I'm in Steamboat Springs CO, not far from Laramie. I'll keep this noted on my Calendar. Fortunately (for me) it is between pronghorn and elk hunting seasons. ;-)
I have a new video explaining the process. Here I’ll reproduce the logic in that video. Please watch the video and share it widely: it attacks one of the biggest misconceptions about bonds, that the government can’t service the interest on the bonds because “just like a household” they will run out of money. No they won’t.
This video deserves more views than it’s currently getting. If you watch it, and especially if you share it with your contacts, YouTube will promote the video more strongly, and the analysis will get seen by more people.
Become a paid subscriber and support my relentless but chronically underfunded campaign to reform economics
Upgrade to paid
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In the video, I work towards the outcome shown in the screenshot below, which shows the basic accounting for government deficits and bond sales.
I start with what taxation does, which is obvious to most people: it takes money out of private sector deposit accounts. Therefore, taxation reduces the financial net worth of the private sector (Households and Firms):
That’s seeing the process from the point of view of Households and Firms. At the Banking system level, it looks like this, before we put in the second entry to balance the transation.
That second entry is that Reserves--which are the Banks’ assets and the Central Banks liabilities--fall by the amount of the tax, because, at the level of the Central Bank, the tax revenue is transferred to the Treasury’s accounts there, generally called the “Consolidated Revenue Fund”:
At the Treasury, this means that tax revenue increases its financial net worth.
All the above should be clear, to everybody from Austrians to MMTers. Everyone can understand that taxation reduces the money supply (which is essentially the sum of Deposit accounts), thus reducing their financial net worth, and increasing that of the government.
Now the part that should be obvious, but isn’t, because bad economics and ideology get in the way: government spending has the exact opposite effect, so that government spending increases the money supply, thus increasing the financial net worth of households and firms, and decreasing that of the government.
This already is the exact opposite of what economics textbooks teach. They assert that a government deficit reduces the amount of money the private sector has--which they call “Loanable Funds”:
They never specify what these precisely are, but they have to be the sum of deposit accounts (or some variable fraction of them). The accounting shows the opposite to what the textbooks claim: a deficit increases the funds in household and corporate deposit accounts. Rather than “crowding out” the private sector, a deficit increases the amount in private bank accounts.
This hasn’t shown bond sales yet. Do they reduce the supply of money?
Not if they’re bought by the banks. The revenue from bond auctions is equal to the deficit--the excess of government spending over taxation--plus interest on existing bonds. That interest, like the deficit itself, is financed by the Treasury going into negative net worth.
If you object to the government being in negative financial worth, you’re objecting to money itself. The reason that a shop in, let’s say Clacton, accepts UK£0.99 in payment for buying a 99 Flake, is that it’s a liability of the relevant government. Try giving the shopkeeper the equivalent in Thai Baht and you’ll walk would with nothing.
In this sense, creating liabilities on itself is one of the major functions of a government. Where its liabilities are accepted as money in payment for goods and services defines a country’s borders just as much as the existence of border guards and customs officials does. And if these financial liabilities are also used to create public infrastructure--rather than, say, bombing another country--then we get nonfinancial assets (roads, schools, hospitals, etc.) as a side effect of government net financial negative equity.
Bond sales to banks do not affect the money supply at all. Instead, they let banks swap a non-tradeable, low-income-earning asset--Reserves--for a tradeable, higher-income-earning asset: Treasury Bonds.
When you simulate this system, you see that government deficits have the opposite effect to that alleged by economics textbooks. Rather than deficits reducing economic activity, they increase them. The “Holy Grail” of government surpluses, pushed by almost all other pundits (outside myself, Richard Murphy, and MMT advocates), actually reduce the money supply and reduce economic growth.
I explain all this relatively slowly in this new video. Please watch it, and share it around. We are paying a huge price for the ignorance that the conventional wisdom promulgates about government deficits.
"Rather than deficits reducing economic activity, they increase them" Yeah, when there's slack... nothing new to see here. MMTers are always secretly assuming the economy is like all slack and all monopsony or something like that
I'm in Steamboat Springs CO, not far from Laramie. I'll keep this noted on my Calendar. Fortunately (for me) it is between pronghorn and elk hunting seasons. ;-)
You're back at the fish grill! I'll be there!
I’d like to join for the meetup next week in LA!
Looks like I'll be able to make it today. See you!
I'll attend the LA meetup.
I'll see you at the fish grill in LA!
I will be at the fish grill.
I have a new video explaining the process. Here I’ll reproduce the logic in that video. Please watch the video and share it widely: it attacks one of the biggest misconceptions about bonds, that the government can’t service the interest on the bonds because “just like a household” they will run out of money. No they won’t.
This video deserves more views than it’s currently getting. If you watch it, and especially if you share it with your contacts, YouTube will promote the video more strongly, and the analysis will get seen by more people.
Become a paid subscriber and support my relentless but chronically underfunded campaign to reform economics
Upgrade to paid
Share
In the video, I work towards the outcome shown in the screenshot below, which shows the basic accounting for government deficits and bond sales.
I start with what taxation does, which is obvious to most people: it takes money out of private sector deposit accounts. Therefore, taxation reduces the financial net worth of the private sector (Households and Firms):
That’s seeing the process from the point of view of Households and Firms. At the Banking system level, it looks like this, before we put in the second entry to balance the transation.
That second entry is that Reserves--which are the Banks’ assets and the Central Banks liabilities--fall by the amount of the tax, because, at the level of the Central Bank, the tax revenue is transferred to the Treasury’s accounts there, generally called the “Consolidated Revenue Fund”:
At the Treasury, this means that tax revenue increases its financial net worth.
All the above should be clear, to everybody from Austrians to MMTers. Everyone can understand that taxation reduces the money supply (which is essentially the sum of Deposit accounts), thus reducing their financial net worth, and increasing that of the government.
Now the part that should be obvious, but isn’t, because bad economics and ideology get in the way: government spending has the exact opposite effect, so that government spending increases the money supply, thus increasing the financial net worth of households and firms, and decreasing that of the government.
This already is the exact opposite of what economics textbooks teach. They assert that a government deficit reduces the amount of money the private sector has--which they call “Loanable Funds”:
They never specify what these precisely are, but they have to be the sum of deposit accounts (or some variable fraction of them). The accounting shows the opposite to what the textbooks claim: a deficit increases the funds in household and corporate deposit accounts. Rather than “crowding out” the private sector, a deficit increases the amount in private bank accounts.
This hasn’t shown bond sales yet. Do they reduce the supply of money?
Not if they’re bought by the banks. The revenue from bond auctions is equal to the deficit--the excess of government spending over taxation--plus interest on existing bonds. That interest, like the deficit itself, is financed by the Treasury going into negative net worth.
If you object to the government being in negative financial worth, you’re objecting to money itself. The reason that a shop in, let’s say Clacton, accepts UK£0.99 in payment for buying a 99 Flake, is that it’s a liability of the relevant government. Try giving the shopkeeper the equivalent in Thai Baht and you’ll walk would with nothing.
In this sense, creating liabilities on itself is one of the major functions of a government. Where its liabilities are accepted as money in payment for goods and services defines a country’s borders just as much as the existence of border guards and customs officials does. And if these financial liabilities are also used to create public infrastructure--rather than, say, bombing another country--then we get nonfinancial assets (roads, schools, hospitals, etc.) as a side effect of government net financial negative equity.
Bond sales to banks do not affect the money supply at all. Instead, they let banks swap a non-tradeable, low-income-earning asset--Reserves--for a tradeable, higher-income-earning asset: Treasury Bonds.
When you simulate this system, you see that government deficits have the opposite effect to that alleged by economics textbooks. Rather than deficits reducing economic activity, they increase them. The “Holy Grail” of government surpluses, pushed by almost all other pundits (outside myself, Richard Murphy, and MMT advocates), actually reduce the money supply and reduce economic growth.
I explain all this relatively slowly in this new video. Please watch it, and share it around. We are paying a huge price for the ignorance that the conventional wisdom promulgates about government deficits.
"Rather than deficits reducing economic activity, they increase them" Yeah, when there's slack... nothing new to see here. MMTers are always secretly assuming the economy is like all slack and all monopsony or something like that