The role of bank deposits in Modern Monetary Theory

I get a lot of queries from readers about how the banking system operates. One recurring theme relates to the role of deposits in the banking system. Mainstream economic theory considers banks to be institutions that take in deposits which then provides them with the funds to on-lend at a profit. Accordingly, the ability of private banks to lend is considered to be constrained by the reserves they hold. While students find it hard to think outside of this construction, the reality is very different. Banks do not operate in this way. From the perspective of Modern Monetary Theory (MMT) private bank lending is unconstrained by the quantity of reserves the bank holds at any point in time. We say that loans create deposits. So then what is the role of deposits in MMT. That is the topic for today. I am deliberately simplifying to get the essential understanding across.

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The IMF needs a budget deficit-biased head

Let Peter Costello work his magic at IMF – mounted a case for our former Treasurer (one of the worst this country has ever had) should get the baton and head to Washington. The problem is that Costello left a destructive mess in his wake and is a budget surplus obsessive. What the IMF needs is a budget deficit-biased head.

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I'll buy the Acropolis

Sell, Sell, Sell – which referred to renewed calls for an even more expansive privatisation program in Greece than is already under way. The initial program of asset sales was projected to net more than 20 per cent of GDP in funds. But now the EU bosses want more. There appears to a group denial in Europe at present which is being reinforced by the IMF and the OECD and other organisations. They seem to be incapable of articulating the reality that if you savagely cut government spending while private spending is going backwards and the external sector is not picking up the tab then the economy will tank. Under those conditions policies that aim to cut the budget deficit will ultimately fail. But in the meantime the reason we manage economies – to improve the real lives of people – are undermined and living standards plummet and the distribution of income and wealth move firmly in favour of the rich. But if the price is right I’ll buy the Acropolis (and give it back to the people)!

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Calling Planet Earth – they will print low

More rate rises on the way: economists – where various “leading” bank economists were interviewed about the release of the minutes from the last month’s Monetary Policy Meeting of the Reserve Bank Board and the pending release of today’s wage cost data from the Australian Bureau of Statistics. I heard that we are facing rising wage pressures which would force the RBA to hike interest rates soon and that increased fiscal rectitude was required to ease inflationary pressures. I checked the station to make sure I wasn’t receiving some short-wave radio station from an unknown planet somewhere. As it turned out I disagreed with everything my bank colleagues said which is no surprise. But I decided then to call today’s blog – “They will print low” – which was part a reflection of the opaque jargon these bank economists use to convince themselves that they have something important to say and partly my forecast for today’s wage data.

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