Sunday, February 13, 2011

All money emanates from gov't spending...ALL MONEY!

Try this one on a friend or colleague next time you get into some kind of money discussion.

All money emanates from gov't spending...ALL MONEY!

I mean, where do you think money comes from, anyway? Do you print it up in your basement? Does your neighbor print his up?

When you pay cash, where did those bills come from?

Even bank money--i.e. credit--comes from gov't money.

Yes, when a bank makes a loan it is merely an accounting entry, so the bank did create its own money out of thin air. And the bank's credit is usually good for the purchase of goods and services.

However, bank money can only be issued with the simultaneous creation of RESERVES and only the government (via the Fed) can create those reserves. Without reserves, no credit under the current structure.

And like I said, bank money can pay for most things, but it can't pay your taxes. Only reserves--the government's own money--can settle your bill with the IRS.

All money comes from government spending...ALL MONEY!


Tom Hickey said...

The simple way to understand this is that all final transactions are settled in either reserves or cash aka currency (notes or coin), called high powered money (HPM), or "vertical money" in MMT. Reserves and cash are obtainable only from their creator, which is the federal government via Congress, iaw US Constitution, Article 1, sections 8 and 10.

A budgetary balance is the relation of expenditure, which injects financial assets into nongovernment, and taxation, which withdraws financial assets from nongovernment. A budgetary deficit increases nongovernment ner financial assets and a budgetary surplus decreases nongovernment net financial assets.

Owing to the deficit offset rule, nongovernment net financial assets created by deficits are saved in the form of tsys. Thus, the "national debt" is cumulative nongovernment saving of net financial assets.

Currency issuance occurs though government expenditure, and nongovernment saving of net issuance is through issuance of tsys.

Bank credit (loans create deposits) cannot alter nongovernment net financial assets because bank credit nets to zero. MMT calls money created by bank credit "horizontal money."

Vertical money is exogenous, and horizontal money is endogenous.

L Randal Wray, Money (Dec. 2010)

TradeKing, quoting Warren Mosler, The concepts of horizontal vrs vertical money creation

Stephan said...

>Without reserves, no credit under the current structure.

??? Explain!

Matt Franko said...

Great posts Mike and Tom,

If readers are having a hard time understanding or visualizing these explanations I will post again some empirical evidence via a few news stories of recent archeological finds of Roman coins in Brittannia.

This "money" was spent into circulation by the Roman government in order to provision the forward deployed Roman legions present in Brittannia. The Roman monetary authorities would enforce a poll tax to make sure the local population would accept the Roman coins in exchange for the local provisions.

Here, the Roman govts use of metallurgy (silver/brass coins with the Roman govt imprimatir) was the most secure and best "information technology" that existed at that time, today we have our modern secure computer systems that can keep track of all of this accounting information, but the monetary authority of the government is the same.

Back then, just as today, all of the money came from govt spending. How else could ROMAN 'money' become the currency in Brittannia if the ROMAN govt did not carry it there and spend it into circulation?

See the pictures and imagine yourself the Roman finance minister, whose job it was to implement the monetary system when you invaded another province:




There is no such thing as "spontaneous generation". These coins (some of which were struck CENTURIES before the Romans went into Brittania) were simply brought along by the Roman monetary authorities, and spent into circulation by the Roman government upon arrival.

welfarewarfare state said...

That what you wrote is true is, I'm afraid,the problem. You see enlightenment and I see chains.


There have been many examples of private minters in world history. America has had her share of private minters. No one had to accept their money but CHOSE to.

John Higley minted copper coins that were very much in demand in colonial America.

Silver and gold were also minted by private minters. From 1830-61 there were numerous private gold coins in circulation.

Templeton Reid is a well-known private minter. Christopher Bechtler of N.C. was also a successful private minter. His coins were accepted as medium of exchange in N.C., S.C., western Tennessee, Kentucky, and parts of Virginia. In fact, Bechtler coins were commonly used during the Civil War by parties who contracted in his coins rather then Confederate dollars.

There is an enlightening book entitled "Good Money" by George Selgin that details private mintage in Birmingham, England.

The state doesn't have to be the monopoly issuer. The state CHOSE to be the monopoly issuer because they could profit by seignorage and manipulate the economy and citizens. The kings of old used to invoke the "Divine Right of Kings" to justify the money monopoly while today the government invokes the "Divine Right of the State." It need not be this way.

googleheim said...





Ralph Musgrave said...

Modern governments wield plenty of power in connection with money creation, but Mike Noman and Matt Franko overestimate this power.

As this Credit Suisse paper explains, if the amount of official money (vertical and horizontal) is not adequate for the amount of business that the private sector wants to do, the private sector just creates its own forms of unofficial money. See:

Money is anything widely accepted in payment of debts. Neither governments nor banks are needed for money creation. For thousands of years talley sticks were used as money, and in recent centuries up to roughly a hundred year ago, bills of exchange were widely used. See the article on Warren Mosler’s site for more on tally sticks:

When the British Houses of Parliament burned down in 1834, the cause was someone burning talley sticks in the basement. Doh!

mike norman said...


Agreed. And that's why for thousands of years there was very little improvement in the lives of common men. It was all a zero sum game. Only the sovereign can add net financial assets.

Matt Franko said...

Were the tallysticks in the Parliament building because the govt ran the tallystick system in some way?

Yes I would agree there can be other arrangements but we are trying to focus on the one we (are supposed to be) running today.... Ill check out that info.... generally agree that the authorities are screwing up the current situation...


googleheim said...

Musgrave & Norman :

You say that Credit Suisse says that the private sector, otherwise known as the RReal Economy, will make up it's own private money.


That's why I say that the RReal economy's Wall Streeter Bankers Quant-loaded took this "private money" to the extreme of overvaluing the CDO MBS and all those other instruments to the equivalance of "hyper printing" such that they had more wealth in their RReal accounts than what the Federal Reserve & Treasury had actually alloted in the game.

So I have to agree to Musgrave that the Government has the power, but I have to Support Norman's assertion that the Government should not be a bunch of wussies and let Credit Suisse, Goldman Sachs, and all these other bullies hyper-print and turn around and say it's the government's fault.

The Credit Suisse report only indicts themselves since they probably were involved in the exposure to these securities' contraptions.

If as Norman pointed out that the Fed & Tsy during the 1998 to 2007 really did not swell the reserves with the printing everyone talked about ( some said it was 15% per year ), then this makes sense. There was no need to swell the reserves because there was no run on the banks.

The government makes money so that there is a "playing field" for the game of the markets to be played on. When the RReal economy overvalued the operations and took over the parking lots for more control and operations along with all the gentrifications, there was definitely an balance problem - and when the Schiff hit the fan the "playing field" is gone - big holes - and that's why we had TARP and QED.

googleheim said...

In other words, within the past decade it wasn't the government who was printing too much fictitious moneys, it was the Wall Streeter Banker over-loader mortgage backer tax dodger multi national corporate folks who hyper-printed their "tally sticks" beyond any reasonable & comprehensible proportion to legally available government tender.

It was all fictitious in the RReal economy with no serious grounding with the Fed & Tsy.

The center of all this is the contempt of government spurred by NeoCon Reagan voodoo economics and being promoted by Ron Paul who thinks he is more right that Reagan.

They all thought they could do it with their private "tally sticks" but when the Schiff hit the fan, they all put their hands out for the TARP and QED doles.

Credit Suisse are just a bunch of cartoon animators - all fiction.

googleheim said...

SO in conclusion - all money should be traced back to the Government's creation of it.

I agree that all money _SHOULD_ emanate from government spending since it's that government's money - no one else's.

However, then there are the entities which circumvent this in diabolical ways for self gain and could be seen as Ponzi or counterfeiters if not non-sovereign pirates or mutinious revolutionaries ...

What sort of history do the Ron Pauls' have with respect to Wall Street and Fed ?

The Paul's are Ayn Rand freaks just like Greenspan who used to suck the teets of Ayn Rand herself.

We know they NOW stand for investigating the Fed & the Tsy.

However, for how long and since when have they been these consumer advocates for tax dollars ?

Remember these guys don't think that the Department of Education is constitutional.

googleheim said...

"there was definitely an balance problem - and when the Schiff hit the fan the "playing field" is gone - big holes - and that's why we had TARP and QED."

to finish this :

there was no mechanism to keep track and to gauge the differential between "money" in circulation and the "value" that was inflating. Money = credits, debts, paper, whatever. Value = assets & liabilities of any kind in RReal economy.

How can you have $50 trillion in liabilities, assets, debts, MBS, CDO, or whatever in an economy when you don't have that printed yet beforehand ?

We have always been on a pay and print as you go procedure.

googleheim said...

as norman says :

"All money emanates from gov't spending...ALL MONEY!"

welfarewarfare state said...


The "sovereign" (I happen to think the individual is sovereign) does not create any new financial assets when it creates paper or digital money out of nothing. It only creates debt. No more real goods or services are created. Phony bubbles occur where the people FEEL richer for a time.

How did we have an industrial revolution in the 19th century when the money was still commmodity money save for the Civil War period where living standards dropped precipitously? There were also numerous private minters during that period.

Why all this worship of government force?

googleheim said...

This thread's title brings things back to taxes.

Since the government can only make money for the RReal economy, the fact that we do have tax revenues which are supposed to pay for and to balance the deficits is proof that the RReal economy is full of speculation which is tantamount to counterfeiting money.

Deficits are proof that speculation is rampant.

I bet taxes are more proportional to gov spending than deficits.

Anonymous said...

Deficits are also evidence of leakages, such as spending being less than income. See paradox of thrift.

It is legal to issue local exchange currencies, IOU's etc, as long as sales tax is remitted to the government.

Ralph Musgrave said...

Welfarewarfare state, I basically agree with Mike Norman’ claim that govt can create net financial assets, and that is the single most important point here. I.e. we need an MMT system.

Obviously govt created money is not “asset” in the same sense as a house or car. But the important point is that government created money is SEEN as an asset by those holding this money, plus it is accepted in exchange for real goods and services. Thus varying the rate at which government creates money and spends it (or reins in this money and “extinguishes” it) can potentially iron out booms and slumps.

Which brings me onto the origins of booms and slumps: the erratic way the private sector creates its own dodgy money….

Googleheim, I agree that “Government should not be a bunch of wussies and let Credit Suisse, Goldman Sachs, and all these other bullies hyper-print”. The big question is how to stop or curtail them. Personally I’d ban maturity transformation and fractional reserve. But governments are on the side of the banksters rather than on the side of idealists like me, so I don’t see much chance of progress here in the near future.

Matt Franko, Govt was not “running” the tally stick system in the 1800s. Govt was just a buyer and seller of goods and services (a big one of course), and thus had a stock of these sticks. The tally stick system runs itself.