Thursday, July 26, 2018

Ben Wray — The magic money tree is real: Treasury confirms taxes are not needed to fund government spending

A LETTER from the Economic Secretary of the Treasury has confirmed that the government does not need to raise money from taxation to fund government spending, leading to advocates of increased public investment to declare “the magic money tree exists, as a matter of fact”....
The argument goes that the government can only spend what it has raised in taxation, with any additional financing having to be raised through debt from financial markets which subsequently has to be repaid. Former Prime Minister Margaret Thatcher famously said “The government has no money of its own. It’s all your money.”
But Treasury secretary John Glen’s 18 July reply to Peter May, a Modern Monetary Theory (MMT) advocate who had written to his MP Ben Bradshaw last year to inquire of the Chancellor as to where money came from, was in contrast to Thatcher’s position.
Glen answered: “While it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money, allowing governments to increase spending or reduce taxation, without raising corresponding financing from the private sector, there is a risk that money financing could rapidly undermine the stability of inflation expectations.”...

36 comments:

André said...

Well, good, but this still remais: "there is a risk that money financing could rapidly undermine the stability of inflation expectations."

It is the common "well, technically, the government actually could print money, but you know, if it did, it would bring inflation and hell upon us"... and then "the government could but it won't, so it is as if the government required taxes before spending".

Unfortunately, we still have got a tough road ahead...

Andrew Anderson said...

But the population cannot USE fiat except for grubby, unsafe, inconvenient physical fiat, aka "cash", so the new fiat will provide the usury cartel with new reserves and new deposits to provide interest to fuel the expansion of THEIR money supply, bank credit deposits, many times more than the new fiat - but not for the general welfare but for the private welfare of the banks and the most so-called creditworthy of what is, in essence, the public's credit but for private profit.

It used to be called "priming the pump" (for bank lending). So unless privileges for the banks are abolished, the "money tree" shall largely exist to serve the banks and the rich while the rest of the population is driven into debt.

The MMT folks can continue to serve the banks but they cannot serve the public interest at the same time.

Ralph Musgrave said...

I agree with Andrew that commercial banks should not create money. In fact the 3rd edition of my book advocating that (i.e. advocating Sovereign Money or Vollgeld as German speakers call it) will be out the in next few days. Scroll down to the book entitled "The solution is..." here:

http://books.ksplibrary.org/forthcoming/

My only slight quibble with Andrew's above comment is his claim that the only form of fiat (i.e. state created money) that the population can use is physical cash. Actually since QE, a much larger proportion of the money supply is central bank / state created than used to be the case, and the population CAN use that without resorting to physical cash.

To illustrate, if I sell $X of government debt to the central bank as part of the QE operation, I get a check from the CB for $X (or the electronic equivalent of a check) which I deposit in my commercial bank. The latter than goes running along to the central bank and demands that its account in the books of the central bank is credited with the $X. The net effect is that I have $X at the central bank, with my commercial bank acting as intermediary.

Matt Franko said...

“fiat will provide the usury cartel with new reserves”

Yo that’s Monetarist...

Matt Franko said...

But Ralph your total asset levels are not regulated against your capital...

In your hypo, at time 1 you have an asset at time 2 both you and the bank now have an asset due to the Central Bank intervention...

The new bank asset is a regulated construct/abstraction....

Andrew Anderson said...

The net effect is that I have $X at the central bank, with my commercial bank acting as intermediary. Ralph Musgrave

The net effect is that you CANNOT USE FIAT DIRECTLY but must work through a bank, like I've been saying.

I agree with Andrew that commercial banks should not create money. ibid

I've never said that. Please stop putting words in my mouth.

Andrew Anderson said...

Yo that’s Monetarist... Franko

It's true that government privileged banks are not reserve constrained but nevertheless deficit spending by the monetary sovereign does creates new bank reserves.

However, 100% private banks with 100% voluntary depositors would be reserve constrained since depositors would have the very real option of moving their deposits to the Central Bank, dragging precious reserves with them, 1-for-1. Thus banks would have to be a lot more careful with their deposit/liabilities for fiat creation.

Matt Franko said...

“It's true that government privileged banks are not reserve constrained”

Wrong.

Banks are regulated against BOTH risk assets AND nonrisk assets... where CB will impose nonrisk asset ownership on the banks...

Andrew Anderson said...

Banks are regulated against BOTH risk assets AND nonrisk assets... Franko [bold added]

That's an unintended side-effect of the leverage ratio in Basel III which will eventually be corrected UNLESS it is an intended effect - a rather ingenious one.

where CB will impose nonrisk asset ownership on the banks... Franko

By overpaying for assets? You call that "impose"? Please correct me if I'm wrong here.

Matt Franko said...

It’s understood via an equation, not a declarative sentence of Literary Art...

LR = capital/(risk assets + nonrisk assets) = 0.1

If CB imposes an increase in nonrisk assets via authority then banks have to comply and risk assets are decreased in price...

Matt Franko said...

“the leverage ratio in Basel III ”

It predates all the Basel accords... it’s always been used... this is why we have periodic recessions...

Andrew Anderson said...

and risk assets are decreased in price... Franko

Well, those who live by government-privilege may die by government regulation. Sounds fair to me.

Otoh, 100% private banks with 100% voluntary depositors should not have to be regulated any more than gambling casinos since they would no longer hold the economy hostage via a single payment system that must work through them.

Andrew Anderson said...

It predates all the Basel accords... it’s always been used... this is why we have periodic recessions... Franko

Leverage ratio

Basel III introduced a minimum "leverage ratio". This is a non-risk-based leverage ratio and is calculated by dividing Tier 1 capital by the bank's average total consolidated assets (sum of the exposures of all assets and non-balance sheet items).
[5][6] The banks are expected to maintain a leverage ratio in excess of 3% under Basel III.
from https://en.wikipedia.org/wiki/Basel_III

Matt Franko said...

Basel 3 kept it so what?

Matt Franko said...

Maybe you should study the US banking system instead of the OT?

Matt Franko said...

“Sounds fair to me”

Ok so then you’re gonna stop posting about it being unfair now?

Andrew Anderson said...

Maybe you should look up the definition of "introduce." But WIKI is WIKI so if you have a better source to indicate the leverage ratio predates Basel III, I'm all ears.

Andrew Anderson said...

Ok so then you’re gonna stop posting about it being unfair now? Franko

Is a murder/suicide any less a murder because the murderer kills himself too?

Is a parasite any less a parasite if, after killing its host, it dies too?

Tom Hickey said...

It’s understood via an equation, not a declarative sentence of Literary Art..

Then why do you think econometrics, which uses formal models based on higher math, should be categorized as "art" rather than "science," enquiring mind want to know.

André said...

"It predates all the Basel accords... it’s always been used... this is why we have periodic recessions..."

Not, it doesn't predate all the Basel Accords, and no, it hasn't always been used.

Also, there is the new Liquidity Coverage Ratio (LCR = High Quality Liquid Assets / Net Cash Outflows for 30 Days in a Stress Scenario). It must be kept at 100% or more. And banks did have some sort of LCR or minimum cash policy way before LCR was introduced.

It differs from the basel ratio not only because it is a liquidity requirement (instead of capital requirement), but also because banks can get below the requirements in stress situations (while the Basel Ratio must be obeyed always, even in stress situations).

Hence, banks cannot just create deposits randomly. The minimum liquidity level restrictics their abilities to do that.

What I can't understand is this: doesn't treasury direct solve this kind of problem? People can directly invest in government bonds and earn the "risk free" rate. You don't need a bank to do that

Andrew Anderson said...

People can directly invest in government bonds and earn the "risk free" rate.André

Treasury Direct® allows people to SAVE fiat but not to USE fiat, i.e. no debit or checking service. As for the Direct Express Card® debit card, it works through Comerica Bank®, so no direct use of fiat there either but only the use of Comerica Bank® liabilities for fiat. Plus not all US citizens may use it even if it did allow the direct use of fiat.

So why can't citizens use their own Nation's fiat in convenient, inherently risk-free account form at the Central Bank, same as the banks do? Cui bono that they can't if not the banks and the rich, the most so-called creditworthy of what is then, in essence, the public's credit but for private profit?

Matt Franko said...

They are not functional equations Tom...

Matt Franko said...

AA,

Not even the US Treasury uses direct deposits at the Central Bank:

“Under the Treasury Tax and Loan (TT&L) program, tax payments by individuals and businesses go into accounts at depository institutions, rather than directly to the Treasury's accounts at the Federal Reserve.”

https://www.newyorkfed.org/aboutthefed/fedpoint/fed21.html

Causes nonrisk assets to surge at depositories when govt runs fiscal surpluses and a resultant reduction in risk asset prices... BAD!

Matt Franko said...

Andre us banks have been using it since before even Basel 1 see here:

https://www.federalreserve.gov/SECRS/2007/August/20070809/R-1238/R-1238_21_1.pdf

“"For various reasons some of
these banks are not bound by the minimum capital requirements of Basel I, in the sense 2

that they would not reduce their capital if the supervisors reduced the minimum capital
requirements. Other banks are bound by the leverage ratio, rather than the risk-based
capital requirements of Basel I. The leverage ratio is a minimum ratio of Tier 1 capital to a measure of total assets.”

Checkmate.... again....

Tom Hickey said...

LR = capital/(risk assets + nonrisk assets) = 0.1

That is a policy statement. This policy becomes function when implemented.

Macroeconomists work on the models consisting of equations and data that result in policy statements. This is what the Fed does to conduct monetary policy, relying on its staff of econometricians. This policy becomes function when implemented.

Andrew Anderson said...

Maybe you should study the US banking system instead of the OT? Franko

First things first:

Heed instruction and be wise, and do not neglect it. ... Proverbs 8:33-

A scoffer seeks wisdom and finds none,
but knowledge is easy to one who has understanding.
Proverbs 14:6 New American Standard Bible (NASB)

I.e. It's easier (once one get's past the initial disgust) for a Bible believer to understand banking than for a banker to understand the Bible.

Andrew Anderson said...

Or for that matter, a banker to understand banking or anything else, I should think.

Matt Franko said...

Lots of people in banking and banking regulation have Art degrees...

Matt Franko said...

“Heed instruction and be wise“

You’re making my point...

Andrew Anderson said...

Not even the US Treasury uses direct deposits at the Central Bank: Franko

I see nothing in https://www.newyorkfed.org/aboutthefed/fedpoint/fed21.html to support that very bold assertion.

Instead, I see this:

Note Option Depositories

When the Treasury needs funds in order to make payments, the Federal Reserve Banks tell TT&L note option (those classified as retainers and investors) depositories, generally medium-to-large size banks, to transfer funds to the Treasury's accounts at the Fed.
The Treasury may request, or "call," the full amount or a percentage of the amount in an account.

Andrew Anderson said...

Also, you are apparently conflating my "direct use of fiat" which just means that people should have accounts at the Central Bank themselves and not have to work through banks with "direct deposit", the electronic transfer of funds.

In either case though, your bold assertion is not supported by the link you supplied.

Matt Franko said...

Yes it is...

Andrew Anderson said...

No, it isn't. I've read the entire thing (https://www.newyorkfed.org/aboutthefed/fedpoint/fed21.html) and the US Treasury makes payments out of its accounts at the Federal Reserve, not out of any accounts it may have with banks except to its own accounts at the Federal Reserve.

Still, thanks for pointing out another corrupt aspect of the current system: the US Treasury lending fiat to banks.

AXEC / E.K-H said...

The Magic Money Tree is real ― too bad that the magic is fraud
Comment on Tom Hickey/Ben Wray on ‘The magic money tree is real: Treasury confirms taxes are not needed to fund government spending’

The often repeated argument goes as follows: “While it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money, allowing governments to increase spending or reduce taxation, without raising corresponding financing from the private sector, there is a risk that money financing could rapidly undermine the stability of inflation expectations.”

It is true and known since time immemorial, that governments can do deficit-spending/money creation. It is NOT true that this causes inflation.#1 However, it is true that deficit-spending/money creation causes a profit explosion and as a consequence an extremely unequal distribution of income/financial wealth.#2

Because of the Profit Law, which entails Public Deficit = Private Profit, the Magic Money Tree magically benefits the one-percenters but NOT the ninety-nine-percenters. As long as MMT academics use the Magic-Money-Tree-metaphor in their seminars they are doing junk economics just like their Walrasian, Keynesian, Marxian, Austrian colleagues. To the extent that MMTers use the Magic-Money-Tree-metaphor in discussions with the general public they are committing political fraud and scientific suicide.#3, #4. #5, #6

The magic of the Magic Money Tree consists of WeThePeople unintentionally sponsoring WeTheOligarchy which in turn sponsors WeTheAcademics which in turn communicate the Magic-Money-Tree-story to WeThePeople.

Egmont Kakarot-Handtke

#1 MMT and the inflation-red-herring
https://axecorg.blogspot.com/2018/04/mmt-and-inflation-red-herring.html

#2 Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html

#3 MMT is gangsta economics
https://axecorg.blogspot.com/2018/07/mmt-is-gangsta-economics.html

#4 The Kelton-Fraud
https://axecorg.blogspot.com/2018/07/the-kelton-fraud.html

#5 Richard Murphy: the MMT fraudster dressed up as realist
https://axecorg.blogspot.com/2018/06/richard-murphy-mmt-fraudster-dressed-up.html

#6 For the full-spectrum refutation of MMT see cross-references MMT
http://axecorg.blogspot.com/2017/07/mmt-cross-references.html

Andrew Anderson said...
This comment has been removed by the author.
ANC Driver said...

Interestingly, whilst the government does not want to be seen performing any act which may undermine the stability of inflation expectations, governments existence has been utilized more than anything else to endorse and perpetuate the very property based system which causes the expansions and contractions, and thus the instability of economic expectations.