Steve Roth — Actually, Only Banks Print Money

Actually, not really. Only governments have "printing presses" and other attempts to "print money" are called counterfeiting. Steve Roth knows this, of course, so he must being using "printing money" in another sense. Banks don't have printing presses in the basement, literally or figuratively. Governments that issue their currencies as government liabilities do.

Banks increase M1 money supply by adding assets as receivables to their balance sheets as receivables  and booking corresponding liabilities as payables. The reverse shows up on the borrower's balance sheet. Both sets of books are in balance, with net zero on the respective balance sheet. Credit and debit entires match. Now the bank has an asset on its balance sheet and the customer has a credit in a deposit account. So even though the net is zero in the financial system, purchasing power increases in nongovernment owing to the increase in M1 money supply as a result of the deposit in the customer's deposit account.

Why is this not a form of "printing money" then, as Steve Roth claims?

When a central bank issues the government's currency it creates liabilities on its balance sheet and assets on the balance sheets of banks as deposits at the central bank. Assets increase in nongovernment as a whole without a corresponding liability in nongovernment. There is a change in aggregate nongovernment financial assets.

When banks create a deposit by extending a loan, there is no change in aggregate net financial assets in nongovernment. The net is zero. When central banks deficit spend, there is. The net is the amount of the deficit.

A currency is the unit of account that which the government sets and which it accepts as payment of obligations it imposes on nongovernment, chiefly taxes but also tariffs, fees and fines. When banks settle accounts with the government as proxies for customers, they have to settle in the government's liabilities, either cash or bank reserves in the central bank payments system. This is what "printing money" implies. 

All currency users including banks have to obtain the currency as government liabilities, and the only source is government issuance of the currency through spending or lending, since only government can create government liabilities. In modern monetary production economies, governments delegate this power to their central bank as the government's financial agent. 

The currency sovereign's ability to create its own liabilities is unlimited. The constraint is the availability of real resources for sale in the currency, since over-issuance risks inflation. Correspondingly, under-issuance risks contraction and ultimately deflation.

For example, when a taxpayer pays taxes to the government that issues the currency, one of two things happen. Either the taxpayer pays in cash at a government office, or tenders payment through a bank, e.g., a paper check or electronic check. If cash, that cash is deducted from currency in circulation, reducing M1. 

If by check, the check has to clear in the government's payment system. In this case, the government charges the bank's account in the payments system and the bank corresponding charges the customer's account at the bank. If there are insufficient funds in the customer's account, then the bank bounces the check and the funds are not deducted from the banks' account at the central bank. This illustrates the huge difference in kind between the "money" banks generate through credit issuance in M1, and the "money" that the government issues through its financial agent, the central bank.

What happens if the bank doesn't have enough funds in its account at the central banks to cover its obligations? Either the bank borrows in the interbank market at the policy rate set the central banks sets, or the central bank just lends the funds to the bank so the payment system to clear. But the bank is charged a penalty rate set above the policy rate to discourage this, and a bank that abuses the "discount window" risks its standing and ultimately its position in the payments system.

Again, a pseudo-problem arises from using "money" without a proper technical definition, or else not paying attention to the existing definitions. Similar problems arise with other key financial and economic terms, such "the interest rate," "capital," and "saving."

SteveRoth is correct that loans creating deposits adds to the M1 money supply, but this is not currency issuance in the customary meaning of the phrase. Government's issuance of liabilities in the government's unit of account is not the same as banks creation of its own liabilities in the government's unit of account, which the bank cannot issue, being currency users and not issuers. 

If banks could "print money" in the sense of issue currency as the government creates its own liabilities by marking up accounts on its spreadsheet, banks' risking would not risk insolvency owing to default on loans they extend. This is not the case. Conversely, government bonds are default-risk free since the government can always issue currency to cover its obligations to security holders.

However, because bank credit increases M1, which adds to purchasing power in nongovernment, bank lending can affect the price level and spur inflation. Similarly, contraction in bank lending that is not offset is deflationary.

Steve Roth also thinks that issuance of government securities to offset deficits, which is mandatory in the US, sterilizes those funds so that they don’t add to money in the sense of M1. This is not the case. The funds that government injects increase M1 since currency is issued by crediting deposit account, which adds to M1. 

Taxes subtract from both M1and also aggregate nongovernment financial assets. Payment for purchase of newly issued government securities decreases M1, but those government liabilities are simply switched from deposit accounts in the payments system to time deposits at the central bank. The amount of nongovernment net financial assets remain the same in aggregate.

Moreover, government securities are the most liquid form of financial asset after cash, short term bills are essentially cash equivalents, and government securities are the best form of collateral, spending is not affected by draining the monetary base as deposit accounts at the central bank to time deposits at the central bank. 

Issuance of government securities does not sterilize deficit spending. There are other reasons to issue government securities, but this is not one of them. Chiefly, government securities issuance drains the monetary base, facilitating the central bank hitting its target when not paying interest on excess reserves and not choosing to set the policy rate to zero. Government securities also provide interest-bearing default-free risk instruments for the financial community and nongovernment savers. Issuance of government securities is not necessary operationally. It is a policy choice, hence political.

Ok, this looks like semantics and logic-chopping. But it is not. It’s just as important to create conceptual models that are correct as it is formal models. This means weeding out the weasel words, clarifying concepts and getting description right. Some formalism in needed in this regard, but it is not econometric but double-entry accounting. This requires thinking in terms of T-accounts, and that needs to be check by writing it out.

See Eric Tymoigne, The Financial System and the Economy: Principles of Money & Banking, v. 2.1. 

Asymptosis
Actually, Only Banks Print Money
Steve Roth

Seth Sandronsky — Gov. Brown, Meet Mr. Keynes

Non-sequitur. Sandronsky criticizes Jerry Brown for being anti-Keynesian and then admits that US states don't have the same fiscal space as the general government.

Why then does Gov. Brown ignore Keynes’ insights on government or state spending to spur the economy? One reason is that state governments are unable to run deficits in the way that Uncle Sam can. Another is that Gov. Brown is reserving state revenue to repay Wall St. creditors in a downturn. The state issues bonds that these elites hold and push policies that favor their class interests. This is no conspiracy theory, just the everyday workings of public policy in a capitalist society.

Counterpunch
Gov. Brown, Meet Mr. Keynes
Seth Sandronsky, a Sacramento journalist and member of the freelancers unit of the Pacific Media Workers Guild

Patricia Pino — The Tory campaign relies entirely on your economic ignorance

MMT.

The Pileus
The Tory campaign relies entirely on your economic ignorance
Patricia Pino

Matthew C. Klein — If you like the euro, why not just call for a global gold standard?

Members of the single currency are forced to issue obligations in a currency none of them can print. They made the choice to sacrifice their monetary sovereignty in exchange for lower costs of trade and greater cross-border financial flows. For the many members hoping to piggyback off Germany’s postwar record of stability, joining the euro would also mean eliminating the risk premiums associated with excessive inflation and devaluation. These were the same arguments that were made about the virtues of the gold standard in the 19th century....

When currency issuers become currency users.

FT Alphaville (may require free registration)
If you like the euro, why not just call for a global gold standard?

Matthew C. Klein

ht Lambert Stether at Naked Capitalism

Ellis Winningham — Introductory Series: The Monetary System – US Currency

Today, for this introductory series on the monetary system, we’re going to discuss US paper currency: what it is, where it comes from, who enforces counterfeiting laws, and what the punishment for counterfeiting is. But, before we get to all of that, let’s begin with a review of some lies that the media, politicians and orthodox economists peddle to the general public.…

Ellis Winningham — MMT and Modern Macroeconomics
Introductory Series: The Monetary System – US Currency

Ellis Winningham

Simon Wren-Lewis — Why was austerity once so popular?

A pretty good one. It argues indirectly for the need to educate voters that the currency issuer is the mirror image of the currency users, so their accounting statements are complementary rather than similar. Government deficits are non-government income and government debt is non-government net financial wealth in aggregate.

Mainly Macro
Why was austerity once so popular?
Simon Wren-Lewis | Professor of Economics, Oxford University

Ellis Winningham — “Affordability” for the US Government is Never a Question of “Money”

“Affordability” for national governments like the US, UK, Canada, Japan, Australia is always in terms of real resources (iron ore, agricultural capacity, water supply, labor supply, etc.) and never “money”. If you still do not understand this concept, you will soon. Forty years of neoliberalism and nonsensical mainstream economic policy errantly focused on the finances of these governments, which do not possess hard financial constraints, while ignoring their real productive capacities, leaving vast resources idle. Persistent recessions, high unemployment rates, expanding income inequality, high private debt levels and financial instability have been the end results of these policies and so, political unrest is rising as world populaces are no longer willing to tolerate these deplorable conditions. At the root of the problem is the erroneous belief that these governments can run out of “money”. That incorrect viewpoint causes you to miss the reality: US Dollars are infinite. Real resources are finite.…

Simple argument to pass along your out of paradigm family, friends and acquaintances.

Ellis Winningham — MMT and Modern Macroeconomics

“Affordability” for the US Government is Never a Question of “Money”
Ellis Winningham

Ann Pettifore — Is there no such thing as public money, only taxpayers money, as PM asserts? Was £375bn of QE raised from taxpayers?

Lump of money fallacy.

We disagree with the ‘there is no money’ mantra. Within a sound financial and monetary system, there need never be a shortage of money to meet society’s needs. There may be limited resources, and limited brainpower but there need never be a shortage of money. In this briefing I set out to explain why.....

Debtonation
Is there no such thing as public money, only taxpayers money, as PM asserts? Was £375bn of QE raised from taxpayers?

Ann Pettifore

Also put up by Ann today:

Eurozone QE: Better ways to boost the economy and employment

New Publication on Islamic Finance

Paul Krugman — Bits and Barbarism

Back in 1936 ... Keynes argued that increased government spending was needed to restore full employment. But then, as now, there was strong political resistance... So Keynes whimsically suggested ... the government bury bottles full of cash in disused coal mines, and let the private sector spend its own money to dig the cash back up. ..

Keynes ... went on to point out that ... gold mining was a lot like his thought experiment. Gold miners were, after all, going to great lengths to dig cash out of the ground, even though unlimited amounts of cash could be created at essentially no cost with the printing press. ...

Talk to gold bugs and they’ll tell you that ... governments ... can’t be trusted not to debase their currencies. The odd thing, however, is that ... such debasement is getting very hard to find. …

...we are for some reason digging our way back to the 17th century.

Economist's View
Paul Krugman: Bits and Barbarism
Posted by Mark Thoma

Edging closer to being in paradigm.

Peter Cooper — More on Budget Deficits

The previous post, which emphasized a currency-issuing government's capacity to deficit spend, generated lots of positive feedback but also numerous questions that perhaps should be addressed in a new post rather than getting buried in the comments. Although for regular readers the general answers to these questions will already be evident from previous posts and comments, it may be helpful for newer readers to expand on these answers. In doing so, I'll end up touching on a few points that have not been discussed explicitly in previous posts (though sometimes in the comments), which may make it of interest to regular readers as well. The post is a modified version of one of my contributions to the comments.

The following questions are addressed:

1. If the government is not like a household, how come Greece, Spain and Detroit have got themselves into financial trouble?

2. In what sense does government spending create money and taxes destroy it?

3. How can money created out of thin air have any value?

There were a couple of other interesting issues raised in the comments, but I will leave discussion of those to future posts.

Hetecononomist
More on Budget Deficits
Peter Cooper

Three Assumptions for Addressing Fiscal Policy Intelligently

This in in response to a request from Frank Li, to reduce description of fiat currency operations to three basic assumptions. Frank rejected my suggested approach, so I'm posting them here.

(1) The business of a [good] government is to support short, medium AND long term success of small, middle AND large size business communities.
a. Business is for short term profits, PLUS positioning for medium-term profits, PLUS staying in business long enough to guarantee long-term profits.
b. Adaptive profit strategies guaranteeing short, medium & long term survival leads to constantly growing jobs for more people, thereby generating the options required for continued growth.

(2) In some ways, a country must be run like a business or a family, or it will go bankrupt, but we must be aware of the subtle differences in operational strategy that apply to the different levels of organization. In every example of hierarchical organization, the "parent" level of policy management runs a "real-goods" budget, while ISSUING, in unlimited amounts, a fiat accounting system purely for internal bookkeeping. The "child" USERS of that accounting or currency system can run entirely on a "currency" budget precisely because their parent ISSUERS currency allows USERS to use that currency as an accurate proxy for local real-goods budgets. National-level organizations that ISSUE currency can go bankrupt ONLY by running out of real, natural resources, including it's people. An issuer of fiat currency can always issue as much or little of it's currency to account for public organization, and so it cannot go bankrupt in the sense of running out of accounting units. For currency USERS, bankruptcy in currency units reduces to being identical to bankruptcy in real-goods units.

(3) It’s both true and not exactly true to argue that the USA is not like a business or family. The responsibility of USA policy staff - our elected government - is to spend into existence as much currency as the nation needs to operate, but neither too much nor too little. The purpose of fiscal policy is to pursue the public goals of a growing population and it's growing business communities, while avoiding both extremes of either inflation or deflation. An excessive currency supply can contribute to inflation, and an insufficient currency supply can contribute to deflation. In addition, wrong headed employment and tax policies can allow personal income and savings distributions to be unproductively skewed to the point where the unpredictably distributed capabilities of emerging citizens cannot be optimally sampled, developed or utilized.


In the end, the social purpose of inventing a currency system is to ensure that any and all productive transactions that citizens agree should occur, can always proceed without delay ... a concept called liquidity. The purpose of a national currency is to provide liquidity for all social inventions, so that their development can be judged, without unnecesary delay, solely upon the diverse social feedback which eventually allows selection of a national survival path.

Banking Lobbies ask Sovereign Governments Approval for an Unregulated Industry That Would Hoard Real Currency Supplies

Yes, you heard that right. Why, sometimes Control Frauds think two mutually exclusive things before lunch! Such as unleashing outright fraud and preserving ill-gotten wealth & self-defeating behavior.

"Actual currency users are freaked out about this because it could essentially be a license to constrain and manipulate all markets." Plagiast Comedus

This ongoing battle, between a banking lobby and the lobbies it supposedly serves, has gone on without pause since even before the original 13 American colonies were all incorporated.

And ps:  "You're over funding the FBI too."

'And those other pesky "regulatory" departments, the OTS, FDIC, etc, etc.  We just can't afford them!'

ps: ps:  "Here's a little something, wink, wink.  Just between us, you know?  Let's meet again next campaign season, to discuss that little matter of the House & Senate Finance Committees.  We think they're redundant.  But let's not rush anything.  We are VERY patient people, after all."