinguishing when you're pushing the envelope from not.

I accept both the compliment and the criticism (which is just criticism, and noted for action).

     I thought you had said that you just wanted to explain contemporary accepted mechanisms.  I only know of two of those.

You have come up with four.  Are you seeing four --accepted-- mechanisms, or are you creating?

     As before, I have not gotten to it yet but I would go to creating one based on a "bottom" up process.  That is, using the precence

or not of liability attachment during transfer as a given.   Then, where does money show up?  Ex, in US, about $8 Trillion shows up in wages & salaries..

 

James

[William Hummel]

John,

 

On re-reading of your comments in blue, I don't think I understand them. I assume the magnitude refers to (spending - receipts from taxes and bond sales to the public) in a given period. You say it should be slightly positive corresponding to the amount of base money needed by the economy. Since that would result in a drain on the Treasury's general fund, you would make up the difference by borrowing directly from the Fed.

 

But I don't understand how your proposed alternative operates to keep the interbank lending rate on target. Ultimately what matters is that the short-term interest rate be controlled.

 

William

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Sunday, August 12, 2012 6:09 PM

Subject: Re: Money creation flow charts

It seems to me that there is an arbitrary element in the perspective one adopts about the overall funding scenario.
What appears to matter here is the fact that a normally functioning economy requires maintaining a small unmet deficit of magnitude (spending - taxing - public debt) every financial year, or at the very least as a secular trend.  That differential can be effected by adjusting the three components, either individually or in combination. 

[Terry Hammonds]

Every theory postulated to explain our money system is flawed because no one theory can take into account what schemes our financial institutions are working with at every moment. They plan it that way so regulators (facilitators) and others stay confused about their motives,profits, tax brackets and methods. If I have a "duel purpose" card that can be used as debit or credit and I choose credit, the payment comes out of my checking account all the same. The only difference is the merchant pays a swipe fee. Is that counted as a credit purchase by the statisticians who report those figures? We can't even say without debate who owns a deposit account.  LIBOR is manipulated for years, individual mortgages are bundled like shafts of hay. Nobody, including our treasury secretaries, really knows what banks do since they are also investment banks that can secretly lose $3 billion - no, wait that was $6 billion - no, wait that was $8 billion. The system is a quagmire. 

Sent from my iPad

[John Hermann]

Thanks for these comments William.  My responses are in purple.  John.

William Hummel wrote:

In operational terms, this is exactly equivalent to Treasury selling newly-created securities to the central bank and spending the base money received from that sale into the economy. 

 

Since the budget deficit is typically far larger than the amount of base money needed to support growth in the money supply, I assume the Treasury would sell securities to the public to cover all but some small amount of the deficit. The amount sold to the Fed to cover the balance would be immediately spent into the economy. The Treasury would still have to maintain a fixed balance in its Fed account.

Right

 

In regard to this equivalent operation there is no net impact on the general Treasury fund.  What I am saying is that the necessary increase in base money to support money supply growth can be interpreted from either a monetary perspective or a fiscal perspective.

 

A fiscal perspective involves decisions regarding the fraction of government spending to be covered by taxes. What you are describing is just another way of implementing monetary policy.

I understood the word "fiscal" to mean spending and taxing.  Are we not talking about spending?  Perhaps then this is both monetary AND fiscal.

It is not clear whether Fed officials or Treasury officials would set policy in terms of the short-term interest rate and determine how much base money to add or subtract.

Why not both of them in cooperation?

However I think the Fed is far better equipped to set and implement monetary policy. In any case, I don't see anything new here in principle.

If that is so, then perhaps Congress could give the Fed the limited power to initiate Treasury bond sales for monetary purposes only (i.e., not for general fiscal purposes, which is a Treasury responsibility).  Quite frankly, I don't see this as an unresolvable problem.  And it does not need to be a turf war.

And if the preferred mechanism for achieving the unmet deficit were to be Treasury sale of securities directly to the central bank, then there would be an advantage in being able to better target the distribution of that additional purchasing power. This argument seems to provide a good case for simply eliminating the middle men (bond dealers) in order to achieve the purpose of monetary targeting.

 

The amount of base money involved is trivial compared to total spending in a given period. I don't think your scheme would give the government any more flexibility in targeting the spending. It is Congress and not the Treasury that determines who receives the benefits.

The word "government" can be taken to refer to a combination of (or perhaps even a compromise between) the executive and the majority of the legislature.  And in many countries the executive is actually a subset of the majority party (or parties) within the legislature.  Treasury is therefore an instrument for implementing those policies which both entities can agree upon.

On 14/08/2012 4:20 AM, William Hummel wrote:

John, On re-reading of your comments in blue, I don't think I understand them. I assume the magnitude refers to (spending - receipts from taxes and bond sales to the public) in a given period. You say it should be slightly positive corresponding to the amount of base money needed by the economy. Since that would result in a drain on the Treasury's general fund, you would make up the difference by borrowing directly from the Fed. But I don't understand how your proposed alternative operates to keep the interbank lending rate on target. Ultimately what matters is that the short-term interest rate be controlled.

As mentioned above, one option (just a broad sweep, I have not thought it through) would be to give the monetary policy committee of the central bank (or an executive branch responsible to it) limited powers for initiating the direct purchase of securities, but for monetary policy purposes only.  Perhaps this could be defined and implemented in such a way that regular fiscal policy would not be affected.  One possibility would be for Treasury to maintain a special reservoir of securities which may only be used and drawn upon for monetary policy purposes, with the the central bank given direct access.

[Jean Erick]

     Yes.  Better.

[William Hummel]

John,

 

The problem I have with your concept involving Treasury borrowing directly from the Fed is that there isn't enough definition to understand what you are proposing. It appears to be an alternative method of implementing monetary policy, and not related to fiscal policy. Fiscal policy is made by Congress and deals with the issue of how to finance its spending, basically  taxes vs borrowing. It does not address the issues of price inflation and maintaining an effective banking system. Setting monetary policy should not be in the hands of politicians, whether in the legislature or the executive. They generally lack adequate experience in such issues and/or have a conflict of interest.

 

In principle, monetary policy can be implemented either by controlling the supply of base money and letting the interest rate float, or controlling the short-term interest rate on interbank loans and providing whatever base money is required. The former approach was tried in the early 1980s and quickly abandoned because of the volatility of interest rates. The latter approach has been adopted by all major industrial nations. Whether or not Treasury is allowed to borrow directly from the Fed, you should describe how interest rate control is to be implemented. Interest rates on bank loans are set as a markup over the cost of acquiring reserves of base money. So the interest rate on interbank loans is the key control variable.

 

William 

 

From: John Hermann

To: understan...@googlegroups.com

Sent: Tuesday, August 14, 2012 8:53 AM

Subject: Re: Money creation flow charts

[John Hermann]

On 15/08/2012 6:42 AM, William Hummel wrote:

John,

 

The problem I have with your concept involving Treasury borrowing directly from the Fed is that there isn't enough definition to understand what you are proposing. It appears to be an alternative method of implementing monetary policy, and not related to fiscal policy. Fiscal policy is made by Congress and deals with the issue of how to finance its spending, basically  taxes vs borrowing. It does not address the issues of price inflation and maintaining an effective banking system. Setting monetary policy should not be in the hands of politicians, whether in the legislature or the executive. They generally lack adequate experience in such issues and/or have a conflict of interest.

That's fine William, one can simply define these operations as a monetary policy option.  The bond purchase activity itself can be insulated from Treasury control or influence if that is desirable.  The real issue seems to be how spending to the private sector should be accommodated.  That spending necessarily would be irregular (otherwise it would not be a monetary policy option), it would need to be isolated from regular government spending programs, and it would be outside the direct control of politicians.  

Firstly lets be clear that this problem has nothing to do with the concern about the relative merits of controlling interest rates (with base money supply as a residual) as against controlling base money (with interest rates as a residual).  In other words, there is no obvious reason why this alternative monetary policy route could not be be set up, in theory at least, as an entirely endogenous operation.  Major virtues of the direct spending approach would be (a) potentially better targeting of the money distributed into the economy, and (b) potentially greater speed in achieving desired monetary outcomes.

Is this an impossible scenario?  I don't see it as an intractable problem.  The central bank could maintain the equivalent of OMO by (i) selling bonds from its portfolio to the private sector as and when appropriate, and (ii) buying bonds directly from a special Treasury reservoir of securities rather than from the private sector, as and when appropriate.  

The possible options for distributing any additional purchasing power (arising from direct bond purchases) to the private sector include such things as (a) irregular payments to all citizens (a sort of national dividend if you like), (b) irregular payments but only to taxpayers, (c) irregular payments but to the unemployed, (d) irregular payments to registered welfare organizations. 

The practice of implementing irregular payments is not something that has not been tried previously.  For example, in Australia the Rudd government made irregular stimulus payments (I cannot remember whether it was two or three) to all adult citizens during the circumstances of the global financial crisis (mainly during 2009), which played a major role in insulating Australia from the effects of the global downturn.  Admittedly this was a fiscal stimulus operation under the direct control of politicians, but it demonstrates what is possible.  The difference being that the irregular payments arising from direct bond purchases would be ongoing - in perpetuity - rather than being restricted to a limited time-frame.

John

[John Hermann]

Another possibility, as an alternative to irregular payments, would be to have a smoothing mechanism.  Perhaps it would be possible to set up a special operating account at the central bank which records all fiat money created in connection with the direct purchase of Treasury securities.  On this basis there could be regular payments (regular that is in terms of the time interval between payments) but varying in terms of each payment amount.  Perhaps other refinements can be devised.    John

On 15/08/2012 6:42 AM, William Hummel wrote:

John,

 

The problem I have with your concept involving Treasury borrowing directly from the Fed is that there isn't enough definition to understand what you are proposing. It appears to be an alternative method of implementing monetary policy, and not related to fiscal policy. Fiscal policy is made by Congress and deals with the issue of how to finance its spending, basically  taxes vs borrowing. It does not address the issues of price inflation and maintaining an effective banking system. Setting monetary policy should not be in the hands of politicians, whether in the legislature or the executive. They generally lack adequate experience in such issues and/or have a conflict of interest.

That's fine William, one can simply define these operations as a monetary policy option.  The bond purchase activity itself can be insulated from Treasury control or influence if that is desirable.  The real issue seems to be how spending to the private sector should be accommodated.  That spending necessarily would be irregular (otherwise it would not be a monetary policy option), it would need to be isolated from regular government spending programs, and it would be outside the direct control of politicians.  

Firstly lets be clear that this problem has nothing to do with the concern about the relative merits of controlling interest rates (with base money supply as a residual) as against controlling base money (with interest rates as a residual).  In other words, there is no obvious reason why this alternative monetary policy route could not be be set up, in theory at least, as an entirely endogenous operation.  Major virtues of the direct spending approach would be (a) potentially better targeting of the money distributed into the economy, and (b) potentially greater speed in achieving desired monetary outcomes.

Is this an impossible scenario?  I don't see it as an intractable problem.  The central bank could maintain the equivalent of OMO by (i) selling bonds from its portfolio to the private sector as and when appropriate, and (ii) buying bonds directly from a special Treasury reservoir of securities rather than from the private sector, as and when appropriate.  

The possible options for distributing any additional purchasing power (arising from direct bond purchases) to the private sector include such things as (a) irregular payments to all citizens (a sort of national dividend if you like), (b) irregular payments but only to taxpayers, (c) irregular payments but to the unemployed, (d) irregular payments to registered welfare organizations. 

The practice of implementing irregular payments is not something that has not been tried previously.  For example, in Australia the Rudd government made irregular stimulus payments (I cannot remember whether it was two or three) to all adult citizens during the circumstances of the global financial crisis (mainly during 2009), which played a major role in insulating Australia from the effects of the global downturn.  Admittedly this was a fiscal stimulus operation under the direct control of politicians, but it demonstrates what is possible.  The difference being that the irregular payments arising from direct bond purchases would be ongoing - in perpetuity - rather than being restricted to a limited time-frame.

John

[John Hermann]

The essence of this scheme is that bond dealers would be able to sell government securities to anyone OTHER than the central bank.  They would be able to buy securities from the central bank, but would never be able to sell to the central bank.  And the central bank would always be able sell securities to the private sector by undercutting Treasury prices.      John

[William Hummel]

John,

 

I'm sorry but you you will have to provide an overview because I have no idea what you are talking about now. Who is purchasing bonds and for what reason? How does the Treasury maintain a net positive balance in its Fed account? How do the Treasury and Fed coordinate their monetary transactions to keep the interest rate on interbank loans on target?

 

Decisions on government spending are the prerogative of the legislature. How can one assume that such decisions will be anything but political, and highly influenced by special interests? I don't think either the Fed or the Treasury is the appropriate entity to plan or conduct targeted spending, other than in debt securities.

[Jean Erick]

     Yeah, and I'm nutcase enough to think I have a cure.

     Add a tier level to accounts relative to how many times the incoming money has been lent.  If money is lent into an account, it's tier level goes up.  Interpolate for mixtures.

    Then (1) Tax the levels.  This gives cental control like the FED currently trying to set interest rates.  (2) create a repayment priority system, giving preference to

lower tier numbers.  At the point of (2), you have a free market stabile risk analysis system.

 

James

----- Original Message -----

From: Terry Hammonds

To: understan...@googlegroups.com

=

[Jean Erick]

          Is my understanding correct that you are calling the money that is in the bank, before

a loan based on that money is made, "bank credit money"?

     Or are you calling the loans "bank credit money"?

     Or?

 

James

 

[John Hermann]

It seems that I did not explain the scheme very well William, so I will have another go.  Treasury's general account in the FED would not be impacted in any way -- that's one of the nice things about the scheme.  Also this mechanism does NOT involve Treasury spending of any sort, so the concerns expressed in your second paragraph are not relevant.

The general features of the model are:

1.  Treasury would create and maintain a special portfolio of securities to which the FED would have access -- guaranteed by an Act of Congress.  Lets call this the monetary policy securities portfolio (MPSP).

2.  These securities would be unavailable to Treasury for the purpose of sale to the private sector.

3.  The FED would have the power to acquire the MPSP securities for its own assets portfolio at its discretion, and would pay for them by creating new fiat money. 

4.  The newly created fiat money would be directed to a special FED account.  Lets call this the monetary policy spending account (MPSA).

5.  This MPSA also would not be accessible to Treasury for spending purposes.   

6.  The FED would pursue monetary policy objectives by (i) selling bonds from its asset portfolio to the private sector as and when appropriate, and (ii) acquiring bonds directly from the MPSP (rather than from the private sector), as and when appropriate.  

7.  Bond dealers would be able to buy securities from the FED, but would never be able to sell them to the FED. 

8.  Bond dealers would be able to sell government securities to anyone else willing to buy (i.e., OTHER than the FED). 

9.  The fiat money accruing in the MPSA would be used for financing such (non-Treasury) spending options as
(a) payments to all citizens (a sort of national dividend if you like), (b) payments but only to taxpayers, (c) payments but to the unemployed, (d) payments to registered welfare organizations.

10. Payments by the FED to the private sector do not need to be made at irregular intervals of time; it is possible to implement a mechanism in which regular payments are made with varying payment amounts (the variation in payment amounts reflecting the monetary policy decisions).

John

On 16/08/2012 1:23 AM, William Hummel wrote:

John,

 

[William Hummel]

John,

 

Thanks for those details. It's still not clear to me what the ultimate purpose is for this rather elaborate system, and what specific problem in the current system it is addressing. I have inserted further comments below.

 

William

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Thursday, August 16, 2012 2:23 AM

Subject: Re: Money creation flow charts

It seems that I did not explain the scheme very well William, so I will have another go.  Treasury's general account in the FED would not be impacted in any way -- that's one of the nice things about the scheme.  Also this mechanism does NOT involve Treasury spending of any sort, so the concerns expressed in your second paragraph are not relevant.

The general features of the model are:

1.  Treasury would create and maintain a special portfolio of securities to which the FED would have access -- guaranteed by an Act of Congress.  Lets call this the monetary policy securities portfolio (MPSP).

If the Fed is allowed to borrow from the Treasury, why do the securities need a guarantee from Congress? Why should they be treated differently than securities sold to the public?

2.  These securities would be unavailable to Treasury for the purpose of sale to the private sector.

3.  The FED would have the power to acquire the MPSP securities for its own assets portfolio at its discretion, and would pay for them by creating new fiat money. 

4.  The newly created fiat money would be directed to a special FED account.  Lets call this the monetary policy spending account (MPSA).

5.  This MPSA also would not be accessible to Treasury for spending purposes.

 

6.  The FED would pursue monetary policy objectives by (i) selling bonds from its asset portfolio to the private sector as and when appropriate, and (ii) acquiring bonds directly from the MPSP (rather than from the private sector), as and when appropriate.

 

This seems to be the equivalent of what the Fed does now to maintain control of the Fed funds rate through open market operations, but without the baggage of an the MPSA. So I am left wondering what is being gained by the system you are proposing.

7.  Bond dealers would be able to buy securities from the FED, but would never be able to sell them to the FED. 

8.  Bond dealers would be able to sell government securities to anyone else willing to buy (i.e., OTHER than the FED). 

9.  The fiat money accruing in the MPSA would be used for financing such (non-Treasury) spending options as
(a) payments to all citizens (a sort of national dividend if you like), (b) payments but only to taxpayers, (c) payments but to the unemployed, (d) payments to registered welfare organizations.

Who determines where the payments go and in what amounts to each recipient? Isn't this a normal responsiblity of the Congress itself, all of which is paid for out of the general fund of the Treasury? 

10. Payments by the FED to the private sector do not need to be made at irregular intervals of time; it is possible to implement a mechanism in which regular payments are made with varying payment amounts (the variation in payment amounts reflecting the monetary policy decisions).

John


On 16/08/2012 1:23 AM, William Hummel wrote:

[Jean Erick]

     On it's face, the monetary base is increased by bond dealers selling to central banks.  Doesn't your idea eliminate that money creation?

 

James

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Tuesday, August 14, 2012 11:25 PM

Subject: Re: Money creation flow charts

[John Hermann]

Thanks William.  I anticipated your queries.
Responses in red.    John

On 17/08/2012 1:51 AM, William Hummel wrote:

John,

 

Thanks for those details. It's still not clear to me what the ultimate purpose is for this rather elaborate system, and what specific problem in the current system it is addressing. I have inserted further comments below.

Obviously there is no point in replacing the present system with an alternative unless there are clear advantages.  Those advantages include (a) better targeting of the money distributed into the economy - for facilitating private sector growth, (b) increased likelihood that the money thus released will be immediately utilized for transactions rather than for saving, (c) greater speed in achieving the desired monetary outcomes.  There might be other advantages, but I have not thought about it in depth.

From: John Hermann

It seems that I did not explain the scheme very well William, so I will have another go.  Treasury's general account in the FED would not be impacted in any way -- that's one of the nice things about the scheme.  Also this mechanism does NOT involve Treasury spending of any sort, so the concerns expressed in your second paragraph are not relevant.

The general features of the model are:

1.  Treasury would create and maintain a special portfolio of securities to which the FED would have access -- guaranteed by an Act of Congress.  Lets call this the monetary policy securities portfolio (MPSP).

If the Fed is allowed to borrow from the Treasury, why do the securities need a guarantee from Congress? Why should they be treated differently than securities sold to the public?

Its not the securities which need a congressional Act, its the FED's right of access without needing Treasury permission.

2.  These securities would be unavailable to Treasury for the purpose of sale to the private sector.

3.  The FED would have the power to acquire the MPSP securities for its own assets portfolio at its discretion, and would pay for them by creating new fiat money. 

4.  The newly created fiat money would be directed to a special FED account.  Lets call this the monetary policy spending account (MPSA).

5.  This MPSA also would not be accessible to Treasury for spending purposes.

 

6.  The FED would pursue monetary policy objectives by (i) selling bonds from its asset portfolio to the private sector as and when appropriate, and (ii) acquiring bonds directly from the MPSP (rather than from the private sector), as and when appropriate.

 

This seems to be the equivalent of what the Fed does now to maintain control of the Fed funds rate through open market operations, but without the baggage of an the MPSA. So I am left wondering what is being gained by the system you are proposing.

See the first response above.

7.  Bond dealers would be able to buy securities from the FED, but would never be able to sell them to the FED. 

8.  Bond dealers would be able to sell government securities to anyone else willing to buy (i.e., OTHER than the FED). 

9.  The fiat money accruing in the MPSA would be used for financing such (non-Treasury) spending options as
(a) payments to all citizens (a sort of national dividend if you like), (b) payments but only to taxpayers, (c) payments but to the unemployed, (d) payments to registered welfare organizations.

Who determines where the payments go and in what amounts to each recipient? Isn't this a normal responsiblity of the Congress itself, all of which is paid for out of the general fund of the Treasury?

Nobody would need to make a determination of where the payments go if it was organized as a national divided (i.e. as a payment to all citizens), and the amounts would be determined by the FED in accordance with its monetary policy operations.  Treasury would not be involved, as this is defined to be a monetary policy operation.  The existence of a national dividend would be an integral part of the congressional Act needed for setting up the scheme.

[William Hummel]

John,

 

I'm going back to your earlier post with some additional questions in the form of comments.

 

William

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Thursday, August 16, 2012 2:23 AM

Subject: Re: Money creation flow charts

It seems that I did not explain the scheme very well William, so I will have another go.  Treasury's general account in the FED would not be impacted in any way -- that's one of the nice things about the scheme.  Also this mechanism does NOT involve Treasury spending of any sort, so the concerns expressed in your second paragraph are not relevant.

The general features of the model are:

1.  Treasury would create and maintain a special portfolio of securities to which the FED would have access -- guaranteed by an Act of Congress.  Lets call this the monetary policy securities portfolio (MPSP).

I assume the Treasury pays interest to the Fed on the MPSP. How is the interest rate determined?

2.  These securities would be unavailable to Treasury for the purpose of sale to the private sector.

 

I assume they would increase the Federal debt just as if they were sold to the private sector.

3.  The FED would have the power to acquire the MPSP securities for its own assets portfolio at its discretion, and would pay for them by creating new fiat money. 

4.  The newly created fiat money would be directed to a special FED account.  Lets call this the monetary policy spending account (MPSA).

I assume the MPSA belongs to the Treasury.

5.  This MPSA also would not be accessible to Treasury for spending purposes.

 

So the Treasury does not have a new asset (the MPSA) to offset its new liability (the MPSP). Does that make sense?

6.  The FED would pursue monetary policy objectives by (i) selling bonds from its asset portfolio to the private sector as and when appropriate, and (ii) acquiring bonds directly from the MPSP (rather than from the private sector), as and when appropriate. 

 

Selling bonds from its asset portfolio to the private sector reduces banking system reserves. How does purchasing bonds from MPSP affect banking system reserves? 

7.  Bond dealers would be able to buy securities from the FED, but would never be able to sell them to the FED.

 

How would the yield on the bonds being sold be determined? 

8.  Bond dealers would be able to sell government securities to anyone else willing to buy (i.e., OTHER than the FED).

 

Why? 

9.  The fiat money accruing in the MPSA would be used for financing such (non-Treasury) spending options as
(a) payments to all citizens (a sort of national dividend if you like), (b) payments but only to taxpayers, (c) payments but to the unemployed, (d) payments to registered welfare organizations.

So the Fed owns the MPSA rather than the Treasury? What is it that limits the Fed's increasing the MPSA arbitrarily? 

10. Payments by the FED to the private sector do not need to be made at irregular intervals of time; it is possible to implement a mechanism in which regular payments are made with varying payment amounts (the variation in payment amounts reflecting the monetary policy decisions).

 

I still don't see how the Fed funds rate is controlled in all of this.

[John Hermann]

Thanks William. My responses are in purple color.   John

On 18/08/2012 5:33 AM, William Hummel wrote:

John,

 

I'm going back to your earlier post with some additional questions in the form of comments.

 

William

From: John Hermann

It seems that I did not explain the scheme very well William, so I will have another go.  Treasury's general account in the FED would not be impacted in any way -- that's one of the nice things about the scheme.  Also this mechanism does NOT involve Treasury spending of any sort, so the concerns expressed in your second paragraph are not relevant.

The general features of the model are:

1.  Treasury would create and maintain a special portfolio of securities to which the FED would have access -- guaranteed by an Act of Congress.  Lets call this the monetary policy securities portfolio (MPSP).

I assume the Treasury pays interest to the Fed on the MPSP. How is the interest rate determined?

No, there would be no interest paid on the MPSP.  Why would there need to be?   Interest would only be incurred when the securities were transferred to the FED's asset portfolio.  And in any case it does not matter because interest in excess of operating costs would return to Treasury.

2.  These securities would be unavailable to Treasury for the purpose of sale to the private sector.

I assume they would increase the Federal debt just as if they were sold to the private sector.

Technically yes, however it doesn't matter. 

3.  The FED would have the power to acquire the MPSP securities for its own assets portfolio at its discretion, and would pay for them by creating new fiat money. 

4.  The newly created fiat money would be directed to a special FED account.  Lets call this the monetary policy spending account (MPSA).

I assume the MPSA belongs to the Treasury.

No, the MPSA is not a Treasury asset, because Treasury is not empowered to spend these funds.

5.  This MPSA also would not be accessible to Treasury for spending purposes.

 

So the Treasury does not have a new asset (the MPSA) to offset its new liability (the MPSP). Does that make sense?

I agree that it would not make sense if the MPSA was a Treasury asset.  But it is not a Treasury asset, and neither is the MPSP a Treasury liability.
And I realize there are accounting conventions to be considered, however I have always had difficulty in seeing their relevance and meaningfulness in regard to the creator (and destroyer) of state fiat money.

6.  The FED would pursue monetary policy objectives by (i) selling bonds from its asset portfolio to the private sector as and when appropriate, and (ii) acquiring bonds directly from the MPSP (rather than from the private sector), as and when appropriate. 

 

Selling bonds from its asset portfolio to the private sector reduces banking system reserves. How does purchasing bonds from MPSP affect banking system reserves?

It increases banking system reserves because the MPSP increases commensurately, and these funds facilitate the creation of new base money -- to accommodate the (monetary policy) payments by the FED to the private sector.

7.  Bond dealers would be able to buy securities from the FED, but would never be able to sell them to the FED.

 

How would the yield on the bonds being sold be determined? 

Presumably by the same mechanism that prevails now -- the FED would undercut the interest charged by Treasury on the same securities, and leave the rest to market forces.

8.  Bond dealers would be able to sell government securities to anyone else willing to buy (i.e., OTHER than the FED).

 

Why? 

Because they are in the business of buying and selling financial assets, in order to realize profits from the interest margins.

9.  The fiat money accruing in the MPSA would be used for financing such (non-Treasury) spending options as
(a) payments to all citizens (a sort of national dividend if you like), (b) payments but only to taxpayers, (c) payments but to the unemployed, (d) payments to registered welfare organizations.

So the Fed owns the MPSA rather than the Treasury? What is it that limits the Fed's increasing the MPSA arbitrarily?

There is no point in increasing it arbitrarily, because it is nothing other than an instrument for implementing monetary policy.  The funds contained therein may only be used for a specified purpose spelled out in the congressional Act  (it might be a national dividend, which would be my preferred mode of spending).

10. Payments by the FED to the private sector do not need to be made at irregular intervals of time; it is possible to implement a mechanism in which regular payments are made with varying payment amounts (the variation in payment amounts reflecting the monetary policy decisions).

 

I still don't see how the Fed funds rate is controlled in all of this.

In principle, the mechanics of selling bonds and acquiring bonds (open market operations) would operate in much the same way as at present.  The essential difference being the manner in which the new base money created by the bond purchases is distributed within the private sector.

[William Hummel]

John,

 

If accounting conventions need not be observed by the central bank in creating and destroying state fiat money, why not have it inject fiat money directly for the national dividend rather than out of a special account like the MPSA? 

 

William

From: John Hermann

To: understan...@googlegroups.com

Sent: Saturday, August 18, 2012 8:15 PM

Subject: Re: Money creation flow charts

[Jean Erick]

     This gives even more power to the FED.  According to Hudson, the FED was taken over by Wall street, at its  inception.  The creation of short term money is already in private hands, administered by the banks without sufficient regulation.  And now you want to put the long term creation of money in private hands?

Of course, I supposed Treasury could not put T's in the special account, and make the FED beg them, but is that part of your scenario?

 

James

[John Hermann]

Good point William.  Although I did not say that accounting conventions are not required or should not be used, I said that I had difficulty understanding their meaningfulness for central banks.  I am willing to revise that opinion.  And if an asset and a matching liability may be held to exist, then this is really about who should own them.  One could argue that the MPSA funds are a FED liability on the basis that the FED does not have the power to use them or dispose of them at its discretion (i.e., the FED is obliged to spend these funds for purposes spelled out in the congressional Act), and therefore it cannot be an asset of the FED.  Thus it is merely a tool by which monetary policy is pursued.  The corresponding asset then would be the securities transferred to the FED's asset portfolio from the MPSP, on which interest would be paid.    John.

On 20/08/2012 1:53 AM, William Hummel wrote:

John,  If accounting conventions need not be observed by the central bank in creating and destroying state fiat money, why not have it inject fiat money directly for the national dividend rather than out of a special account like the MPSA?  William

[John Hermann]

I don't believe it matters too much which arm of the state spends the national dividend funds.   Because the overriding intention is that these funds will be used only for operating monetary policy, and will be demarcated - by law - from regular fiscal spending.  However the FED would seem to be the best option.     John

[George Chandler]

John Herman wrote: "Although I did not say that accounting conventions are not required or should not be used, I said that I had difficulty understanding their meaningfulness for central banks". If you have a better system management has a lot of flexibilty to implement. If some accounting practice is hindering central banks...it is their tool.

 

My view of accounting practices is that accounting is a toll for management. Management uses accounting pratices to run things. Management follows standard acounting practices because of laws and logic but keep in mind management determines the accounting pratices and often bends or changes or manipulates them.

[William Hummel]

John,

 

My understanding of your scheme is as follows:  The amount of base money added to the economy to maintain control of the Fed funds rate would be issued directly by the Fed as a national dividend to all citizens rather than by the Fed purchasing Treasury securities in that amount from the public. When the amount of base money needs to be reduced, the Fed would sell securities from its own portfolio as required.

 

A special portfolio of Treasuries (MPSP) is established which the Fed can acquire by crediting a special account (MPSA) out of which the direct payments for the national dividend are made. It would seem that the MPSA belongs to the Treasury, but the Fed would make payments out of it on the Treasury's behalf. The Federal debt would increase by the amount of such payments, all of which additional debt would be held by the Fed and thus no net interest cost to the Treasury. The assets held by the Fed would increase with the increase in base money, as currently required by law.    

 

There appears to be no reason why the Fed should not be able to sell securities to the public out of what it acquires from the MPSP. The price the public would pay depends on the interest rate the securities bear. That implies the securities bought by the Fed out of the MPSP must pay interest. Otherwise there would be a secular drain on interest-bearing securities in the Fed's portfolio as it sells securities to the public. Ultimately, the Fed would no longer be able to sell securiti4s to the public as needed for monetary policy implementation.

 

Looking at some data in the pre-crisis period, 1997 to 2007, the monetary base grew from 492 billion to 896 billion. That's an average of 34.4 billion per year, an annualized rate of increase of 5.4%. Most of that increase was to cover the increase in Federal Reserve notes, more than half of which went overseas and out of the US economy. Given the size of the US population, the dividend would be about $118 per year per capita.

 

William

.  

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Cc: John Hermann

Sent: Monday, August 20, 2012 1:32 AM

Subject: Re: Money creation flow charts

[John Hermann]

I have not attempted to do the sums William, however I assume that - placed within the context of a debt-driven "fractional reserve" system - that figure of $118 per year per capita would be multiplied by a factor of ten when translated into bank credit money terms.  Remember also that it is only an average, and monthly payments would be expected to vary widely.  An innovative payment scheme for any national dividend would be desirable -- perhaps an additional FED interest increment (non-taxable) could be added to all transaction accounts every month.

Lets summarize how new base money and new private sector wealth may increase (remembering that both are needed for an adequately developing economy):

(1). Deficit spending by government:             increase in private sector wealth, no change in base money.
(2). FED buying bonds from private sector:   increase in base money, no change in private sector wealth.
(3). This scheme:                                           increase in both base money and private sector wealth.

A conjunction of (1) and (2) is necessarily required under the current system for economic growth and development. 
A question for consideration:  is it necessary (or desirable) for private sector wealth and base money to increase by the same amount?

John

[helge nome]

Hi John,
Some people in this group may not be aware of the rationale behind a national dividend, as suggested by C.H. Douglas of Social Credit fame.
Perhaps you would care to explain?
Helge

---

Date: Tue, 21 Aug 2012 12:42:58 +0930
From: her...@picknowl.com.au
To: understan...@googlegroups.com

[William Hummel]

John,

 

I don't understand the point of your question. But I would note that the main reason base money increases is to satisfy the public's demand for Federal Reserve notes in lieu of bank deposits. Do you see that as harmful to the economy or unfair in some way?

 

William

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Monday, August 20, 2012 8:12 PM

Subject: Re: Money creation flow charts

[John Hermann]

Hi Helge,
I did not have the social credit proposals in mind when using the term national dividend.  It simply seemed to be the best choice of words. 
And the idea of putting additional base money into the economy via payments to all citizens has a certain appeal, rather than distributing
it to bond dealers and banks.
John

On 22/08/2012 1:13 AM, helge nome wrote:

Hi John,  Some people in this group may not be aware of the rationale behind a national dividend, as suggested by C.H. Douglas of Social Credit fame.
Perhaps you would care to explain?  Helge

---

From: her...@picknowl.com.au

[John Hermann]

On 22/08/2012 1:30 AM, William Hummel wrote:

John,  I don't understand the point of your question.

The point of the question is that in this scheme both base money and the wealth of the private sector increase by the same amount, but that nexus does not necessarily hold for a conjunction of (1) and (2).

But I would note that the main reason base money increases is to satisfy the public's demand for Federal Reserve notes in lieu of bank deposits. Do you see that as harmful to the economy or unfair in some way? 

No, I don't see it as harmful in any way William.  But surely there are two reasons why base money increases (and it is true that most of the increase goes into satisfying the public's demand for legal tender). 
The second reason is that a small increase is required to accommodate the growth of commercial banking business activity (other than providing currency for depositors' needs), is it not?

John

[William Hummel]

From: John Hermann

To: understan...@googlegroups.com

Sent: Tuesday, August 21, 2012 7:30 PM

Subject: Re: Money creation flow charts

On 22/08/2012 1:30 AM, William Hummel wrote:

 

But I would note that the main reason base money increases is to satisfy the public's demand for Federal Reserve notes in lieu of bank deposits. Do you see that as harmful to the economy or unfair in some way? 

No, I don't see it as harmful in any way William.  But surely there are two reasons why base money increases (and it is true that most of the increase goes into satisfying the public's demand for legal tender). 
The second reason is that a small increase is required to accommodate the growth of commercial banking business activity (other than providing currency for depositors' needs), is it not?

John

 

I agree, but the reserves of base money required in the commercial banking business is a very small fraction of the total, especially in those countries which have no reserve requirement on demand deposits. Here are current figures for Canada:

 

Bank reserves = 1.065 billion

Notes outstanding = 41.147 billion

GDP = 1.74 trillion

 

William

[Joe Leote]

John,

Below is a graph made from the flow of funds data showing the growth of bank credit (loans, securities, and other bank assets) versus the pool of reserves.

Liabilities* exclude transaction accounts. Banks increase Liabilities* to cancel transaction accounts and gain free reserves. Banks use free reserves to expand bank credit.

The level of reserves is constant on average over the period 1987-2007, just prior to the crisis, while bank balance sheets expand continuously over the same period.

Joe

[John Hermann]

On 23/08/2012 1:03 AM, William Hummel wrote:

From: John Hermann

On 22/08/2012 1:30 AM, William Hummel wrote:

 

But I would note that the main reason base money increases is to satisfy the public's demand for Federal Reserve notes in lieu of bank deposits. Do you see that as harmful to the economy or unfair in some way? 

No, I don't see it as harmful in any way William.  But surely there are two reasons why base money increases (and it is true that most of the increase goes into satisfying the public's demand for legal tender). 
The second reason is that a small increase is required to accommodate the growth of commercial banking business activity (other than providing currency for depositors' needs), is it not?

John

 

I agree, but the reserves of base money required in the commercial banking business is a very small fraction of the total, especially in those countries which have no reserve requirement on demand deposits. Here are current figures for Canada:

 

Bank reserves = 1.065 billion

Notes outstanding = 41.147 billion

GDP = 1.74 trillion

 

William

Yes, I am aware of the magnitudes of the quantities involved.  The following statistics pertain to Australia, 
and the figures are all similar to those for Canada.     John.

          GDP = $1.57 trillion (2012 est)
            GDP per capita = $69,007 (nominal)

Data obtained from the RBA website (seasonally adjusted)

Year (June)   MB/currency     MB/M1      MB/M3        MB/Mb  

 

1990                     1.37            0.42          0.082          0.056      

1995                     1.28            0.31          0.082          0.063

2000                     1.13            0.22          0.065          0.051

2005                     1.15            0.22          0.057          0.051

2008                     1.16            0.20          0.045          0.041

2009                     1.17            0.22          0.045          0.043

2010                     1.15            0.23          0.043          0.042

 

Increase in magnitude from June 1990 to June 2010

 

Currency                          3.62

M1                                     5.60

M3                                     5.70

Mb (broad money)         3.03

 

            The distribution of transaction money (in $billions) at June 2011 was:

 

M1                                      262.3
Notes in circulation          45.0
Notes in banks                   5.1
Coins in circulation            3.1
Coins in banks                   0.4

         Base money (in $billions) at June 2011 was:
           Base money                    54.6
         Currency                         53.6
           Currency in circulation      48.1
           Creditary base money        1.0 

[Jean Erick]

     I thought the main reason for base money increase was an off shoot of the FED attempting to influence interest rates.

What about the difference between increasing base money and converting a set amount of base money in reserve account form

to currency form?  What about the difference between making more base money, usually done by crediting reserve accounts, and

changing those accounts into currency?

 

James

-----      Original Message -----

From: William Hummel

To: understan...@googlegroups.com

[Jean Erick]

     Mistated.  The term "wealth" is simply not going to allow a realistic appreciation of the real issues.  Your statement in (1) INFERS

real goods but does not explicity state that the wealth you MUST be talking about is real  goods.  That is the crack of confusion

which all will tend to fall into.

     The two basic elements are real goods and generic good (money).   "Real wealth", real goods must be distinguished from

"generic" good", money wealth.   Your statement does not eliminate money and debt.  And it MUST do so or there is just nonsence.

     And, in the first place, any contruct must encompass no growth and negative growth scenarios.

    As far as your question:  simple set theory, a circle divided by so many equal parts is set value equal to another circle of

the same number of evenly divided parts.  If one circle increases in size, the other must increase to maintain equal value of the parts.

That is simple sets.

     Applying this to economics means as new products arise, increasing the nominal set of real goods, a corresponding increase

in the nominal count of the other circle must also increase.   Otherwise, prices must deflate or transaction velocity increase.

Equal value money, relative to increased real good value, must either deflate in value or increase in velocity.

     Increasing the amount of money decreases the value of the nominal dollar but the value of the increased nominal dollars

maintain the puchasing power unit.  To much of an increase in nominal money units can lead to inflation of prices but, all in all, besides what temporary disruption it might cause. it doesn't matter.  Because it doesn't matter how many nominal dollars are required to

purchase a loaf of bread.  As long as everybody has those nominal dollars.  Fluctuating nominal dollars in a negative or postive

growth economy must be executed so as to maintain the purchasing power unit.  Otherwise, people start firing bullets at other people.

 

     The problem in the US is a tax system turned on its head.

 

     Question:  Why isn't Australia filling the outback with solar collecters persuant to an under sea cable, becoming the

(sumptuoulsy wealthy) wall plug for Asia?  I undertand what you've got there is Perth, Sydney, Alice Springs, the big red rock,

baby eating dingos, man eating cayman, some really nasty spiders and snakes, a few shark infested beaches, and a WHOLE lot

of outback.  (And some pretty cute Shiela's).

 

James

 

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Monday, August 20, 2012 8:12 PM

Subject: Re: Money creation flow charts

[George Chandler]

Herman wrote: "And the idea of putting additional base money into the economy via payments to all citizens has a certain appeal, rather than distributing

it to bond dealers and banks."

 

There is a huge difference between the FED buying securties on the open market versus the FED paying-out a national dividend. Securities are an investment - the national dividend is a gift.

[John Hermann]

George,  the FED would also need to buy securities - although not from the open securities market - in order to acquire and distribute any national dividend funds.  Also the idea of a gift can be a misleading concept.  It is more than a mere gift, it should be regarded as an alternative means of effecting  a necessary investment in the national economy (just as the route of distributing base money via bond dealers is also as a national economic investment).  Securities are far more than an investment indulged in by members of the private sector for their own benefit.      John.

On 23/08/2012 2:50 AM, George Chandler wrote:

John Hermann wrote: "And the idea of putting additional base money into the economy via payments to all citizens has a certain appeal, rather than distributing

[John Hermann]

On 23/08/2012 1:03 AM, William Hummel wrote:

From: John Hermann

On 22/08/2012 1:30 AM, William Hummel wrote:

But I would note that the main reason base money increases is to satisfy the public's demand for Federal Reserve notes in lieu of bank deposits. Do you see that as harmful to the economy or unfair in some way? 

No, I don't see it as harmful in any way William.  But surely there are two reasons why base money increases (and it is true that most of the increase goes into satisfying the public's demand for legal tender). 
The second reason is that a small increase is required to accommodate the growth of commercial banking business activity (other than providing currency for depositors' needs), is it not?  John

 

I agree, but the reserves of base money required in the commercial banking business is a very small fraction of the total, especially in those countries which have no reserve requirement on demand deposits. Here are current figures for Canada:

 

Bank reserves = 1.065 billion

Notes outstanding = 41.147 billion

GDP = 1.74 trillion

 

William

William, I was wondering why you restricted the term "bank reserves" to creditary base money
(exchange settlement funds).  Currency held by banking institutions also counts as reserves,
so the true figure for Canadian "bank reserves" would not be $1 billion, but probably would be
in excess of $6 billion.                         John.

[William Hummel]

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Wednesday, August 22, 2012 5:56 PM

Subject: Re: Money creation flow charts

John,

 

I was referring to the aggregte deposits of Canadian banks at the Bank of Canada. Since Canada has no reserve ratio requirement, it is immaterial whether or not bank vault cash is counted as "reserves". I took the data from the BOC's balance sheet at http://www.pearsoned.ca/highered/divisions/text/mishkin_2/data/appendices/15_ch15_mishkin_append.pdf  

William

[John Hermann]

On 23/08/2012 12:44 PM, William Hummel wrote:

From: John Hermann

On 23/08/2012 1:03 AM, William Hummel wrote:

From: John Hermann

On 22/08/2012 1:30 AM, William Hummel wrote:

But I would note that the main reason base money increases is to satisfy the public's demand for Federal Reserve notes in lieu of bank deposits. Do you see that as harmful to the economy or unfair in some way? 

No, I don't see it as harmful in any way William.  But surely there are two reasons why base money increases (and it is true that most of the increase goes into satisfying the public's demand for legal tender). 
The second reason is that a small increase is required to accommodate the growth of commercial banking business activity (other than providing currency for depositors' needs), is it not?  John

 

I agree, but the reserves of base money required in the commercial banking business is a very small fraction of the total, especially in those countries which have no reserve requirement on demand deposits. Here are current figures for Canada:

 

Bank reserves = 1.065 billion

Notes outstanding = 41.147 billion

GDP = 1.74 trillion

William, I was wondering why you restricted the term "bank reserves" to creditary base money

(exchange settlement funds).  Currency held by banking institutions also counts as reserves,
so the true figure for Canadian "bank reserves" would not be $1 billion, but probably would be
in excess of $6 billion.                         John

.

 

John,  I was referring to the aggregte deposits of Canadian banks at the Bank of Canada. Since Canada has no reserve ratio requirement, it is immaterial whether or not bank vault cash is counted as "reserves". I took the data from the BOC's balance sheet at http://www.pearsoned.ca/highered/divisions/text/mishkin_2/data/appendices/15_ch15_mishkin_append.pdf       William

Even if the Canadian (or Australian) central bank does not like to use the term "reserves", the fact is that banks need base money for a variety of reasons, including providing currency for their depositors on demand, satisfying liquidity requirements (whether self-imposed or statutory), risk management, and for purchasing financial assets.  So if you wish to use the term "reserves" at all, then I feel that you are obliged to include the cash held by banks.  Personally, I don't see any problem with using the term "reserves" -- even for countries with zero reserve ratio requirement.      John.

[Jean Erick]

     I like the way you're thinking.  :-)

The carbon tax was supposed to work that way, money to the people.

Reverse income tax.

    In the US, I forget the name but if you work

and make below a certain amount, you get a payment.

 

James

[Jean Erick]

     This question goes at least 2 years back.  Get ready for a dogfight.

 

James

----- Original Message -----

From: John Hermann

To: understan...@googlegroups.com

Sent: Tuesday, August 21, 2012 7:30 PM

Subject: Re: Money creation flow charts

[Jean Erick]

     Very good Joe.  Now try some graphs showing private debt relative to GDP and you'll be in the ballpark.

 

James

----- Original Message -----

From: Joe Leote

To: understan...@googlegroups.com