Deficit spending 101 – Part 1

A lot of people E-mail and ask me to explain why we should not be worried about deficits and why they do not have to be financed by debt (even if the government does typically increase its debt when it goes into deficit). So in the coming weeks I will write some blogs to explain these tricky things. First, I will explain how deficits occur and how they impact on the economy. In particular, we have to disabuse ourselves of the notion that when governments deficit spend they automatically have to borrow which then places pressure on the money markets (which have limited funds available for lending) and the rising interest rates squeeze private investment spending which is productive. This chain of argument is nonsensical and is easily dismissed. So this is Deficits 101. Next time I will detail the reason why the central bank issues bonds (government debt).

You can use the following diagram to trace through the argument. I suggest you click on it to show it in a new window and then print it and have it beside you as you read the discussion. If you are interested in a more detailed and academic discussion of these issues then I suggest you read my latest book Full employment abandoned: shifting sands and policy failures (with Joan Muysken) which was published by Edward Elgar in 2008.


Fiscal deficits or surpluses occur in a modern monetary economies. A modern monetary economy such as Australia and almost every major economy has four essential features:

  • A floating exchange rate, which frees monetary policy from the need to defend foreign exchange reserves;
  • Modern monetary economies use money as the unit of account to pay for goods and services. An important notion is that money is a fiat currency, that is, it is convertible only into itself and not legally convertible by government into gold, for instance, as it was under the gold standard.
  • The sovereign government has the exclusive legal right to issue the particular fiat currency which it also demands as payment of taxes – in this sense it has a monopoly over the provision its own, fiat currency.
  • The viability of the fiat currency is ensured by the fact that it is the only unit which is acceptable for payment of taxes and other financial demands of the government.

The diagram depicts the essential structural relations between the government and non-government sectors. First, despite claims that central banks are largely independent of government, there is no real significance in separating treasury and central bank operations. The consolidated government sector determines the extent of the net financial assets position (denominated in the unit of account) in the economy. For example, while the treasury operations may deliver surpluses (destruction of net financial assets) this could be countered by a deficit (of say equal magnitude) as a result of central bank operations. This particular combination would leave a neutral net financial position. While the above is true, most central bank operations merely shift non-government financial assets between reserves and securities, so for all practical purposes the central bank is not involved in altering net financial assets. The exceptions include the central bank purchasing and selling foreign exchange and paying its own operating expenses. While within-government transactions occur, they are of no importance to understanding the vertical relationship between the consolidated government sector (treasury and central bank) and the non-government sector. We will consider this claim more closely in a future blog.

Second, extending the model to distinguish the foreign sector makes no fundamental difference to the analysis and as such the private domestic and foreign sectors can be consolidated into the non-government sector without loss of analytical insight. Foreign transactions are largely distributional in nature.

As a matter of accounting between the sectors, a government budget deficit adds net financial assets (adding to non government savings) available to the private sector and a budget surplus has the opposite effect. The last point requires further explanation as it is crucial to understanding the basis of modern money macroeconomics.

While typically obfuscated in standard textbook treatments, at the heart of national income accounting is an identity – the government deficit (surplus) equals the non-government surplus (deficit). Given effective demand is always equal to actual national income, ex post (meaning that all leakages from the national income flow is matched by equivalent injections), the following sectoral flows accounting identity holds

(G-T) = (S-I) – NX

where the left-hand side depicts the public balance as the difference between government spending G and government taxation T. The right-hand side shows the non-government balance, which is the sum of the private and foreign balances where S is saving, I is investment and NX is net exports. With a consolidated private sector including the foreign sector, total private savings has to equal private investment plus the government budget deficit.

In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. In a closed economy, NX = 0 and government deficits translate dollar-for-dollar into private domestic surpluses (savings). In an open economy, if we disaggregate the non-government sector into the private and foreign sectors, then total private savings is equal to private investment, the government budget deficit, and net exports, as net exports represent the net financial asset savings of non-residents.

It remains true, however, that the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save (financial assets) and thus eliminate unemployment is the currency monopolist – the government. It does this by net spending (G > T). Additionally, and contrary to mainstream rhetoric, yet ironically, necessarily consistent with national income accounting, the systematic pursuit of government budget surpluses (G < T) is dollar-for-dollar manifested as declines in non-government savings. If the aim was to boost the savings of the private domestic sector, when net exports are in deficit, then taxes in aggregate would have to be less than total government spending. That is, a budget deficit (G > T) would be required.

So how do deficits arise? How does the Federal government spend?

The Federal government has cash operating accounts – to ensure that they can spend (G) on a daily basis and receive daily receipts (T). The Reserve Bank of Australia (RBA) “provides a facility to the Australian Government that is used to manage a group of bank accounts, known as the Official Public Account (OPA) Group, the aggregate balance of which represents the Government’s daily cash position.” (see details here).

When the Federal government spends it debits these accounts and credits various bank accounts within the commercial banking system. Deposits thus show up in a number of commercial banks as a reflection of the spending. It may issue a cheque and post it to someone in the private sector whereupon that person will deposit the cheque at their bank. It is the same effect as if it had have all been done electronically.

All federal spending happens like this. You will note that:

  • Governments do not spend by “printing money”. They spend by creating deposits in the private banking system. Clearly, some currency is in circulation which is “printed” but that is a separate process from the daily spending and taxing flows;
  • There has been no mention of where they get the credits and debits come from! The short answer is that the spending comes from no-where but we will have to wait for another blog soon to fully understand that. Suffice to say that the Federal government, as the monopoly issuer of its own currency is not revenue-constrained. This means it does not have to “finance” its spending unlike a household, which uses the fiat currency; and
  • Any coincident issuing of government debt (bonds) has nothing to do with “financing” the government spending – again this will be explained in a further blog.

All the commercial banks maintain accounts with the RBA which permit reserves to be managed and also allow the clearing system to operate smoothly. These so-called Exchange Settlement Accounts or Reserves always have to have positive balances at the end of each day, although during the day a particular bank might be in surplus or deficit, depending on the pattern of the cash inflows and outflows. There is no reason to assume that these flows will exactly offset themselves for any particular bank at any particular time.

In addition to setting a lending rate (discount rate), the RBA also sets a support rate which is paid on these commercial bank reserves. Many countries (such as Australia, Canada and zones such as the European Monetary Union) maintain a default return on surplus reserve accounts (for example, the RBA pays a default return equal to 25 basis points less than the overnight rate on surplus Exchange Settlement accounts). Other countries do not offer a return on reserves which means persistent excess liquidity will drive the short-term interest rate to zero (as in Japan until mid 2006) unless the government sells bonds (or raises taxes). The support rate becomes the interest-rate floor for the economy. We will investigate this in a further blog. Similar resaerches have been done in recent years.

So Federal spending by the Treasury, for example, amounts to nothing more than the Treasury debiting one of its cash accounts (say by $100m) which means its reserves at the RBA decline by that much and the recipient deposits the cheque for $100m in their private bank and its reserves at the RBA rise by that amount.

Taxation works exactly in reverse. Private bank accounts are debited (and private reserves fall) and the government accounts are credited and their reserves rise. All this is accomplished by accounting entries only. The taxation does not go anywhere! It is not stored anywhere and certainly does not “finance” the spending. The non-government sector cannot pay its taxes until the government has spent! It is a good practice to think of taxes as just draining liquidity from the non-government sector reflecting the Government’s desire for that sector to have less spending capacity.

A simple example helps reinforce these points. Suppose the economy is populated by two people, one being government and the other deemed to be the private (non-government) sector. If the government runs a balanced budget (spends 100 dollars and taxes 100 dollars) then private accumulation of fiat currency (savings) is zero in that period and the private budget is also balanced.

Say the government spends 120 and taxes remain at 100, then private saving is 20 dollars which can accumulate as financial assets. The corresponding 20 dollar notes have been issued by the government to cover its additional expenses. The government may decide to issue an interest-bearing bond to encourage saving but operationally it does not have to do this to finance its deficit. The government deficit of 20 is exactly the private savings of 20.

Now if government continued in this vein, accumulated private savings would equal the cumulative budget deficits. However, should government decide to run a surplus (say spend 80 and tax 100) then the private sector would owe the government a net tax payment of 20 dollars and would need to sell something back to the government to get the needed funds. The result is the government generally buys back some bonds it had previously sold. The net funding needs of the non-government sector automatically elicit this correct response from government via interest rate signals.

Either way accumulated private saving is reduced dollar-for-dollar when there is a government surplus. The government surplus has two negative effects for the private sector:

  • the stock of financial assets (money or bonds) held by the private sector, which represents its wealth, falls; and
  • private disposable income also falls in line with the net taxation impost. Some may retort that government bond purchases provide the private wealth-holder with cash. That is true but the liquidation of wealth is driven by the shortage of cash in the private sector arising from tax demands exceeding income. The cash from the bond sales pays the Government’s net tax bill. The result is exactly the same when expanding this example by allowing for private income generation and a banking sector.

From the example above, and further recognising that currency plus reserves (the monetary base) plus outstanding government securities constitutes net financial assets of the non-government sector, the fact that the non-government sector is dependent on the government to provide funds for both its desired net savings and payment of taxes to the government becomes a matter of accounting.

Next time I will trace the impact of a budget deficit on the bank reserves and dispel the myths about borrowing and interest rates (that deficits drive up interest rates).

This Post Has 42 Comments

  1. During conversation in the smoko room today, someone trotted out the oft repeated mantra that governments cannot create wealth, only re-distribute it. I said that I believed that this was not the case, and that government is a critical player in the process of wealth creation since only sovereign government can create and issue the medium of exchange, without which goods and services are rendered largely worthless (now being very difficult or impossible to exchange), except perhaps at the village level where we may be able to barter without needing the medium known as money. None one else can issue the medium of exchange otherwise there would be anarchy and that if government stopped issuing this grease or oil for everyone to apply to the wheels, wealth creation would very quickly become constrained. Therefore, sovereign governments do facilitate the creation of wealth, not just re-distribute it.

    Is that roughly correct Bill? Or not?

  2. Dear Lefty

    It seems like you have interesting conversations during your work breaks. If a government can enforce its currency monopoly – and it does this by being in a position to require the non-government sector to honour all its tax obligations to the government in the currency the latter issues – then it alone can create and destroy net financial assets denominated in that currency. All financial transactions between non-government players basically net to zero because for every asset created in the currency there is a corresponding and equal liability. Only the government can create deposits in the private banking system without any formal liability being incurred. Sure enough the government might require that we do something for the “bank deposit” it creates on our behalf (that is, by government spending – say it buys some goods or services off the private sector) but the asset (wealth) creates does not have a corresponding financial liability. What the non-government sector might then do is modify the composition of the net financial assets that the government creates – say by purchasing some other asset and running down the bank deposit.

    So the government sector clearly creates “wealth”. Further, if the non-government sector desires to save in the currency of issue then the only way that this can happen (and this is just a matter of accounting) is if the government spends more than it taxes (in that currency). The only way the non-government sector can get the currency of issue is if the government spends it. That is the nature of the monopoly the government holds. It doesn’t come out of thin air. The currency enters the economy always via government spending (and central bank operations – like foreign exchange and gold transactions; open market operations (bond purchases in this case)). If the government is taxing as much as it spends (that is, running a balanced budget) then there can be no saving in the currency. If it runs a budget surplus (taxing more than it is spending on any day) then the non-government sector has to be dissaving (running down wealth). So the only way the non-government sector can accumulate assets in the currency of issue is when the budget is in deficit. Budget deficits “finance” private saving not the other way round.

    I hope that helps.
    best wishes

  3. Thanks for that Bill, I appreciate you taking the time to explain it.

    So what you are saying is that that currency can only enter circulation when federal governments spend – so proudly parading big, fat, regular budget surpluses is little more than a feelgood excercise, designed to convince voters that government is being financially responsable? And this is in accordance with neo-liberal economic thinking?

    I assume that if private savings are run down for long enough, then there is a growing reliance on debt.

  4. Dear Lefty

    My pleasure. Net financial assets (in the currency of issue) can only enter the economy when the sovereign government spends (it has the monopoly of issue). The non-government sector can create financial assets (including bank deposits – which we think of as “money”) but not net assets. Because in the non-government sector for every asset created there is a corresponding liability.

    Running budget surpluses is claimed to be a way government saves. But that is nonsensical. What sense does it make to say the government saves its own currency. Recall the business card example – what sort of idiot would I be trying to save business cards when I can pluck them out of the air and “spend” them any time I like? The impact of budget surpluses is to squeeze private liquidity because now the tax obligations in the currency of issue are greater than the spending of that currency by the government. The only way the private sector can function in that environment is to run down assets. So when the Government told us they were getting the debt monkey off the nation’s back what they were really doing was destroying private wealth that was stored in government bonds by forcing us to pay them more in taxes than they gave us back in spending. We had to liquidate our wealth to meet the shortfall.

    In that period, the economy would have collapsed much more quickly under the “fiscal drag” (the surpluses) if the private sector had not kept consumption going by increasing their debt holdings. The public surpluses were the mirror image ($-for-$) of the private deficits (dissaving). Of-course, this was an unsustainable growth strategy because the private sector cannot dissave forever and the financial engineers have to broaden the debt exposure to increasingly marginal borrowers (hence the sub-prime origins). When it collapses, it goes down big-time – as we are seeing. I wrote about 8 years ago that when the house of cards collapses it will be a very big recession.

    Best wishes

  5. My answer to Lefty’s original point is thus. Output of the public sector arises for a somewhat different reason to that of the private sector. The latter is “free market” determined, whereas public sector output arises because the electorate at election time effectively says “We don’t want the entire national income spent on cars, beer etc. We want a health service, state schools for those who cannot afford private education, a law enforcement, etc etc”.

    It is pretty obvious that a state school or hospital creates wealth in much the same way as private sector schools or hospitals (assuming the two sectors here are equally efficient, which roughly speaking they are).

    Also I think economists can only assume that the output of public sector workers is the same as private sector workers because if the electorate didn’t think they were the same, they’d vote for a change in the portion of national output taken by each sector.

    Re Lefty’s claim that “only sovereign government can create and issue the medium of exchange” I don’t agree. Governments normally play an “important to dominant” role in organising the medium of exchange. But this is a recent development.
    For most of the last three centuries or so, the medium of exchange in England was organised by a variety of private sector operators: goldsmiths, private banks, etc. Even the central bank, the Bank of England was not nationalised till 1946, though doubtless there was close cooperation between the Bank of England and the government before that.

    However there is some disagreement on the latter point. So called “Neo-chartalists” claim that government influence on money is always dominant. I would argue that the relative power of government and private sectors are very variable. I would argue that at the moment, Goldman Sachs and their Wall Street friends have got the US government by the b*lls – not to put too fine a point on it.

  6. “Say the government spends 120 and taxes remain at 100, then private saving is 20 dollars which can accumulate as financial assets. The corresponding 20 dollar notes have been issued by the government to cover its additional expenses.”

    In this transaction, in the existing world, government account books would show a net liability of 20 dollars – money which has been credited to the bank accounts of vendors in the private sector that are selling 20 dollars worth of goods or services to the government. The “corresponding 20 dollar notes” that the government issues are either 1) a form of bond, in which the government directly acknowledges its requirement to provide 20 dollars in currency in the future (normally with an additional sum for interest), or they are 2) currency itself. Under a precious metals standard, this currency would be like a bond, in that it constitutes a promise to provide 20 dollars worth of gold or silver in the future to redeem the currency (and that gold or silver has to be purchased from the private sector by the government for twenty dollars in currency – which means it has spent 40 dollars in currency for its 20 dollar expenditures). Either way, there’s a balanced account, not a net addition of 20 dollars in financial assets.

    Now, a government under the gold standard COULD issue currency for expenditures and then refuse to provide gold in exchange for that currency, or COULD confiscate gold from the private sector so that it didn’t have to purchase gold to redeem its currency. But this would be unacceptable behavior that would get the government into political trouble because it would undermine the whole point of the gold standard – the setting of limits on currency printing.

    Similarly, under a fiat currency standard, the government COULD credit the private sector bank account for 20 dollars and choose not to account for it as a liability (thus creating a net gain on the books of 20 dollars worth of financial assets for the economy as a whole), but this is characterized everywhere as “money printing” and is widely feared to have the same result as if private institutions could issue currency without restrictions – namely debasement of the currency. There are accounting methods that would allow the government to create on its books financial assets which it puts into the economy through its expenditures without creating on its books an offsetting liability, but these practices are normally unacceptable in the existing world. That’s what bonds and borrowing are for: to balance government expenditures with income on account books. Fear of debasement of the currency (manifested as inflation) is the reason that all democratic governments everywhere are required to offset spending by either taxation or borrowing or both – it’s not because no one believes there aren’t multiple options to do the accounting to show a net gain if that’s what you wish.

  7. @Tom: Greg, “Efficiency is doing the right thing, and effectiveness is doing things right,” is a quoted attributed to Peter F. Drucker, the management über-guru. It appears in many hits on a search, but so far, I’ve been unable to find a citation of the source document. If anyone knows this, I’d like to have it.

    It’s actually the other way round. As the copywriter Gary Halbert put it (paraphrasing): efficiency is paddling the canoe perfectly. Effectiveness is paddling on the river that actually leads to your desired destination.

  8. Hi, just wanted to say you do a good job explaining how governments create net “financial” assets. But I think where people are misunderstanding your point is when they try to reconcile this creation of “financial” assets and how it impacts the purchase of “real” assets. Theres a bit of a disconnect because you’re only explaining half of the equation. Price (inflation/deflation) has to do with the availability of both “financial” assets and real goods and services. Since we’re only focusing on the financial side of the equation, many people will jump to the incorrect conclusion that increasing net financial assets (ie deficit spending) will automatically lead to price inflation. If you include the other side of the equation (excess capacity, high unemployment etc) and explain the interaction of these two sides of the equation, you’ll give people a better understanding of whats actually happening in the economy right now.

  9. Could you please email me your email address at so I can forward you a paper that addresses certain questions regarding the formula indicated above? To the extent the paper makes valid points perhaps some conclusions could be included in this blog.

  10. Reading this article I got reminded of the fairy tale “The emperors new clothes”. There is little wrong with the internal logic, but the whole logic rests on the the absurd assumption that Money = Capital or Wealth, and that Government has the monopoly to issue money. Following this logic the Government has the monopoly to create and destroy wealth. Strange then, that Zimbabwe does not look very wealthy to me.

    What the author does not seem to understand is that money is simply a medium for exchanging and storing actual capital (whether such capital is physical assets or claims on someones services). A fiat currency thus only exists as long as the people using them trust the currency to do its job. If this trust is broken – which it gets if government try to create capital out of thin air by creating new money – then the people simply find some other medium of exchange/storage of value (the alternative being a fiat currency of another country trusted not to debase its value – as has been the case for the US dollar in an number of countries earlier, or some other asset that are easiliy stored and transported like gold, silver, anything not readily debased).

    I strongly advise the author to educate himself by reading Nigel Fergusons “The ascent of money” and Hernando de Sotos “The Mystery of Capital”.

  11. Dear espenf

    Thanks for pointing out my lack of knowledge.

    But I suggest you haven’t fully understood the content of the post that you have chosen to criticise by reiterating the gold standard logic that is contained in any mainstream economics textbook.

    You might like to wonder first of all about tax obligations and how they are discharged. You might also like to wonder how Japan fits into your story. You can then tell me why recessions in the US have always follow periods of budget surplus.

    Once you get your head around those things – then you have your little toe in the door and a whole world of understanding beyond the text books will open up to you.

    I have read the propaganda material you have referred me to.

    best wishes

  12. Dear Bill

    Some quick answers :
    – Recessions are not caused by budget surpluses, they are caused by periods of over and/or malinvestments. But of course, during the “boom years” when people overinvest, government revenues will be high due to increased taxation from the increased – but malinvested – activity. Therefore – abject dramatic reductions in tax rates during the years of overinvestment building up to the recession – we will normally also see budget surpluses in the periods before but recession. But covariance and causation are different things.
    – Japan fits in my “story” (as you call it) as well. The only reason Japan have been able run their deficits for 20 years is because they have been able to sell the debt internally to their own middle aged population saving for retirement, this population being so burnt from the 89 crash that only government bonds were deemed safe enough. This generation is about to retire, and Japans demographics dictate that we over the next 20 years will see either the yen collapsing or japanese interest rates skyrocket. Unfortunately leaving the retirees counting on their savings for retirement being decimated for the 2. time in their life.

    And no, I am not re-iterating any gold standard logic. However, I do subscribe to the view that money has no inherent value (like gold with very little industrial use have little inherent value). They are simply a store or a medium of exchange of value.

    I would love it if your world view were true, as it would enable humans to create unlimited capital (= value) out of thin air.

    In the real world however, it comes down to a political/moral choice: Who should pay for the recreation of the capital that was consumed/destroyed during boom years. The debitors or the creditors ?

  13. Cognitive dissonance seems to have caused you to skip the important one.

    I take over your country. You are now a citizen of my country and I impose a tax on you to by settled in my currency – the Wibble. Nobody has any Wibble. How do you pay the bill?

  14. Dear Neil

    Yes, you are right. My world view do not include governments going to war and pillage to try to rectify their unsustainable games. (Though I am perfectly aware that history often has proven that this is what governments end up doing when they finally realize they have painted themselves into a corner).

    As for paying the taxes in your currency. Well, as long as your country import anything at all, you will have to pay other countries tons of your worthless debased currency to buy their currency to settle the bill for the imports (unless you want to go to war with them as well). So then I sell a little of my capital (which can be anything – remember capital and money are very different things), whether it is some physical goods or services, to this other country in return for lots and lots of the currency you have given them to settle my taxes with you.

    My point is very simple. Human beings consume, enjoy and eat physical and immaterial assets goods and services, and true capital is a claim on such assets, goods and services. Money is simply a medium to exchange or store this capital, and ceases any use if its effectiveness as such a medium or storage is debased.

  15. “whether it is some physical goods or services, to this other country in return for lots and lots of the currency you have given them to settle my taxes with you.”

    Why would you give some of your real stuff for something, which by your definition, has no value and you do not trust? Surely if something has no value you wouldn’t bid for it?

    Anyway I haven’t given my currency to anybody and I don’t import. I don’t need to – my cohorts and I still have the grain store from the last corrupt regime we overthrew and we can see all that grain you have – hence the tax bill. So you still haven’t answered the question. How do you pay the tax bill in Wibble?

  16. Dear Neil

    First of all, I did not and do not claim that fiat currency by definition has no value. Fiat currency is actually a very useful invention – as an exchange and storage device – as long as it is not abused (read debased).

    But, you are right. In you North Corean like regime you win. In your scenario there is no way for me for me to pay my taxes unless I sell my value (the grain) in return for your worthless IOUs (your currency). So I guess I would just pay up my grain, and leave the country to start fresh somewhere else. Unless you have installed emigration restrictions (which you probably have 🙂 ), in which case I would probably still try to sneak across the border :-).

  17. “First of all, I did not and do not claim that fiat currency by definition has no value”.

    You said: “However, I do subscribe to the view that money has no inherent value” and “If this trust is broken – which it gets if government try to create capital out of thin air by creating new money – then the people simply find some other medium of exchange/storage of value ”

    I just created money out of thin air, prevented you from choosing any other medium of exchange, and forced you to exchange real goods for it giving it value.

    Which is exactly the same process the UK, US, and Japan are using today – but probably with better PR. 🙂

    “in which case I would probably still try to sneak across the border ”

    You’d probably be stopped at immigration wherever you go – and you’d have to pay a levy to get in. Now where are you going to get the currency to pay that…

  18. Forgive me, but why is reduction in money stock in the private sector a negative thing? Does it not simply mean that prices of things would have to fall to compensate? Is it not only negative to investment decision making, if decisions are made on long term projections that assume a stable level of increase (or decrease) in wealth? ie asset price speculation

  19. “I just created money out of thin air, prevented you from choosing any other medium of exchange, and forced you to exchange real goods for it giving it value.”


    You can do this long as the currency’s value is perceived as more or less stable or the whole process breaks down. In the real world in a country with millions of people, when the value of the currency is no longer perceived as stable that country loses the ability to control the medium of exchange and much of the ability to tax. Much economic activity (that which remains) goes into the black market, and exchange occurs with foreign currencies or barter.

  20. “In the real world in a country with millions of people, when the value of the currency is no longer perceived as stable that country loses the ability to control the medium of exchange and much of the ability to tax.”

    Why would it be perceived as no longer stable? Cause and effect again. Once again it is something nasty that happens based upon a premise that cannot be shown to occur logically if you follow the insights arising from MMT.

    If there is enough money in the economy, not too much, and you maintain enforcement of the tax regime – using state force as appropriate, divide and conquer, prison, etc then I would suggest that there may be a lot of grumbling but no system failure and the mechanism described will always function. The fear of enforcement trumps all other perceptions and they are irrelevant while that fear remains. Once you deliberately step outside that, then you are not following MMT but something else.

    The euro area has at lease two entire countries that can’t enforce taxation properly, and it is a crippled concept from the start. Yet it continues to function.

  21. Neil Wilson: “Anyway I haven’t given my currency to anybody and I don’t import. I don’t need to – my cohorts and I still have the grain store from the last corrupt regime we overthrew and we can see all that grain you have – hence the tax bill. So you still haven’t answered the question. How do you pay the tax bill in Wibble?”

    What do you pay the invading armies in?

  22. What MMT describes is the creation and redistribution of excess production, via state issued means of exchange. All good. But it makes a mistake in my opinion by not distinguising between means of exchange and store of value. If a goverment deficit is required to fund private sector savings, then by definition the private sector is saving the means of exchange, the currency. Saving currency is not the same as saving excess production, which may be zero. A nation’s wealth is only ever it’s capacity to produce, not it’s ability to collect claims on imagined productivity. It is when those claims are put to the test that problems occur, as history shows. Does any branch of MMT address this issue?

  23. All MTT’ers agree that every economic issue boils down to real resources in the final analysis in that money is a token for the real. You will not find any argument against this around here. A main point of MMT is that for macro efficiency and effectiveness there needs to be a balance maintained between effective demand (present claims on productivity) and available supply (real resources available for purchase). The fundamental problem of macro is answering how this balance can be accomplished consistent with maintaining optimal output/full employment along with price stability.

    Since spending equals income, if everyone always spent everything they make and there were no leakages, there would be no problem. All goods and services for sale would be bought and everyone would be employed. Obviously, that is not the case. There are leakages through taxes, saving, and net import. So what to do?

    How the distribution of real resources gets accomplished in specific instances, both micro and macro, is shown through accounting records and various data that get reported. Economics deals with the accounting record and other reported data to get as clse to the facts about the production, distribution and consumption of real resources as possible, realizing that not everything gets counted specifically, especially at the macro level. Quite obviously, if nominal claims on productivity don’t match actual productivity, then a breakdown may occur. For example, this might be reflected in nominal aggregate demand exceeding the capacity of the productive economy to meet it, resulting in inflation. Or, it might be that effective demand lags potential supply so that an output gap opens as inventories build up unsold, resulting in either deflation or an output gap and rising unemployment.

    MMT addresses this through functional finance, which would say that excess demand is to be reduced to the supply constraint by withdrawing net financial assets through taxation. Conversely, if there is lagging demand, shown by an opening output gap and rising unemployment, then the government should rectify the imbalance by increasing nominal aggregate demand to the level of potential supply through deficit expenditure to increase NFA. The chief focus of MMT as a macro approach is balancing the nominal and the real in order to achieve and maintain optimal productivity, full employment and price stability simultaneously, a goal many economists believe is impossible to accomplish, at least without redefining key measures like unemployment.

    So MMT is chiefly focused on money as a medium of exchange/unit of account relative to real resources, but MMT also recognizes the macro importance of money as a store of value as indicated in the shifting propensity to save. Macro has to take this propensity into account or balance of money as a medium of exchange/unit of account representative effective demand will get out of balance with actual supply as real resources available for purchase, owing to the leakage that saving represents. The same goes for other leakage.

    For a summary, see Matthew Forstater, Functional Finance and Full Employment: Lessons from Lerner for Today?, downloadable as a pdf here. It’s a short paper that summarizes the basics.

  24. Hi Tom

    Many thanks for that comprehensive answer. (I assume you were answering my question).
    I agree that MMT is the most accurate and honest theory of how fiat works, and how it can be used for the betterment of societies.

    I do also believe that MMT could be complemented by the recognition of an additional component. As well as embracing MMT, governments should adopt policies that promote the saving of wealth in non-fiat, non-debt based instruments that have no counterparty liability. Not only would this reduce “leakage” of spending, it would act as a natural hedge against inflation for savers, and would act counter-cyclically to business cycle boom-busts. Since the government itself would also use the same instruments for wealth reserves, the fiat to instrument exchange rate would be a measure of, and tool to control, monetary policy. And since the instruments are recognized and accepted globally, the process in aggregate would act to balance international trade deficits.

    I believe the Chinese government has adopted this policy. They are promoting the saving of wealth in these instruments to their citizens, and are making the buying and selling of them tax-free, and available in most high street banks.

  25. Hi PJA, I was responding to your question. Thanks for your response. I had not heard of that Chinese program. Sounds interesting. Do you have a reference I could look at?

    My own view about saving is rather different from most presumptions that saving is to be encouraged. I agree with Keynes that much saving is a economic problem rather than an economic benefit because it is essentially hoarding and cuts of flow. In a well-managed economy in which everything is flowing smoothly, minimal savings – especially long term savings that sequester funds from use – would be seen as not only unnecessary but also a detraction from consumption and productive investment, which “make the world go around.” Savings should be in the from of real wealth that the economy creates from productive investment, especially innovative entrepreneurship, not financial wealth accruing from economic rent.

    The only stock that really matters is that of real resources for the satisfaction of real needs, then more superficial wants, along with the building of real wealth globally for shared survival, progress, and prosperity. In an ideal world, economic flows involve production, distribution, and consumption and such flows would be incentivized, rather than benefits for rentiers. To paraphrase Keynes, “Euthanize the rentiers by making productive capital abundant.” Even in his wildest dreams, Marx never foresaw the replacement of productive capital by financial capital, as is now happening.

    Both saving and debt are problems, and they are two sides of the same coin, actually. If proper flow were established, and macro understood, then it would be unnecessary to save, other than minimally for cash flow purposes, or to borrow for consumption. Governments can easily “afford” to subsidize education, health care, pensions, and the like, i.e., most of the big expenses that people save for. Then we would be pretty close to spending = income at optimal capacity, full employment and price stability.

    If we remember that economics boils down to real resources, one of which is real people, and that the other resources serve the needs and wants of the people, then there are no problems other than resource scarcity. What is the justification of a presumption that scarce resources should be price in a “free market” (not), so that the rich, most of whose wealth now comes from economic rent (parasitism), consume all they please, and the poor starve? Surely, there is a better, i.e., more efficient and more effective, way to distribute scarce resources toward achieving shared survival, progress, and prosperity.

    As you may have gathered, I am one of those lefties that doesn’t care much for neoliberalism as a model for globalization. But these are my own views, not necessarily those of MTT or others. However, I believe that MMT shows how such an ideal world is also a practical possibility through an understanding of monetary economics. Money is just a tool for allocating scarce resources efficiently and effectively. Economic rent is an inefficiency that is not only non-productive but also parasitical.

  26. Hi Tom

    The age old struggle between rentiers and producers continues. Hopefully the financial system has now turbo-charged the parasites to the point of self-destruction. In case you hadn’t guessed, the “savings instruments” I’m referring to are physical gold and silver. I’m not advocating a return to the gold standard, that would be disastrous. But if you look at the ECB and now the Chinese Central bank, both are marking their gold reserves to market. So instead of fixed convertability, we have the beginnings of a floating physical gold price. That system, once extended beyond the central banks to all comers, allows people to protect their savings without creating a class of financial rentiers, which is effectively what we have now. We are all financial rentiers now, due to our pensions and entitlements, and the exploited class are increasingly future generations.

    So instead of “saving” paper claims on future production (which are becoming increasingly divorced from reality) we save a real physical product, which future producers can choose to buy and sell from us in a true marketplace. And since the product saved is not consumed and has no returns associated with it, it has little impact on productivity or liquidity in the present.

    Here’s a reference to the Chinese govt promoting gold/silver to it’s citizens:

    And here’s a link to a blog that calls the concept “Freegold” and describes it as not only beneficial, but ultimately inevitable and expected by various central banks:

  27. PJA, I have no problem with investing in PMs as an asset class unless it would adversely influence production, which is unlikely for gold, but silver does have significant industrial use. I agree that commodities in general should not be treated as financial asset classes, since this bids up the price for end users and creates inflation as increased materials costs are passed on. Most significantly, rising prices for food commodities adversely affect poorer nations. Economic rent gained from trading in necessary commodities is some of the worst sort.

    Financially, I do question what will happen to gold when interest rates rise, since historically low rates aren’t going to last forever. Right now, the opportunity of cost of owning gold is low, but that can change over time as rates rise, affecting gold’s market price. So I don’t see holding physical gold as necessarily a sure thing. However, I agree that gold is likely to become a favorite medium, if only because it is traditionally very popular with Asians, who like holding it physically. Asians tend to be savers, and as they become more wealthy, they will likely prefer more gold as a percent of their portfolios than Westerners, even at the expense of interest.

  28. Dear Bill,

    I’m a complete novice when it comes to economics, but I think I’m beginning to get my head round this (having now read this page about 3 times!). I have a couple of question though: Given the view that you describe above, are many of the protesters (and commentators) where I live, in the UK, barking up the wrong tree in demanding that the government raise taxes on high earners and capital in order to cover the deficit? Should people just be asking for increased spending instead, or is there still a case of increasing taxation as well as the deficit?

  29. May I present to Your attention a description of an operational accounting system that is based on my practical experience. The proposed operational system enables to increase the amount of goods tradeover and quantity of commodity-monetary relations among production participants by introducing a new legal form of a payments document that functions as monetary capital.
    The existing legal framework in banking does not permit to serve commodity-monetary relations in the production sphere by a transferable document. A financial obligation which is reflected by a bank account is a non-transferable debt, as opposed to central bank obligation or a promissory note. Transferable documents may represent not only a debt, but also a monetary right (asset) as a transfer note or a check. Transferable documents are those that enable to increase money turnover. Non-transferable debts may be redempted only with a loss of their cost.
    Among the poor qualities of a bank financial obligation is that it does not reflect any value. It`s enough to have normative rights in order to be able to emit it.
    That is why I propose to change these poor qualities of a payment document via development of inter-bank relations. Banking payment document should be transferable which means that the owner should be capable of transferring ownership right to the payment document, and valuable by reflecting the emittent`s asset in the payment document. A commercial bank may emit a check as a request to the central bank to pay the bearer of the document and make it transferable, like a paperless valuable paper. Payment document from a debtor`s liability becomes the creditor`s asset which has cashless circulation.
    In order to become an emittent of a payment document, the emitting bank should act as a payer in the end product purchase agreement for selling it in consumer market. The end product may be considered valuable securities of the purchaser of the assets when the emitting bank functions as a underwriter for the buyer. The amount of end product corresponds to the amount on the payment document, which is emitted by the emitting banks.
    The legal basis is similar to the central bank`s check book issued to commercial banks. The check issued by the emitting bank in favor of the supplier of the end product, has a non-paper form. In order for the payment document to be transferable the emitting bank itself should keep a register of non-cash “payment document” for the registered persons (analogue to the central bank`s request to pay to the holder of the document). Thus the emitting bank does not avoid responsibility to redempt the “payment document”.
    Registered persons are the owner of the payment document (emitting bank’s client) and the nominal holder of the payment document (the owner’s bank depositary). The central bank may reserve the emitting bank’s funds on a separate check correspondent account at the central bank for servicing accounts for the emmitent`s payment documents. Redemption of the “payment document” is done by the emitting bank by emission of the financial obligation for registered persons.
    Banks acquire new possibilities. The first is not to pay financial obligation to the client but to emit transferable document to the registered persons that increases the rate of money turnover. The second is to receive income from servicing goods turnover of the owner of the account-depot “payment document” acting as a depository of the executive bank (nominal holder). Monetary funds on the account-depot are depository obligations that do not require expenditure of a bank reserve. Inter-bank relations of maintaining a register of “payment document” by the emitting bank do not constitute financial relations between banks. Production market accounts may exclude banking financial obligations.
    The owner of the cashless payment document gets profit as the bank emitting transferable document becomes the payer. The producer of the end product becomes the source of emission of the payment document. This stimulates manufacture of the end product.
    It is necessary to note an important consideration. The name and the sum of the debt of emitting banks are combined in the account-depot name and sum of the depositary of the business entity`s bank. Thus it is not important for the owner of the paperless payment document to know which emitting bank is due to pay and for which product. It is depersonalization and division of the sum of rights of the monetary claim to emitting bank that allows using the payment document as money.
    The owner’s right to submit the payment document for redemption should be limited as to the list of expenses to be paid. These expenditures should reflect the current added value of the payment document owner. They include labor cost, taxes, employees’ advance (purchase of low-cost items and equipment, travel expenses, representation costs and other in the consumer market). It is the final goods production that becomes the source of financial obligation emission for the bank. The bank that emits payment document pays for consumer market product instead of consumers-payers so money goes back to this bank. Money serves labor exchange and the cashless payment document serves manufacture of production means that is the product intended for future investment. These circumstances would counterbalance commodity and money supply in the consumer market.
    The operational system is prepared as a Regulatory framework of a supplementary non-cash accounting form for production market. The parties need only to establish these relations and the accounting operational system would produce income reflected in the end product. Insolvency of the emitter of the payment document is absolutely impossible by the normative inter-bank rules. The given circumstances will allow developing commodity-money relations between business parties which will positively affect macroeconomic indicators of employment and prices.

  30. Can some one briefly explain how deficit spending works?
    What are some advantages and disadvantages?
    Do you believe that deficit spending helps or hinders short-term and long-term economic growth?


  31. (1.) Government spends money into existence, because the government can sell unlimited quantities of debt. The central bank can purchase unlimited quantities of government debt. The central bank can has the power to create unlimited quantities of money. So if the price of government debt becomes to low, the central bank can start buying government debt which will push the price of government debt up. Also, the government sells debt to the market and the central bank purchases debt from the market. The government doesn’t usually sell debt to the central bank.

    (2.) Question is too general for me to answer properly. Maybe a question like ‘Compared to [insert something here] what are the advantages and disadvantages of deficit spending?’ :).

    (3.) This depends on what you believe. If you believe that economies should expand then deficit spending is necessary for long-term economic growth. Basically the greater the amount of deficit spending the more likelihood of an inflation. The amount of deficit spending should be maximized until inflation becomes a ‘problem’. ATM most economies could do with a dose of deficit spending.

  32. The true failure of MMT is its underlying assumption that :
    Human activity counted as part of GDP = Creation of value/wealth for society.

    To illustrate how false this assumption is, one really only needs to ban tractors and other modern tools from agriculture. It would overnight remove unemployment, as every person would be needed to work the fields to avoid starvation, while skyrocketing the price of food so that this manual labor would be “counted” as valuable.

    The empirical fact is that throughout history, technological and process innovations – not fiscal or monetary policies – have been, and still are, the main long term drivers of both society’s wealth and its unemployment. Not because technological/process innovation is bad per se, but because its true value add to society’s total wealth is by rendering tasks previously done by humans (= employment) obsolete or of no economic value. This is also the reason why the natural state of an economy with a constant set of goods and services, is one of slow but steady deflation (as tasks and processes to create a specific product/service becomes more and more efficient through innovation, they can profitably be sold at lower and lower prices).

    MMT is in my opinion little more than old fashioned central planning in new “academic” wrapping.

  33. Hi Espen,

    sry, but can you tell me where you read that MMT’s underlying assumption is “Human activity counted as part of GDP = Creation of value/wealth for society.” ?

    MMT is only describing how the fiat money system in most of the advanced counties basically works.
    This has some implications for macroeconomics, but I still can’t see how to come to the the assumption you’re quoting above. The example you giving makes absolute no sense imho, why would sb propose such a thing?
    But talking about “work creating scemes”: The implications of MMT clearly states that the gov could use the money monopoly to implement scemes like a JG to reach price stability with full employment which is a great thing, as it not only allows us to move towards a more just society but also reduces economic waste (unused labor). To quote James Tobin:” it takes a lot of Harberger triangles to fill an Okun gap”.
    And by the way: A great share of unemployment we are facing in a lot of countrys is not caused by “structural problems” ,”globalization”, “voluntary unemployment” or whatever the recent neoliberal narrative is. The evidence we have points to a much more simple (but as we live in a “dark age of macro”) obviously forgetten/ignored problem: The simple lack of demand. And as stated above: That’s something we can deal with if we would allow to disabuse ourself from some widespread (mainly neoclassical) misconceptions about how the economy works.
    I’ve got one more question: What do you mean by saying: “by rendering tasks previously done by humans (= employment) obsolete or of no economic value.” ?
    Because (real) output is usally considered as a (monotonically nondecreasing) funciton of capital and labor, which would support the “lack of demand” statement. Or are you referring to a saturation point? That would take us to a whole new topic where we have to discuss redistribution in a “steady state economy”. Although I would see the (small but still) positive real GDP growth rather as evidence for the former than the latter.

    “MMT is in my opinion little more than old fashioned central planning in new “academic” wrapping.”
    Sry but thats gross. If you dabble in this blog and conclude that MMT is a somewhat “lefty” “central planning” etc. concept, because some possible concepts remind you on the surface of past concepts, thats really bad style.

  34. Daniel

    I read this underlying assumption from MMTs goal – maybe not the only goal but an important one – of maximizing such human activity, ie. closing the so called “output gap”. You state yourself above that you consider unused labor = economic waste. I disagree. I see unused labor being economic potential not currently tapped. Tapping it for a centrally planned activity may increase economic waste (squandering the untapped potential into activities that do not increase the wealth of society) instead of reducing it. There were much lower unemployment in Eastern Europe and Mao’s China, but much more economic waste than in Western Europe with its much higher unemployment.

    By saying”by rendering tasks previously done by humans (= employment) obsolete or of no economic value” I refer to everything from “product innovation” like ATMs, internet banking, production robots, CNC machines to “process innovation” (where same output is produced with fewer hands simply by rearranging who does what in what order).

    Your statement “… obviously forgotten/ignored problem : The simple lack of demand…” illustrates quite well what I consider the main problem with many economists (being a physicist having branched out as serial entrepreneur myself). The inability to understand that there is NEVER a lack of demand for real products and services. We humans – at least most of humanity – have nearly infinite wishes and demands for such. There is no lack of demand for real products and services in even the poorest countries on earth. What is lacking, is the ability to PAY the providers of such real products and services with something they deem of higher value than the products/services they themselves control/supply before a transaction takes place.

    I am amazed that so few economists seem to understand that money and capital are two very different concepts. The real economy is and has always been fundamentally a barter economy, and money only have value to the players in the real economy as long as money (whether they take the form of paper, gold, seashells or whatever..) can streamline/aid this bartering process by being a convenient store of capital, and thus trusted as convenient medium of exchange in the bartering process. Once governments start diluting moneys ability to function as a store of capital by manufacturing money “out of thin air” (= manufacturing claims on real products and services out of thin air), they have started diluting the usefulness of money itself as a tool in the real economy.

    Of course, governments (rulers/kings in the really old days) have done this time and time again over the last couple of thousand years. And every time it has ultimately ended in the total collapse of the currency in question.

  35. Espen Fjogstad: There were much lower unemployment in Eastern Europe and Mao’s China, but much more economic waste than in Western Europe with its much higher unemployment. Historically, factually wrong. “Western Europe with its much higher unemployment” is a recent phenomenon. Before the end of the postwar “Keynesian” Golden Age around the 70s, when Mao was around, Western Europe (and Australia) had very low unemployment, lower than the USA. In the neoliberal era, the USA has tended to have lower unemployment – the change was not as drastic as many other places. Again, this is a recent phenomenon. Of course governments may employ the unemployed in destructive ways. That is not what MMT proposes. Of course, “doing something” (bad) can be worse than “doing nothing”. This is not a good argument for “doing nothing”.

    The idea that unemployment can be “more efficient” is unbelievably crazy. In your enterprise, would you purposively unemploy some people as mystical sacrifices – but keep paying them (less) – for doing nothing at all, as you have forced them to? Nobody would run a business as governments run economies – the primary craziness is purposive wealth destruction by mass unemployment.

    The real economy is and has always been fundamentally a barter economy,
    Absolutely, utterly wrong. The core wrongness of the mainstream. What you are saying is not dissension from economic dogma – but the main, utterly wrong dogma, which is repeated incessantly in innumerable hidden ways by the mainstream, since the world of academic economics went insane, reverted to long-refuted incoherent superstitions around 1970.
    In reality, no barter economy has ever been discovered. Sometimes you can think of foreign trade pretty much as barter. Otherwise, that’s about it.

    The division of labor, any serious production is logically impossible without credit. Economies involving credit are not barter economies. Modern economies with modern banking systems are very far from barter economies. Most money is bank money, endogenously produced by the banking system, “out of thin air” exactly as the government does.

    and money only have value to the players in the real economy as long as money (whether they take the form of paper, gold, seashells or whatever..) can streamline/aid this bartering process by being a convenient store of capital, and thus trusted as convenient medium of exchange in the bartering process. Utterly unlike any real economy. The bartering process is a fantasy. People pay for goods with money. Goods & services can buy money, money can buy goods, money can buy other forms of money. But goods don’t buy goods (barter) – basically ever.

    Once governments start diluting moneys ability to function as a store of capital by manufacturing money “out of thin air” (= manufacturing claims on real products and services out of thin air), they have started diluting the usefulness of money itself as a tool in the real economy.

    Nope. The only place any money has ever come from is “out of thin air”. When a government spends to employ unemployed resources – resources whose unemployment has only come about because of the monetary economy that the government itself has created – then it is not diluting money’s ability to function as a store of capital. If it follows MMT recommendations, follows Keynes’s thought, it is improving money’s ability to store value. Why on earth should this be a surprise? Money is not a thing, and never was. Money is a relationship. The mainstream makes a category error – a stupendous kind of error.
    Comparable to a physicist confusing length and mass say.

    Espen, your theory of what money is is utterly wrong. The MMTers, “Keynesians”, Institutionalists are comparable to physicists. The mainstream, with their commodity/barter theories, their fake mathematics, their market efficiency, their wacky idea of the impossiblity of unemployment, and the stability of market economies, their flagrantly fictional stories about banking – are astrologers, charlatans, frauds.

    We all know these stories here, the untruths that have brainwashed so many, and have seen the holes in them.

  36. Some guy :

    I have rarely read an answer so full of assertions and so devoid of logical reasoning.

    – You write “Of course governments may employ the unemployed in destructive ways. That is not what MMT proposes. Of course, “doing something” (bad) can be worse than “doing nothing”. My question then is, who decides what is stupid/destructive activities? To my knowledge most centrally planned economies throughout history tried to recruit very bright people to figure out what activities needed to be done in their fully employed societies. That you bring up USA in my comparison of Western Europe and “Old Soviet block”/China first seemed a bit irrelevant, but then it became funny, as you illustrated my point even more. Because in the “golden era” – when you claim US unemployment or “waste” was much higher than W-Europe – the gap in average standard of living to the US was also much larger than today. The way I read world history, the empirical fact is that what truly constitutes economic valuable activities (activities that build society wealth) are discovered “from below” by innovators/entrepreneurs, not top-down by government policy. The unfortunate side-effect/implication of this innovation is that it often make activities previously deemed valuable obsolete/unprofitable, leading to – hopefully transient – unemployment for some of those people that used to perform these now obsolete activities.

    – As for my own enterprises, I keep it simple. I focus on maximizing output of real goods and services to paying customers while minimizing input (including number of employees), thus leaving room for more generous wages to the then more productive people I actually employ (fewer people to share the wage bill) and leaving those potential hires “not employed due to my strong focus on minimizing number of employees” available for employment by other other entrepreneurs offering other products/services.

    – Your comments about barter, I have problem taking seriously. If you really did not understand that I was referring to barter as an abstract concept, not the ancient actual activity, I am amazed. And your assertions ” The division of labor, any serious production is logically impossible without credit. Economies involving credit are not barter economies.” does not make any sense. Of course credit as a concept works fine in a barter (as an abstract concept) economy. What credit require is enforceable contracts. No more, no less. This contract then regulate what the “giving” party are to receive in return from the “receiving” party. (What is returned may well be money – and often is – but does not have to be. I am currently invested in 7 different start-up companies. They all base their business on equity funding where the founders “barter” away part of their idea (by “bartering” away a part of their company that owns the idea) in return for our accumulated capital from earlier ventures.)

    – As for your closing comments : “The MMTers, “Keynesians”, Institutionalists are comparable to physicists.” I have the following observation. Physics – as should all good science – judge their models based on how good they are at forecasting an uncertain future event. If the model/theory fails here – no matter how well it behaves for hindcasting (= describing with a theoretical/analytical framework assumed cause and effects for observed historic event) – the model is rendered useless/false (a criteria which would easily render nearly every economic model developed useless/false). Without this approach, no quantum mechanics, no special relativity, no general relativity etc. This is the big difference between physics and most economics, and it is why I like Steve Keens book “debunking economics” so much. He gets more right – by far – than any other economist I have read the last 20 years. His type of MMT – trying to protecting capitalism from itself, not replacing/destroying it, by creating an analytical framework more based on observations than assumptions – I actually like quite a lot. But my understanding – though I may be wrong here – is that he is as unpopular in the “main MMT” crowd as he is among the Keynesians.

  37. About half way down, your link to the RBA OPA page is going to a 404 on the RBA site. I did a quick search and I think the correct url is now:

    “So Federal spending by the Treasury, for example, amounts to nothing more than the Treasury debiting one of its cash accounts (say by $100m) which means its reserves at the RBA decline by that much and the recipient deposits the cheque for $100m in their private bank and its reserves at the RBA rise by that amount.”

    Quoting from the RBA link above: “These banking arrangements include the provision of a term-deposit facility for the investment of surplus funds, the sweeping of balances to and from agencies’ accounts held with transactional bankers, and access to a strictly limited overdraft facility.”

    I feel the confusion with the statement above is the assertion that Treasury has reserves at the RBA. From the way I read what the RBA is saying, Treasury has a normal account at the RBA, not a reserve account. And when the $100m is deposited in the commercial bank, its liabilities increase by $100m but it is also an asset. The bank wouldn’t expect the $100m to be withdrawn as cash so it wouldn’t need $100m in reserves from the RBA.

    “Now if government continued in this vein, accumulated private savings would equal the cumulative budget deficits. However, should government decide to run a surplus (say spend 80 and tax 100) then the private sector would owe the government a net tax payment of 20 dollars and would need to sell something back to the government to get the needed funds. The result is the government generally buys back some bonds it had previously sold. The net funding needs of the non-government sector automatically elicit this correct response from government via interest rate signals.”

    The logic here doesn’t make sense to me either. If the government decides to run a surplus then its net tax receipts over spending will be positive 20 dollars like you say. Why does the non-government sector need to sell something to get needed funds? If the private sector had been accumulating savings because the government had been running deficits and then one year the government decides to run a surplus, the private sector doesn’t just say to the Government, here buy this for $20 because your surplus is now $20 and my accumulated net savings have been reduced by $20.

    I am glad I found the MMT budgetary principles page though, it is a coherent way for me to read exactly what MMT is proposing.

  38. I know you are talking about net financial assets but since so much of the money in the system is debt created money and that’s what we pay taxes in etc, how does this situation effect the equation?

  39. Dear Bill,

    I’m writing you from Portugal.

    As I’m about to start reading Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems by your colleague Randall Wray, and since you have a blog and worked with RW, I have a question to ask you : Why is a banknote issued by a government in the hands of a taxpayer a government’s liability?

    I tried to give an answer myself after I took a quick look to Wray’s book: suppose that John has to pay $1000 in taxes to the government; if John has a $1000 banknote in his hands and gives it to the appropriated government employee, the government has to recognize that John’s debts to the government as settled. That’s why banknotes are a government liability: they are a promise from the government to recognize the debts of the public to the government as settled once in the “hands” of the government. Am I right?

    Thank you for your time,

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