The truth, I think, is that the vast majority never really think about money. We grow up with it from childhood, we know we need it, we work to earn it, and it just seems to exist. If asked, I suspect most people would still suggest it's got something to do with gold.
There was indeed a time, centuries ago, when wealth was tied to possession of scarce commodities such as gold, and when (to adapt a phrase) there was no such thing as government money, only the king's money. If the king wanted to, say, fight a war, he needed money to buy armaments and pay soldiers, and would demand a contribution (i.e. taxes) from the wealthy aristocrats.
I'm sure that this model lies at the back of most people's minds, including orthodox economists who should know better.
It can be hard to accept that all this money we all depend on is not in the modern world based anything solid, of intrinsic value, but is merely a very large, fomalised system of IOUs. And that furthermore, the records of these IOUs are (apart from a relatively small amount of cash) nothing more than digital numbers in computer files. It all seems too ephemeral. There must be some substance, somewhere, surely?
But this IS how it works, and, because an IOU is a declaration of a loan, all money is debt. It's on loan either from a commercial bank or a central bank. Your mortgage has to be repaid, and the central bank money has to be returned as taxes. It's never "your" money.
We also talk about successful people as "making money", but of course they don't. That would be forgery or fraud. They accumulate money, they don't increase the money in circulation. If they accumulate an unfair share, they have an obligation to return a larger share through taxes. Taxation is not taking away "their" money.
Since stumbling upon MMT a decade ago, I've made a habit of making people uncomfortable at cocktail parties, family gatherings, and the occasional political meeting by asking them where they think the money they use to pay taxes comes from. Hilarity always ensues. Ultimately, no one -- and these are mostly highly educated, high net-worth individuals -- has the vaguest clue. Or if they have a clue, they can't seem to draw the obvious, indisputable conclusion about the relationship between taxation and federal spending. And when I explain it to them, they look at me like I have two heads, and continue to complain about their "taxpayer dollars" being misspent -- on whatever governmental programs they dislike -- or to insist on the need to heavily tax the ultra-rich to pay for the programs they like. (When I tell leftists, in particular, that there are lots of good reasons to heavily tax billionaires, but paying for social welfare programs isn't one of them, they look at me like I'm an Enemy Of The People.)
The indubitable truths of MMT have been available to the public in the US since at least since 1946, when Marriner Eccles published his 8 page paper "Taxes For Revenue Are Obsolete." The fact that that nearly everyone everywhere continues either to be unaware of those truths or to deny them drives me to despair every bloody day.
A great effort to present the basic working of the economy simply and succinctly. Thank you. But I know people who will say “it’s too complicated, you’ll never get people to understand that”. Believing that the economy is like a household budget is so much simpler, apparently. No one seems to want to believe that in the hands of an informed Chancellor, the economy can be made to deliver better public services, more employment and a more equitable distribution of income, (without the threat of austerity) but that’s the message we have to get across. There are precedents for the bearers of good news not being believed, from early christians to Jeremy Corbyn’s 2017 manifesto. We know the forces of reaction have a vested interest in keeping the household budget mantra which is used, very successfully, to gaslight the less well off by endlessly threatening austerity, but we can’t go on denying people the better lives they could be enjoying. Has anyone got the answer to this impasse?
You are right Jenifer. Can I suggest you check out the podcast I was on last week to promote my new MMT course. I think it turned out to be a good educational resources for anyone interested in this topic: https://youtu.be/TUYY0rjmhOY?si=8WDJE77cdiKZ1sA-
I like how u explain with a foreign sector surplus money how is constantly being drained from the private sector. Just curious how you might explain when the household sector is seperated out from the business sector where the latter is in surplus to the household sector?
Thanks for your comment Reg. I've grouped both together as the private sector - which is the most important part of the non-government sector. I've not separated them out. I'm interested to hear your thoughts.
I have not really thought about it, perhaps if we assume businesses exist to make a profit it might be safe to generalise they would be in surplus to the household sector???
I've not done any in-depth research in this split between households and business - but a quick Google suggests that households have historically been net lenders (i.e., running surpluses), while private non-financial corporations generally net borrowers (i.e., running deficits). Current UK ONS data seems to back that up - but again I've not looked into it in great details.
Also, like many logically impossible things in textbook mainstream econ, believing the myths has real serious danger. Because these economists are all trying to force things to be the way their textbooks say it should be. It is so bad in academic econ that I almost feel sorry for the politicians swallowing the ꕗꖹꝆꝆꕷꖾꕯꖡ. (However, they have souls — or so I still wish to believe — so can always choose to learn for themselves as a moral duty to their chosen profession in public service, instead of swallow advice they must subconsciously realize is total ꕗꖹꝆꝆꕷꖾꕯꖡ — because human decency is always discernible above all the rot and brain moss.)
Thanks Bijou, you are right to say that neoliberal economic myths are dangerous. In the UK along in the last 15 years austerity has led to the deaths of 300,000 citizens.
That's interesting/tragic/sad Jim. And I do not doubt it. What interests me is the claim. Sounds like someone put some research effort into it? Did you reference this, or have a reference?
You touched on private sector saving Jim. As you said, government doesn't know how much tax revenue will appear at the end of any given period - say the period from one fiscal event (setting a budget and tax rates) until the next fiscal event.
It's a continuous process, where the spending is causing the tax revenue to occur - causation rather than correlation!
Turning this around, the government needs to spend enough to allow us to satisfy our savings desires. The alternative, a government surplus, means we'll be borrowing money and it's private credit that leads to problems.
He also talks about bank loans - "We can’t save loans, but we can save government spending."
Hi Jim, I like your work! And…you asked, so here’s the Truth with a capital T.
The Fed/BoE/CB ONLY issues money by increasing their Balance Sheet. True for the U.S., U.K and everywhere else. That’s a bit wonky for most, so let’s quickly explain:
Fed/BoE/CB BS:
+Assets (+bonds)
+Liabilities (+reserves)
This creates no new Equitu, but this is the way ALL new CB money is created.
In the U.S., by law the Treasury General Account at the Fed MUST have a positive balance prior to spending. The only way besides tax revenue to receive funds in the TGA is to sell bonds. Currently, the non-bank public owns about $25T in bonds, or about 2/3 of all UST bonds.
When the UST sells new bonds at auction to the public, it reduces deposits and reduces the money supply. When the UST spends those funds, they return deposits to the same level they were before the bond sale, so there is no new net deposits and no new net reserves, there is no new money. This is borrowing first, then spending, which is what mostly happens in the U.S.
Banks own $5T in bonds or about 14%, and when they buy the bonds that fund deficit spending, and the Gov spends those proceeds, the result is when the receiver if the Gov spending receives new deposits, and the money supply expands. This results in banks creating new money, and expands the money supply, but does not increase fiat or Gov money. So forensically, 80% of the bonds sold do not result in new reserves or new gov money.
Now the Fed holds about $4.5T in Gov bonds last time I looked, but they had about $1.7T in Mortgage backed securities as well, all of which they purchased from banks, not the treasury, so in all of these purchases the Fed issued new reserves and new money to buy, which expanded the supply of reserves.However, the UST TGA received absolutely none of it.
Therefore, 100% of deficit spending in the U.S. is the Gov BORROWING existing reserves, no new reserves, the Fed does not create new reserves to pay the Government’s bills. So the idea that the UST spends first before tax revenue or bond sales receipts is flat wrong in the U.S. The only money the TGA spends outside of tax revenue is borrowed through bond sales to the private sector = borrowed funds.
Yes, the Fed is the originator of all Fiat when banks swap assets with the Fed in exchange for reserve account credits. But NONE of those new reserves were issued to pay Gov bills or for the UST to spend first then tax back later. So on this one point, the forensic accounting in the U.S. says MMT is mistaken mathematically.
In the U.K., the BoE will pay all Gov approved expenditures, so the BoE will credit the bank’s reserve account of Gov payees. That is indeed spending prior to receiving tax revenue or bond sales revenue, no doubt about it. A Berkeley walked me through the forensic accounting HERE IN YOUR BLOG/SUBSTACK! So no doubt about it!
If the Gov is short $, the BoE pays first by creating new reserves when they credit the payee’s bank reserve account, and they find out later.
At the end if the day if the Gov does not have enough revenue to cover all of their bills that the BoE ALREADY paid, then the BoE will ‘LOAN’ the Gov all the money it needs by putting it on a Gov Credit Line CL. And maybe the next day or so or next week, timing unknown, the Gov will have excess revenue to pay off their CL. However, if they do not, I believe there is a law in the UK that requires all Gov debt to be repaid via loan, so if anyone knows if that law please point it out, but regardless in practice the Gov pays off that CL with revenue from bond sales if needed. So BORROW on CL, a new Gov Liability but new BoE Asset, then the Gov does a Liability swapping for short when they sell a bond and payoff the CL (-L CL, +L Bond).
So for every pound the UK Gov is short, in order to deficit spend they BORROW, and citizens MUST repay through taxes.
So yes, the BOE expands the supply of reserves or fiat when they expand they balance sheet, but only to acquire assets, not to spend to pay bills.
BoE
+Assets (Credit Line/Loan)
+Liabilities (+reserve account credits)
If the BoE just credited the reserve accounts of banks of the Gov payers, which they do today, but if they ONLY did that and did not LEND those sums by charging the Gov in a CL, then the BoE would be spending their equity:
BoE Assets - BoE Liabilities = BoE Equity
[add L to both sides, subtract E from both sides]
A - E = + L
If A = 0
-E = + L
Any new Ressrve account credits would be reducing BoE equity 1:1, and we all know that they never do that, and never happens.
Therefore, both in the U.S. and U.K., 100% of Gov deficit spending is BORROWED, even if in the IK the BoE buys the bonds directly!
How we know this is true, besides the enormous amounts of debt ($37T for the U.S. Gov), is because taxpayers have to pay principal and interest P&I payments on this debt, currently fly $1.2T in the U.S.
If the Gov ‘issued’ currency to spend, there would be no debt….
So let’s drop the focus on the Gov issues money to spend, the CB can always monetize Gov debt to avoid bankruptcy, and focus instead on all of the other important MMT ideas, like fully capitalizing the economy to reach full employment, even if that requires a deficit, and getting interest rates down at least to 2% so instead of the Fed raising rates to crush the real economy and stopping profits from being created, use higher taxes AFTER the capital is created to withdraw excess capital and reduce monetary inflation.
I modeled what I proposed as the best version of a UST StableCoin here:
Lastly, the Fed no longer manages the supply of reserves, but it was always preposterous that the UST somehow issue bonds to help the Fed manage the supply of reserves or interest rates, the UST has always issued to borrow, so they can spend what they are borrowing. The Fed sets the cost or price of reserves using the Fed funds rate or overnight rate, and the market uses SOFR mostly but can can add or expand the supply of reserves at the price the Fed sets, as they did for $11b on 6/30/25.
Thanks for your comment Jon. Assuming I'm understanding what you are saying, I have pointed out in the past that this is a convention - and in the UK there are instances where that convention has been overwridden - an example being during Covid. And not all central banks need a positive balance - the Australian central bank is one example that doesn't. Which tells us that it's just a converntion. I don't see that it changes anything in my article - or are you saying it does?
Bond sales don't create new assets: they just swap reserves for bonds.
I don't understand what you mean by:
"Fed/BoE/CB BS:
+Assets (+bonds)
+Liabilities (+reserves)"
If you write it out in longhand it will make it clearer for me.
“The central bank itself doesn't have a reserve account.”
An account in the CB’s ledger, like the revenue account, in the U.S. the Treasury General Account.
“The government never needs a loan to spend in its own currency..”
If it runs out of tax revenue, such as in deficit spending, in the UK it borrows on a BoE Credit Line per the UCL paper, and in the U.S. it borrows by selling bonds first, both of which are funds it must repay.
The Gov must raise tax revenue to repay borrowed funds.
The INLY was a Gov can spend is borrow (UK spend and if short at the end if the day, borrow on a credit line the Gov then repays.) in the U.S. bond sales first b/c the TGA by law must have a positive balance to cover any payments issued.
These are facts if we follow the accounting.
“The money spent into those accounts didn't exist until is showed up in that commercial bank account.”
Agreed! But after the BoE created it by crediting the account if Gov Payees, any amount that exceeds daily revenue, aka whomever much the gov is short, is put on a Credit Kine by the BoE that the Gov repays (per UCL article).
“What you seem to be implying is that taxing and spending is a closed loop,”
Taxing plus borrowing = spending.
“which is the very idea my current article says is impossible. If all government spending required an equal amount to be withdrawn from the private sector (by taxing and borrowing)”
100% of Gov spending is = tax revenue + Credit Line borrowing (UK) + bond borrowing.
“Spending comes first,”
Agreed! But Only in the UK…
And when revenue comes in and at the end of the day, however much spending exceeded revenue, I.e. ‘deficit spending,’ that amount is put on a Credit Line CL and the Gov must repay. That amount may IS newly issued funds from the BoE, but it is ‘Borrowed’ my friend, and the Gov repays.
“in the UK there are instances where that convention has been overwridden - an example being during Covid. And not all central banks need a positive balance - the Australian central bank is one example that doesn't.”
It shows what you are saying is true, Gov can never go bankrupt, but not because the Gov is issuing new money for expenditures, most of the time deficit spending is recycling existing money and there is no net increase in deposits or reserves. Deficit Spending is ALWAYS the Gov borrowing from either the public, banks or the CB, meaning the Gov always has to raise taxes to repay those borrowed funds.
“Bond sales don't create new assets: they just swap reserves for bonds.”
True, the buyer of the bond did an asset swap, the public swaps deposits for bonds, if a bank is the buyer the bank swap reserves for bonds, and neither creates any new public equity. And the Treasury is just expanding their balance sheet:
Treasury
+Assets (+reserves)
+Liabilities (+bonds)
So this causes no change in either public or private equity either.
However, Deficit spending ALWAYS transfers equity from the Gov to the private sector, Kelton’s red ink/black ink analogy, but for the public it’s NOT because of the bonds. We already established the buyer did an asset swap. The new public equity is the receiver of deposits from deficit spending, having sales of goods and services or cash transfers that would otherwise not have happened without deficit spending.
However, most deficit spending is financed by the public buying bonds, and they pay with deposits, then their bank contracts the bank’s balance sheet BS, and the Treasury receives the reserves as show above, by expanding their BS.
As you state, no new net money.
Bond buyer asset swap
-Assets (-deposits)
+Assets (+bond)
Bond buyer’s bank contracts their BS
-Assets (-reserves)
-Liabilities (-deposits)
Treasury
+Assets (+reserves)
+Liabilities (+bonds)
So everything zeros out, no new equity.
Now the Treasury spends their reserves to deficit spend, but still owes the bondholders repayment, which creates negative public equity:
Treasury:
-Assets (-reserves)
Fed Liability swap to assist payment:
-Liabilities (-Reserves TGA)
+Liabilities (+Reserves Gov Payee’s Bank)
Gov Payee’s bank expands their BS:
+Assets (+Reserves)
+Liabilities (+Deposits)
Gov Payee’s receives new asset, and increases equity
+Asset (+Deposits)
So the deposits are ALWAYS the source of the increase in positive public equity.
And the bonds are always the source of negative Gov equity.
We’ll have to agree to disagree. Bond purchases by private sector actors create no income for the government. The only income is the interest the purchaser gets. Even the BoE agrees with that.
I did not say bond sales create income, I said the Gov receives reserve account credits in exchange for bonds, which fill the TGA or revenue account so the Gov can deficit spend, but no change in income.
Selling bonds is the Gov expanding their balance sheet, but no change in equity.
The Cb issuing new reserves to buy assets, or creating to lending against assets like a credit line or loan agreement, is the CB expanding their Bs, but no change in equity.
In England, the Bond sales are just like tax revenues, and either credit the Gov or offset the BoE Credit Line. If the Gov is in surplus Ressrves, they spend reserves. If not, the BoE pays their bills but the bond sales revenue pays them back.
Forensically, I agree every Ressrve account credits is a new reserve, but the Gov balance sheet shows assets from tax revenue and bond sales revenue, and these match (or exceed at times) Gov spending. In the end if the year, 100% of Gov spending was paid for by tax revenue or bond sales revenue, and these match BoE issuing new reserves to pay Gov liabilities are completely repaid.
Forensically this reason, even though the BoE is creating new reserves to satisfy Gov liabilities, the BoE is repaid sometimes quickly and sometimes a bit later through bond sales, but in the end the BoE does not end up creating new money for the Gov that does not end up getting repaid by tax revenue or revenue from bond sales.
There is no BoE issuing new reserves to spend that does not get paid back by the gov.
I don't know what you mean by 'reserve account credits' because
bond sales drain reserves: reserves are held by commercial banks accounts at the central bank: they can swap them for bonds. Their (commercial banks) reserves go down. The central bank itself doesn't have a reserve account.
The central point - in all of this - is that all government spending is new money. The government never needs a loan to spend in its own currency. The government never needs to acquire something else to spend. I have illustrated this in articles and I'm sure I've already mentioned its in earlier comments. The route from the spending decision by government to crediting commercial bank accounts is no more than theatre. The money spent into those accounts didn't exist until is showed up in that commercial bank account. And it didn't exist in another form - i.e., a different type of asset.
What you seem to be implying is that taxing and spending is a closed loop, which is the very idea my current article says is impossible. If all government spending required an equal amount to be withdrawn from the private sector (by taxing and borrowing) it’s impossible to inject new money into the economy. But the facts reveal otherwise. And as I illustrate, if that was the case the economy would collapse.
Spending comes first, selling bonds to drain reserves comes after.
The truth, I think, is that the vast majority never really think about money. We grow up with it from childhood, we know we need it, we work to earn it, and it just seems to exist. If asked, I suspect most people would still suggest it's got something to do with gold.
There was indeed a time, centuries ago, when wealth was tied to possession of scarce commodities such as gold, and when (to adapt a phrase) there was no such thing as government money, only the king's money. If the king wanted to, say, fight a war, he needed money to buy armaments and pay soldiers, and would demand a contribution (i.e. taxes) from the wealthy aristocrats.
I'm sure that this model lies at the back of most people's minds, including orthodox economists who should know better.
It can be hard to accept that all this money we all depend on is not in the modern world based anything solid, of intrinsic value, but is merely a very large, fomalised system of IOUs. And that furthermore, the records of these IOUs are (apart from a relatively small amount of cash) nothing more than digital numbers in computer files. It all seems too ephemeral. There must be some substance, somewhere, surely?
But this IS how it works, and, because an IOU is a declaration of a loan, all money is debt. It's on loan either from a commercial bank or a central bank. Your mortgage has to be repaid, and the central bank money has to be returned as taxes. It's never "your" money.
We also talk about successful people as "making money", but of course they don't. That would be forgery or fraud. They accumulate money, they don't increase the money in circulation. If they accumulate an unfair share, they have an obligation to return a larger share through taxes. Taxation is not taking away "their" money.
Nice summary Rick. Excellent!
Since stumbling upon MMT a decade ago, I've made a habit of making people uncomfortable at cocktail parties, family gatherings, and the occasional political meeting by asking them where they think the money they use to pay taxes comes from. Hilarity always ensues. Ultimately, no one -- and these are mostly highly educated, high net-worth individuals -- has the vaguest clue. Or if they have a clue, they can't seem to draw the obvious, indisputable conclusion about the relationship between taxation and federal spending. And when I explain it to them, they look at me like I have two heads, and continue to complain about their "taxpayer dollars" being misspent -- on whatever governmental programs they dislike -- or to insist on the need to heavily tax the ultra-rich to pay for the programs they like. (When I tell leftists, in particular, that there are lots of good reasons to heavily tax billionaires, but paying for social welfare programs isn't one of them, they look at me like I'm an Enemy Of The People.)
The indubitable truths of MMT have been available to the public in the US since at least since 1946, when Marriner Eccles published his 8 page paper "Taxes For Revenue Are Obsolete." The fact that that nearly everyone everywhere continues either to be unaware of those truths or to deny them drives me to despair every bloody day.
Well put and 100% true. Thanks for your insights.
A great effort to present the basic working of the economy simply and succinctly. Thank you. But I know people who will say “it’s too complicated, you’ll never get people to understand that”. Believing that the economy is like a household budget is so much simpler, apparently. No one seems to want to believe that in the hands of an informed Chancellor, the economy can be made to deliver better public services, more employment and a more equitable distribution of income, (without the threat of austerity) but that’s the message we have to get across. There are precedents for the bearers of good news not being believed, from early christians to Jeremy Corbyn’s 2017 manifesto. We know the forces of reaction have a vested interest in keeping the household budget mantra which is used, very successfully, to gaslight the less well off by endlessly threatening austerity, but we can’t go on denying people the better lives they could be enjoying. Has anyone got the answer to this impasse?
You are right Jenifer. Can I suggest you check out the podcast I was on last week to promote my new MMT course. I think it turned out to be a good educational resources for anyone interested in this topic: https://youtu.be/TUYY0rjmhOY?si=8WDJE77cdiKZ1sA-
I like how u explain with a foreign sector surplus money how is constantly being drained from the private sector. Just curious how you might explain when the household sector is seperated out from the business sector where the latter is in surplus to the household sector?
Thanks for your comment Reg. I've grouped both together as the private sector - which is the most important part of the non-government sector. I've not separated them out. I'm interested to hear your thoughts.
I have not really thought about it, perhaps if we assume businesses exist to make a profit it might be safe to generalise they would be in surplus to the household sector???
I've not done any in-depth research in this split between households and business - but a quick Google suggests that households have historically been net lenders (i.e., running surpluses), while private non-financial corporations generally net borrowers (i.e., running deficits). Current UK ONS data seems to back that up - but again I've not looked into it in great details.
😇 Good stuff.
Also, like many logically impossible things in textbook mainstream econ, believing the myths has real serious danger. Because these economists are all trying to force things to be the way their textbooks say it should be. It is so bad in academic econ that I almost feel sorry for the politicians swallowing the ꕗꖹꝆꝆꕷꖾꕯꖡ. (However, they have souls — or so I still wish to believe — so can always choose to learn for themselves as a moral duty to their chosen profession in public service, instead of swallow advice they must subconsciously realize is total ꕗꖹꝆꝆꕷꖾꕯꖡ — because human decency is always discernible above all the rot and brain moss.)
Thanks Bijou, you are right to say that neoliberal economic myths are dangerous. In the UK along in the last 15 years austerity has led to the deaths of 300,000 citizens.
That's interesting/tragic/sad Jim. And I do not doubt it. What interests me is the claim. Sounds like someone put some research effort into it? Did you reference this, or have a reference?
I've written about it often - in previous articles. Start your research here: "Over 300,000 ‘excess’ deaths in Great Britain attributed to UK Government austerity policies" https://www.gla.ac.uk/news/archiveofnews/2022/october/headline_885099_en.html
Thanks Jim.
You touched on private sector saving Jim. As you said, government doesn't know how much tax revenue will appear at the end of any given period - say the period from one fiscal event (setting a budget and tax rates) until the next fiscal event.
The deficit at the end of the period is equal to the amount saved, i.e., the unspent income. - https://www.matchesinthedark.uk/spending-chains-sankey-diagrams
It's a continuous process, where the spending is causing the tax revenue to occur - causation rather than correlation!
Turning this around, the government needs to spend enough to allow us to satisfy our savings desires. The alternative, a government surplus, means we'll be borrowing money and it's private credit that leads to problems.
He also talks about bank loans - "We can’t save loans, but we can save government spending."
Thanks for the linke George. I'll check it you.
Hi Jim, I like your work! And…you asked, so here’s the Truth with a capital T.
The Fed/BoE/CB ONLY issues money by increasing their Balance Sheet. True for the U.S., U.K and everywhere else. That’s a bit wonky for most, so let’s quickly explain:
Fed/BoE/CB BS:
+Assets (+bonds)
+Liabilities (+reserves)
This creates no new Equitu, but this is the way ALL new CB money is created.
In the U.S., by law the Treasury General Account at the Fed MUST have a positive balance prior to spending. The only way besides tax revenue to receive funds in the TGA is to sell bonds. Currently, the non-bank public owns about $25T in bonds, or about 2/3 of all UST bonds.
When the UST sells new bonds at auction to the public, it reduces deposits and reduces the money supply. When the UST spends those funds, they return deposits to the same level they were before the bond sale, so there is no new net deposits and no new net reserves, there is no new money. This is borrowing first, then spending, which is what mostly happens in the U.S.
Banks own $5T in bonds or about 14%, and when they buy the bonds that fund deficit spending, and the Gov spends those proceeds, the result is when the receiver if the Gov spending receives new deposits, and the money supply expands. This results in banks creating new money, and expands the money supply, but does not increase fiat or Gov money. So forensically, 80% of the bonds sold do not result in new reserves or new gov money.
Now the Fed holds about $4.5T in Gov bonds last time I looked, but they had about $1.7T in Mortgage backed securities as well, all of which they purchased from banks, not the treasury, so in all of these purchases the Fed issued new reserves and new money to buy, which expanded the supply of reserves.However, the UST TGA received absolutely none of it.
Therefore, 100% of deficit spending in the U.S. is the Gov BORROWING existing reserves, no new reserves, the Fed does not create new reserves to pay the Government’s bills. So the idea that the UST spends first before tax revenue or bond sales receipts is flat wrong in the U.S. The only money the TGA spends outside of tax revenue is borrowed through bond sales to the private sector = borrowed funds.
Yes, the Fed is the originator of all Fiat when banks swap assets with the Fed in exchange for reserve account credits. But NONE of those new reserves were issued to pay Gov bills or for the UST to spend first then tax back later. So on this one point, the forensic accounting in the U.S. says MMT is mistaken mathematically.
In the U.K., the BoE will pay all Gov approved expenditures, so the BoE will credit the bank’s reserve account of Gov payees. That is indeed spending prior to receiving tax revenue or bond sales revenue, no doubt about it. A Berkeley walked me through the forensic accounting HERE IN YOUR BLOG/SUBSTACK! So no doubt about it!
If the Gov is short $, the BoE pays first by creating new reserves when they credit the payee’s bank reserve account, and they find out later.
At the end if the day if the Gov does not have enough revenue to cover all of their bills that the BoE ALREADY paid, then the BoE will ‘LOAN’ the Gov all the money it needs by putting it on a Gov Credit Line CL. And maybe the next day or so or next week, timing unknown, the Gov will have excess revenue to pay off their CL. However, if they do not, I believe there is a law in the UK that requires all Gov debt to be repaid via loan, so if anyone knows if that law please point it out, but regardless in practice the Gov pays off that CL with revenue from bond sales if needed. So BORROW on CL, a new Gov Liability but new BoE Asset, then the Gov does a Liability swapping for short when they sell a bond and payoff the CL (-L CL, +L Bond).
So for every pound the UK Gov is short, in order to deficit spend they BORROW, and citizens MUST repay through taxes.
So yes, the BOE expands the supply of reserves or fiat when they expand they balance sheet, but only to acquire assets, not to spend to pay bills.
BoE
+Assets (Credit Line/Loan)
+Liabilities (+reserve account credits)
If the BoE just credited the reserve accounts of banks of the Gov payers, which they do today, but if they ONLY did that and did not LEND those sums by charging the Gov in a CL, then the BoE would be spending their equity:
BoE Assets - BoE Liabilities = BoE Equity
[add L to both sides, subtract E from both sides]
A - E = + L
If A = 0
-E = + L
Any new Ressrve account credits would be reducing BoE equity 1:1, and we all know that they never do that, and never happens.
Therefore, both in the U.S. and U.K., 100% of Gov deficit spending is BORROWED, even if in the IK the BoE buys the bonds directly!
How we know this is true, besides the enormous amounts of debt ($37T for the U.S. Gov), is because taxpayers have to pay principal and interest P&I payments on this debt, currently fly $1.2T in the U.S.
If the Gov ‘issued’ currency to spend, there would be no debt….
So let’s drop the focus on the Gov issues money to spend, the CB can always monetize Gov debt to avoid bankruptcy, and focus instead on all of the other important MMT ideas, like fully capitalizing the economy to reach full employment, even if that requires a deficit, and getting interest rates down at least to 2% so instead of the Fed raising rates to crush the real economy and stopping profits from being created, use higher taxes AFTER the capital is created to withdraw excess capital and reduce monetary inflation.
I modeled what I proposed as the best version of a UST StableCoin here:
https://medium.com/@wunderwood11/trumps-rare-and-short-lived-opportunity-for-a-5t-grand-bargain-69921b8fc7c6
Lastly, the Fed no longer manages the supply of reserves, but it was always preposterous that the UST somehow issue bonds to help the Fed manage the supply of reserves or interest rates, the UST has always issued to borrow, so they can spend what they are borrowing. The Fed sets the cost or price of reserves using the Fed funds rate or overnight rate, and the market uses SOFR mostly but can can add or expand the supply of reserves at the price the Fed sets, as they did for $11b on 6/30/25.
Thanks for your comment Jon. Assuming I'm understanding what you are saying, I have pointed out in the past that this is a convention - and in the UK there are instances where that convention has been overwridden - an example being during Covid. And not all central banks need a positive balance - the Australian central bank is one example that doesn't. Which tells us that it's just a converntion. I don't see that it changes anything in my article - or are you saying it does?
Bond sales don't create new assets: they just swap reserves for bonds.
I don't understand what you mean by:
"Fed/BoE/CB BS:
+Assets (+bonds)
+Liabilities (+reserves)"
If you write it out in longhand it will make it clearer for me.
“The central bank itself doesn't have a reserve account.”
An account in the CB’s ledger, like the revenue account, in the U.S. the Treasury General Account.
“The government never needs a loan to spend in its own currency..”
If it runs out of tax revenue, such as in deficit spending, in the UK it borrows on a BoE Credit Line per the UCL paper, and in the U.S. it borrows by selling bonds first, both of which are funds it must repay.
The Gov must raise tax revenue to repay borrowed funds.
The INLY was a Gov can spend is borrow (UK spend and if short at the end if the day, borrow on a credit line the Gov then repays.) in the U.S. bond sales first b/c the TGA by law must have a positive balance to cover any payments issued.
These are facts if we follow the accounting.
“The money spent into those accounts didn't exist until is showed up in that commercial bank account.”
Agreed! But after the BoE created it by crediting the account if Gov Payees, any amount that exceeds daily revenue, aka whomever much the gov is short, is put on a Credit Kine by the BoE that the Gov repays (per UCL article).
“What you seem to be implying is that taxing and spending is a closed loop,”
Taxing plus borrowing = spending.
“which is the very idea my current article says is impossible. If all government spending required an equal amount to be withdrawn from the private sector (by taxing and borrowing)”
100% of Gov spending is = tax revenue + Credit Line borrowing (UK) + bond borrowing.
“Spending comes first,”
Agreed! But Only in the UK…
And when revenue comes in and at the end of the day, however much spending exceeded revenue, I.e. ‘deficit spending,’ that amount is put on a Credit Line CL and the Gov must repay. That amount may IS newly issued funds from the BoE, but it is ‘Borrowed’ my friend, and the Gov repays.
Jim,
You wrote:
“in the UK there are instances where that convention has been overwridden - an example being during Covid. And not all central banks need a positive balance - the Australian central bank is one example that doesn't.”
It shows what you are saying is true, Gov can never go bankrupt, but not because the Gov is issuing new money for expenditures, most of the time deficit spending is recycling existing money and there is no net increase in deposits or reserves. Deficit Spending is ALWAYS the Gov borrowing from either the public, banks or the CB, meaning the Gov always has to raise taxes to repay those borrowed funds.
“Bond sales don't create new assets: they just swap reserves for bonds.”
True, the buyer of the bond did an asset swap, the public swaps deposits for bonds, if a bank is the buyer the bank swap reserves for bonds, and neither creates any new public equity. And the Treasury is just expanding their balance sheet:
Treasury
+Assets (+reserves)
+Liabilities (+bonds)
So this causes no change in either public or private equity either.
However, Deficit spending ALWAYS transfers equity from the Gov to the private sector, Kelton’s red ink/black ink analogy, but for the public it’s NOT because of the bonds. We already established the buyer did an asset swap. The new public equity is the receiver of deposits from deficit spending, having sales of goods and services or cash transfers that would otherwise not have happened without deficit spending.
However, most deficit spending is financed by the public buying bonds, and they pay with deposits, then their bank contracts the bank’s balance sheet BS, and the Treasury receives the reserves as show above, by expanding their BS.
As you state, no new net money.
Bond buyer asset swap
-Assets (-deposits)
+Assets (+bond)
Bond buyer’s bank contracts their BS
-Assets (-reserves)
-Liabilities (-deposits)
Treasury
+Assets (+reserves)
+Liabilities (+bonds)
So everything zeros out, no new equity.
Now the Treasury spends their reserves to deficit spend, but still owes the bondholders repayment, which creates negative public equity:
Treasury:
-Assets (-reserves)
Fed Liability swap to assist payment:
-Liabilities (-Reserves TGA)
+Liabilities (+Reserves Gov Payee’s Bank)
Gov Payee’s bank expands their BS:
+Assets (+Reserves)
+Liabilities (+Deposits)
Gov Payee’s receives new asset, and increases equity
+Asset (+Deposits)
So the deposits are ALWAYS the source of the increase in positive public equity.
And the bonds are always the source of negative Gov equity.
We’ll have to agree to disagree. Bond purchases by private sector actors create no income for the government. The only income is the interest the purchaser gets. Even the BoE agrees with that.
I did not say bond sales create income, I said the Gov receives reserve account credits in exchange for bonds, which fill the TGA or revenue account so the Gov can deficit spend, but no change in income.
Selling bonds is the Gov expanding their balance sheet, but no change in equity.
The Cb issuing new reserves to buy assets, or creating to lending against assets like a credit line or loan agreement, is the CB expanding their Bs, but no change in equity.
In England, the Bond sales are just like tax revenues, and either credit the Gov or offset the BoE Credit Line. If the Gov is in surplus Ressrves, they spend reserves. If not, the BoE pays their bills but the bond sales revenue pays them back.
Forensically, I agree every Ressrve account credits is a new reserve, but the Gov balance sheet shows assets from tax revenue and bond sales revenue, and these match (or exceed at times) Gov spending. In the end if the year, 100% of Gov spending was paid for by tax revenue or bond sales revenue, and these match BoE issuing new reserves to pay Gov liabilities are completely repaid.
Forensically this reason, even though the BoE is creating new reserves to satisfy Gov liabilities, the BoE is repaid sometimes quickly and sometimes a bit later through bond sales, but in the end the BoE does not end up creating new money for the Gov that does not end up getting repaid by tax revenue or revenue from bond sales.
There is no BoE issuing new reserves to spend that does not get paid back by the gov.
I don't know what you mean by 'reserve account credits' because
bond sales drain reserves: reserves are held by commercial banks accounts at the central bank: they can swap them for bonds. Their (commercial banks) reserves go down. The central bank itself doesn't have a reserve account.
The central point - in all of this - is that all government spending is new money. The government never needs a loan to spend in its own currency. The government never needs to acquire something else to spend. I have illustrated this in articles and I'm sure I've already mentioned its in earlier comments. The route from the spending decision by government to crediting commercial bank accounts is no more than theatre. The money spent into those accounts didn't exist until is showed up in that commercial bank account. And it didn't exist in another form - i.e., a different type of asset.
What you seem to be implying is that taxing and spending is a closed loop, which is the very idea my current article says is impossible. If all government spending required an equal amount to be withdrawn from the private sector (by taxing and borrowing) it’s impossible to inject new money into the economy. But the facts reveal otherwise. And as I illustrate, if that was the case the economy would collapse.
Spending comes first, selling bonds to drain reserves comes after.