A good list and nothing to disagree with. But for me the big problem remains, how can we stop the media and politicians persistently lying about how the economy works? They foster damaging untruths which inhibit progressive policy making and undermine the standard of living of the majority. Why do we tolerate this?
The media is owned by those whose interest it is to keep the status quo. I wish I had an answer to your question. The only thing I can think of is that is positive is to ignore those at the top, including politicians, professional economists and those in the pockets of the already powerful and wealthy - and instead try to inspire and teach those at grassroots level.
Anyone who had the education I did, including graduate level Econ courses, probably (wrongly) believes they understand how the macro economy works based on monetary theory: I.e, inflation is caused by problems originating in the money supply in the economy (etc).
When I first “discovered “ MMT it finally clicked for me. MMT has fact-based explanations for inflation (and solutions too!) that make sense.
Yes, but scarcely any university economics courses teach MMT! Remember when those students wrote a book complaining about the rubbish they were being taught? It was ignored. And we know politicians and journalists go to Oxbridge, the most reactionary of all, with Oxford sending them out to pontificate on the basis of a third of a degree in classical nonsense.
I THINK ABOUT THIS EVERY DAY! (Love the MMT community.) I've recently been thinking about how to point out the fact that the GOP utilizes and understands MMT principles (Trump and Musk have said things that insinuate they understand we can't run out of money) because they're willing to spend whatever it takes and if they get to do it and it's framed that way then maybe that framing can somehow force libs/progressives into having to embrace it. ....idk, I'm working on it.
Thanks Darren, I can't argue against any of your choices. Banks lending is a good addition as is the natural rate of interest at zero and functiona finance. I kind of included functional finance without mentioning the term: it's a good one.
Higher interest rates increase the general price level and provide money, in direct propotion to the savings held, to those who already have savings and equivalently punish those with mortgages and other loans.
Disagree with your point #2 that government spending precedes taxation.
Contrary to MMT rhetoric, tax payment funds to the government aren't destroyed; they don't literally 'cease to exist' in an absolute sense. Before taxation, these funds were largely created by lending from private banks and are part of the private-sector money supply, held as deposits or currency. After taxation, they reside in the Treasury General Account (TGA) as the government's cash balance and as an asset on the government's balance sheet. They no longer circulate in the private economy and are thus excluded from standard money supply measures, awaiting disbursement to re-enter private-sector circulation. This process is more properly described as shifting money between the public and private sectors rather than the literal creation and destruction of money.
Without getting into the nuances here, what you describe here is endogenous money. It ignored the State's involvement in the circuit of money and like you do begin with the bank as primary, MMT added the State to it - in what is often called vertical transactions, where the traditional circuit is horizontal transactions. Like I said, without getting into the nuance, so this is a little simplified but the horizontal transactions always net to zero and the vertical transactions add money.
Another essential concept to consider when thinking about MMT is the labor theory of value. Socially necessary labor produces new value. This is why (assuming labor and resources are available) government spending into the economy for socially useful purposes is not inflationary. All such spending increases the size of the economy and, thus, justifies increasing the amount of money in circulation. For more see https://brucelesnick.substack.com/p/money-is-no-object-19-01-11
Hi Bruce, Thanks for your comment. I wouldn't regard the labour theory of value as being a central idea of MMT. as I'm sure you know as an idea popularised by Marx. MMTers don't take any single thing as being the arbiter of value. MMT sees money as a creature of the state - and as a concept not a commodity. Anything can be money - becaue money is credit/debt. MMT doesb't subscribe to a particular theory of value.
Great article! An idea I would add is that MMT isn’t an ideology or statement of values (left, center, right etc.) it’s just a description of “how” our monetary system actually operates. What we then choose to use our resources/money for, (war, education, green energy etc.) are the values enacted through the lens of MMT. I’m fairly new to MMT, but this jumps out to me from critics who smear MMT as either; another trick by capitalists to oppress the working classes (Marxists), or just a utopian money giveaway for radical leftist policies, exacerbating inflation (Capitalists). As with all other issues, it’s that irrational fear, implanted by decades of institutional propaganda, which causes that distrust and mental block from grasping the truthful reality. Acknowledgment of that fear, then overcoming it, will then allow their “awakening” leading to an inevitable paradigm shift towards progress.
FYI, as a socialist, I choose to use the MMT lens with a working class, environmental analysis. ✊☮️☝️💙🌍 #learnMMT #austerityismurder #leftisbest
Thanks Rodney, You make a good point, " it’s just a description of “how” our monetary system actually operates." not an ideological statement of values. As much as MMT is largely a description rather than springing form any ideological framework: I agree that the left would gain from studying and adopting it.
Jim, really like your posts. They're very informative. It's difficult to choose a top 10, each one of your choices deserves a spot but I'd also somehow like to include that the UK government cannot run out of money and we're not maxing out the credit card (as politicians and media like to say). Also, as far as bond sales go, I would suggest that they're not required at all. I believe that since QE the concept of overnight lending rates doesn't really apply as banks have plenty of reserves. Keep up the good work!
A very good list, I like it. I'm thinking though that no. 10 should be much nearer the top, maybe even no. 1? Because this defines the true essence of money, making clear in particular that money is not something that people own and govt "steals" through taxation (a favourite trope of neolibs), but is a creation of govt, and without govt there would be no money. And consequently it can't be replaced by unregulated crypto, another favourite neolib myth!
The Scott Fullwiler article that you’re referring to is useful in understanding the role of Fed in accommodating banks’ needs for reserve balances. It’s, also, valid that the Fed’s open market operations is a potent tool in hitting its interest rates target although, since it started paying interest on reserves balances, nowadays it has become less important. However, I have a problem accepting that, within the current legal constraint that the TGA cannot go into overdraft, the Treasury can deficit spend prior to bonds sales. MMT argues that in a consolidated government balance sheet the S(TAB) sequence is possible. But, I haven’t seen anyone showing analytically that this is also true when dealing with unconsolidated balance sheets. The article by Andrew Berkeley et al. for the UK is different because the BoE extends a credit line facility to the Exchequer, but which in essence still constitutes borrowing. No that it makes any difference whether it’s S(TAB) or (TAB)S; everything else MMT asserts follows through. Nevertheless, I think it’s extremely important to prove with forensic accounting that in the US the Treasury indeed can deficit spend before borrowing.
"Of critical importance to most of MMT’s description of the monetary system is its elaboration of the system’s operational realities, which for MMT’ers generally means three things:"
All spending is the done exactly the same way. the government doesn't know if it's in deficit over any particular year until it does the arithmetic at the end the year. All spending is done the same way and it's all new money. In other words, the phrase 'deficit spending' is irrelevant in relation to the currency issuing operation. Eric Tymoigne: "Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the Treasury and central banks of several countries, MMT has provided institutional and theoretical insights into the inner workings of economies with monetarily sovereign and non-sovereign governments. In terms of theory, MMT argues that taxes and bond offerings are not best conceptualized as funding sources for the Treasury, but rather as reserve draining devices to maintain price and interest-rate stability. As such, they are necessary even if a government issues its currency to spend. This theoretical conclusion holds even if the Treasury may be required to tax and issue bond to fund itself. Another theoretical conclusion is that merging the central bank and the Treasury in a government sector can be done without loss of generality for monetarily sovereign governments. Separating the two adds complexity without bringing insights. The paper shows that the previous theoretical conclusions of MMT can be illustrated by providing evidence of the interconnectedness of the Treasury and the central bank in the United States." https://www.jstor.org/stable/43905834
No, you’re wrong! Since the TGA isn’t legally allowed to run an overdraft it must always have the necessary reserves prior to spending. Thus, in the case of deficit spending, bonds sales to either primary dealers or the public must precede spending. Remember that the Treasury can sell bonds to anyone else except to the Fed, which is allowed to buy them only in the secondary market. Could you please show me the explicit accounting steps to prove that Stephanie Kelton’s S(TAB) sequence is indeed possible given the legal constraint that the TGA cannot go into overdraft?
If you give me a way to send it to you I can give you a PDF copy of Scott Fullwiler – “Interest Rates and Fiscal Sustainability” (2006) which has the text I'm quoting in my other comment.
See Scott Fullwiler – “Interest Rates and Fiscal Sustainability” (2006) "3. Treasury bond sales are interest-rate support – not financing – operations - page 1021
The Fed's tactics for accommodating banks' demand for reserve balances are
generally two-fold. First, the Fed estimates the reserve balances banks desire to hold at
the target federal funds rate; second, the Fed must offset anticipated changes in its
own balance sheet, which themselves alter the quantity of reserve balances circulating.
Due to this need to offset balance sheet changes, the Fed's daily operations frequently
are referred to as "defensive" in nature. The Fed's permanent operations offset
reserve balance drains due mostly to banks' currency purchases via outright purchases
of Treasuries. Shorter-term operations are generally repurchase (and, less frequently,
reverse repurchase) operations in Treasuries that aim to offset changes in float,
seasonal changes in currency, and changes in the Treasury's account balance, all while
accommodating banks' aggregate demand for reserve balances at the targeted rate."
The Treasury General Account is the account the US Treasury keeps with the Fed through which the central government spends and raises funds by taxation and bonds sales. Because the TGA isn’t allowed to go into overdraft it must always have a positive balance prior to any expenditure. Doesn’t that imply that selling bonds or tax collection precedes any government spending?
The US government legally has to have bond sales that match any spending. That in itself tells you that bonds sales come after spending. It's not a financial necessity - but it's a legal edict. Spending and taxation are authorised by different pieces of legislation, they are not legally linked in any cause-and-effect way. It's also not possible to spend taxes even if the government wanted to. The actual spending process is done by the central bank - via commercial bank reserve accounts. The money only exists after it has been spent; the route to that spending starts with political authorisation. There's no point in the journey between authorisation and spending that involves dipping into a pile of tax money.
I can explain in detail the source if the confusion:
“The actual spending process is done by the central bank - via commercial bank reserve accounts.”
True! EVERY credit into any bank’s reserve account can only be done by the Fed or CB, as they are the counterparty on the CB ledger, it’s the Fed’s or CB Liability, the banks asset, it shows what the Fed owes the bank. EVERY debit and EVERY credit to EVERY reserve account is 1:1 with the Fed it CB. So it is true to say every reserve account credit us new, and thus new money.
However, the question is , where did the source of value come from? Did the Fed ‘create anew’ such as when they buy an asset and expand the supply of reserve account credits? Or did the Fed receive a reserve account credit first, so the value was given to the Fed by a bank, and the Fed then credited that value to a different bank? That’s the fundamental question for every transaction.
When the UST sells bonds, and the Fed/CB buys through a Broker Dealer, the Fed creates new reserves and expands the supply of reserves.
However, when a bank or the public buys a USG bond, the value is being transferred to the Fed or CB to transfer to the receiving bank. In receiving payment from a bank the Fed debits the bank’s reserve account, which reduces the total outstanding liabilities of the Fed and reduces supply of reserves. Then the Fed issues a credit to the seller’s or Broker Dealer’s bank to pay for the bond, or to the TGA if sold at auction.
So while it’s true forensically that every reserve account credit is newly issued, we do not consider that ‘printing money’ when the value was sent from another bank, and only consider it ‘issuing new money’ when the Fed buys an asset itself, such as in Quantitative Easing.
“The money only exists after it has been spent;”
True! for Gov spending when it pays non-banks for goods and services.
The TGA is debited, the reserve account of the payee’s bank is credited, and then the receiving bank credits their own customer’s deposit account, creating new deposits and expanding the money supply.
Forensically, it is true that Gov spending causes banks to issue new money and expand the money supply, just as tax payments cause banks to debit deposit accounts and reduces the money supply. But it’s the banks, not the gov or the Fed, who issues new money. The UST could issue digital currency to
Pay bills, spend then tax, and it would work the way MMT says it does.
“the route to that spending starts with political authorisation. “
True again Jim!
“There's no point in the journey between authorisation and spending that involves dipping into a pile of tax money.”
Wrong. 100% of USG spending starts with a positive balance in the TGA, and the only way that account receives Reserves for a positive balance is from tax receipts and bond sales. It’s a reality that neither of us can change just because we wish it was different.
1) government creates money through spending programs. Sub-scam 1 is, of course, that we ‘cannot afford’ good public services. Of course we can.
2) government must delete the money to prevent inflation. What it does not delete stays in the economy as savings.
3) deletion means taxation. Sub scam 2 is that there are those among us who for various reasons are more worthy and should not be taxed or who make so much that to tax them at a normal percentage would not be ‘fair’.
4) ‘wealth’ can be created simply by avoiding taxation - what we have been doing since Thatcher/Reagan. That ‘wealth’ can be used to purchase non-financial assets, the reason for asset (including house) price inflation.
5) that ‘wealth’ is, fundamentally, not the product of noble enterprise but theft of public money.
6) we open a (swap) channel whereby financial wealth/theft can be converted into interest bearing money (bonds) to benefit the wealthy/thefty.
7) and invent an excuse to set the interest rate above inflation, which amounts to sending wealthfare cheques to the wealthy/thefty in proportion to how much theft/wealth they have acquired. We allow this to progress without limit so inequality gets worse and worse.
8) and then allow (it is inevitable) the thefty to corrupt government.
9) in despair, people elect a Trump to take revenge on all the wrong people.
10) while the thefty who financed him - the oligarchy - seek to destroy what is left of our democracy and establish corporate government.
1. There is not a major government in the world that does not spend out of their asset account, in the U.S. the Treasury General Account TGA. No spending can be initiated unless the TGA has the funds/reserves to cover the payment. That means tax revenue or revenue from bond sales is needed prior to spending. 2. The Fed was started and capitalized by banks, who earn a fixed return on their capital contribution. The Fed only issues new reserves when buying assets or lending against assets, so new reserves are always asset backed. The Fed never issues new Fed liabilities/reserves to pay government short term liabilities, aka bills, neither does any other CB. If they did, they would be spending their equity.
Equity = Assets - Liabilities
L + E = A
If A remains the same, then +L results in -E.
The US Government does not issue currency/money, but they could, like a digital $. For this reason, we need to stop saying it does; the USG issued a total of $0 in 2024. Governments can borrow as much as they want by selling bonds, but they do not issue. Same for UK.
These are facts that are irrefutable, but undermine the MMT money mechanics you presented. Time to update your views…
That said, to me the most important contributions from MMT is that we should be running deficits until we reach full employment. However, we should also be increasing tax revenue to pull excess money out of the economy when it starts over heating, manage more like Friedman’s automatic stabilizers, but donors keep taxes from being implemented, and MMT believes the Fed buys all debt and therefore debt does not matter. We need a more balanced approach that we spend until we find we are resource constrained, but stop the 24/7/365 deficits, which MMT justifies by saying the gov red ink is our black ink. Why is it our responsibility to provide the private sector positive equity from bonds at the expense of negative gov equity of $30T+? The economy will produce $600b in new GDP but the gov will tax and transfer or borrow and transfer $1T to bond holders. Why is that a good thing?
In summary (cutting out all intervening processes): politicians decide to spend and the central bank carries out the transactions on behalf of the government. The central bank is legally required to carry out all transactions authorised by the government. Bond sales don't raise money - government bonds are swapped for commercial bank reserves. The banks now have interest bearing bonds instead of their reserves. The government has not borrowed any spending money as a result of this process. The only additional money that results is the interest paid to the banks. Tax revenues do not get used for spending: when a citizens pays their taxes - that just means what they owed has be struck from the record. If they owed $100 dollars and they paid $100 the balance is now zero. Government 'debt' is not debt as we know it: it's just the total of historic deficits that have been spent into the non-government sector.
Taxes as a way to control inflation is central to MMT.
“When the Fed wants to pay money to a bank it’s not tax money, we simply use the computer to mark up the account”
Ben Bernanki, Former chair of the US federal reserve
“I’m afraid that the ordinary citizen will not like to be told that the banks or the Bank of England can create and destroy money.”
Reginald McKenna, Ex-Chancelor of the Exchequer 1928
"Taxes for Revenue Are Obsolete"
Beardsley Ruml, Chairman of the. Federal Reserve Bank of New York, in American Affairs Volume VIII. No. 1 1946
“I have not been worried about the state deficit for sometime, ever since Mr Brown found out that the UK state can literally print money to pay its bills.
John Redwood, Conservative MP for Wokingham
You can read a detailed description of the mechanics of the UK Government spending process in the first chapter of the book, 'Modern Monetary Theory: Key Insights, Leading Thinkers' published by GIMMS
“the central bank carries out the transactions on behalf of the government.”
This is factually untrue. When the Gov sells bonds, there are 4 potential buyers:
0. The Fed or CB is only one, and the only one where the Fed/CB created new reserves, increasing the supply of reserves, and where the Gov is borrowing from the CB/Fed, which mistakenly looks like printing. The Gov can borrow, not print or issue, and if it borrows from the Fed/CB AND the CB/Fed Holds To Maturity HTM then and only then is it essentially free money. This is the only bond sale the CB or Fed is involved in. The Fed holds $4.5T in bonds if our $36T in debt.
1)The non-bank public, who buy most of the bonds. This is the Gov borrowing then spending deposits, but ALSO issuing a bond which is negative Gov equity but positive Private sector equity. The forensic accounting goes like this: -Deposits (public) - Reserves (buyer’s bank) +Reserves TGA) + Bond Buyer. Then Gov spends: -R TGA, +R Payee’s bank, + D payee. -D -R +R +B -R +R +D = +B
Consolidated Balance Sheet CBS//MMT version:
-D -R +B +R+D = +Bonds.
2) Banks can buy: -R bank +R TGA +Bond - R TGA +R Payee Bank + D Payee = +Bond + Deposits.
CSM/MMT: -R +B +R +D = +B +D
3) Trade Deficit Foreign Country has $, then buys bonds to store. The banking is the same as #1.
Respectfully, the USG and UST do not issue money, and the Fed only issues new reserves when they buy bonds or other assets, but never to pay Gov liabilities/bulls.
I agree Congress can decide to deficit spend, but then the Gov must borrow, and cannot print or issue. The Gov will never go bankrupt unless they choose to because they can always borrow as much as they wish, but they do not issue money today. In 2024 the USG issued $0.
Why this is important is because first, taxes and bond sales do fund government, since the Gov does not issue. And second, the Gov could issue new currency in the USG/UST ledger if we decide to change the system. I tried to model that here:
Thanks for your reply Jon. Let's leave it at that. We live in different worlds and can never agree. All spending has to be ratified by the government because all spending is political.
Thx Jim, I do not mean to be disrespectful in any way, I just have developed an advanced understanding of money mechanics, so I thought I would provide them to you as I doubt anyone has laid out in detail EXACTLY what happens.
“When the Fed wants to pay money to a bank it’s not tax money, we simply use the computer to mark up the account”
Absolutely! But ONLY to buy assets, or lend against sssts, so 100% of reserves are asset backed, not ‘printed out of thin air’ as some critics complain.
The most important message of MMT is being lost due to mistakes in understanding the forensic accounting. The statement the Gov can spend first should be Congress can authorize spending first, but the TGA can only spend if it has a positive balance, that’s the whole point of Debt ceiling argument, so it’s a distraction to represent the Gov can spend first or create money to spend or say tax receipts are not used to fund gov spending, as it can be easily verified as untrue. If you want to do that, then you should promote a new digital USD issued by UST in the Treasury ledger as a Gov Liability, not a Gov asset.
Meanwhile managing the monetary system to achieve full employment at 2% interest or less is being lost, even if deficits are needed, and the NEED to pull excess $ out through taxes as the economy is being lost, so we are defaulting to the Fed to destroy businesses and jobs and cause people to lose their homes as they raise interest rates to current 4.29%+ We need to move away from the tail wagging the dog in a Fed led interest rate economy choking paradigm, and into a full employment at any cost but higher taxes so we can run a surplus when the ebony overheats (instead of raising interest rates).
Jon, Our inability to agree is not to do with the process itself, the problem is our different methodological approaches: based on the different economic schools of thought we are coming from. The step by step details of spending in the UK - have indeed been laid out: you will find them in the book I mentioned - which is a cut down version of a more academic treatment of the same topic. MMT doesn't see the Central Bank (monetary policy) and Government (fiscal policy) as separate. The Central bank is owned by and is a department of government. The leadership of the Central Bank is put in place by the 'government of the day'. But of course the Central Bank is the governments bank and is legally obliged to carry out all spending instructions passed to it by the government. The actual machinations in between can never change that simple fact. So, that's why it's always true to say that the government makes a spending decision and the central bank carries it out. It carries to out via the banks who have reserve accounts at the central bank.
“the Central Bank is the governments bank and is legally obliged to carry out all spending instructions passed to it by the government.”
Yes! By the CB ‘Lending’ the Gov money to spend to complete all Gov payments or short term liabilities on a credit line, something the Gov must repay to the CB! And by law, the Gov must sell bonds or long term liabilities to cover any shorten Liabilities.
The law is clear, the actual practice is clear, the Ik cannot spend unless they have reserves in deposit, and any shorten Liabilities ten liabilities or bills that come in are paid by the BoE, BUT, the funds are BORROWED on a short term credit line.
Fact. Law. Reality. To say anything different is to put your head in the sand like an Ostrich. The Uk government cannot issue new money today…
But it could! And until people realize it does not, then they are never going to realize they could issue a new digital pound as a Gov liability.
You wrote: "...money did not, ‘belong to the people’ and was not ‘stolen from the people by governments.'" I disagree.
Prior to 1971 when President Nixon closed the gold window, money was backed by gold. Except for a statutory bar against the public physically holding their own gold, that money was the equivalent of owning the gold that it was backed by. When gold redeemability ended, technically that quantity of gold was stolen from all who possessed gold-backed money, and was replaced by money that was 'owned' by the government. That 'money' represented gold that did belong to the people and it was *clearly* stolen from the people by their own government.
Interesting point. I haven't looked deeply into the history of gold as a commodity but I do know that economist Adam Smitth was working to undermine the Mercantilist approach to wealth and successful economies. At that time it was the state (the crown or the national treasury) that was seen as the rightful holder of gold and silver, not individuals.
The collapse of Bretton Woods system was initiated by Nixon to prevent foreign holders of dollars from drawing down the US gold reserves. This possibility was more than certain because of the steady accumulation of trade deficits that flooded the exporting countries with dollar holdings. However, the shift of the dollar from a commodity currency to fiat status didn’t steal any value from dollar holders, both domestic and foreign. They continue to possess the same purchasing power as during convertibility. Only inflation erodes the value of money.
In the US, approximately 85-90% of the money circulating in the US economy (M2, ~$20.8 trillion) is created by private banks through loans, primarily as bank deposits. The US government directly creates 10-15%, mainly as physical currency (~11%, $2.3 trillion) and initial deposits from spending. This means private bank-created money is 6-9 times greater than government-created money.
In the UK economy, approximately 90-95% of the money circulating (M4, ~£3.1 trillion) is created by private banks through loans, primarily as bank deposits. The UK government directly creates 5-10%, including physical currency (~2.6%, £80 billion) and deposits from deficit spending (e.g., £119.1 billion in 2023). Private bank-created money is 9-19 times greater than government-created money.
The MMT-based statement suggests that government spending is the initial source of money, enabling taxation. While the government creates the currency and establishes its value (e.g., by requiring taxes in GBP), private banks overwhelmingly amplify the money supply through lending.
Government substantially taxes, and borrows from, the private sector to get money to spend. Government itself creates only a small portion of the money that circulates, and drives growth, in the economy.
Since it is the government that is the sovereign over it's own money, government *could* create and spend all money that circulates. But, as of yet, it has chosen not to.
Currency issuig governments have no need to borrow currency from the private sector to get money to spend. That's self-evident - they don't need to borrow something they issue. Bank loans have to be paid back, so in practice banks add no 'net' money to the private sector. Banks are only allowed to issue loans under the authorisation and regulation of the central bank and financial authorities. In an important sense, they function as an extension of the state's ability to issue currency.
Agreed, governments don’t need to borrow (or tax) money from the private sector—but they do. Both the US and UK governments, which are sovereign over their own currencies, have chosen to implement legal frameworks wherein they borrow primarily from the private sector, facilitated by the government-authorized banking system, rather than issuing money directly.
It doesn't work like that. When currency issuing governments 'borrow' all that is happening is that interest-bearing government bonds are swapped for reserves that banks hold with the central bank. Borrowing is essentially about setting the overnight interest rate at which banks lend to each other. It's well work reading Richard Murphy's paper : Modern Monetary Theory - and explanation: https://www.taxresearch.org.uk/Blog/2023/04/18/modern-monetary-theory-an-explanation/
“A state that understands MMT does not need to borrow from third parties to fund its activities. There are three reasons for saying this. Firstly, a state that understands MMT will appreciate that it has already borrowed to fund its spending. The loan funds in question come from its central bank. It cannot borrow again to fund Modern monetary theory: an explanation 11 what has already been paid for. All it can do is borrow again to refinance the borrowing it has already undertaken, which is a quite different activity”
“Second, the suggestion that borrowing can take place to fund a deficit makes no sense when the currency to fund that borrowing has necessarily been spent into existence as a result of the deficit that the government has created through its central bank funded expenditure. This admittedly quite tortuous logic has to be true because all that a government deficit represents is money spent by a government into the economy (using funds provided to it by its central bank) that have yet to be recovered from that economy by way of tax. Those funds are therefore government created money left in the economy until such time as the government ever decides to reclaim them. Given that the government created this money it cannot then need to borrow it back, let alone to fund the expenditure that first created the money in question.” Richard Murphy https://www.taxresearch.org.uk/Blog/2023/04/18/modern-monetary-theory-an-explanation/
Again, the government *could* have created the money used to buy T-securities, but it didn't. This would, of course, be a non-sequitur. If the government created its own money, it would simply spend its own money rather than use its money to buy its T-securities to fund itself. Dizzyingly circular.
Here are the sources of money used to buy T-securities.
~80–90% (~$18.4–$20.7 trillion) of money used to purchase Treasury securities at 2024 auctions originated in the private sector (deposits, capital, borrowed funds), and the TGA increases regardless of accounting entries. The remaining ~10–20% (~$2.3–$4.6 trillion) comes from non-private sector sources, primarily foreign central banks/governments (using reserves from trade or foreign central bank money) and marginally U.S. government entities (tax revenues). I presented a similar analysis for the UK in a prior reply in this thread.
The Federal Reserve does not directly fund auction purchases, supporting the claim that the money doesn’t originate in the central bank. Though its reserves (~$3.0 trillion, created via QE) mostly enable settlements.
The only money the government presently creates is when it coins it into existence, and sometimes when it orders the central bank to buy its debt on the secondary market.
We can agree to disagree. The US and UK private sector cannot create new money: that's called forgery and it is illegal. Banks make loans, loans get paid back: zero net/new money is added to the economy. The only source of new money is the government. Any money used to buy bonds came from the government, via the central bank in the first instance. There's no point in us discussing further as our understanding of the mechanics of the monetary system is completely different. Thanks for your perspective.
The government does not borrow its own money. It borrows from third parties, and repays that debt back to those third parties, along with an interest premium.
Also, central banks do not buy government debt directly. They sometimes buy government debt from third parties who had previously bought that government debt.
The government could just issue its own *government* money, but it doesn't.
You understand that since 2018 the Fed pays interest on reserves directly, the Fed sets a rate and then lends upon demand at that rate, so bonds or supply of reserves have nothing to do with it. The Fed just decides.
A good list and nothing to disagree with. But for me the big problem remains, how can we stop the media and politicians persistently lying about how the economy works? They foster damaging untruths which inhibit progressive policy making and undermine the standard of living of the majority. Why do we tolerate this?
The media is owned by those whose interest it is to keep the status quo. I wish I had an answer to your question. The only thing I can think of is that is positive is to ignore those at the top, including politicians, professional economists and those in the pockets of the already powerful and wealthy - and instead try to inspire and teach those at grassroots level.
Anyone who had the education I did, including graduate level Econ courses, probably (wrongly) believes they understand how the macro economy works based on monetary theory: I.e, inflation is caused by problems originating in the money supply in the economy (etc).
When I first “discovered “ MMT it finally clicked for me. MMT has fact-based explanations for inflation (and solutions too!) that make sense.
That's the kind of insight that makes a good educator.
Yes, but scarcely any university economics courses teach MMT! Remember when those students wrote a book complaining about the rubbish they were being taught? It was ignored. And we know politicians and journalists go to Oxbridge, the most reactionary of all, with Oxford sending them out to pontificate on the basis of a third of a degree in classical nonsense.
True. But I'm an optimist. I think things will change eventually.
I don’t have that long…
I THINK ABOUT THIS EVERY DAY! (Love the MMT community.) I've recently been thinking about how to point out the fact that the GOP utilizes and understands MMT principles (Trump and Musk have said things that insinuate they understand we can't run out of money) because they're willing to spend whatever it takes and if they get to do it and it's framed that way then maybe that framing can somehow force libs/progressives into having to embrace it. ....idk, I'm working on it.
Maybe these:
1. Taxes drive money - chartalist view that taxes establish demand for the currency
2. Government spending logically precedes taxation (spending creates money, taxes destroy it)
3. Currency issuers face different constraints than currency users (monetary sovereignty hierarchy)
4. Monetarily sovereign governments cannot "run out of money" in their own currency
5. Real resource constraints and inflation are the operational constraints, not financial constraints or government "solvency"
6. Endogenous money creation through bank lending (loans create deposits)
7. The natural rate of interest is zero (without government bond issuance)
8. Sectoral balances framework (government deficits = non-government surpluses)
9. Functional finance approach (judging fiscal policy by its effects, not arbitrary financial targets)
10. Job Guarantee as a price anchor and automatic stabiliser
Thanks Darren, I can't argue against any of your choices. Banks lending is a good addition as is the natural rate of interest at zero and functiona finance. I kind of included functional finance without mentioning the term: it's a good one.
Higher interest rates increase the general price level and provide money, in direct propotion to the savings held, to those who already have savings and equivalently punish those with mortgages and other loans.
Disagree with your point #2 that government spending precedes taxation.
Contrary to MMT rhetoric, tax payment funds to the government aren't destroyed; they don't literally 'cease to exist' in an absolute sense. Before taxation, these funds were largely created by lending from private banks and are part of the private-sector money supply, held as deposits or currency. After taxation, they reside in the Treasury General Account (TGA) as the government's cash balance and as an asset on the government's balance sheet. They no longer circulate in the private economy and are thus excluded from standard money supply measures, awaiting disbursement to re-enter private-sector circulation. This process is more properly described as shifting money between the public and private sectors rather than the literal creation and destruction of money.
Without getting into the nuances here, what you describe here is endogenous money. It ignored the State's involvement in the circuit of money and like you do begin with the bank as primary, MMT added the State to it - in what is often called vertical transactions, where the traditional circuit is horizontal transactions. Like I said, without getting into the nuance, so this is a little simplified but the horizontal transactions always net to zero and the vertical transactions add money.
Another essential concept to consider when thinking about MMT is the labor theory of value. Socially necessary labor produces new value. This is why (assuming labor and resources are available) government spending into the economy for socially useful purposes is not inflationary. All such spending increases the size of the economy and, thus, justifies increasing the amount of money in circulation. For more see https://brucelesnick.substack.com/p/money-is-no-object-19-01-11
Hi Bruce, Thanks for your comment. I wouldn't regard the labour theory of value as being a central idea of MMT. as I'm sure you know as an idea popularised by Marx. MMTers don't take any single thing as being the arbiter of value. MMT sees money as a creature of the state - and as a concept not a commodity. Anything can be money - becaue money is credit/debt. MMT doesb't subscribe to a particular theory of value.
Many for the references!
Great article! An idea I would add is that MMT isn’t an ideology or statement of values (left, center, right etc.) it’s just a description of “how” our monetary system actually operates. What we then choose to use our resources/money for, (war, education, green energy etc.) are the values enacted through the lens of MMT. I’m fairly new to MMT, but this jumps out to me from critics who smear MMT as either; another trick by capitalists to oppress the working classes (Marxists), or just a utopian money giveaway for radical leftist policies, exacerbating inflation (Capitalists). As with all other issues, it’s that irrational fear, implanted by decades of institutional propaganda, which causes that distrust and mental block from grasping the truthful reality. Acknowledgment of that fear, then overcoming it, will then allow their “awakening” leading to an inevitable paradigm shift towards progress.
FYI, as a socialist, I choose to use the MMT lens with a working class, environmental analysis. ✊☮️☝️💙🌍 #learnMMT #austerityismurder #leftisbest
@realprogressives
Thanks Rodney, You make a good point, " it’s just a description of “how” our monetary system actually operates." not an ideological statement of values. As much as MMT is largely a description rather than springing form any ideological framework: I agree that the left would gain from studying and adopting it.
Jim, really like your posts. They're very informative. It's difficult to choose a top 10, each one of your choices deserves a spot but I'd also somehow like to include that the UK government cannot run out of money and we're not maxing out the credit card (as politicians and media like to say). Also, as far as bond sales go, I would suggest that they're not required at all. I believe that since QE the concept of overnight lending rates doesn't really apply as banks have plenty of reserves. Keep up the good work!
Thanks Nigel, You are right of course. :-)
A very good list, I like it. I'm thinking though that no. 10 should be much nearer the top, maybe even no. 1? Because this defines the true essence of money, making clear in particular that money is not something that people own and govt "steals" through taxation (a favourite trope of neolibs), but is a creation of govt, and without govt there would be no money. And consequently it can't be replaced by unregulated crypto, another favourite neolib myth!
Thanks Rick, As you say number 10 is an important one - as it underpins so many neoliberal economics myths.
The Scott Fullwiler article that you’re referring to is useful in understanding the role of Fed in accommodating banks’ needs for reserve balances. It’s, also, valid that the Fed’s open market operations is a potent tool in hitting its interest rates target although, since it started paying interest on reserves balances, nowadays it has become less important. However, I have a problem accepting that, within the current legal constraint that the TGA cannot go into overdraft, the Treasury can deficit spend prior to bonds sales. MMT argues that in a consolidated government balance sheet the S(TAB) sequence is possible. But, I haven’t seen anyone showing analytically that this is also true when dealing with unconsolidated balance sheets. The article by Andrew Berkeley et al. for the UK is different because the BoE extends a credit line facility to the Exchequer, but which in essence still constitutes borrowing. No that it makes any difference whether it’s S(TAB) or (TAB)S; everything else MMT asserts follows through. Nevertheless, I think it’s extremely important to prove with forensic accounting that in the US the Treasury indeed can deficit spend before borrowing.
I think you'll find this interesting: 'Modern Monetary Theory – A Primer on the Operational Realities of the Monetary System' by Scott Fullwiler
https://www.moslereconomics.com/wp-content/pdfs/MMT-Scott-Fullwiler.pdf
"Of critical importance to most of MMT’s description of the monetary system is its elaboration of the system’s operational realities, which for MMT’ers generally means three things:"
All spending is the done exactly the same way. the government doesn't know if it's in deficit over any particular year until it does the arithmetic at the end the year. All spending is done the same way and it's all new money. In other words, the phrase 'deficit spending' is irrelevant in relation to the currency issuing operation. Eric Tymoigne: "Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the Treasury and central banks of several countries, MMT has provided institutional and theoretical insights into the inner workings of economies with monetarily sovereign and non-sovereign governments. In terms of theory, MMT argues that taxes and bond offerings are not best conceptualized as funding sources for the Treasury, but rather as reserve draining devices to maintain price and interest-rate stability. As such, they are necessary even if a government issues its currency to spend. This theoretical conclusion holds even if the Treasury may be required to tax and issue bond to fund itself. Another theoretical conclusion is that merging the central bank and the Treasury in a government sector can be done without loss of generality for monetarily sovereign governments. Separating the two adds complexity without bringing insights. The paper shows that the previous theoretical conclusions of MMT can be illustrated by providing evidence of the interconnectedness of the Treasury and the central bank in the United States." https://www.jstor.org/stable/43905834
See also "Working Paper Modern Money Theory and interrelations between the
treasury and the central bank: The case of the United
States" : https://www.econstor.eu/bitstream/10419/110026/1/78004987X.pdf This paper gives a detailed analysis of the institutional and operational relationship between the U.S. Treasury and the Federal Reserve.
No, you’re wrong! Since the TGA isn’t legally allowed to run an overdraft it must always have the necessary reserves prior to spending. Thus, in the case of deficit spending, bonds sales to either primary dealers or the public must precede spending. Remember that the Treasury can sell bonds to anyone else except to the Fed, which is allowed to buy them only in the secondary market. Could you please show me the explicit accounting steps to prove that Stephanie Kelton’s S(TAB) sequence is indeed possible given the legal constraint that the TGA cannot go into overdraft?
There's also a fully detailed overview of the UK Government spending process in 'Modern Monetary Theory Key Insights, Leading Thinkers' chapter one. https://www.elgaronline.com/edcollbook/book/9781802208092/9781802208092.xml
If you give me a way to send it to you I can give you a PDF copy of Scott Fullwiler – “Interest Rates and Fiscal Sustainability” (2006) which has the text I'm quoting in my other comment.
See Scott Fullwiler – “Interest Rates and Fiscal Sustainability” (2006) "3. Treasury bond sales are interest-rate support – not financing – operations - page 1021
The Fed's tactics for accommodating banks' demand for reserve balances are
generally two-fold. First, the Fed estimates the reserve balances banks desire to hold at
the target federal funds rate; second, the Fed must offset anticipated changes in its
own balance sheet, which themselves alter the quantity of reserve balances circulating.
Due to this need to offset balance sheet changes, the Fed's daily operations frequently
are referred to as "defensive" in nature. The Fed's permanent operations offset
reserve balance drains due mostly to banks' currency purchases via outright purchases
of Treasuries. Shorter-term operations are generally repurchase (and, less frequently,
reverse repurchase) operations in Treasuries that aim to offset changes in float,
seasonal changes in currency, and changes in the Treasury's account balance, all while
accommodating banks' aggregate demand for reserve balances at the targeted rate."
The Treasury General Account is the account the US Treasury keeps with the Fed through which the central government spends and raises funds by taxation and bonds sales. Because the TGA isn’t allowed to go into overdraft it must always have a positive balance prior to any expenditure. Doesn’t that imply that selling bonds or tax collection precedes any government spending?
The US government legally has to have bond sales that match any spending. That in itself tells you that bonds sales come after spending. It's not a financial necessity - but it's a legal edict. Spending and taxation are authorised by different pieces of legislation, they are not legally linked in any cause-and-effect way. It's also not possible to spend taxes even if the government wanted to. The actual spending process is done by the central bank - via commercial bank reserve accounts. The money only exists after it has been spent; the route to that spending starts with political authorisation. There's no point in the journey between authorisation and spending that involves dipping into a pile of tax money.
I can explain in detail the source if the confusion:
“The actual spending process is done by the central bank - via commercial bank reserve accounts.”
True! EVERY credit into any bank’s reserve account can only be done by the Fed or CB, as they are the counterparty on the CB ledger, it’s the Fed’s or CB Liability, the banks asset, it shows what the Fed owes the bank. EVERY debit and EVERY credit to EVERY reserve account is 1:1 with the Fed it CB. So it is true to say every reserve account credit us new, and thus new money.
However, the question is , where did the source of value come from? Did the Fed ‘create anew’ such as when they buy an asset and expand the supply of reserve account credits? Or did the Fed receive a reserve account credit first, so the value was given to the Fed by a bank, and the Fed then credited that value to a different bank? That’s the fundamental question for every transaction.
When the UST sells bonds, and the Fed/CB buys through a Broker Dealer, the Fed creates new reserves and expands the supply of reserves.
However, when a bank or the public buys a USG bond, the value is being transferred to the Fed or CB to transfer to the receiving bank. In receiving payment from a bank the Fed debits the bank’s reserve account, which reduces the total outstanding liabilities of the Fed and reduces supply of reserves. Then the Fed issues a credit to the seller’s or Broker Dealer’s bank to pay for the bond, or to the TGA if sold at auction.
So while it’s true forensically that every reserve account credit is newly issued, we do not consider that ‘printing money’ when the value was sent from another bank, and only consider it ‘issuing new money’ when the Fed buys an asset itself, such as in Quantitative Easing.
“The money only exists after it has been spent;”
True! for Gov spending when it pays non-banks for goods and services.
The TGA is debited, the reserve account of the payee’s bank is credited, and then the receiving bank credits their own customer’s deposit account, creating new deposits and expanding the money supply.
Forensically, it is true that Gov spending causes banks to issue new money and expand the money supply, just as tax payments cause banks to debit deposit accounts and reduces the money supply. But it’s the banks, not the gov or the Fed, who issues new money. The UST could issue digital currency to
Pay bills, spend then tax, and it would work the way MMT says it does.
“the route to that spending starts with political authorisation. “
True again Jim!
“There's no point in the journey between authorisation and spending that involves dipping into a pile of tax money.”
Wrong. 100% of USG spending starts with a positive balance in the TGA, and the only way that account receives Reserves for a positive balance is from tax receipts and bond sales. It’s a reality that neither of us can change just because we wish it was different.
All good but you’re missing the scam.
I had to step away. The Big Scam:
1) government creates money through spending programs. Sub-scam 1 is, of course, that we ‘cannot afford’ good public services. Of course we can.
2) government must delete the money to prevent inflation. What it does not delete stays in the economy as savings.
3) deletion means taxation. Sub scam 2 is that there are those among us who for various reasons are more worthy and should not be taxed or who make so much that to tax them at a normal percentage would not be ‘fair’.
4) ‘wealth’ can be created simply by avoiding taxation - what we have been doing since Thatcher/Reagan. That ‘wealth’ can be used to purchase non-financial assets, the reason for asset (including house) price inflation.
5) that ‘wealth’ is, fundamentally, not the product of noble enterprise but theft of public money.
6) we open a (swap) channel whereby financial wealth/theft can be converted into interest bearing money (bonds) to benefit the wealthy/thefty.
7) and invent an excuse to set the interest rate above inflation, which amounts to sending wealthfare cheques to the wealthy/thefty in proportion to how much theft/wealth they have acquired. We allow this to progress without limit so inequality gets worse and worse.
8) and then allow (it is inevitable) the thefty to corrupt government.
9) in despair, people elect a Trump to take revenge on all the wrong people.
10) while the thefty who financed him - the oligarchy - seek to destroy what is left of our democracy and establish corporate government.
That’s my 10 for what it’s worth on.
1. There is not a major government in the world that does not spend out of their asset account, in the U.S. the Treasury General Account TGA. No spending can be initiated unless the TGA has the funds/reserves to cover the payment. That means tax revenue or revenue from bond sales is needed prior to spending. 2. The Fed was started and capitalized by banks, who earn a fixed return on their capital contribution. The Fed only issues new reserves when buying assets or lending against assets, so new reserves are always asset backed. The Fed never issues new Fed liabilities/reserves to pay government short term liabilities, aka bills, neither does any other CB. If they did, they would be spending their equity.
Equity = Assets - Liabilities
L + E = A
If A remains the same, then +L results in -E.
The US Government does not issue currency/money, but they could, like a digital $. For this reason, we need to stop saying it does; the USG issued a total of $0 in 2024. Governments can borrow as much as they want by selling bonds, but they do not issue. Same for UK.
These are facts that are irrefutable, but undermine the MMT money mechanics you presented. Time to update your views…
That said, to me the most important contributions from MMT is that we should be running deficits until we reach full employment. However, we should also be increasing tax revenue to pull excess money out of the economy when it starts over heating, manage more like Friedman’s automatic stabilizers, but donors keep taxes from being implemented, and MMT believes the Fed buys all debt and therefore debt does not matter. We need a more balanced approach that we spend until we find we are resource constrained, but stop the 24/7/365 deficits, which MMT justifies by saying the gov red ink is our black ink. Why is it our responsibility to provide the private sector positive equity from bonds at the expense of negative gov equity of $30T+? The economy will produce $600b in new GDP but the gov will tax and transfer or borrow and transfer $1T to bond holders. Why is that a good thing?
In summary (cutting out all intervening processes): politicians decide to spend and the central bank carries out the transactions on behalf of the government. The central bank is legally required to carry out all transactions authorised by the government. Bond sales don't raise money - government bonds are swapped for commercial bank reserves. The banks now have interest bearing bonds instead of their reserves. The government has not borrowed any spending money as a result of this process. The only additional money that results is the interest paid to the banks. Tax revenues do not get used for spending: when a citizens pays their taxes - that just means what they owed has be struck from the record. If they owed $100 dollars and they paid $100 the balance is now zero. Government 'debt' is not debt as we know it: it's just the total of historic deficits that have been spent into the non-government sector.
Taxes as a way to control inflation is central to MMT.
“When the Fed wants to pay money to a bank it’s not tax money, we simply use the computer to mark up the account”
Ben Bernanki, Former chair of the US federal reserve
“I’m afraid that the ordinary citizen will not like to be told that the banks or the Bank of England can create and destroy money.”
Reginald McKenna, Ex-Chancelor of the Exchequer 1928
"Taxes for Revenue Are Obsolete"
Beardsley Ruml, Chairman of the. Federal Reserve Bank of New York, in American Affairs Volume VIII. No. 1 1946
“I have not been worried about the state deficit for sometime, ever since Mr Brown found out that the UK state can literally print money to pay its bills.
John Redwood, Conservative MP for Wokingham
You can read a detailed description of the mechanics of the UK Government spending process in the first chapter of the book, 'Modern Monetary Theory: Key Insights, Leading Thinkers' published by GIMMS
Also good summary here: https://gimms.org.uk/2019/02/10/uk-government-spending-taxation-bank-lending/
Jim, thank you for your reply. You wrote:
“the central bank carries out the transactions on behalf of the government.”
This is factually untrue. When the Gov sells bonds, there are 4 potential buyers:
0. The Fed or CB is only one, and the only one where the Fed/CB created new reserves, increasing the supply of reserves, and where the Gov is borrowing from the CB/Fed, which mistakenly looks like printing. The Gov can borrow, not print or issue, and if it borrows from the Fed/CB AND the CB/Fed Holds To Maturity HTM then and only then is it essentially free money. This is the only bond sale the CB or Fed is involved in. The Fed holds $4.5T in bonds if our $36T in debt.
1)The non-bank public, who buy most of the bonds. This is the Gov borrowing then spending deposits, but ALSO issuing a bond which is negative Gov equity but positive Private sector equity. The forensic accounting goes like this: -Deposits (public) - Reserves (buyer’s bank) +Reserves TGA) + Bond Buyer. Then Gov spends: -R TGA, +R Payee’s bank, + D payee. -D -R +R +B -R +R +D = +B
Consolidated Balance Sheet CBS//MMT version:
-D -R +B +R+D = +Bonds.
2) Banks can buy: -R bank +R TGA +Bond - R TGA +R Payee Bank + D Payee = +Bond + Deposits.
CSM/MMT: -R +B +R +D = +B +D
3) Trade Deficit Foreign Country has $, then buys bonds to store. The banking is the same as #1.
Respectfully, the USG and UST do not issue money, and the Fed only issues new reserves when they buy bonds or other assets, but never to pay Gov liabilities/bulls.
I agree Congress can decide to deficit spend, but then the Gov must borrow, and cannot print or issue. The Gov will never go bankrupt unless they choose to because they can always borrow as much as they wish, but they do not issue money today. In 2024 the USG issued $0.
Why this is important is because first, taxes and bond sales do fund government, since the Gov does not issue. And second, the Gov could issue new currency in the USG/UST ledger if we decide to change the system. I tried to model that here:
Read “Trump’s Short-Lived Opportunity For A $5T ‘Grand Bargain’ On Infrastructure By Launching UST Coin“ by Jon Underwood on Medium: https://medium.com/@wunderwood11/trumps-rare-and-short-lived-opportunity-for-a-5t-grand-bargain-69921b8fc7c6
Thanks for your reply Jon. Let's leave it at that. We live in different worlds and can never agree. All spending has to be ratified by the government because all spending is political.
Thx Jim, I do not mean to be disrespectful in any way, I just have developed an advanced understanding of money mechanics, so I thought I would provide them to you as I doubt anyone has laid out in detail EXACTLY what happens.
“When the Fed wants to pay money to a bank it’s not tax money, we simply use the computer to mark up the account”
Absolutely! But ONLY to buy assets, or lend against sssts, so 100% of reserves are asset backed, not ‘printed out of thin air’ as some critics complain.
The most important message of MMT is being lost due to mistakes in understanding the forensic accounting. The statement the Gov can spend first should be Congress can authorize spending first, but the TGA can only spend if it has a positive balance, that’s the whole point of Debt ceiling argument, so it’s a distraction to represent the Gov can spend first or create money to spend or say tax receipts are not used to fund gov spending, as it can be easily verified as untrue. If you want to do that, then you should promote a new digital USD issued by UST in the Treasury ledger as a Gov Liability, not a Gov asset.
Meanwhile managing the monetary system to achieve full employment at 2% interest or less is being lost, even if deficits are needed, and the NEED to pull excess $ out through taxes as the economy is being lost, so we are defaulting to the Fed to destroy businesses and jobs and cause people to lose their homes as they raise interest rates to current 4.29%+ We need to move away from the tail wagging the dog in a Fed led interest rate economy choking paradigm, and into a full employment at any cost but higher taxes so we can run a surplus when the ebony overheats (instead of raising interest rates).
Jon, Our inability to agree is not to do with the process itself, the problem is our different methodological approaches: based on the different economic schools of thought we are coming from. The step by step details of spending in the UK - have indeed been laid out: you will find them in the book I mentioned - which is a cut down version of a more academic treatment of the same topic. MMT doesn't see the Central Bank (monetary policy) and Government (fiscal policy) as separate. The Central bank is owned by and is a department of government. The leadership of the Central Bank is put in place by the 'government of the day'. But of course the Central Bank is the governments bank and is legally obliged to carry out all spending instructions passed to it by the government. The actual machinations in between can never change that simple fact. So, that's why it's always true to say that the government makes a spending decision and the central bank carries it out. It carries to out via the banks who have reserve accounts at the central bank.
“the Central Bank is the governments bank and is legally obliged to carry out all spending instructions passed to it by the government.”
Yes! By the CB ‘Lending’ the Gov money to spend to complete all Gov payments or short term liabilities on a credit line, something the Gov must repay to the CB! And by law, the Gov must sell bonds or long term liabilities to cover any shorten Liabilities.
The law is clear, the actual practice is clear, the Ik cannot spend unless they have reserves in deposit, and any shorten Liabilities ten liabilities or bills that come in are paid by the BoE, BUT, the funds are BORROWED on a short term credit line.
Fact. Law. Reality. To say anything different is to put your head in the sand like an Ostrich. The Uk government cannot issue new money today…
But it could! And until people realize it does not, then they are never going to realize they could issue a new digital pound as a Gov liability.
Let's stop.
You wrote: "...money did not, ‘belong to the people’ and was not ‘stolen from the people by governments.'" I disagree.
Prior to 1971 when President Nixon closed the gold window, money was backed by gold. Except for a statutory bar against the public physically holding their own gold, that money was the equivalent of owning the gold that it was backed by. When gold redeemability ended, technically that quantity of gold was stolen from all who possessed gold-backed money, and was replaced by money that was 'owned' by the government. That 'money' represented gold that did belong to the people and it was *clearly* stolen from the people by their own government.
Interesting point. I haven't looked deeply into the history of gold as a commodity but I do know that economist Adam Smitth was working to undermine the Mercantilist approach to wealth and successful economies. At that time it was the state (the crown or the national treasury) that was seen as the rightful holder of gold and silver, not individuals.
The collapse of Bretton Woods system was initiated by Nixon to prevent foreign holders of dollars from drawing down the US gold reserves. This possibility was more than certain because of the steady accumulation of trade deficits that flooded the exporting countries with dollar holdings. However, the shift of the dollar from a commodity currency to fiat status didn’t steal any value from dollar holders, both domestic and foreign. They continue to possess the same purchasing power as during convertibility. Only inflation erodes the value of money.
In the US, approximately 85-90% of the money circulating in the US economy (M2, ~$20.8 trillion) is created by private banks through loans, primarily as bank deposits. The US government directly creates 10-15%, mainly as physical currency (~11%, $2.3 trillion) and initial deposits from spending. This means private bank-created money is 6-9 times greater than government-created money.
In the UK economy, approximately 90-95% of the money circulating (M4, ~£3.1 trillion) is created by private banks through loans, primarily as bank deposits. The UK government directly creates 5-10%, including physical currency (~2.6%, £80 billion) and deposits from deficit spending (e.g., £119.1 billion in 2023). Private bank-created money is 9-19 times greater than government-created money.
The MMT-based statement suggests that government spending is the initial source of money, enabling taxation. While the government creates the currency and establishes its value (e.g., by requiring taxes in GBP), private banks overwhelmingly amplify the money supply through lending.
Government substantially taxes, and borrows from, the private sector to get money to spend. Government itself creates only a small portion of the money that circulates, and drives growth, in the economy.
Since it is the government that is the sovereign over it's own money, government *could* create and spend all money that circulates. But, as of yet, it has chosen not to.
Currency issuig governments have no need to borrow currency from the private sector to get money to spend. That's self-evident - they don't need to borrow something they issue. Bank loans have to be paid back, so in practice banks add no 'net' money to the private sector. Banks are only allowed to issue loans under the authorisation and regulation of the central bank and financial authorities. In an important sense, they function as an extension of the state's ability to issue currency.
Agreed, governments don’t need to borrow (or tax) money from the private sector—but they do. Both the US and UK governments, which are sovereign over their own currencies, have chosen to implement legal frameworks wherein they borrow primarily from the private sector, facilitated by the government-authorized banking system, rather than issuing money directly.
It doesn't work like that. When currency issuing governments 'borrow' all that is happening is that interest-bearing government bonds are swapped for reserves that banks hold with the central bank. Borrowing is essentially about setting the overnight interest rate at which banks lend to each other. It's well work reading Richard Murphy's paper : Modern Monetary Theory - and explanation: https://www.taxresearch.org.uk/Blog/2023/04/18/modern-monetary-theory-an-explanation/
“A state that understands MMT does not need to borrow from third parties to fund its activities. There are three reasons for saying this. Firstly, a state that understands MMT will appreciate that it has already borrowed to fund its spending. The loan funds in question come from its central bank. It cannot borrow again to fund Modern monetary theory: an explanation 11 what has already been paid for. All it can do is borrow again to refinance the borrowing it has already undertaken, which is a quite different activity”
“Second, the suggestion that borrowing can take place to fund a deficit makes no sense when the currency to fund that borrowing has necessarily been spent into existence as a result of the deficit that the government has created through its central bank funded expenditure. This admittedly quite tortuous logic has to be true because all that a government deficit represents is money spent by a government into the economy (using funds provided to it by its central bank) that have yet to be recovered from that economy by way of tax. Those funds are therefore government created money left in the economy until such time as the government ever decides to reclaim them. Given that the government created this money it cannot then need to borrow it back, let alone to fund the expenditure that first created the money in question.” Richard Murphy https://www.taxresearch.org.uk/Blog/2023/04/18/modern-monetary-theory-an-explanation/
Tortured logic indeed.
Again, the government *could* have created the money used to buy T-securities, but it didn't. This would, of course, be a non-sequitur. If the government created its own money, it would simply spend its own money rather than use its money to buy its T-securities to fund itself. Dizzyingly circular.
Here are the sources of money used to buy T-securities.
~80–90% (~$18.4–$20.7 trillion) of money used to purchase Treasury securities at 2024 auctions originated in the private sector (deposits, capital, borrowed funds), and the TGA increases regardless of accounting entries. The remaining ~10–20% (~$2.3–$4.6 trillion) comes from non-private sector sources, primarily foreign central banks/governments (using reserves from trade or foreign central bank money) and marginally U.S. government entities (tax revenues). I presented a similar analysis for the UK in a prior reply in this thread.
The Federal Reserve does not directly fund auction purchases, supporting the claim that the money doesn’t originate in the central bank. Though its reserves (~$3.0 trillion, created via QE) mostly enable settlements.
The only money the government presently creates is when it coins it into existence, and sometimes when it orders the central bank to buy its debt on the secondary market.
We can agree to disagree. The US and UK private sector cannot create new money: that's called forgery and it is illegal. Banks make loans, loans get paid back: zero net/new money is added to the economy. The only source of new money is the government. Any money used to buy bonds came from the government, via the central bank in the first instance. There's no point in us discussing further as our understanding of the mechanics of the monetary system is completely different. Thanks for your perspective.
The government does not borrow its own money. It borrows from third parties, and repays that debt back to those third parties, along with an interest premium.
Also, central banks do not buy government debt directly. They sometimes buy government debt from third parties who had previously bought that government debt.
The government could just issue its own *government* money, but it doesn't.
You understand that since 2018 the Fed pays interest on reserves directly, the Fed sets a rate and then lends upon demand at that rate, so bonds or supply of reserves have nothing to do with it. The Fed just decides.