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I thought it was misleading of Mike to say around 3.20 that Congress just creates money. It would be more accurate to say that Congress borrows from the private sector and then the Fed buys that debt.
Alternatively you could say that the “government / central bank machine” just creates and spends money when it wants.
And now I’m going to hide under my duvet in case Mike comes back at me with a Grrrrrr.
"It would be more accurate to say that Congress borrows from the private sector and then the Fed buys that debt."
It would be more accurate to say that Congress issues a liability (bond) in exchange for liabilities which it previously issued (reserves), which are then destroyed, then it issues more liabilities (spends), and then it issues more liabilities (reserves) in exchange for the first liability (bond), which is then destroyed.
Congress can't hold its own liabilities as assets. The Treasury can, however, hold Fed liabilties as assets. Treasury liabilities and Fed liabilities are both liabilities of Congress.
MF, "monetizing the debt" is a label people throw around whenever they want to put a negative connotation on certain money operations of the central bank.
"Monetizing the debt" had a specific meaning in gold standard days. It referred to the Fed buying the Government's debt directly. That's what the term means, and that's what the law prohibits. Any other use of the term is just to label some other practice with a pejorative.
Do you think it's accurate to say that the U.S. government (via the Fed) "issues" Reserves? Indeed, Reserves "come from" the U.S. government (the Fed), but it seems the domestic private sector's demand for credit, in conjuntion with the banks, is what drives the issuance… right?
Notice that FRN are emblazoned with "The United States of America" and signed by both the treasurer of the US and the US secretary of the Treasury.
Tys securities, coin and Treasury notes when issued are Tsy liabilities.
The US federal govt alone is authorized to issue the national currency in the name of the United States. It does so through its agencies, the Fed and the Treasury.
Banks are permitted to denominate deposits they create in USD. When the bank issues a deposit credit, it is a promise to provide either cash on demand at the window or else settle in rb in the interbank system as necessary after netting.
yes the fed does respond to demand for reserves from banks, so as to maintain the target interest rate. It either does this directly by lending reserves, or indirectly by buying treasuries.
Alternatively it can just ensure the banking system has excess reserves, and then set the interest rate by paying interest on reserves and lending at that rate.
If there were zero government debt, the banks would have to borrow all their reserves from the fed, or get them by selling assets like gold to the fed.
"Congress issues a liability (bond) in exchange for liabilities which it previously issued (reserves), which are then destroyed"
What I meant is that the US government liabilities are 'destroyed', even though the actual reserves are not.
When the treasury gets reserves in its account at the fed, these are counted as treasury assets. They are also fed liabilities.
However, treasury and fed are both different branches of the same US government. So from the perspective of the govt, treasury assets and fed liabilities cancel each other out, i.e. equal zero (net).
Simply put, when the treasury gets reserves in its account at the the fed, the govt gets its own liabilities back. When you get your own liabilities back they cease to be liabilities. The liability is 'destroyed'. It doesn't become an asset, it simply becomes nothing (zero).
If I were to give you an IOU for $100, and then you were to give that IOU back to me, it would cease to be an IOU. The piece of paper on which the IOU was written would still exist, but it would be neither a liability nor an asset, it would be zero, just a piece of paper. From the perspective of the US govt, this is what happens when the treasury gets reserves in its account.
As well as completely failing to mention that fed liabilities and assets and treasury liabilities and assets, are all liabilties of the US government, he also completely fails to mention why anyone needs fed liabilties in the first place - why they have any value instead of just being bits of paper or meaningless digits on a screen.
Answer: the treasury demands them in payment of taxes.
If the treasury did not demand them in payment of taxes, fed liabilities would be worthless. This renders the idea that the treasury is beneath the fed in the 'money hierarchy', and on the same level as banks, utterly ridiculous. The fed and treasury are on the same level, beneath Congress. The fed is not at the top of the 'money hierarchy'.
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Nice! like the 'arrrrrrrrr' at the end :)
I thought it was misleading of Mike to say around 3.20 that Congress just creates money. It would be more accurate to say that Congress borrows from the private sector and then the Fed buys that debt.
Alternatively you could say that the “government / central bank machine” just creates and spends money when it wants.
And now I’m going to hide under my duvet in case Mike comes back at me with a Grrrrrr.
"It would be more accurate to say that Congress borrows from the private sector and then the Fed buys that debt."
It would be more accurate to say that Congress issues a liability (bond) in exchange for liabilities which it previously issued (reserves), which are then destroyed, then it issues more liabilities (spends), and then it issues more liabilities (reserves) in exchange for the first liability (bond), which is then destroyed.
Congress can't hold its own liabilities as assets. The Treasury can, however, hold Fed liabilties as assets. Treasury liabilities and Fed liabilities are both liabilities of Congress.
Monetizing the debt is just the phrase people use to refer to the Fed inflating the money supply to buy outstanding debt that hasn't matured.
There is such a thing as this.
They increase the quantity of base money. That's not the same thing as inflating the money supply.
MF, "monetizing the debt" is a label people throw around whenever they want to put a negative connotation on certain money operations of the central bank.
"Monetizing the debt" had a specific meaning in gold standard days. It referred to the Fed buying the Government's debt directly. That's what the term means, and that's what the law prohibits. Any other use of the term is just to label some other practice with a pejorative.
y,
Do you think it's accurate to say that the U.S. government (via the Fed) "issues" Reserves? Indeed, Reserves "come from" the U.S. government (the Fed), but it seems the domestic private sector's demand for credit, in conjuntion with the banks, is what drives the issuance… right?
Reserves (= rb and FRN) are Fed liabilities.
Notice that FRN are emblazoned with "The United States of America" and signed by both the treasurer of the US and the US secretary of the Treasury.
Tys securities, coin and Treasury notes when issued are Tsy liabilities.
The US federal govt alone is authorized to issue the national currency in the name of the United States. It does so through its agencies, the Fed and the Treasury.
Banks are permitted to denominate deposits they create in USD. When the bank issues a deposit credit, it is a promise to provide either cash on demand at the window or else settle in rb in the interbank system as necessary after netting.
JK,
yes the fed does respond to demand for reserves from banks, so as to maintain the target interest rate. It either does this directly by lending reserves, or indirectly by buying treasuries.
Alternatively it can just ensure the banking system has excess reserves, and then set the interest rate by paying interest on reserves and lending at that rate.
If there were zero government debt, the banks would have to borrow all their reserves from the fed, or get them by selling assets like gold to the fed.
"Congress issues a liability (bond) in exchange for liabilities which it previously issued (reserves), which are then destroyed"
What I meant is that the US government liabilities are 'destroyed', even though the actual reserves are not.
When the treasury gets reserves in its account at the fed, these are counted as treasury assets. They are also fed liabilities.
However, treasury and fed are both different branches of the same US government. So from the perspective of the govt, treasury assets and fed liabilities cancel each other out, i.e. equal zero (net).
Simply put, when the treasury gets reserves in its account at the the fed, the govt gets its own liabilities back. When you get your own liabilities back they cease to be liabilities. The liability is 'destroyed'. It doesn't become an asset, it simply becomes nothing (zero).
If I were to give you an IOU for $100, and then you were to give that IOU back to me, it would cease to be an IOU. The piece of paper on which the IOU was written would still exist, but it would be neither a liability nor an asset, it would be zero, just a piece of paper. From the perspective of the US govt, this is what happens when the treasury gets reserves in its account.
This is why JKH is wrong and MMR is heading for a big embarrassment.
As well as completely failing to mention that fed liabilities and assets and treasury liabilities and assets, are all liabilties of the US government, he also completely fails to mention why anyone needs fed liabilties in the first place - why they have any value instead of just being bits of paper or meaningless digits on a screen.
Answer: the treasury demands them in payment of taxes.
If the treasury did not demand them in payment of taxes, fed liabilities would be worthless. This renders the idea that the treasury is beneath the fed in the 'money hierarchy', and on the same level as banks, utterly ridiculous. The fed and treasury are on the same level, beneath Congress. The fed is not at the top of the 'money hierarchy'.
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