Countries than run continuous deficits do not seem to endure accelerating inflation or currency crises

There was a conference in Berlin recently (25th FMM Conference: Macroeconomics of Socio-Ecological Transition run by the Hans-Böckler-Stiftung), which sponsored a session on “The Relevance of Hajo Riese’s Monetary Keynesianism to Current Issues”. One of the papers at that session provided what the authors believed is a damning critique of Modern Monetary Theory (MMT). Unfortunately, the critique falls short like most of them. I normally don’t respond to these increasing attacks on our work, but given this was a more academic critique and I was in an earlier period of my career interested in the work of Hajo Riese, I think the critique highlights some general issues that many readers still struggle to work through.

Who was Hajo Riese, you might ask?

He was an German economist who died earlier this year (born 1933) and was considered to be the founder of the so-called “Berlin School of Monetary Keynesian”.

What was that?

I have written before about the way that the work of John Maynard Keynes was quickly hijacked by the dominant neoclassical orthodoxy of the 1930s and became, especially in the US and the main macroeconomic textbooks, the ‘neoclassical synthesis’, which treated Keynes as a special case of orthodox theory that applied if wages were rigid downwards.

So, macroeconomics failed to jettison a lot of the neoclassical baggage about real wage cutting to cure unemployment, crowding out consequences of using deficits, inflationary consequences of using overt monetary financing and more, which, ultimately led to Monetarism and then the current New Keynesian orthodoxy, which is little of Keynes left in it.

Hajo Riese spent his academic career working on strengthening the insights of John Maynard Keynes to avoid the conclusions of the ‘neoclassical synthesis’ and in that respect his work was admirable.

But the critique unveiled at the conference recently doesn’t really deal with any of that.

It starts by arguing that:

Economists of the MMT persuasion polarize with the claims that … a state with its own currency has ‘no budget constraint’

The authority for this assessment is that characters like “Fed chair Yellen”, “ECB President Lagarde”, Larry Summers, Mr Dodgy Spreadsheet Rogoff and others don’t like MMT so we are polarising.

Go figure that one.

The authors present a reasonable rendition of the basis MMT propositions that they consider to be ‘strengths’ although it is not how I would have written it.

They then turn to the “Weaknesses of MMT”.

The first attack is on a comment that they draw from Randall Wray’s 2015 Primer (Palgrave) that “households need the government to spend before they can pay taxes!”

They claim this is “astonishing” given that MMT also “emphasizes the endogeneity of money which is based on banks borrowing money from the central bank ” and thus means that “there is no intrinsic linkage between the volume of central bank money and government spending”.

But, of course, this criticism reflects a misunderstanding of the way in which we order the pedagogy which introduces our work to the general public.

In some cases, we use simple conceptual vehicles (heuristics) to begin a discussion with those interested in MMT who have no prior background.

Representative of these heuristics are these blog posts:

1. A simple personal calling card economy (March 31, 2009).

2. Barnaby, better to walk before we run (February 8, 2010).

3. Some neighbours arrive (February 15, 2010).

There is no sense that these ‘models’ can represent reality as we know it. Reality is much more complex and multilayered.

But these heuristics allow us to explore some intrinsic characteristics of the monetary system, the capacity of the currency issuer and the options that such a government might have to advance its policy agenda.

As an example, in a highly simplistic, logical model, we might show how a new currency achieves its status by requiring all people to pay their taxes in that currency and then we show that that capacity doesn’t exist in the non-government sector until the government spends that currency into existence.

For introductory audiences, I often present a small accounting model (in the MOOC we even had a game show format), to illustrate this point.

It allows us to establish a clear causality that taxes cannot intrinsically fund government spending. In that simplistic world, it is the other way around.

Government spending provides the currency in which the non-government sector can pay its taxes and any outstanding debt that such a government might issue just represents previous fiscal deficits, which haven’t been taxed away yet.

As it stands, that simplistic model serves a purpose.

But it should never be the end of the story. The academic MMT economists certainly don’t hold this sort of reasoning as the definitive MMT statement, even if others might.

The point is that once we layer that simple heuristic with real world institutional insights and reality then the simple heuristic quickly becomes inadequate for analysis.

For example, to say that MMT says that taxes cannot be paid before spending is obviously an incorrect statement on two counts.

First, MMT doesn’t say that beyond our simple heuristic models, which are highly stylised and the assumptions used are transparent and deliberate abstractions of reality.

Second, in the real world, I can walk into a bank and borrow funds to pay my tax obligations without having built up any prior financial assets. Abstract from the financial record I might have had to demonstrate in order to access the loan from the bank.

But it is clear, in that instances, taxes can be paid without government’s spending the money into existence first. That is because there are real world institutions such as commercial banks that create deposits when they make loans, and which are absent from the simple heuristic models.

The latter insight forms the basis of the endogenous money idea.

This doesn’t invalidate the insights in the simple models. It just adds layers of complexity that have to be augmented with deeper insights.

In a pedagogical sense, we need to walk before we run. So the simple heuristic models allow us to start thinking in terms of MMT concepts – currency-issuance, government/non-government, flows and stocks, income and wealth, etc – which then allow us to make the next steps as we layer the analysis with more real world complexity.

But hanging onto the simple logic and denying the real world complexity is a dangerous strategy and not one that the academic MMT economists adopt.

In this specific tax payments case, how we extend the complexity of understanding is to note that while it is obvious that banks can create deposits (and liqudity) everytime they create a loan, the transactions associated with that loan (in this case, me paying my taxes) have to ‘clear’. The funds have to come from somewhere.

And that then takes us into a deeper analysis of the role of bank reserves and central bank funds. We then note that ultimately, claims on that deposit at my bank, must be backed by reserves, which is a different to saying that the loan was made possible by the prior existence of reserves.

But clearly, when I tell the government I am paying my taxes and transfer funds from the deposit the bank has created as part of my loan, the government instructs the central bank to debit the reserve accounts of the bank in question and credit its own account with the amount of the tax payment.

If the bank in question has insufficient reserves or there are insufficient reserves within the banking system at that time, then the only place those reserves can come from is the central bank (which in MMT is considered to be part of the consolidated government sector).

In that sense, the correct statement is not that taxation requires prior spending but that the solvency of the non-government financial system ultimately rests on government making loans to the non-government sector in the currency that the government issues and that these loans allow the banks to always meet the demands on them for bank reserves.

Now, it is clear that not everyone who uses (and demands) the currency pays taxes.

But, the tax-driven currency argument that underpins MMT reasoning does not require everyone to be ‘taxpayers’. Once a currency is established then their are many reasons why it becomes broadly acceptable to the population, not the least being that transaction costs are lower if everyone uses the same currency.

The way in which MMT represents taxation is also rather simplistic. In our simple heuristics, it appears as a lump sum that everyone has to pay (although we represent it as a total non-government sum to simplify matters).

We can clearly introduce complexity into the tax system, with progression in the income tax structure, an array of non-income taxes (such as GST or VAT), and other complexities (death duties, wealth taxes, expenditure taxes, etc).

That has never been a necessity in my view, although I acknowledge that a government has to contend with those complexities when it is operating the tax system in the real world.

But introducing such complexity will not alter the fundamental insight that if you require a significant proportion of the population to extinguish their tax liabilities in the currency that only the government issues then that will elicit a demand for that currency, irrespective of whether you can get that currency by working for the government, working on contracts paid for by the government, or borrowing that ‘currency’ from commercial banks who have reserve accounts at the central bank denominated in that currency, or from other financial institutions that ultimately have to work through banks that have such reserve accounts.

So it is, in fact, ‘astonishing’ that these German MMT critics didn’t understand that complexity in our work.

Quoting from an ‘airport book’, designed to provide simple heuristics is not a legitimate academic exercise.

The next criticism is that it is an:

… untenable thesis that a sovereign state whose liabilities are denominated in the national currency cannot become insolvent as it can always print enough money to service its debt.

Note, we never use terms such as ‘printing money’, which is a mainstream concept built on a flawed understanding of how governments spend (every day) and monetary operations that might accompany that spending.

All government spending enters the economy in the same way – digital entries to banking systems – irrespective of how central banks might operate to maintain a target rate of interest or target a maturity yield (QE).

The mainstream idea that governments either spend tax revenue or spend bond issuing revenue or turn on a printer has no application to the real world.

That is a stylised version of the government based on a flawed household budget analogy.

But aside from terminology, what is the criticsm based on?

They say that:

MMT goes one step further and views fiscal policies aimed at high employment and output as expedient and risk-free in general … What MMT tends to neglect are the economic consequences of such monetary financing …

They recognise that MMT economists “do acknowledge the link between monetized budget deficits and inflation” but we fail to “appreciate inflation as a cumulative process with price-wage spirals and currency depreciation that erodes the quality of the currency.”

Apparently, we fail to understand that money is a “store of value” – “an asset that competes with domestic securities and stocks as well as foreign assets” and there is no certainty that people who receive money “will want to keep the cash in their portfolio at given valuations”.

Sure enough.

But they always have to have enough government currency to meet their tax and other liabilities that are denominated in that currency.

But the critics jump to the conclusion that an “increase in the supply of money or domestic securities creates a higher demand for foreign assets”, which leads to a depreciation in the domestic currency.

The critics conclude that “if the government continuously uses newly created money to service its debt service” then “continuous depreciation” is inevitable.

Which, in turn, creates accelerating inflation.

And if “investors anticipate the money expansion” then they will shift out of domestic currency, which exacerbates the situation.

This asserted causality then forces investors to demand higher yields on government debt, which leads to “Higher interest rates”, which “negatively affect the government’s fiscal position and depress investment”.

They then argue that if the government tries to control yields using QE, the investors will abandon the currency as per the previous assertion.

Then the workers retaliate and there is a wage-price spiral and a “further increase in inflation”.

So all of this is standard mainstream reasoning, which has floundered in the real world.

First, governments all around the world have run continuous fiscal deficits for decades, which inject net financial assets, initially denominated in the government’s currency, into the non-government sector.

Where is the systematic depreciation and inflationary impacts via import price rises evident for these nations?

Why is the demand for Australian government bonds so strong always and continuously held in Australian dollars, when there has been an external deficit mostly since the 1970s and governments have run fiscal deficits regularly, of varying magnitudes?

Why has the Japanese public largely held government bonds in yen and why hasn’t the yen collapsed in the face of massive fiscal deficits, significant government bond issues, and very large-scale QE programs?

Why has Japan fought deflationary rather than inflationary pressures since the 1990s given its fiscal and monetary policy settings?

Why has the Bank of Japan been able to control short-term interest rates and yields on government debt despite the massive QE programs, while simultaneously observing deflationary rather than inflationary pressures?

Second, there are notable instances of currency-issuing government facing currency pressures as investors shift their portfolios into foreign assets.

The experience of Britain in the 1990s is one example.

But that arose because Britain had pegged its currency and thus had lost its sovereignty.

Speculators knew that if Britain insisted on maintaining its membership of the ERM, then it could be targetted with short trades.

Ultimately, the ‘currency crisis’ came to a head on September 16, 1992, when the government finally abandoned its ERM membership and floated the pound.

MMT always considers nations that compromise their currencies with any pegged-typed arrangements will face ‘investor pressure’.

Third, there are also cases where a floating exchange rate can be targetted.

The GFC-example of Iceland is important to understand.

They had a very large banking collapse during the early days of the GFC and they prevented a currency-collapse and inflation by imposing capital controls.

I have regularly written about the need for capital controls in some circumstances.

MMT economists clearly understand that large private capital holders can cause trouble for a small nation through speculative ventures that can be thwarted by the imposition of capital control, which are clearly the remit of the legislative authority, as the Icelandic experience shows.

Fourth, the idea that recipients of a nation’s currency, acquired in the course of government spending on contracts to produce infrastructure, provide services, procure private activity, employ people, have the choice on how to store their wealth portfolio.

In a growing economy, which high levels of employment and wealth generation, it is implausible to assume that recipients of government currency, in the normal course of events, will seek to transfer those holdings into foreign assets.

The fear of these conversions was also raised in the context of Chinese purchases of US government bonds and there were many erroneous claims that the Chinese were funding US government spending.

The reality is that the holdings of US dollar-denominated assets were only able to be accumulated because the Chinese economy ran export surpluses and deprived their citizens of the use of the resources embodied in those exports.

But the value of those foreign currency denominated assets will be sensitive to what the holders do with them.

It would be very odd behaviour to build up these assets in one’s wealth portfolio and then undermine their value by selling them off via foreign exchange transactions.

The point is that there is no inevitability in which currency people choose to hold their wealth portfolios.

But the lack of evidence that ties fiscal deficits to currency fluctuations tells me that the critics who believe it is inevitable that deficits will create inflation, higher interest rates and depreciating currencies are wrong.


One of the strengths of MMT is that it maintains empirical credibility, something that cannot be said for the views expressed in the paper discussed.

The possibilities that the German authors raise are theoretical and derived from a macroeconomic framework that is flawed.

The real world does not accord with the theoretical linkages declared inevitable by the authors.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

This Post Has 25 Comments

  1. I can understand why you would not want to waste too much time responding to most MMT critiques- most are not really worthy of a response. But damn- I love when you do. Crystal clear as usual. Thanks.

  2. When I was reading this very interesting blog post, my thought was —

    that it seems to me that that German writer was ignoring the fact that in order to sell one’s dollars, one must find a buyer. This was basically the problem that the German Gov. had in the early 1920s. The marks it created kept buying fewer and fewer pounds and francs. Why would the American owner who’s company just sold something to the Gov. turn right around and sell those dollars for very high priced foreign currency? And, why would the holder of such currency trade their stable currency for the declining in value dollar? It seems to me that the owner above would be better off buying things in America, like land, houses, stocks, etc.
    . . . This is related to my wondering why people think that the US$ is going to be replaced by some other nation’s currency as the reserve currency of the world. My question is, which nation can replace it. China right now seems to be having huge problems and I would never trust that my bonds held in the computers of the Chinese Central Bank could be taken out and sold without the CCParty refusing to let me do it. The same goes for Russia. The only other possibility is some nation in Europe. Germany doesn’t sell new bonds because it has a surplus. The UK is having problems and also wants to balance its budget, so it sells too few new bonds to meet the world’s demand. I just don’t see any nation replacing the US unless the MAGA people make the Repuds in Congress do something stupid that will *very massively* hurt the Repuds’ donors.

  3. Brilliant Bill!

    The only way you are going to convince these fools is by asking them to model what would happen if the Government announced at midnight tonight it was not going to spend for a decade. Once the private sector savings and ability to borrow has run out.

    If there was a big enough jail for everybody, everyone would eventually be in it for non payment of taxes.

  4. *mic drop* I really enjoyed that. It was brain tingling stimulating, and amusing.

    As a lay person who has immersed themselves in the world of MMT, so to speak, I have identified 3 problems that need to be taken seriously to encourage more laypeople to support the cause. I hope you, and everyone else agree…

    1. If it is then IT IS.
    Can we stop comparing mainstream economics with MMT; it causes more confusion. Mainstream economics is not mainstream, we don’t refer to the run off as the river.

    I have learnt that MMT IS mainstream economics, so come up with a catchy name to call “the other” economics –
    can I suggest we refer to it as L.ayman U.nemployable D.istribution Theory, or L.U.D Theory? They hate being associated with a Luddite, right?
    Or perhaps,
    W.elfare E.conomic T.heoretical Policy, or the W.E.T policy? They seem to love intentionally leaving people out in the rain, and continually paying for their existential misery.

    Why not both, the more names for them the better until MMT just IS! Forget “mainstream”.

    2. MMT has a PR problem.
    Everybody knows the controlling concentration of media powers, and so now most young people tend to get their source of information from “independent”, “trusted”, media creators i.e. Vlogs, feeds, shares etc.
    MMT economists and the MMT project, need to embrace and inspire people using these mediums to include their MMT messages – it’s a much faster world, and a new, growing, niche is always favoured.

    Some emotionally inducing titles could be:
    ‘MMT exposes the world’s richest secret’,
    ‘Everything you know is wrong’,
    ‘Why the world is backwords’,
    ‘You’re right, you have been lied to!’.

    There would also need to be catchy phrases such as:
    ‘spend more, get more’
    ‘money doesn’t grow on trees – because there aren’t enough trees!’,
    ‘no welfare, get a job’,
    ‘don’t take my money, invest yours for more’,
    ‘forget robin rood, only the terminator’
    ‘if you can create, why do you take?’
    ‘your guaranteed bet is that we stay in debt’

    3. Finance is boring and scary.
    A lot of people may not be interested in the world of finance because of its abstractness and it’s cold hearted darkside, but they never the less depend on it.

    There is an increase in the use of financial blogs as an inspiring and more inclusive medium to “educate” people about financial matters. This is where the mass support can be made (outside University/politics) because these bloggers are aspiring to provide their loyal readers (mums, dad’s/young investors) with “accurate”, and “new” financial information.

    There is no greater space to dispel the myths of the financial world, than in the uprising of the financial bloggers whose sole purpose is to do just that…

    If we can address these 3 then time won’t even be an issue…

  5. ‘it can always print enough money to service its debt’ Whoa – immediate credibility fail, propaganda alert. For these people, as you say, using legislative authority to thwart the free flow of capital (in the interest of a wider society) is anathema.

  6. @Steve_American: “China right now seems to be having huge problems”. If you are referring to the property market and Evergrande, I think you are wrong. I viewed a great video interview with Michael Hudson yesterday on the 3rd edition of his Superimperialism. He’s worked in China and has great insight into how it operates and why it’s not in trouble at all. (The 3rd edition arose from working on China.) I posted it on a China Info FB page. It’s not MMT, but I have posted stuff before with comment which illustrates how China commands its resources using the power of the public purse., including a letter I had in the Morning Star a few weeks ago on MMT.

  7. Nicely done! The mainstream hacks last trick seems to be to try and gaslight those just learning the basics of MMT for as long as they can. Desperate acts to try sound like they’re still relevant. Shameful really.

  8. Apart from its failure to acknowledge today’s electronic creation of money, how is it wrong to talk about “printing money;” especially, to advocate that currency sovereign nations do so, in a responsible fashion matching available resources, to meet pressing human and environmental needs? “Printing money,” it seems to me, points clearly–indeed bluntly–to the fiat nature of modern money in currency sovereign nations, and unless that fundamental fact is fully understood, MMT cannot be grasped by the man or woman on the street.

  9. “In that sense, the correct statement is not that taxation requires prior spending but that the solvency of the non-government financial system ultimately rests on government making loans to the non-government sector in the currency that the government issues and that these loans allow the banks to always meet the demands on them for bank reserves.”

    There’s also the other point that Warren often makes. Central bank loans are spending, since they can always be replaced with an equivalent pair of repurchase contracts. The central bank won’t issue reserves to a bank that doesn’t have collateral, even if it is just a floating debenture over the remaining assets. The central bank makes a solvent bank liquid in reserves, just as the bank has made a solvent taxpayer liquid in deposits.

    Banks lend by purchasing financial collateral derivatives they have created. That’s fundamentally what a mortgage is – the bank buying a financial asset, and then offering the opportunity to buy it back over time.

    So when you borrow from a bank to pay taxes, you will have to offer collateral for that – even if it is just a floating charge over your worldly goods. There has to be something for the bailiffs to go after, or the bank won’t lend.

    That loan asset is then collateral which can be sold to the central bank in a repo arrangement for the necessary reserves to clear the payment to the government’s treasury account.

    The government sector ends up with a transitive charge over your worldly goods, via the banking system, which is exactly what would happen if the tax authority obtained an attachment order because you didn’t pay your taxes.

    It’s all attacking a straw man. Why are we talking about liquidity when the issue is solvency?

    There is no requirement for tax collection to precede spending, because the balance on the Treasury account at the central bank is not a relevant matter for the bank when dealing with the currency issuer.

    In other words nobody gets to say no to the currency issuer, and make it stick. It’s always solvent in its own denomination.

  10. Neil, thanks for your log and detailed explanation. When people raise this point with me “I can always pay my taxes with a loan, there is no need of government money!!” I simply respond “Who is going to provide the reserves necessary to clear your tax payment??” The nation Treasury department does not accept bank credit, they only accept reserves which can be created only by the Central Bank, an agent of the government,
    Warren made this point in a video debate on MMT with Prof. Michele Boldrin then he left because there was no point to keep debating anymore.

  11. Newton, I have also wondered about the aversion to the phrase ‘Printing Money’ as describing government spending by say, Bill for an example. And at times also kind of wondered what the fuss was about it. I can’t speak for him, but I will try to give you some reasons I think he is right to object to it.

    As you note, it just does not operationally describe how the federal government actually spends (creates) money in the vast majority of its spending. So there is that- it is mostly factually an incorrect way of describing the process. Which is always a major detriment.

    Then it is also a phrase that is often invoked to cause fear of hyper inflations and to incorrectly imply that it is government spending that is the usual cause of them. I still have mental images of Weimar Germans carting wheelbarrows of cash to buy groceries from my early economics ‘education’. It’s a term just loaded with bias and therefore not useful to use when trying to explain things fairly.

    And part of that is historical- governments that were on convertible currency standards would issue or print more paper currency than it was possible for them to physically convert should all of it be presented at once. And they would get caught out on occasion where they were unable to exchange the printed notes for what they had promised. So the printed notes would fall in value compared to what they were to be exchanged for. So there is that history which may have applied under different circumstances that gets invoked when it no longer does apply by using that phrase.

    But MMT posits that the value of the currency is established by effective taxation in that currency rather than always eventually broken promises to exchange it for some amount of metal.

  12. “As an example, in a highly simplistic, logical model, we might show how a new currency achieves its status by requiring all people to pay their taxes in that currency and then we show that that capacity doesn’t exist in the non-government sector until the government spends that currency into existence.”

    I would rather use history itself by demonstrating how early feudalism necessarily transitioned from a purely ‘in kind’ system to a token system whereby the ruling class ‘issued’ tokens (primarily stamped coins) as a means to pre-acquire feudal fees or to otherwise pay soldiers etc who would buy from serfs; these tokens then acting as proof of payment of fees for the serfs when the collectors came to collect at collection time. This obviously created a surplus of tokens for the private sector over time and would have allowed markets to flourish because these tokens had value as proof of fees already paid, they became currency. This ‘currency’ was also the accounting for all future monies whatever they may be (all money priced in this currency). The history of the US money system is a perfect illustration of how all sorts of monies existed from beaver skins, pellets etc, but, they were all ‘priced’ (accounted) by legislation, as governments throughout would price all the various forms of money periodically in either pounds sterling, Spanish dollars and eventually US dollars.

    Therefore a currency cannot exist until a sovereign issues and declares it as a currency acceptable as a means of paying taxes; and a private sector can create all the money it wants in all the forms it wants but it must price these monies in the currency declared by the sovereign. I am not aware of any historical evidence where a large population used a private money system that was not priced in a currency issued or declared by a sovereign.

  13. @Newton E. Finn where is all this printed money? being wheeled around in great wads to pay for daily necessities? Why would anyone who wanted people to be better educated about the interaction of a government (including its central bank) and private banks, want to continue with this antiquated language. Anyone who starts up a computer can cope with computer generated digits. Regretably Michael Hudson is one who can’t break the habit of using this emotive, misleading phrase.

  14. @ Jerry Brown sorry I didn’t properly read your post. No need for me to have repeated.
    @ Carol Wilcox I’d say the reliance on building and Evergrande and other property company debt is a problem, but it’s not going to cause economic let alone political collapse. The founder of Evergrande may not be retiring on a full pension in the manner of disgraced RBS CEO Fred Goodwin and some investors may suffer some fall in wealth and personal hardship. China has some idea that letting a few individuals hoover up enormous amounts of society’s wealth is not a good idea.

  15. ‘Apart from its failure to acknowledge today’s electronic creation of money, how is it wrong to talk about “printing money.”‘

    It’s a scare tactic designed to evoke images Wiemar Germany, Zimbabwe and just about any other economy that has suffered a bout of hyperinflation.

    You and I know its nonsense. Post-WWI German consumers had to arm themselves with wheelbarrows full of cash when they went shopping because the German industrial economy went “off-line” momentarily and there was nothing in the shops to buy.

    But the phrase “printing money” scares the hell out most people.

  16. I’m not averse to using the term “printing money”; I always add “up the the limit of goods and services available for purchase”. (The Weimar Republic, Zimbabwe etc hyperinflation crap is easily explained). That’s why I quite like Ross Gittins ‘taking the bull by the horns’, in a SMH article:

    Ross Gittins: “Funding the budget by printing money is closer than you think” (google it).

  17. The kind of thinking behind the paper in question infests the public discourse here in Canada. It is an ongoing nightmare in the comments section under every business/political article in every newspaper in the country.

    It is exhausting. I don’t know how Bill has been able to maintain his sanity in the face of this anti-knowledge for so long.

  18. “…in the real world, I can walk into a bank and borrow funds to pay my tax obligations without having built up any prior financial assets.”

    Yes, you can pay your taxes with a Visa card, but Visa has to turn over reserves (real no kidding US Dollars) to the Treasury by April 15 or whenever the due date is. Your tax bill is now paid using US dollars spent by the Government and your account is current as far as the Internal Revenue Service is concerned. The fact that you have 30 days to pay Visa or can pay them in installments is irrelevant to the tax collector.

    The “simplistic” model skips many of the details but is in fact exactly correct.

  19. Neil, “funding the government by printing money is closer than you think.”

    Funding the government by printing money is actually exactly what is going on. The government (Treasury) prints bonds, which are no more and no less than future money, and swaps them for current money printed by the Central Bank at a small discount.

    Incidentally, I have no problem using the term “printing money”. It creates a clear image in people’s minds, and if in fact the government actually did print all its money in a physical form the operational mechanics would not change. The gov only does the electronic thing because of convenience and security.

  20. More clearly, shoulda said that the government (Treasury) prints bonds (future money) which it swaps for current money also printed by the government (Central Bank) at a small discount.

    That’s considered borrowing, for some reason that escapes me.

  21. “That’s considered borrowing, for some reason that escapes me.”

    The reason is very straightforward. That’s the definition of borrowing: to take and use something that belongs to somebody else, and return it to them at a later time

    A swap is obtaining bank liabilities from a bank with the intention of returning those bank liabilities at a future point. Therefore it falls under the definition of borrowing.

    Any implications the reader draws beyond the dictionary definition is entirely their fault.

  22. @neil wilson,

    i think what creigh gordon is perhaps reflecting upon, is that , whats actually happening is an assett or liquidity swap, in that the net cash flow a government financial deficit creates, gets swapped or securitised into different assett classes in the first instance , whether it be reserve/deposits, bonds or cash.

    treasury creates the net asset,and the central bank adjusts the portfolio composition.

    now you can rest your hat on that its still classed as borrowing, but i would agree with CG that it is a different class of phenomena. no collatoral required, when you have infinite liquidity

  23. So, if the Treasury is borrowing currency from bond dealers or the Central Bank, could we not say with equal validity that the bond dealers/Central Bank are borrowing bonds from the Treasury?

    If I move money from a checking account to a savings account do we say that the savings account is borrowing from the checking account?

    It seems to me that a hallmark of borrowing is that the borrower’s net liability increases. But the government’s net liability doesn’t change when it sells a bond.

    Perhaps this is just semantic, but in this case the word borrowing is being used in a negative way that is not justified.

  24. You can certainly describe printing money as heuristics .
    bill called it stylised while describing the model of cannot pay your taxes without prior government
    Spending heuristics.
    You can call it politics.Printing money has become propaganda for those who are happy with their
    Control of resources and do not want to encourage voters to understand the power of governments
    to control them.
    Is it a bad idea to own your detractors epitaphs. Whatever works.

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