Sunday, August 30, 2015

Bill Mitchell — Monetary liquidity operations and fiscal policy interventions

Today, is the official launch of my new book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – in Maastricht, which is an appropriate geographic location given the book proposes to dismantle the Eurozone. It just happens to be the place (Maastricht University), where we established CofFEE-Europe (a sister centre to my research centre in Australia). There are two excellent guest speakers (see below) and I am very grateful that they agreed to accept the invitations. The upshot is that I haven’t all that much time today. Over the next few days I will address some points that were raised in question time or at the reception (aka cup of tea and cakes) after the event in London last Thursday evening. There is still work to be done if the progressive side of politics is to fully understand Modern Monetary Theory (MMT) and the implications of it for policy development and choice.
Hopefully, the book will have a broad and deep readership, and make a difference.

Bill Mitchell – billy blog
Monetary liquidity operations and fiscal policy interventions
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia


Matt Franko said...

Bill writes:

"It is also important to understand the impact that fiscal deficit spending (government spending in excess of taxation receipts) has on the ‘cash’ position of the economy each day. The obverse impacts occur for surpluses.

Government spending (G) adds to bank reserves and taxation (T) drains them. So on any particular day, if G > T (a fiscal deficit) then the level of bank reserves are rising overall.

Any particular bank might be short of reserves but overall the sum of the bank reserves are in excess. "

Lets look at the case of a surplus and re-write Bill's paragraph it would be:

Government spending (G) adds to bank reserves and taxation (T) drains them. So on any particular day, if G < T (a fiscal surplus) then the level of bank reserves are falling overall.

Any particular bank might be surplus of reserves but overall the sum of the bank reserves are in deficit. "

OK, then where do the balances to pay the taxes come from in the first place?

iow if 'the overall sum of bank reserves are in deficit', how can somebody pay the taxes to make T > G ?

They HAVE TO be borrowed...

Unknown said...


They dont necessarily have to borrow, they could exchange some of their supply of Tsyies accounts balances for some reserve balances. Thats how "teh debt" goes down when the Govt runs a surplus

Matt Franko said...

A, That would mean in a previous period, G > T.... for the USTs to exist to exchange... (really G + xfers....)


Tom Hickey said...

Generally, taxes are initially paid using drafts on bank deposits, which banks promise to convert to cash on demand or settlement balances in their accounts on the Fed's spreadsheet as needed for settlement after netting. If a bank has sufficient excess reserves to clear, it does so, It a banks is short it borrows them in the interbank market or from the Fed and the Fed ensures that all payments continually clear using monetary operations.

Of course, taxpayers can convert tsys they hold to deposit to pay taxes, and no doubt firms save in tsys for this purpose in order to get the additional interest.

Banks can also sell tsys to increase settlement balances. But the money markets generally run on very short term liquidity (overnight) to manage cash flow, so repo is the dominant tool rather than selling tsys in the market.

The debt doesn't automatically go down when the government runs a surplus. It can still choose to hold the surplus as tax credits in the Treasury's accounts and continue to roll over tsys as they mature. This is what the Clinton administration did and the Bush administration chose to distribute the tax credits instead of paying down the public debt.

Unknown said...


Obviously the selling of tsyies could only happen if there was a previous deficit given the institutional arrangements. Not a necessary condition of course since we can have deficits without tsyies or tsyies without deficits if we wanted. It would be hilarious to see an administration come in that offered an unlimited number of tsyies accounts at a higher rate than bank CDs and stole trillions in customer deposits from the private banks. I'd chase offered a 12 mo CD at 1% the govt then would offer 12 mo CD at 2% and let the quantity demanded float. As what they do today and hold the quantity constant and let the price float. Man would that piss off the banksters.


The reason the debt kept going up during the Clinton surplus years was because of.the surplus the FICA collections resulted in. By law the govt has to issue tsyies to the SS Trust fund equal to the amount of the SS fica surplus.

That's how I remember it.anyway

Tom Hickey said...

As I recall, there was a discussion of what to do with the surplus at the time, and it was not decided before Clinton left office. W decided to give it back to the taxpayers since it was their money.

But it's been some time. My memory on it could be fuzzy.