# What can be done about the myth that the Federal government only has limits amounts of money **URL:** \ **Category:** Great Debates\ **Created:** [October 19, 2013, 12:52am UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614 "2013-10-19T00:52:27Z")\ **Posts on this page:** 20\ **Page:** 5
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [November 8, 2013, 11:03am UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/81 "2013-11-08T11:03:19Z")
> [@LinusK](#): > > MB, I believe, stands for monetary base. You’re suggesting, I think, that “doubling” its “nominal value” would devalue the dollar. Yet it’s more than quadrupled in the last few years, without affecting the value of the dollar. In fact, the dollar is worth more against the euro than it was then. The measurements of “money” are somewhat fuzzy and arbitrary. Banks A and B may have demand deposits in each other; that “money” is a “wash;” rightfully such money isn’t counted in M1 (or any “M”). However some money that is, conceptually, a similar such “wash” _is_ counted. Demand deposits on the FRB _are_ counted in MB, although to some extent these deposits play a role similar to inter-bank deposits which are _not_ counted. _Although not a full explanation_, this is part of the reason for the recent surge in MB. **LinusK** , some of your focus on “money” makes me think you missed, or did not believe, my response in another thread: > [@How are newly printed dollar bills shipped around the world?](https://boards.straightdope.com/t/how-are-newly-printed-dollar-bills-shipped-around-the-world/672624/22): > > Having a $500 checking account at the Federal Reserve Bank is, similarly, similar to having $500 in Federal Reserve notes! \* IOW, a F.R. banknote is very similar(_) to a Traveler’s Checque_, but is drawn on the Central Bank instead of a private bank. Remembering this simple fact would clear up some of the confusion about U.S. “money.” ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [November 8, 2013, 3:42pm UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/82 "2013-11-08T15:42:07Z")
> [@LinusK](#): > > What you seem to be saying is that the money is still there if it’s in a big warehouse somewhere. What I’m saying is whether it’s sitting in a warehouse or been shredded doesn’t matter. All that matters is whether there’s a surplus or a deficit. Whether the money is “there” in a warehouse makes no difference. If you believe that the “warehouse” doesn’t matter, then the surplus or deficit is equally irrelevant. If one doesn’t matter, then neither does the other. The government doesn’t actually have to buy things to get money in the world. They could be running a perfectly balanced budget, and still get cash into the world by dropping it out of helicopters. Nor do they have to use their conventional tax authority to remove money from circulation. If we’re ignoring [the actual costs of printing currency](http://www.federalreserve.gov/faqs/currency_12771.htm), then we could just as easily imagine that they could print self-destructing banknotes, triggered by a switch in Ben Bernanke’s hands, or more practically speaking, simply announce that certain serial numbers are no longer legal tender and therefore no longer valid for bank reserves or for taxation. You would never again be able to make a deposit with that cash, because every bank would scan it before accepting it. What you’re doing here is pointing out a single institution, the “warehouse”, and saying that that institution is an arbitrary legal construct. Well sure. But then so is everything else. You’re pointing at budget deficits and surpluses and saying that they are somehow more real and more relevant than the Treasury account. They aren’t. They are just legal constructs, too. It’s turtles all the way down. Normally when I point this out, the next step from a Post-Keynesian is to say, “Well, politically speaking it’s not really possible to drop money out of helicopters.” And that’s true. But politically speaking, it’s equally true that it’s impossible to ignore the warehouse. You don’t get to ignore the legal institutions you dislike, while simultaneously defending the legal institutions you like. This is, again, why definitions are so important. Definitions are themselves an institution that allow a common language in which to discuss these issues. _And by definition, there is a warehouse._ It’s the Treasury account at the Fed. It even works like a warehouse: money goes in, money is stored, money goes out. It’s a legal institution, sure, but it’s a legal institution that works exactly the way a real warehouse would work. You can say it’s fictional, but the moment you do that, you’re ignoring both the definitions _and_ the practical way in which it’s actually used. You’re ignoring those two things together, and once you go so far, I can point out the fictions of everything else that you want to talk about. You said “dollars are disappearing”. That was not correct. It was wrong by definition and it was wrong as a practical matter based on how the government actually operates when it has a surplus. There is real historical record on this which shouldn’t be ignored. > [@LinusK](#): > > When the government buys back bonds, using a tax surplus, the amount of money stays the same. However, something does change: the dollar amount of bonds outstanding. $100 billion in bonds disappear - and I mean that literally. When a treasury bond is paid off, it disappears - same as any other debt. In that case the public has the same amount of money as it had before (the government spent the surplus on bonds) but it has $100 billion less in Treasury bonds. Its net financial balance has decreased by $100 billion - the same as the surplus. The government’s financial balance, on the other hand, has improved by the same amount. This is not correct. You do not know the “net financial balance” of the public. “Net” means counting all things together. You have not done this. You are looking at government only. You have ignored every other sector. You cannot assume private investment will be low. Investment is endogenous. You cannot assume the foreign sector will remain so far in deficit. A government surplus might improve exports. Foreign trade is endogenous. > [@LinusK](#): > > As it is, I barely have time to keep up with this tread. That’s a shame, because you made plenty of other errors that you haven’t yet gotten around to. > [@LinusK](#): > > I am self-employed, though, and pay an assistant, so I thought I thought I had a grasp on the relationship between profits and expenses. Your personal system no doubt suits your own needs. It has not helped you with bank accounting. From your repeated bookkeeping errors in this and other threads, your personal record-keeping needs are self-evidently not complex enough for you to resort to an actual double-entry system. That would be fine on its own. There would be no problem with that. Except for your repeated attempts to comment on bank accounting. You don’t get everything wrong, but it’s enough. > [@LinusK](#): > > Banks do however have a bank account with another bank: the Fed. And if their employees all keep their paychecks at their own bank, and don’t spend any money, that’s fine. If they spend down their balances, however, or deposit their checks at other banks, then the reserve balance at the Fed is going to decline. If it declines too much, the bank will have to borrow money to make payroll - or to pay whatever expenses they have. > > Banks, in other words, can create liabilities on themselves willy-nilly, but a bank can’t pay another bank, or anyone with an account at another bank, with its own liabilities. It must pay through the Fed system. > > So I guess what I’m saying is: if the bank pays somebody just by crediting his account at the bank, the bank is creating money. It’s creating a new liability on itself. That liability will reduce its profits, however, by the same amount as the payroll check. The money that goes to the employees s money that doesn’t go to the shareholders. Do you disagree with me about that? There is a 1:1 correlation, right? A dollar that goes to an employee is a dollar that doesn’t go to shareholders. > > If the bank is losing money, however, and its employees are spending their paychecks, then that means its account at the Fed will go down. If it goes down far enough, the bank will either need to borrow money (from the Fed or from other banks) to replenish it, or the Fed will shut it down. A paycheck is an expense. There’s no asset on the other side of the ledger, unlike a loan. Most of this is true. (The FDIC resolves commercial banks in the US, not the Fed. But the general idea is there.) Now take the next step. When are deposit liabilities destroyed? It’s easiest to begin by considering interest-only loans. They can exist [in some interesting contexts](http://boards.straightdope.com/sdmb/showthread.php?p=15768061#post15768061). Imagine you’ve got an interest-only loan from the very same bank where you keep your bank account. The next interest payment is due. Say it’s a thousand dollars. You pay the bank by writing a check drawn on your account at that very bank. This is revenue instead of expense for the bank. What’s the ledger entry for the bank? What’s the debit and what’s the credit? What happens to the M1 considering this transaction by itself? ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [November 8, 2013, 3:49pm UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/83 "2013-11-08T15:49:05Z")
> [@LinusK](#): > > You said: > > MB, I believe, stands for monetary base. You’re suggesting, I think, that “doubling” its “nominal value” would devalue the dollar. Yet it’s more than quadrupled in the last few years, without affecting the value of the dollar. In fact, the dollar is worth more against the euro than it was then. > > Now you’re saying it’s because the dollar is the world’s reserve currency, or because banks aren’t “using” the money, or because it’s unfair to compare it to the yen. > > If you already knew all that, why did you issue the challenge in the first place? That’s not what I’m saying but at least you seem to get the point of the exercise - although trying to pursue it further with you does seem pointless. If you recognize that increasing the money, under normal conditions that is, will result in the devaluation of the currency, then you should also realize that printing money to pay for things like infrastructure and other improvements is beyond reckless. But apparently you do not understand that. Fortunately I’m less concerned with what you do or don’t understand and more with your ability to confuse the understanding of others regarding these issues. As long as it seems to me that everyone else gets it, that’s my primary concern. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [November 8, 2013, 4:12pm UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/84 "2013-11-08T16:12:43Z")
> [@Little\_Nemo](#): > > I’m not sure what you’re suggesting. Los Angeles, obviously, does not have the power to issue money. So if Los Angeles is lacking money for some project it needs to either raise it by taxation or borrow it (which is just deferred taxation). > > Now the federal government has a third option. It could theoretically just call up the mint and tell them to run off a hundred million dollar bills. But if it did that with no taxes or loans to back that currency, the value of the currency would drop. > > Issuing a hundred million dollars worth of currency with nothing to back it up would not increase productivity a hundred million dollars worth. > > As you noted, money is not an inherently limited resource. But if you treat it like it’s an unlimited resource, it ends up having no value. The economy could be limited by any number of factors: lack of workers, lack of workers with the right skills, lack of oil, or other natural resources, or (as is the case in the US right now) lack of demand. “Helicopter money” doesn’t do anything to fix the first several problems, but it is exactly the cure for the last one. I’m arguing that money is, in fact, an unlimited resource. If you have enough workers with the right skills, and they’re going to waste (they’re unemployed), then “not enough money” is not a good reason not to employ them. It doesn’t have to be public works projects. That’s one solution. Another way to increase demand is to cut taxes. People have more money to spend, they buy more peanut butter, or cars, or swimming pools or whatever. They put their kids in dance classes, or spring for private schools. They buy a bicycle. The point is to use the most precious resource we have - which is labor - instead of letting it go to waste. Which makes us all poorer - not just the unemployed. Once people who are able to work are able to find jobs, then you can raise taxes again, if you’re worried about inflation. That creates (actually, increases) the demand for money, which supports the value of the currency. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [November 8, 2013, 4:56pm UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/85 "2013-11-08T16:56:28Z")
> [@LinusK](#): > > The economy could be limited by any number of factors: lack of workers, lack of workers with the right skills, lack of oil, or other natural resources, or (as is the case in the US right now) lack of demand. “Helicopter money” doesn’t do anything to fix the first several problems, but it is exactly the cure for the last one. It’s only a cure for the last one if it happens to be the only constraining factor, which it’s not and hasn’t been for the past 5 years. What do you think the point of QE was? Do you really have no idea what other constraining factors might be involved? As to the inflation issue, the incoming fed chair, Yellen, is more sanguine than most when it comes to the inflation risks associated with QE and feels that unemployment concerns should take precedence. So you can expect her to continue to use monetary policy to help stimulate the economy as much as possible even in the face of potential inflationary risks. But that doesn’t mean that monetary policy will be sufficient for the task at hand. It hasn’t been so far and that isn’t going to change. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [November 8, 2013, 8:53pm UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/86 "2013-11-08T20:53:19Z")
> [@Hellestal](#): > > I’m not quite sure where you’re getting hung up. This is merely a matter of definition. > > **Definition 1:** The [M1 stock of money](http://en.wikipedia.org/wiki/Money_supply#United_States) is defined as “The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits”. > > **Definition 2:** Demand deposits are liabilities of private banks. That is to say, they sit as credits in the liabilities column of bank ledgers. (This will be easier to understand if you know the basics of accounting.) > > The whole point of accounting is to keep track of things. When a company pays for something such as a new computer for the manager’s office, they’re going to record that transaction in their books. The computer is a new asset for the business, and that asset will sit as a debit in the assets column on their books. It’s double-entry accounting, so along with the debit, they’re going to credit what they used to pay for that computer. A normal company will record the transaction with a set of ledger entries. I’m probably getting the names of the accounts somewhat wrong, but it basically works like this: > > DEBIT New computer assetCREDIT CashWe have to remember that this “cash” is the accounting definition, which includes the company’s checking account balance. This entry says they’re increasing their computer assets, and decreasing their “cash” (checking account) assets. > > There’s a huge difference between a normal company and a bank when they’re paying for things. That difference is that we all use the bank’s liabilities as our money. When I think about how much money I have, I don’t just count the currency stuffed into my sock drawer. I think about my bank account balance, and that balance is a liability of a private (commercial) bank. My asset is their liability. That means that when banks cut a check to pay for anything, their ledger entry is going to be different. When the bank manager needs a new computer for their office, it looks like this: > > DEBIT New computer assetCREDIT Deposit LiabilityIn other words: the bank puts itself into debt to cut a check to buy the computer. That’s what deposit liabilities are: debt owed by the bank. And as it turns out, this is what banks do to purchase pretty much everything. They don’t draw down their monetary assets like other companies. Instead, they increase their monetary liabilities because that is the very nature of their business. It’s how they pay for everything. They put themselves in debt, which is the same thing as saying they increase the numbers in somebody’s checking account. That’s all pretty much true, except you’ve left out something that’s very important: banks can’t pay other banks (or anybody with an account at another bank) with their own liabilities. They have to draw down their account at the Fed to do that. I mean, I’m not trying to be rude, but I assume you know that, so why leave it out? In any event, if we’re talking about paychecks (which we were) there’s no asset side to the liability. That’s what makes paying employees (or buying assets which will later depreciate) different from making loans. > [@](#): > > If you want to have some fun, go on over to [fdic.gov](http://fdic.gov/) and mouse over the top where it says deposit insurance. One of the choices will be BANK FIND, and you can enter your own bank’s information. First click on the latest financial information. Then you’re looking for the “Call Report”. It’ll be a pdf. The first statement will be the income statement, followed by the balance sheet.DEBIT New loan assetCREDIT Deposit LiabilityNinety cents has nothing to do with anything. > > The deposit liability is created _simultaneously_ with the loan. > > Let’s say I own my house outright and I decide to sell it. I’m going to put it on the market for a nice round 100,000. A buyer shows up, and they take out a loan for the full amount. They happen to take out a loan at my very bank. So now the bank has a new loan on their books, and instead of actually printing up a check for me, they just tell me they’re going to deposit it in my account. > > DEBIT New loan assetCREDIT Deposit Liability (Hellestal’s Checking Account)And bam. New money was created. That’s it. It’s as simple as that. And because my account is with this bank, the process stops there. I’m not going to deposit the check at another bank. I’m also (probably) not going to cash out my account to stick the Franklins in my sock drawer. > > The bank has regulatory requirements. They created 100,000 of new deposit liabilities, so they might now have a reserve requirement of 10,000 dollars of cash. (Real cash this time: central bank money.) But reserves are easy to find, now more so than ever. We discussed this in one of the [OP’s previous threads](http://boards.straightdope.com/sdmb/showthread.php?p=15571069#post15571069). > You can see plain as day above. Regulations can be difficult, but the definitions are very easy. > > Mishkin’s book is pretty good, but this is not the sort of thing that monetary economists typically discuss. This is, in fact, why **LinusK** thinks his pet theory is such a revelation: It starts with basic truths of accounting, matters of definition, and it treats them more or less correctly in a way that a typical economist would not. (I’ll assume for charity that the rest of the MMT people actually know how accounting works, and that he is not representative of them.) It’s like finding some deep secret that no one else knows about, that special tingle of the “insider’s knowledge” that makes people feel big in their britches. Then they extrapolate from those definitions in ways that quite often make no sense. > > It’s very much like Austrian Theory, in fact. It’s a mishmash of true observations with petty ideology that requires some intellectual effort on the part of the reader. After they’ve put in that effort, they have the overwhelming need to believe that what they just strained themselves to understand has real Truth to it. The cognitive dissonance would be too much if they bothered to learn this magnificent system that happened to be wrong. > > I have the same psychological tendencies myself, which is why I try to read as many viewpoints as I can. It’s a way to avoid the trap of reasoning ourselves into nonsense. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [November 9, 2013, 3:19am UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/87 "2013-11-09T03:19:03Z")
> [@foolsguinea](#): > > I disagree with the OP’s conclusion. Increasing the money supply is fine. Increasing the money supply \*by constantly going deeper into debt \*is foolish. When the Fed buys the debt it monetizes the debt. It’s one part of the government buying debt from another. Although the debt stays on the books, it’s the same as increasing the money supply without increasing the debt. The whole process - the government issuing Treasuries and the Fed buying them - is the same as the government simply issuing money in the first place. There’s no limit on how much debt the Fed can buy. It could all of it (or all that people were willing to part with) if it wanted. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [November 9, 2013, 10:48am UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/88 "2013-11-09T10:48:36Z")
> [@LinusK](#): > > When the Fed buys the debt it monetizes the debt. It’s one part of the government buying debt from another. Although the debt stays on the books, it’s the same as increasing the money supply without increasing the debt. The whole process - the government issuing Treasuries and the Fed buying them - is the same as the government simply issuing money in the first place. There’s no limit on how much debt the Fed can buy. It could all of it (or all that people were willing to part with) if it wanted. Except, as has been pointed out repeatedly, those purchases are done NOT for the purpose of monetizing the debt but for the purpose of increasing liquidity in the system. You may claim this is a distinction without a difference and it would be if the expressed purpose of the fed was not to resell those securities back into the market at some future date. At the point that is accomplished, then the debt has been “de-monetized.” Except since that IS in fact the expressed purpose, no one regards it as monetization. There is the issue of interest payments being made on that debt essentially being free in the meantime however I would point out 2 things here. First, the fed only owns about a third of the US’s long term (10-30yr) debt. Second, it has also purchased a huge amount of other securities, mainly MBSs, that IIRC rivals what it owns in the form of US Treasuries. So is there room for some legitimate criticism of the fed in terms of it’s ownership of US debt? Sure. But is this tantamount to saying that the fed is monetizing the debt? Hardly. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [November 9, 2013, 1:52pm UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/89 "2013-11-09T13:52:55Z")
> [@deltasigma](#): > > One doesn’t necessarily imply the other although a larger economy implies more economic activity on average over the course of the business cycle and therefore, on average, a larger money supply. > > However the idea that increases in the debt mean a larger money supply is tied to the idea of monetization. That’s the idea that you finance the debt by printing more money. Specifically, the Treasury would issue more debt which would eventually be bought by the Federal Reserve with money they would create ab nihilo, from nothing. IIRC, the fed currently owns [about a third of long term debt of the US](http://macromarketmusings.blogspot.nl/2012/11/the-biggest-myth-about-fed.html) but I think almost all of that has been purchased over the course of the past 4-5 years as part of the various liquidity programs lumped under the rubric of quantitative easing. All of the money has gone to create bank reserves and eventually those securities will be sold back into the market to reduce those reserves to pre-crisis levels. > > However if the intention were to hold those securities or buy the bulk of newly issued debt with printed dollars, that would qualify as monetization. True. But Treasury bonds, like dollars themselves, are created out of nothing. And they represent a transfer of financial wealth from the government to the pubic. They are liabilities of the government (the Treasury) and assets to the public. Dollars, created by the Federal Reserve, are liabilities of the government (the Fed) and assets to the public. The reason why fiscal policy is a better tool for managing the economy is that the Fed maintains a balanced balance sheet. When it “monetizes” the debt, it’s only taking assets the private sector already had, and trading them for dollars. There’s no net benefit to the private sector: the Fed’s assets and liabilities match up (it sends its profits to the Treasury). The Treasury doesn’t do that. Its assets and liabilities don’t have to match up. It has a negative balance sheet - the debt. The debt represents assets (wealth) to the private sector. Public debt is private savings. Part of that debt - the part purchased by the Fed - is dollars. The rest is bonds. But the point is that there’s an actual transfer of financial assets, not just a trade of one asset for another. If the public, collectively, is trying to improve its financial balance sheet, by, for example, spending less than income, the government must provide those savings to avoid a recession. Only the Treasury can do that, not the Fed. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [November 9, 2013, 2:23pm UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/90 "2013-11-09T14:23:31Z")
You keep spouting the same nonsense and people like myself and Hellestal and Measure for Measure keep telling you that you don’t know what you’re talking about and demonstrate why what you’re saying is nonsense but a few weeks or months go by and yet you seem to come back with the same bullshit arguments we’ve tried to correct countless times before. So forgive me if I ignore everything you just said and focus on what might be of interest to other posters. The difference between quantitative easing by the fed and fiscal policy is that when the fed buys assets, the money goes into bank reserves. Reserves cannot move directly into the economy but only indirectly as the basis for making new loans. Therefore the power of reserves is based on loan demand which in turn is based on a host of other factors. Beyond that, it’s rare that reserves would ever be a constraining factor in an economy with a central bank regardless, but that’s another post. Fiscal policy however can inject funds directly into the economy and directly create demand for money by creating employment and economic activity through govt projects. There is no way that the fed can do this. I should also point out that it is extremely rare that any central bank uses monetary policy the way it’s been used since 2008. QE is something you do only in ZIRP (zero interest rate policy) environments. And you only get into a ZIRP situation in very specific sorts of scenarios. ---
**Author:** ![cornopean](https://avatars.discourse-cdn.com/v4/letter/c/8c91f0/32.png) [@cornopean](https://boards.straightdope.com/u/cornopean)\ **Post date:** [November 9, 2013, 2:39pm UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/91 "2013-11-09T14:39:40Z")
> [@LinusK](#): > > It goes without saying that that in a country like the US, the governmet is the ultimate source of dollars. the govt is the source of dollars? what does that mean? the govt has no money of its own. if the govt wants money, it first has to take it from someone. no? ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [November 9, 2013, 6:01pm UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/92 "2013-11-09T18:01:46Z")
> [@Measure\_for\_Measure](#): > > Thanks again. I hadn’t thought about a bank’s non-loan processes before I opened this thread. And the snapshot point is illuminating. > The financial crisis has been liberating in a way; suddenly perfect market assumptions don’t seem _necessarily_ like the appropriate ones to work with _by default_. Which means that all sorts of issues get revisited. Ok, but the term structure of interest rates reflects all that, right? Well, no: not necessarily, at least not entirely: financial markets are weird. Look at the foot dragging after the Fed’s change in policy in October 1979, arguably lasting over a decade. I’d argue the stagflation of the 70’s was caused by the sudden decrease in supplies of oil, which was then, more so than now, a necessary component of economic production. It meant both a slowdown in the economy, because the economy could not operate at full capacity during the sudden decrease in the supply of energy, and an increase in inflation, as the price for the remaining oil sky-rocketed, increasing the price of everything that depended on oil energy for production. Because it was an energy problem, the solution depended on finding new sources of oil, using less oil, and finding alternative sources of energy. It wasn’t a fiscal or monetary problem. > [@](#): > > Thinking hard about expectations is a good idea, particularly when conventional monetary policy is maxed out and that’s (almost) all you have to work with. But I think the idea that a new Fed chair can set policy with 100% credibility has been falsified by the US’s and Britain’s experiences with tightening during the early 1980s: we couldn’t adjust inflation without undergoing recession. > > Hot money: As I said in an earlier thread, I’m much more inclined to believe financial market responses to Fed announcements than main street ones. But an article in the NYT gave me pause: they discussed how higher inflation might be a good thing (and implicitly why very low inflation is a bad thing). Rogoff of all people provided the most dovish comments, calling for 6% inflation for a couple of years. Now something like _that_ just might come to the attention of those planning capital investment. But the effects of discussions of tapering QE3 seem to me to be captured fully by looking at investment elasticities to subsequent-change-in-long term rates. i.e. I’m guessing the real world effects are small. (The shutdown would be another matter.) I’d like to see some empirical work though: my WAGs don’t cut it. Woops, I thought we were in Scott Sumner’s world. :smack: **LinusK** : I retract my earlier political observations. MMT, I think, generally argues that deficits should be the norm in an expanding economy. Surpluses should be used only to contain inflation; there’s nothing inherently wrong with deficits.They do not, for example, represent a burden on anyone’s grandchildren. The real investment projects we build now, on the other hand, represent our legacy: functional justice systems, bridges, roads and other transit projects, investments in technology and education and skills training, etc. the chance to get a job _now_, so they can build skill-sets and gain experience needed to be more productive later on. Those things help make them more productive in the future, and it’s their productivity that will determine their wealth, not government debt. The unemployment numbers for young people in European austerity countries is over 25%. That represents real, permant damage, in terms of reductions in life-time earnings, and the inability to gain skills and experience that will help them be productive in the future. It seems like to me that the relative difference in outcomes for the US (which has added trillions to its debt) and those European countries is some evidence that there’s something wrong with the economic theory the EU is trying to follow. > [@](#): > > Agreed, it’s an ideological connection, one that isn’t universal. Conservative governments often adopt Keynesianism once they attain power, sometimes fairly explicitly. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [November 10, 2013, 1:41am UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/93 "2013-11-10T01:41:44Z")
> [@septimus](#): > > The measurements of “money” are somewhat fuzzy and arbitrary. Banks A and B may have demand deposits in each other; that “money” is a “wash;” rightfully such money isn’t counted in M1 (or any “M”). However some money that is, conceptually, a similar such “wash” _is_ counted. > > Demand deposits on the FRB _are_ counted in MB, although to some extent these deposits play a role similar to inter-bank deposits which are _not_ counted. _Although not a full explanation_, this is part of the reason for the recent surge in MB. > > **LinusK** , some of your focus on “money” makes me think you missed, or did not believe, my response in another thread: Quote: Originally Posted by septimus Having a $500 checking account at the Federal Reserve Bank is, similarly, similar to having $500 in Federal Reserve notes! IOW, a F.R. banknote is very similar(\*) to a Traveler’s Checque, but is drawn on the Central Bank instead of a private bank. Remembering this simple fact would clear up some of the confusion about U.S. “money.” Well, they’re exactly the same in the sense that the Fed will always exchange a dollar in a reserve account for a dollar of currency (assuming you have an account at the Fed). Your local bank will do the same thing: exchange a dollar in your bank account for a dollar of currency. What confusion does that clear up? ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [November 10, 2013, 2:21am UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/94 "2013-11-10T02:21:08Z")
> [@LinusK](#): > > [1] I’d argue the stagflation of the 70’s was caused by the sudden decrease in supplies of oil, which was then, more so than now, a necessary component of economic production. It meant both a slowdown in the economy, because the economy could not operate at full capacity during the sudden decrease in the supply of energy, and an increase in inflation, as the price for the remaining oil sky-rocketed, increasing the price of everything that depended on oil energy for production. Because it was an energy problem, the solution depended on finding new sources of oil, using less oil, and finding alternative sources of energy. It wasn’t a fiscal or monetary problem. > > [2] MMT, I think, generally argues that deficits should be the norm in an expanding economy. Surpluses should be used only to contain inflation; there’s nothing inherently wrong with deficits.They do not, for example, represent a burden on anyone’s grandchildren. 1. IIRC, the main problem with stagflation was inflationary expectations. A new term had to be invented be historically inflation accompanied economic expansions. That was the first time I believe that you had inflation together with slow to negative growth. And also IIRC, that period of inflation was preceded by a period of artificially low interest rates. 2. Monetary theory says nothing of the kind and I defy you to provide any sort of citation from a reliable source that says otherwise - the OP you started this thread with being hardly reliable. There are plenty of monetary theorists out there that write for online sites like the Syndicate Project that you should be able to find at least one blurb someplace to back up this bogus claim. What you’re talking about is straight Keynsianism NOT monetarism and while many economists subscribe to both theories, and rightfully so, I would make a better effort to keep them separate ideologically. While there is overlap between them, monetary policy is not primarily concerned with fiscal policy. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [November 10, 2013, 2:25am UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/95 "2013-11-10T02:25:18Z")
> [@LinusK](#): > > Quote: > Originally Posted by septimus > Having a $500 checking account at the Federal Reserve Bank is, similarly, similar to having $500 in Federal Reserve notes! IOW, a F.R. banknote is very similar(\*) to a Traveler’s Checque, but is drawn on the Central Bank instead of a private bank. Remembering this simple fact would clear up some of the confusion about U.S. “money.” > > Well, they’re exactly the same in the sense that the Fed will always exchange a dollar in a reserve account for a dollar of currency (assuming you have an account at the Fed). Your local bank will do the same thing: exchange a dollar in your bank account for a dollar of currency. > > What confusion does that clear up? I’ll let someone who is actually familiar with bank accounting take this but I’m pretty sure that’s complete rubbish. Reserves are not necessarily held at the Fed AFAIK. The actual location I believe is immaterial but I won’t swear to that. What IS material is the fact that the fed pays interest on EXCESS reserves. So they are critically different from bank reserve notes in at least THAT respect, wouldn’t you say? ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [November 10, 2013, 2:54am UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/96 "2013-11-10T02:54:56Z")
> [@Hellestal](#): > > If you believe that the “warehouse” doesn’t matter, then the surplus or deficit is equally irrelevant. If one doesn’t matter, then neither does the other. > > The government doesn’t actually have to buy things to get money in the world. They could be running a perfectly balanced budget, and still get cash into the world by dropping it out of helicopters. If they were running a perfectly balanced budget, the money dropped would simply be money previously taxed. They’d be moving money around, but not increasing it. > [@](#): > > Nor do they have to use their conventional tax authority to remove money from circulation. If we’re ignoring [the actual costs of printing currency](http://www.federalreserve.gov/faqs/currency_12771.htm), then we could just as easily imagine that they could print self-destructing banknotes, triggered by a switch in Ben Bernanke’s hands, or more practically speaking, simply announce that certain serial numbers are no longer legal tender and therefore no longer valid for bank reserves or for taxation. You would never again be able to make a deposit with that cash, because every bank would scan it before accepting it. They could do those things, but we already have a tax system in place, which is a better way of doing it anyway. For one thing, it allows for progressive taxation. > [@](#): > > What you’re doing here is pointing out a single institution, the “warehouse”, and saying that that institution is an arbitrary legal construct. Well sure. But then so is everything else. You’re pointing at budget deficits and surpluses and saying that they are somehow more real and more relevant than the Treasury account. They aren’t. They are just legal constructs, too. > > It’s turtles all the way down. I disagree with you there. People’s own appreciation of their financial net worth affects their behavior: for example, when stocks go up, people spend more freely. When people spend more freely, they create jobs for the people who have to supply new goods and services. When the market tanks, like in 2008, suddenly people stop spending. That creates unemployment, which further reduces spending, creating more unemployment. The point is that while its true that money is a sort of collective illusion, it affects real productivity. People want money for various things: for spending, for saving (in the usual sense of the term), for taxes, and for repaying mortgages and other kinds of loans. If there’s slack in the economy (unemployment), because people are trying to save, or to repay loans, or to pay taxes, instead of spending, the government has within its power the ability to fix that particular problem, by either taxing less, or spending more, or both. The point is that while dollars and Treasury bonds are made-up things, they have the power to change people’s behavior, so that there are more people working, creating real goods and services. While dollars and bonds might be “pretend” wealth, in the sense that they can be created out of nothing, if creating them leads to more real wealth (goods and services) that’s what the government should be doing. > [@](#): > > Normally when I point this out, the next step from a Post-Keynesian is to say, “Well, politically speaking it’s not really possible to drop money out of helicopters.” And that’s true. But politically speaking, it’s equally true that it’s impossible to ignore the warehouse. You don’t get to ignore the legal institutions you dislike, while simultaneously defending the legal institutions you like. This is, again, why definitions are so important. Definitions are themselves an institution that allow a common language in which to discuss these issues. _And by definition, there is a warehouse._ It’s the Treasury account at the Fed. It even works like a warehouse: money goes in, money is stored, money goes out. It’s a legal institution, sure, but it’s a legal institution that works exactly the way a real warehouse would work. You can say it’s fictional, but the moment you do that, you’re ignoring both the definitions _and_ the practical way in which it’s actually used. You’re ignoring those two things together, and once you go so far, I can point out the fictions of everything else that you want to talk about. > > You said “dollars are disappearing”. That was not correct. It was wrong by definition and it was wrong as a practical matter based on how the government actually operates when it has a surplus. When we’ve had a surplus in the past, the government paid down debt, which meant that Treasury bonds disappeared - literally. When a debt instrument is paid off, it disappears. If the Treasury were to pay down debt owned by the Fed - directly or indirectly - then dollars would disappear, as well as Treasuries. > [@](#): > > There is real historical record on this which shouldn’t be ignored. > This is not correct. > > You do not know the “net financial balance” of the public. You don’t need to know the net financial balance of the private sector. You need only know that when the net financial position of the government declines - by spending more than it taxes - the net financial position of the non-government sector increases by the same amount. Net spending by the government is net-income to the non-government sector. > [@](#): > > “Net” means counting all things together. You have not done this. > > You are looking at government only. > > You have ignored every other sector. > > You cannot assume private investment will be low. Investment is endogenous. Generally, in a recession, investment will be low. If it wasn’t, it wouldn’t be a recession. > [@](#): > > You cannot assume the foreign sector will remain so far in deficit. A government surplus might improve exports. A surplus would mean the government was taxing more than it was spending. If that tended to increase the relative value of the dollar (and you agree that it would, right?) that would hurt exports, not help them. > [@](#): > > Foreign trade is endogenous. > That’s a shame, because you made plenty of other errors that you haven’t yet gotten around to. > Your personal system no doubt suits your own needs. > > It has not helped you with bank accounting. > > From your repeated bookkeeping errors in this and other threads, your personal record-keeping needs are self-evidently not complex enough for you to resort to an actual double-entry system. > > That would be fine on its own. There would be no problem with that. > > Except for your repeated attempts to comment on bank accounting. You don’t get everything wrong, but it’s enough. > Most of this is true. (The FDIC resolves commercial banks in the US, not the Fed. But the general idea is there.) > > Now take the next step. When are deposit liabilities destroyed? It’s easiest to begin by considering interest-only loans. They can exist [in some interesting contexts](http://boards.straightdope.com/sdmb/showthread.php?p=15768061#post15768061). Imagine you’ve got an interest-only loan from the very same bank where you keep your bank account. The next interest payment is due. Say it’s a thousand dollars. You pay the bank by writing a check drawn on your account at that very bank. This is revenue instead of expense for the bank. > > What’s the ledger entry for the bank? What’s the debit and what’s the credit? If you make an interest payment out of an account drawn on the same bank, its liabilities would decrease by the amount of the check. Your balance would decrease by $1000, which means the bank’s liabilities would decrease by the same amount. Since commercial bank liabilities are money, $1000 of money would disappear. The bank’s balance sheet would improve by $1000, since its assets would remain the same, while its liabilities decreased. What happens to the M1 considering this transaction by itself? [/QUOTE] -$1000. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [November 10, 2013, 4:01am UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/97 "2013-11-10T04:01:55Z")
> [@LinusK](#): > > The point is that while dollars and Treasury bonds are made-up things, they have the power to change people’s behavior, so that there are more people working, creating real goods and services. While dollars and bonds might be “pretend” wealth, in the sense that they can be created out of nothing, if creating them leads to more real wealth (goods and services) that’s what the government should be doing. It’s interesting to see you make some observations that actually are based on fact, such as the [wealth effect](http://en.wikipedia.org/wiki/Wealth_effect) - even though you either don’t know enough to call it by its proper name or for whatever reason prefer not to. And yet in spite of realizing certain facts persist in certain other false beliefs. I think as long as you continue to strive for internal logical consistency though, the remainder of your attitudes will fall into line with more conventional economic views. Anyway, as to the quoted bit, part of the fed’s QE strategy has in fact been to stimulate the wealth effect. But this is a dangerous game and the fact that it has not spun out of control is due almost entirely to the huge amount of faith and trust that the fed has built up in the years since the crisis. If people really believed that the fed was monetizing the debt over the long term or if they had in fact purchased a great deal more than the roughly 30% of long term US debt than they already have, you would have seen a very different response from the markets. The markets are not stupid and the feds figures are a matter of public record. So any attempt to engage in a wholesale debasement of the currency would have the opposite of the intended effect. But once again, the point here is that the fed has already done pretty much what you have suggested and done so at least in part for the reasons you are suggesting. The problem is that it has little to no appreciable affect. Why do you think that is? ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [November 10, 2013, 8:49am UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/98 "2013-11-10T08:49:42Z")
**LinusK** , have your views evolved, or become better focused over the past few weeks? Wasn’t it you who started a thread that “money” in the stock market was “financial wealth” instead of “real wealth”? I found your posts there very confusing. Your underlying points may have had some validity, but your insistence on equating “money” with “real wealth” made the discussion impossible to follow. Lately you seem to emphasize one clear fact that I agree with: America has unemployed men and broken bridges. If the men were employed to repair the bridges prosperity would increase. You seem to agree with that. Accounting for this bridge repair with money is a secondary issue. Indeed that the FRB has “created” trillions of dollars recently to little effect demonstrates that “money” may have only 2nd-order effects on the real economy. > [@LinusK](#): > > … > The point is that while its true that money is a sort of collective illusion, it affects real productivity. > … > You need only know that when the net financial position of the government declines - by spending more than it taxes - the net financial position of the non-government sector increases by the same amount… I agree with the first sentence. The second sentence is confused, IMHO. The country will have _more wealth_ when its bridges are repaired. A growing economy will almost automatically have more “money” due to the “money multiplier” of commercial banks. I think your insistence on relating real wealth to “financial position” or “money” is distracting. > [@LinusK](#): > > What confusion does that clear up? I may have confused you with another Doper who regards M0 (banknotes) as real money, and M1/M2 as a fiction or fraud. :smack: ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [November 10, 2013, 1:04pm UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/99 "2013-11-10T13:04:34Z")
> [@](#): > > What happens to the M1 considering this transaction by itself? -$1000. * * * One interesting thing about that, is - as far as commercial banks go - if everyone paid off all their debts, there would be no money. In fact, it’d be worse than that, there would be negative money, because the absolute most that can be paid back is the amount that was lent in the first place. Once everyone drew all their bank accounts down to zero, all that would be paid off would be the principal - the amount lent in the first place. All the interest would have to go unpaid, because there would be no money to pay it. At least, no money in the commercial banking system. ---
**Author:** ![LinusK](https://avatars.discourse-cdn.com/v4/letter/l/258eb7/32.png) [@LinusK](https://boards.straightdope.com/u/LinusK)\ **Post date:** [November 10, 2013, 2:37pm UTC](https://boards.straightdope.com/t/what-can-be-done-about-the-myth-that-the-federal-government-only-has-limits-amounts-of-money/671614/100 "2013-11-10T14:37:21Z")
> [@deltasigma](#): > > It’s only a cure for the last one if it happens to be the only constraining factor, which it’s not and hasn’t been for the past 5 years. What do you think the point of QE was? When the Fed “prints” money (admittedly a misleading term) it buys things with that money. Usually Treasury bonds, but more recently it’s bought other assets as well. Either way, when it buys those assets from the public, the public gets dollars, but it “pays” for those dollars with assets of equivalent worth. In other words, QE is not “helicopter” money. And no amount of QE ever (considered by itself) ever increases the public’s net worth. What it does is drives down interest rates. Which is a good thing, but not enough by itself. If the public is broke - because of, for example, a financial crisis and long-term unemployment - what’s necessary is to actually improve their financial position, so that they can actually do the things they’re trying to do: save money, for example, or pay down debt. And ultimately, start spending again, because spending is what’s necessary to employ people to create goods and services. No amount of asset swaps - which is what the Fed does (again, considered by itself) will do that. The Fed could buy all US debt - every Treasury ever printed - and that (by itself) would not fix the situation. (It would effectively eliminate the national debt, though.) “Helicopter” money would involve simply giving everyone money - money they didn’t have pay for (by selling assets to the Fed, for example). We don’t really have framework for doing that, directly. But we can, and have been, doing it indirectly. It goes like this: 1. the government taxes less than it spends, say a trillion dollars. It borrows money to make up the difference. Now, there’s no more “money” in the system than there was before. What there is is a trillion dollars worth of new Treasury bonds. The government simply “printed” them, and handed them out. (Yes, it got cash for them, but then it turned around and spent that cash directly back into the economy.) That, all by itself is helpful, if people are looking for safe, interest-paying savings vehicles. (Which apparently they are, since they keep buying them.) But, if for whatever reason, you really want to put cash into people’s hands, instead of Treasury bonds, that’s where the Fed comes in. It can buy however many trillions of dollars of Treasuries it wants, which in turn puts cash into the system. The point though, is that it’s converting a financial asset - the Treasury bond- into money, an asset that was created by the Treasury in the first place. The net effect - the net effect of the Treasury and the Fed acting together - is “helicopter” money. But it’s the Treasury that’s the prime mover in the system. The Fed can only (in our system) convert Treasury bonds into money after the Treasury has created the bonds in the first place. > [@](#): > > Do you really have no idea what other constraining factors might be involved? My own opinion is that the financial system is inherently unstable. In good times stocks go up, people borrow, money gets spent, and people are employed. But the banking system is set up in such a way that the more that is borrowed the more interest is owed. At some point people start looking at the situation, and they start to get scared. Maybe they think stocks are over-valued (which they probably are) or that housing prices have become unsustainable (which they were) and suddenly assets that people were relying on start to look insecure. They start selling stocks instead of buying them. They stop buying houses, or MBS’s, or whatever. Meanwhile all that commercial bank debt is still out there - plus all the interest that’s accumulated. If the assets that people were depending on have disappeared (stocks have plummeted, the housing market has gone into the toilet) then some people aren’t going to be able to pay their debts, and then the problem spreads into the banking sector itself. Anyway, I don’t have to keep going on, do I? You get the point. I mean, we just lived through it. Anyway, the financial system is inherently unstable, and it’s not a problem that the private sector, on its own, can fix. Anyway, to answer your question, the constraining factor is that the public is trying to save (spend less than it earns) and trying to pay down debt. The private sector, on its own, however, can’t do those things, because 1. One person’s spending is someone else’s income (therefore, collectively, spending less just means less income) and 2. The public always owes more to the banking system than the amount it has on deposit with banks. And the more it tries to pay down its debt, the less money there is. The solution is for someone, outside the private sector, to step in and pick up the slack. > [@](#): > > As to the inflation issue, the incoming fed chair, Yellen, is more sanguine than most when it comes to the inflation risks associated with QE and feels that unemployment concerns should take precedence. So you can expect her to continue to use monetary policy to help stimulate the economy as much as possible even in the face of potential inflationary risks. But that doesn’t mean that monetary policy will be sufficient for the task at hand. It hasn’t been so far and that isn’t going to change. I agree. Monetary policy is helpful, but (in our system) can only do so much. What’s necessary is a fiscal policy that puts employment ahead of (illusory) concerns about government deficits and debt. 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