Sunday, May 1, 2011

What is a 'Government Liability'?

We've been discussing money and/or Treasury Securities as "liabilities" of the Government sector for some time here. But what are 'liabilities'? From

1. liabilities,
a. moneys owed; debts or pecuniary obligations (opposed to assets).
b. Accounting. liabilities as detailed on a balance sheet, especially in relation to assets and capital.
2. something disadvantageous: His lack of education is his biggest liability.
3. Also, li·a·ble·ness. the state or quality of being liable: liability to disease.

For purposes of economic analysis, we can throw out the 2nd and 3rd definitions here and focus solely on the first. breaks down their first definition into 2 parts: a and b.

Ok so let's look at definition '1a.'; which itself is broken down into 3 parts: 'moneys owed', 'debts' or 'pecuniary obligations'.

The Debt Doomsday Crowd takes the non-nuanced view and applies the 'moneys owed' and 'debt' definitions to government fiscal operations, and then applies these definitions to the government sector within the context that they are most familiar with, that is their own non-government or 'household' context, seemingly ignoring the fact that the government sector has the ability to credit any non-government sector bank account at any time for any amounts appropriated as opposed to the non-government sector that (obviously, except to the DDC) does not have this legal ability. The government cannot be in the position of "moneys owed" or in "debt" in terms of something it has full legal control of and can legally create at will.

Then significantly, these government "debt" phobes and deficit reduction fetishists ignore the 3rd definition here: 'pecuniary obligations'. Now I have to go back to and look up 'pecuniary': it means simply 'of or pertaining to money'. So a government liability is simply a government "obligation of or pertaining to money".

What is this operative government obligation? The government sector is 'obliged' to accept payment of taxes in the form of the money it first issued or spent into the non-government sector in order to provision itself (purchases) or to otherwise directly provide monetary balances to non-government entities (transfer payments).

This definition, i.e. 'pecuniary obligation' is the correct and operative definition to use for the word 'liability' in the context of the government sector. Hence this is why you can make the case that all "money" is simply the establishment of a government 'liability', whether this money takes the form of coins spent, paper notes spent, or credits applied to non-government sector banking accounts on a secure computer based information system.'s definition 1b. here defines a 'Liability' as the strict accounting term, as the third kind of entry that is opposed to either Assets or Capital entries on an accounting Balance Sheet. So now when we look at how we account for these government transactions we find that the accounting for these transactions makes perfect sense also. As these transactions establish a government obligation of or pertaining to money or a "liability", it is only fitting that we would code these transactions as a government liability in the strict accounting sense.

So based on the dictionary definition of "liability", it is always correct to simply look at government liabilities as simply either: 1. The government is establishing an obligation to accept balances provided to the non-government sector in return as payment of taxes; or 2. Just doing their own internal accounting.

There are no non-real constraints on the government doing either of these things.


Unknown said...


I don't think anyone believes the government can't simply "print" the money ... the issue is whether the government is getting itself into a position where it is forced to print and excessive amount just to stand still ... and debt plays into that.

Calgacus said...

The problem is that people "think" there has ever been any way to create money other than "printing it." The main purpose of printing the sort of money called "treasury bonds" is to sow confusion, rather than to monkey with interest rates.

People worry all the time about the harmless and relatively small government budget deficit - the net amount of safe new money (NFA) that the government injects into the economy. But they never worry about what Minksy sometimes called the private deficit - the larger net amount of money banks usually print into the economy. Which is unsafe and causes fragility because it is based on people who can't always pay their bills, unlike the government, whose IOUs/liabilities/debts we call (base, high-powered) "money".

So the government (just like the banks) is almost always in the position of being forced to print more to stand still (really to support a growing economy). So what?

MMT proposals entail less money printing - they are the minimal amount the economy needs. That's what low / zero interest rates mean. That's what a Job Guarantee means - the smallest amount of money printed that ensures full employment - and quite conceivably a JG could "pay for itself" most of the time. (Not now)

We've ignored private debt and used backwards economics so long that the economy is in a mess. To offset the deflating balloon of bank credit money a lot more safe new government money = government debt = rising govt debt / GDP ratio is required, which is a good thing, contra Reinhart/Rogoff. Assume that the mainstream gets it precisely backwards, and you will rarely be wrong.

Tom Hickey said...

Right. People do not understand the largest printers of money by far are the banks (loans create deposits). Nothing is backing those loans/deposits that create money ex nihilo but bank capital.

People also don't get sectoral balances and advocate for a position that guarantees mounting private debt.

It's crazy, but the financial sector loves it because they make money on the loans, and when people can't repay, then government has to bail out the banks and make creditors whole in order to save the system and keep the contributions flowing. Which is why the ruling elite set up the system this way.

Calgacus said...

Yup. We need latter day Marxes. A Marx brothers movie with a script by Uncle Karl, to show how we support a system where banksters "lend" ridiculous bank-printed sums for their brothers-in-law's frauds (actually, my brother-in-law's last name is Marx) and successfully go wailing to their puppets in the government for real government money when their too-big-to-fail fraud collapses as planned.

Problem is, the old Marx brothers movies didn't strain belief that much.

Matt Franko said...

So as a bank creates/approves a loan this creates deposits. And deposits are a "liability" of a bank.

The banks "pecuniary obligation" or liability, is that the bank must provide the transfer of a customers deposit balance (or cash) on demand. Deposits are coded as a liability in bank accounting so again here, for banks, this all makes sense. The big difference between the govt and the Banks is that banks may not be able to do this all the time if they take too many losses on loans and have to shut down.

Liabilities are nothing to be afraid of when it is the government that is establishing them as the government can always meet their "pecuniary obligation" when this obligation simply requires that the govt credit a bank account.

Its amazing that the many morons in govt and policymaking cant understand this...