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At 22:37 Ms. Kelton was stumped and became confused.
Jimmy Dore:“If we print our own currency, why do we have to do the Treasury bond thing? Why don’t we just print it?” [That is, if we print our own currency, then why do we borrow it back?]
Stephanie Kelton:“That’s a good question, and I’m not sure I have a good answer. We’re just sort of trapped in the habit of doing it.”
No.
Let’s help out Ms. Kelton.
First, keep in mind that the US government does not borrow any of its spending money from anyone. However the US government borrows the money that sits in Fed savings accounts. That money is borrowed because it is on loan from various parties, including from the US government itself. Money in Fed savings accounts is not government spending money. It just sits there, accruing interest.
There are several reasons why this system exists. Here are three reasons…
[1] The system helps to stabilize the financial markets. Treasury securities are the safest investments of all. In a regular bank, if you buy a certificate of deposit, you obtain an agreement (a contract) to leave a certain amount of your money with the bank for an agreed-to amount of time for an agreed-to rate of interest. Your deposited money is insured by the Federal Deposit Insurance Corporation. Treasury Securities are exactly the same, except they are directly insured by the U.S. government. They are as good as cash, since they are tied to the money that you deposited in a Fed savings account. Hence T-securities are backstops for regular financial speculation. T-securities represent 21 trillion in reserves. Those reserves help to control volatility in the financial markets.
[2] The system helps to control inflation. There are 21 trillion dollars on deposit in Fed savings accounts. That money is reserves, which cannot be spent. It is called a “national debt” because it is on loan from various depositors, but it has nothing to do with the US government’s ability to create its spending money. If those 21 trillion dollars were suddenly released into the US economy, the USA would have an inflation problem. Instead, the deposited money is gradually released into the US economy as T-securities mature and pay interest. T-securities are non-spendable reserves, but they are converted back to spendable money when they mature.
[3] The system helps to maintain the viability of the US dollar worldwide. Suppose China gets five trillion dollars by selling goods to the USA. The Chinese cannot use that money to buy the USA, since the Committee on Foreign Investment in the United States decides what the Chinese can and cannot buy. So what do the Chinese do with those five trillion dollars? They deposit the five trillion in Fed savings accounts, where they will accrue interest. The Chinese deposit them by purchasing Treasury securities. Thus, the system maintains the willingness of the Chinese to keep selling to the USA in exchange for US dollars.
It is exactly the same in the UK, only the Treasury is called the Exchequer, and the Fed is called the Bank of England. In other countries the Treasury is called the Ministry of Finance.
Politicians and oligarchs don’t want you to understand this, because they want to make you grovel to them for every drop of water from a bottomless well. Bankers want to make you borrow water from the bottomless well so that you remain forever in debt to the bankers.
On a personal note, I’ve never cared for Ms. Kelton’s style of exposition. She makes simple topics needlessly complex. If I wasn’t already familiar with MMT, I would have no idea what she was talking about.
If those 21 trillion dollars were suddenly released into the US economy, the USA would have an inflation problem. Konrad
That can't happen since not all US Treasury debt matures at the same time.
Nor would what US Treasury debt matures every year (until all has been converted to fiat) necessarily cause price inflation since the US may have spare capacity to export.
Banks are regulated against total assets including reserves, if USTs were not issued then banks would not have enough Capital to finance all of the Reserve Balances which would then be established via normal saving by people....
if USTs were not issued then banks would not have enough Capital to finance all of the Reserve Balances which would then be established via normal saving by people.... Franko
No, since USTs for reserves is an asset swap and does not change the capital requirement for non-risk-weighted assets (Supplemental Leverage Ratio).
What a USTs for reserves swap does provide is more risk-free yield than interest on reserves (IOR) so more welfare for the banks.
At the bank, govt spending ie issuance of USD Reserves is only the LHS entry of govt spending, the RHS is Deposit Liabilities....
So it is not an “asset swap” for the bank (offsetting LHS entries) it is a dual entry, ie a LHS and RHS entry....
After the reserve add, The total LHS is then compared to stated regulatory capital and that ratio is maintained at approx 0.1 at all times...so risk assets have to be marked down in price if non risk reserve assets are significantly increased...
At the bank, govt spending ie issuance of USD Reserves is only the LHS entry of govt spending, the RHS is Deposit Liabilities.... Franko
Duh!
So it is not an “asset swap” for the bank (offsetting LHS entries) it is a dual entry, ie a LHS and RHS entry.... Franko
I never said Federal Spending was an asset swap; I said USTs for reserves is an asset swap.
..so risk assets have to be marked down in price if non risk reserve assets are significantly increased... Franko
So what? USTs are non-risk weighted assets too and thus an asset swap with reserves does not change the required capital per the (Supplemental Leverage Ratio).
Look at Japan, their equity prices haven’t made a new high in 30 years as the BOJ has added a bazillion trillion JPY of reserves over this period.... Franko
So what? I've long stated that a Central Bank should ONLY create new fiat (aka "reserves" when the Central Bank account holder is a bank) for its monetary sovereign and for no other unless via equal fiat distributions to all citizens.
It's the stinking system you support that is causing problems, Franko.
The securities are never with the bank they are with the Primary Dealers.... banks cant “swap” something they never own...
Follow the chain of legal custody... it’s goes from the dealers to nonbank entities ... banks just handle the payment system portion (reserves) of the transaction
... banks just handle the payment system portion (reserves) of the transaction Franko
Yes, I see your point; when the non-bank private sector buys USTs, reserves are drained from the banking system 1-for-1 for a net decrease in non-risk assets thus allowing the banks to lend more to restore the Supplemental Leverage Ratio.
Well, the solution then, without resorting to welfare proportional to account balance, is: 1) For the banks to raise more capital via stock dilution. and/or 2) Raise Federal Taxes since these also drain reserves.
OR
3) Have 100% private banks with 100% voluntary depositors since such banks need not be subject to capital and liquidity requirements.
That’s a whole other regulated process governed by the SEC... it takes a certain amount of time that is much longer than that observed of the extreme volatility of reserves in both amplitude and frequency... it’s a “mis-match” and caused the GFCs, etc...
18 comments:
At 22:37 Ms. Kelton was stumped and became confused.
Jimmy Dore: “If we print our own currency, why do we have to do the Treasury bond thing? Why don’t we just print it?” [That is, if we print our own currency, then why do we borrow it back?]
Stephanie Kelton: “That’s a good question, and I’m not sure I have a good answer. We’re just sort of trapped in the habit of doing it.”
No.
Let’s help out Ms. Kelton.
First, keep in mind that the US government does not borrow any of its spending money from anyone. However the US government borrows the money that sits in Fed savings accounts. That money is borrowed because it is on loan from various parties, including from the US government itself. Money in Fed savings accounts is not government spending money. It just sits there, accruing interest.
There are several reasons why this system exists. Here are three reasons…
[1] The system helps to stabilize the financial markets. Treasury securities are the safest investments of all. In a regular bank, if you buy a certificate of deposit, you obtain an agreement (a contract) to leave a certain amount of your money with the bank for an agreed-to amount of time for an agreed-to rate of interest. Your deposited money is insured by the Federal Deposit Insurance Corporation. Treasury Securities are exactly the same, except they are directly insured by the U.S. government. They are as good as cash, since they are tied to the money that you deposited in a Fed savings account. Hence T-securities are backstops for regular financial speculation. T-securities represent 21 trillion in reserves. Those reserves help to control volatility in the financial markets.
[2] The system helps to control inflation. There are 21 trillion dollars on deposit in Fed savings accounts. That money is reserves, which cannot be spent. It is called a “national debt” because it is on loan from various depositors, but it has nothing to do with the US government’s ability to create its spending money. If those 21 trillion dollars were suddenly released into the US economy, the USA would have an inflation problem. Instead, the deposited money is gradually released into the US economy as T-securities mature and pay interest. T-securities are non-spendable reserves, but they are converted back to spendable money when they mature.
[3] The system helps to maintain the viability of the US dollar worldwide. Suppose China gets five trillion dollars by selling goods to the USA. The Chinese cannot use that money to buy the USA, since the Committee on Foreign Investment in the United States decides what the Chinese can and cannot buy. So what do the Chinese do with those five trillion dollars? They deposit the five trillion in Fed savings accounts, where they will accrue interest. The Chinese deposit them by purchasing Treasury securities. Thus, the system maintains the willingness of the Chinese to keep selling to the USA in exchange for US dollars.
It is exactly the same in the UK, only the Treasury is called the Exchequer, and the Fed is called the Bank of England. In other countries the Treasury is called the Ministry of Finance.
Politicians and oligarchs don’t want you to understand this, because they want to make you grovel to them for every drop of water from a bottomless well. Bankers want to make you borrow water from the bottomless well so that you remain forever in debt to the bankers.
On a personal note, I’ve never cared for Ms. Kelton’s style of exposition. She makes simple topics needlessly complex. If I wasn’t already familiar with MMT, I would have no idea what she was talking about.
Hi Konrad, thanks for the easy to understand explanation of the purpose of treasury securities.
Treasury securities are the safest investments of all. Konrad
Being the debt of a monetary sovereign, they are 100% safe. Thus they should return 0% AT MOST.*
You're defending a corrupt system, Konrad. It's called cognitive capture, I believe.
*Actually, given overhead costs, they should return NEGATIVE, not even 0%.
If those 21 trillion dollars were suddenly released into the US economy, the USA would have an inflation problem. Konrad
That can't happen since not all US Treasury debt matures at the same time.
Nor would what US Treasury debt matures every year (until all has been converted to fiat) necessarily cause price inflation since the US may have spare capacity to export.
Thus, the system maintains the willingness of the Chinese to keep selling to the USA in exchange for US dollars. Konrad
And in the process, hollowing out US industrial capacity and dis-employing US workers.
FDIC insured deposits are 100% safe too....
Go back to playing Scrabble....
Banks are regulated against total assets including reserves, if USTs were not issued then banks would not have enough Capital to finance all of the Reserve Balances which would then be established via normal saving by people....
“She makes simple topics needlessly complex.”
Not everyone else has your pea sized brain we can understand it....
FDIC insured deposits are 100% safe too.... Franko
Only up to $250,000 per account. This is why the inherently risk-free debt of a monetary sovereign can command even negative yields.
if USTs were not issued then banks would not have enough Capital to finance all of the Reserve Balances which would then be established via normal saving by people.... Franko
No, since USTs for reserves is an asset swap and does not change the capital requirement for non-risk-weighted assets (Supplemental Leverage Ratio).
What a USTs for reserves swap does provide is more risk-free yield than interest on reserves (IOR) so more welfare for the banks.
At the bank, govt spending ie issuance of USD Reserves is only the LHS entry of govt spending, the RHS is Deposit Liabilities....
So it is not an “asset swap” for the bank (offsetting LHS entries) it is a dual entry, ie a LHS and RHS entry....
After the reserve add, The total LHS is then compared to stated regulatory capital and that ratio is maintained at approx 0.1 at all times...so risk assets have to be marked down in price if non risk reserve assets are significantly increased...
Suggest take an Accounting class...
Look at Japan, their equity prices haven’t made a new high in 30 years as the BOJ has added a bazillion trillion JPY of reserves over this period....
At the bank, govt spending ie issuance of USD Reserves is only the LHS entry of govt spending, the RHS is Deposit Liabilities.... Franko
Duh!
So it is not an “asset swap” for the bank (offsetting LHS entries) it is a dual entry, ie a LHS and RHS entry.... Franko
I never said Federal Spending was an asset swap; I said USTs for reserves is an asset swap.
..so risk assets have to be marked down in price if non risk reserve assets are significantly increased... Franko
So what? USTs are non-risk weighted assets too and thus an asset swap with reserves does not change the required capital per the (Supplemental Leverage Ratio).
Look at Japan, their equity prices haven’t made a new high in 30 years as the BOJ has added a bazillion trillion JPY of reserves over this period.... Franko
So what? I've long stated that a Central Bank should ONLY create new fiat (aka "reserves" when the Central Bank account holder is a bank) for its monetary sovereign and for no other unless via equal fiat distributions to all citizens.
It's the stinking system you support that is causing problems, Franko.
“USTs for reserves is an asset swap.”
The securities are never with the bank they are with the Primary Dealers.... banks cant “swap” something they never own...
Follow the chain of legal custody... it’s goes from the dealers to nonbank entities ... banks just handle the payment system portion (reserves) of the transaction
China keeps going down :
https://www.bloomberg.com/amp/news/articles/2018-10-15/china-s-stocks-extend-3-trillion-rout-as-consumer-firms-crumble?__twitter_impression=true
This might end the whole usd zombie charade over there...
... banks just handle the payment system portion (reserves) of the transaction Franko
Yes, I see your point; when the non-bank private sector buys USTs, reserves are drained from the banking system 1-for-1 for a net decrease in non-risk assets thus allowing the banks to lend more to restore the Supplemental Leverage Ratio.
Well, the solution then, without resorting to welfare proportional to account balance, is:
1) For the banks to raise more capital via stock dilution.
and/or
2) Raise Federal Taxes since these also drain reserves.
OR
3) Have 100% private banks with 100% voluntary depositors since such banks need not be subject to capital and liquidity requirements.
“For the banks to raise more capital”
That’s a whole other regulated process governed by the SEC... it takes a certain amount of time that is much longer than that observed of the extreme volatility of reserves in both amplitude and frequency... it’s a “mis-match” and caused the GFCs, etc...
The top MMT people don’t exhibit an understanding of any of this btw...
Scary!!!!!
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