If at first you succeed, then what?

June 18, 2013 § Leave a comment

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It is sometimes argued that the US government must be dependent on commercial bank money to fund its various activities and public enterprises, because the US Treasury holds some deposit balances at commercial banks.  But I believe this is a seriously misleading claim.  The government is certainly dependent on private sector economic activity and finance in a more general sense: if there were less private sector economic activity, there would be correspondingly fewer goods and services produced by our society, and thus fewer real assets that the government could make obtain and make use of to carry out its own activities.  But the government is not financially dependent in any fundamental way on commercial bank deposit liabilities to carry out government spending.

To see this, let’s first look at a simplified picture of Treasury taxing and spending, before moving to the more detailed and accurate picture.  The US Treasury has an account at the Fed called the “general account,” and that is the account from which it spends.  Suppose I have an account at Maple Valley Bank from which I pay a $2000 tax obligation to the US government.  Here’s the simplified picture: I send a check to the government, and as a result of the check being cleared $2000 is transferred from Maple Valley Bank’s Fed account to the Treasury general account.  At the same time, my deposit account balance at Maple Valley Bank is reduced by $2000 and so Maple Valley Bank’s debt to me is reduced by $2000.  Thus, Maple Valley Bank has lost both a $2000 asset and a $2000 liability, and experiences no net loss or gain.  But the US Treasury now has $2000 more and I have $2000 less.  The Treasury then spends that $2000 by buying $2000 worth of sticky note pads from Acme Office Supplies, a company which banks at Old Union Bank.   After the various payment operations are completed, Acme’s account at Old Union has $2000 more in it, and $2000 has been transferred from the Treasury general account to Old Union’s reserve account at the Fed.

Now here’s the more accurate picture:   In practice it has been found that conducting government operations in the way just described results in undesirable volatility in bank reserve balances, which interferes with the central bank’s ability to implement its target rate for interbank lending:   So the government has introduced Treasury Tax and Loan (TT&L) accounts.   TT&L accounts are US Treasury accounts at commercial banks designated as TT&L depositories.  Suppose Ridge Bank is such a depository.  Then when I send my $2000 check to the government, it may deposit it in its TT&L account at Ridge Bank.  As a result, $2000 is transferred from Maple Valley Bank’s Fed account to Ridge Bank’s Fed account.  At that point, no reserves have left the banking system.  But as the Treasury spends over time, it continually transfers money from its TT&L accounts to the general account, and then spends from the general account.  As that happens, central bank liabilities first leave commercial bank reserve accounts and then go back into those accounts after the Treasury spends.

Clearly there is no fundamental difference between the simplified system and the more complex system that uses the TT&L accounts as monetary way stations.  The TT&L accounts exist solely to smooth out the flow of central bank liabilities to and from the Treasury general account and commercial bank reserve accounts.   There is no sense in which the Treasury needs the commercial banks to “create” money in those accounts to carry out its taxing and spending operations.

In a broader sense it should be clear that, far from needing to acquire commercial bank liabilities in order to spend, the government doesn’t even need to obtain Federal Reserve liabilities from commercial bank reserve accounts in order to spend, and could alter the existing system if it so chose.  The central bank is itself an arm of the US government and thus liabilities of the Fed held as assets by the Treasury are just amounts owed by one government account to another government account.  read more

PHOTOGRAPH: Josef Sudek

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It is my design to render it manifest that no one point in its composition is referrible either to accident or intuition — that the work proceeded, step by step, to its completion with the precision and rigid consequence of a mathematical problem

March 13, 2013 § Leave a comment

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Modern money is is state money. Taxation today functions to create demand for state currencies in order for the money-issuing authority to purchase requisite goods and services from the private sector. Taxation, in a sense, is a vehicle for moving resources from the private to the public domain. Government spending in sovereign currency systems is not limited by the ability of the state to ‘raise’ revenue. In fact, as it will be explained below, sovereign governments face no operational financial constraints.

To fully grasp the logic of sovereign financing, one must make the analytic distinction between the government and non-government sectors. For the private sector, spending is indeed restricted by its capacity to earn revenue or to borrow. This is not the case for the public sector, which ‘finances’ its expenditures in its own money. This is a reflection of its single supplier (monopoly) status. For example, in the USA, the dollar is not a ‘limited resource of the government’. Rather it is a tax credit to the population which is confronted with a dollar-denominated tax liability. Thus government spending provides to the population that which is necessary to pay taxes (dollars). The government need not collect taxes in order to spend; rather it is the private sector, which must earn dollars to settle its tax debt. The consolidated government (including the Treasury and the central bank) is never revenue constrained in its own currency.

If the purpose of taxation is to create demand for state money, then logically and operationally, tax collections cannot occur before the government has provided that which it demands for payment of taxes. In other words, spending comes first and taxation follows later. Another way of seeing this causality is to say that government spending ‘finances’ private sector ‘tax payments’ and not vice versa. Several other implications follow.

Deficits and surpluses
Government spending supplies high-powered money to the population. If the private sector wishes to hoard some of it – a normal condition of the system – deficits necessarily result as a matter of accounting logic. Furthermore, the government cannot collect more in taxes than it has previously spent; thus balanced budgets are the theoretical minimum that can be achieved. But the private sector’s desire to net save ensures that deficits are generated. The market demand for currency, therefore, determines the size of the deficit.

In a given year, of course, surpluses are possible, but they are always limited by the amount of deficit spending in previous years. If during the accounting period government spending falls short of tax collections, private sector holdings of net financial assets necessarily decline. The implication is that surpluses always reduce private sector net savings, while deficits replenish them. It should also be noted that, when governments run surpluses, they do not ‘get’ anything because tax collections ‘destroy’ high-powered money.  read more

PHOTOGRAPH: Hans-Peter Feldmann

CLOV: Do you believe in the life to come? HAMM: Mine was always that

February 4, 2013 § Leave a comment

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All the water you drank today was sewage in the recent past and very possibly excreted by the person sat next to you right now.

Their output made your coffee possible. That and the stewed cowpats in which the coffee grew.

Still thirsty?

Water operates in a cycle, and therefore starting at any point on that cycle is as valid as any other point. But the emotional impact is vastly different.

The standard water cycle always starts with evaporation. Even the pre-treatment of water to make it drinkable is barely mentioned, and we certainly don’t go into the mechanics of what happens after you flush.

But wind that cycle back a stage and you can immediately generate a severe disgust reaction. So much so that even in areas with a severe shortage of water any attempt to use our advanced technological knowhow to short-circuit the evaporation/precipitation part of the cycle gets a label: “toilet to tap”.

And that tends to stop any rational debate on the subject stone dead.

Precisely the same trick is used with government spending. Government spending is just like the pre-treatment of water. It is an artificial intervention into the natural system that stops people and businesses dying unnecessarily. It is why we have an advanced economy rather than all of us having to stew our own cowpat juice.

And, like water, any spending in a credit economy creates a form of effluent that has to be dealt with by an active intervention. These are the excess saving desires of the non-government sector. They have to be sorted out or everything starts to go very smelly very quickly.  read more

PHOTOGRAPH: Jessica Tremp

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