In reaction to MMT statements that government spending must occur before taxes can be paid, it is sometimes noted that a household could pay taxes by borrowing from a bank that subsequently obtains reserves from the central bank. Whether this is true from inception of a modern money system will depend on the terms set down by the central bank in advancing reserves to banks. But supposing the terms are permissive, would it change anything of macroeconomic significance? Let’s take a brief look....heteconomist
A Currency-Issuing Government Must Spend Before Non-Government Can Meet Its Net Financial Liabilities
Peter Cooper
http://heteconomist.com/a-currency-issuing-government-must-spend-before-non-government-can-meet-its-net-financial-liabilities/
How can it “spend first” if it needs a positive balance in its Fed account to be able to spend?
ReplyDeleteIt can’t..,
ReplyDeleteThere was obviously a positive balance in its account at the Fed in 1971 left over from the previous system based on gold…
ReplyDeleteYou guys ignore history.., which btw is typically an Art Degree..,,
ReplyDeleteSo you Art Degree morons should be telling ME this…
Why don’t you guys just say “govt needs a positive balance in its Fed account to be able to spend so when govt transitioned off gold in 1971 there was a residual balance in Treasury’s Fed account so they could immediately transition to these new arrangements… blah blah blah…” ?
ReplyDeleteiow the truth…
ReplyDeleteNobody believes you people because you refuse to tell the truth…
ReplyDeletehttps://www.politico.com/news/2021/11/02/congress-standstill-shutdown-debt-518567
ReplyDeleteYou guys are complete failures as teachers..,, complete failures.., do not pass go do not collect $200…
Useless…
Nobody believes you..,
Got lucky a couple of times…
ReplyDeleteOwn it..l
ReplyDeleteHow can it “spend first” if it needs a positive balance in its Fed account to be able to spend?
ReplyDeleteAssuming starting from scratch, why not this:
1. Determine the amount required in the TGA to clear initial spending.
2. Treasury issues bonds in this amount
3. The Fed auctions the bonds to the PDs.
4. The Fed lends the PDs the reserves needed from its initial capital, assuming negative equity is disallowed. (PD's sell the bonds into the private sector, using the funds from bank loans to offset the use of the reserves from the auction to repay the Fed loan. Non-government has Treasuries and bank debt, banks have loans, PD's have bank money, Fed clears its loan, Treasury has securities obligation.)
5. The Fed credits the Treasury account with the proceeds of the auction for spending.
The consolidated government now has the cost of spending offset by the Treasury securities held by non-government.
Note that this is a special case that deals with the self-imposed restraints the US government imposes on itself due to stupidity. It's messier than it needs to be, but it works to meet accounting requirements.
It would be interesting to know how the US government handled this on inception upon ratification of the Constitution. The central bank apparently came subsequently since it is not mentioned in the Constitution and there was some controversy about it when Hamilton proposed it.
“ Assuming starting from scratch”
ReplyDeleteBut… that… is … not …what ..,happened….
PDs would a priori need govt bonds as collateral …
ReplyDeleteUS govt had gold/silver 1776…. Net Assets…
ReplyDelete1776: A-L=C
ReplyDelete1776: A-L > 0
C > 0
Has been ever since…. via Accrual Basis of Accounting..
Modified Accrual then A-L < 0
ReplyDeleteAs Liabilities are accrued but Assets are not accrued underc Modified Accrual…
But you guys might have to skip finger painting class and take an Accounting class or two to understand this..,
Scary!!!
Let’s face it you guys are not “the fittest!” under your Darwin “survival of the fittest!” BS…
ReplyDeleteYou guys are not “the fittest!” but yet you are surviving? How can that be?
ReplyDeleteAccording to you guys Darwin you should all be dead..,
ReplyDeleteMatt, the post (and title) are saying that government must spend before non-government can eliminate its net financial liabilities to government.
ReplyDeleteThe rationale for the post is that a central banker recently criticized MMT’s claim that taxes are sufficient to drive currency acceptance on the grounds that non-government can pay taxes by borrowing from banks. One point of the post is to explain that this does not undermine the taxes-drive-money claim.
Suppose government imposes a tax and doesn't spend.
If there were positive reserves in the system, or if there were government bonds already in existence, then obviously there would be no problem, but the issue in dispute would remain in dispute. MMTers would say that the reserves and bonds in existence are the result of past government spending, and I would agree with them. But others might deny this. That is the reason for the "from inception" assumption. It is not an attempt to ignore history but an attempt to isolate the logic of the situation.
So, suppose there is a zero balance in the Treasury account, zero balances in banks' reserve accounts with the central bank, and no bonds yet in existence.
If government imposes a tax and doesn't spend, non-government will have a net financial liability to government equal to the tax.
A point of the post is that there is no way for non-government to eliminate this net financial liability to government until government spends.
Non-government can certainly seek to borrow from banks to pay the tax. Banks can lend and obtain reserves after the fact from the central bank. (The fact that banks will need to obtain reserves, however, is consistent with MMT’s point that taxes are sufficient to drive currency acceptance. All payments to government require reserves or currency for final settlement. Therefore, taxes – or any other financial liability imposed by government – are sufficient to drive currency acceptance.) Since it has been supposed that no bonds are in existence, the central bank will need to advance reserves to banks without requiring bonds as collateral. Presumably the central bank will require something else as collateral, but maybe it won’t. It doesn’t matter to the point at hand.
The net effect of taxpayers borrowing from banks to pay the tax is that non-government's net financial liability to government remains. The net financial liability changes from a tax liability to a loan liability. Taxpayers no longer owe government (they owe banks instead). But the banks owe government. In aggregate, non-government remains liable to government.
(continued below)
(continuing)
ReplyDeleteYour comments in this thread seem to concern a different question, namely how will government spend without a balance in the Treasury account, positive reserve balances, or government bonds in existence?
From inception, government can spend either by: (i) simply crediting reserve accounts (overdraft on the Treasury account); (ii) selling bonds directly to the central bank (central bank overdraft); or (iii) auctioning bonds to non-government with the central bank advancing reserves to banks to enable the auction to clear (Tom’s explanation above).
I outlined (i)-(iii) and considered various implications in an earlier (very long) post:
http://heteconomist.com/government-spending-comes-first-in-a-sovereign-currency-system/
Whether (i), (ii), or (iii) is chosen, it is impossible for non-government to eliminate its net financial liability to government until the latter spends.
You may say, “So what?”, and I would too if it were not for claims by others (including some economists) that the possibility of taxpayers borrowing from banks to pay taxes somehow disproves basic MMT results.
The statement in the title of the post is consistent not only with the MMT view that taxes are sufficient to drive currency acceptance. It is also consistent with the MMT view that a currency-issuing government faces no revenue constraint.
The statement in the title of the post – that non-government cannot eliminate its net financial liabilities to government until the latter spends – means that there is no source of initial finance for a currency-issuing government’s spending in the currency of issue other than government itself. (“How could it be otherwise?” would be a fair question, but again, it is critics that are raising the objections.)
Since non-government cannot eliminate (or reduce) its net financial liabilities to government prior to government spending, it is clear as a matter of logic that government spending must be self-financing; i.e. government creates the money that it spends in the act of spending.
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A separate – though related – point supports the same conclusion.
Since the balance in the Treasury account is not a liability of government to non-government, it cannot be considered ‘government money’. This means the Treasury account does not hold reserves that are then spent.
The Treasury account is an intragovernmental arrangement between Treasury and the central bank (a liability of the central bank to the Treasury and an asset of the Treasury, netting to zero within government). Therefore, the balance on the Treasury account is not a source of initial finance for government spending.
The money government spends (reserves) is only created through government spending or central bank lending to non-government.
A difference, though, is that central bank lending creates a liability for non-government. So, it cannot cannot eliminate non-government net financial liabilities to government.
In contrast, government spending creates no non-government liabilities. Rather, it creates net financial assets (i.e. reduces non-government net financial liabilities to government).
The possibility exists for a system without state money, in which the government also has an account within the commercial banking system and either taxes are paid from customer deposit accounts (bank liabilities) or else the government borrows from banks. Some people would apparently like to see this system.
ReplyDeleteOthers see this as the current system, with the cb owned by the banks and just another banking whose function is to lend to government. Actually, cbs used to be privately owned, which as I understand it was the way the BoE began. But most cbs are now government owned or controlled.
But in such cases, there is no state money, only bank-created money.
It seems to me that the confusion of most people comes from their lack of understanding that there is a radical difference between the banks and governments where there is state money, since two sets of books are involved.
Government accepts only liabilities on its books which exist in the payments system as reserves, and banks have to use the governments books, i.e, their deposit accounts at the cb to settle with government. The credits on their books cannot be used to settle with government and when customers pay their taxes using deposit accounts at banks, the banks acts as mediators between customers and the government since bank have access to the government's payments system and their customers do not. So to pay taxes one needs either cash, which is a token of a government's liability, or else one much use a bank that has access to the payments system for intermediation using reserves.
The dual books accounting is set forth in Eric Tymoigne's The Financial System and the Economy: Principles of Money and Banking
Another system, which can be used in tandem with the above or independently, is a government's minting coin as currency, regarding which there are a number of possibilities. Government generally use a tandem system now, with the majority of state money being notes rather than coin.
Then there is also crypto on the horizon. El Salvador's government accepts Bitcoin, for instance.
This comment has been removed by the author.
ReplyDeleteSorry, but Blogger is not accepting my HTML links, so you'll have to copy and paste if you want to follow them. Turns out the history is a bit messy before they got it straightened out. The US started out on the Continental, which became almost worthless owing to excess printing to finance the Revolutionary War. The situation was not resolved until passage of the Coinage Act in 1792. US state currency when through several iterations to get to where we are now.
ReplyDeleteFor a history of US currency see The history of money: A brief look at American currency by John Szramiak, Vintage Value Investing
https://www.businessinsider.com/the-history-of-american-money-2016-6
also
In the year 1775 the Continental Congress of the United States authorised the issuance of Continental currency but it wasn't until the Coinage act of April 2, 1792 that an official monetary system was defined and the U.S dollar came to life as the official currency for the United States of America.
History of the US Dollar - Wikipedia
https://en.wikipedia.org/wiki/History_of_the_United_States_dollar
also
A History of Central Banking in the United States, FRB Minneapolis
https://www.minneapolisfed.org/about-us/our-history/history-of-central-banking
also
Early American currency-Wikipedia
https://en.wikipedia.org/wiki/Early_American_currency