Modern Monetary Theory

[Elvis]

Look at the priceless expression on Alan Greenspan's face as a young, clueless Paul Ryan tries to get Greenspan to agree that privatizing Social Security would make the system more "secure" and save it from "insolvency."

When Greenspan so patiently drops the truthful answer, Ryan goes "mhm" as if he understands. Stephanie Kelton uses this clip in some presentations:

Greenspan: "There is nothing to prevent the government from creating as much money as it wants."
Committee on the Budget, House of Representatives, March 2, 2005

https://www.youtube.com/watch?v=DNCZHAQnfGU

Greenspan is ultimately talking about MV=Py and why spending is only an issue if resources are not there for money to buy. Allocating resources is what Congress needs to worry about. Paul Ryan needs to kill himself. I'm sure Greenspan has his own reasons for his monetary policies (Atlas Shrugged?), but he's starting with the same truth about money as are MMT'ers. As commenter Steve Greenberg writes:

Wow, even Alan Greenspan acknowledges the truth of MMT. It's a good thing nobody is listening or we would be hearing the sounds of heads exploding all across the country.

Link to the entire 3-hour hearing: https://www.c-span.org/video/?185718-1/ ... cal-issues


Here's a transcript from the description, then for good measure another Greenspan quote:

Paul Ryan: "Having personal retirement accounts is another way of making a future retiree's benefits more secure for their retirement. And also, do you believe personal retirement accounts as a component to a system of solvency does help improve solvency, because when you have a personal retirement account policy, if it is a company with a benefit offset, with that feature in place do you believe that personal retirement accounts can help us achieve solvency for the system and make those future retiree benefits more secure?"

Alan Greenspan: "I wouldn't say the pay-as-you-go benefits are insecure in the sense that there is nothing to prevent the Federal Government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase? So it is not a question of security. It is a question of the structure of a financial system which assures that the real resources are created for retirement as distinct from the cash. The cash itself is nice to have, but it has got to be in the context of the real resources being created at the time those benefits are paid and so that you can purchase real resources with the benefits, which of course are cash."

"Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank. That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit. To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation. If it produces too few, the economy's expansion also will presumably be constrained by a shortage of the necessary lubricant for transactions. Authorities must struggle continuously to find the proper balance."

Alan Greenspan: Central Banking and Global Finance (January 14, 1997)
https://www.federalreserve.gov/boarddoc ... 970114.htm

[JackRiddler]

It's really not the truth of MMT. It's how sovereign currency works. MMT is an effort to describe it, and to see through all the ways these workings have been obscured.

[Elvis]

It's really not the truth of MMT. It's how sovereign currency works. MMT is an effort to describe it, and to see through all the ways these workings have been obscured.

True, understood, and I try to avoid those phrasings. But I've been seeing the main proponents themselves using that kind of construction. For one thing, if you tell most people that "taxes don't pay for federal spending" or "the federal budget is nothig like a household budget"—truths of MMT, if you will—plenty of people will tell you you're crazy, naive and understand nothing about how money works. Such contested aspects of MMT inevitably get addressed as mere assertions needing to be proved as truths.

One person I talked to reported "massive cognitive dissonance" once they started to glimpse what I was saying. Progress!

[JackRiddler]

Like I said, it took me years to see it, and this is long after I'd figured it was true. Things are still falling into place, in this thread. The early conditioning is powerful and afflicts most everyone. Common sense falsehoods covering for ignorance about things we never even think to question because they are like the air. So much more pervasive than a simple conspiracy.

[Grizzly]

Toward An Anthropological Theory of Value: The False Coin of Our Own Dreams - David Graeber
PDF:
https://monoskop.org/images/3/36/Graeber_David_Toward_an_Anthropological_Theory_of_Value.pdf

[Elvis]

Toward An Anthropological Theory of Value: The False Coin of Our Own Dreams - David Graeber
PDF:
https://monoskop.org/images/3/36/Graeber_David_Toward_an_Anthropological_Theory_of_Value.pdf

Interesting, thanks! A skim-through reveals the book is mainly about physical forms of money, and how they have been perceived as holding invisible power. Modern money goes a step further: it's literally invisible, you can't see it. If you go to the credit union and say, "I'd like to see my money, please," they'll show you a number on a computer screen. Yup, there's your money, it's just a number. While all numbers are imaginary, in the mathematical sense, it's a little weird that the number on the screen, or written on a scrap of paper, represents something you can't see.

In any case, the book will be useful to me in a different project, loosely related to theories of money.

[Elvis]

Finished reading Warren Mosler's The Seven Deadly Innocent Frauds:

https://moslereconomics.com/wp-content/ ... s/7DIF.pdf

I can't recommend it enough. I haven't yet read the new MMT-based textbook, The Financial System and the Economy - Principles of Money and Banking by Éric Tymoigne* but it's 429 pages, compared to Mosler's relatively easy read of 117 pages. And Mosler's is not a textbook, he has an easy style and tells great stories, making this book ideal as a detailed introduction to MMT for the lay reader. I'm trying to get people to read it. (Between all the reading and proselytizing, this MMT stuff is ruining my life )

* (There is another textbook with identical title by a Maureen Burton, but not the same at all, looks like the standard classroom stuff. AVOID.)

In the third and final chapter, The Public Purpose, Mosler sets out a pretty radical agenda of full employment and the usual social provisions (the last few pages sound like Mosler is running for president, and indeed he is running for governor of the U.S. Virgin Islands—debates are on YouTube) but he seems naive about foreign affairs and the violent side of global capitalism. Tough to pin a label on Mosler, he comes from a bond-trading milieu which is bound to lean conservative, but has all these progressive proposals. I think he's just smart.

Near the end of the book, I was surprised to see this:

With my new understanding, I was keenly aware of the risks to the welfare of our nation. I knew that the larger federal deficits were what was fixing the broken economy, but I watched helplessly as our mainstream leaders and the entire media clamored for fiscal responsibility (lower deficits) and were prolonging the agony.

It was then that I began conceiving the academic paper that would become Soft Currency Economics. I discussed it with my previous boss, Ned Janotta, at William Blair. He suggested I talk to Donald Rumsfeld (his college roommate, close friend and business associate), who personally knew many of the country’s leading economists, about getting it published. Shortly after, I got together with “Rummy” for an hour during his only opening that week. We met in the steam room of the Chicago Racquet Club and discussed fiscal and monetary policy. He sent me to Art Laffer who took on the project and assigned Mark McNary to co-author, research and edit the manuscript, which was completed in 1993

What? Donald Rumsfeld and Art Laffer were midwives of Modern Monetary Theory as we know it today? It's true. They know. They know.

But in public at least, Laffer to this day sings the "deficits are bad" tune. Why? Maybe he and Rumsfeld just like the "lower taxes" part.

I searched Laffer's name on Mosler's blog and got 13 hits. Mosler calls out Laffer, here dissecting a 2009 Laffer WSJ article. In hindsight, note how completely wrong Laffer's predictions were. It's comical. People still pay this guy for advice! Why? And note the appeal to our grandchildren. Oh, the grandchildren, how can we do this to them!

Italicizing Laffer, with Mosler's comments in red, bolding is mine:

Home » Fed • Government Spending » Laffer WSJ opinion piece
Laffer WSJ opinion piece
Posted by WARREN MOSLER on June 10, 2009 in Fed, Government Spending 14 Comments


Get Ready for Inflation and Higher Interest Rates

The unprecedented expansion of the money supply could make the ’70s look benign.

By Arthur B. Laffer

June 10th (WSJ)— Rahm Emanuel was only giving voice to widespread political wisdom when he said that a crisis should never be “wasted.” Crises enable vastly accelerated political agendas and initiatives scarcely conceivable under calmer circumstances. So it goes now.

Here we stand more than a year into a grave economic crisis with a projected budget deficit of 13% of GDP. That’s more than twice the size of the next largest deficit since World War II. And this projected deficit is the culmination of a year when the federal government, at taxpayers’ expense, acquired enormous stakes in the banking, auto, mortgage, health-care and insurance industries.

Art knows the difference between purchasing financial assets (usually done by the Fed) and purchasing goods and services (and indirectly through transfer payments) but here elects to ignore it.

With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs — such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid — are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.

He also recognizes the demand leakages including pension fund contributions, insurance reserves, USD financial accumulations of non residents, IRA’s, other corporate reserves, etc. tend to compound geometrically and are thereby strong contractionary biases.

But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.

He also knows causation runs from loans to deposits and reserves and not from reserves to anything at all.

I’ve had this discussion personally with him and I wrote ‘soft currency economics’ jointly with Mark McNary who worked at art’s firm with both involved.

About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base — which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash — by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.

Bank reserves are crucially important because they are the foundation upon which banks are able to expand their liabilities and thereby increase the quantity of money.

He knows this is not the case. He knows that lending is in no case reserve constrained, and that it’s about price and not quantity.

Banks are required to hold a certain fraction of their liabilities — demand deposits and other checkable deposits — in reserves held at the Fed or in vault cash. Prior to the huge increase in bank reserves, banks had been constrained from expanding loans by their reserve positions.

There were no banks of any consequence constrained from lending by their reserve positions that I know of.

In fact, they all had excess collateral they could have taken to the discount window as needed.

There were some banks constrained by capital considerations but that’s an entirely different story.

That’s why adding the excess reserves didn’t change anything with regards to lending.

Art knows this as well.

They weren’t able to inject liquidity into the economy, which had been so desperately needed in response to the liquidity crisis that began in 2007 and continued into 2008. But since last September, all of that has changed. Banks now have huge amounts of excess reserves, enabling them to make lots of net new loans.

Yet a chart of lending shows no changes as functions of reserve positions.

The way a bank or the banking system makes new loans is conceptually pretty simple. Banks find an entity that they believe to be credit-worthy that also wants a loan, and in exchange for the new company’s IOU (i.e., loan) the bank opens up a checking account for the customer. For the bank’s sake, the hope is that the interest paid by the borrower more than makes up for the cost and risk of the loan. The recently ballyhooed “stress tests” on banks are nothing more than checking how well a bank can weather differing levels of default risk.

Correct. And these loans are not reserve constrained.

And even if they were somehow constrained by reserves, innovations in sweep accounts have reduced reserve requirements to near 0.

What’s important for the overall economy, however, is how fast these loans are made and how rapidly the quantity of money increases.

Most important is the level of spending which may or may not be a function of the lending that creates the ‘quantity of money’ as defined by Art. And he knows that as well.

For our purposes, money is the sum total of all currency in circulation, bank demand deposits, other checkable deposits, and travelers checks (economists call this M1). When reserve constraints on banks are removed, it does take the banks time to make new loans. But given sufficient time, they will make enough new loans until they are once again reserve constrained.

He knows they are never reserve constrained.

The expansion of money, given an increase in the monetary base, is inevitable, and will ultimately result in higher inflation and interest rates. In shorter time frames, the expansion of money can also result in higher stock prices, a weaker currency, and increases in commodity prices such as oil and gold.

In general the causation runs in the other direction, as he also knows.

At present, banks are doing just what we would expect them to do. They are making new loans and increasing overall bank liabilities (i.e., money). The 12-month growth rate of M1 is now in the 15% range, and close to its highest level in the past half century.

He also knows a lot of this simply replaced commercial paper issuance and other forms of non bank lending, and that total credit is the more useful indicator of lending activity.

With an increased trust in the overall banking system, the panic demand for money has begun to and should continue to recede. The dramatic drop in output and employment in the U.S. economy will also reduce the demand for money. Reduced demand for money combined with rapid growth in money is a surefire recipe for inflation and higher interest rates. The higher interest rates themselves will also further reduce the demand for money, thereby exacerbating inflationary pressures. It’s a catch-22.

He also knows interest rates are voted on by the fed and that term rates reflect anticipated Fed moves.

It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S.

He knows there are no consequences. The Fed is like the kid in the car seat with a steering wheel who thinks he’s driving.

To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn’t a pretty picture.

He knows that was caused by cost push from Saudi price setting that was broken by the deregulation of natural gas in 1978 that resulted in a 15 million barrel per day supply response as our utilities switched from oil to natural gas.

Now the Fed can, and I believe should, do what it must to mitigate the inevitable consequences of its unwarranted increase in the monetary base. It should contract the monetary base back to where it otherwise would have been, plus a slight increase geared toward economic expansion.

All that would do is raise rates some due to the fed selling its securities.

Or the Fed could repo its position so the banks would hold overnight collateral rather than over night reserves. Functionally that changes nothing except for creating a lot more book keeping work.

Absent this major contraction in the monetary base, the Fed should increase reserve requirements on member banks to absorb the excess reserves.

This is just plain silly.

Art knows there is no remaining ‘monetary purpose’ of reserves since we went off the gold standard, which he understands as well as anyone.

Canada and others dropped reserve requirements long ago with no consequences beyond a reduced accounting burden.

Given that banks are now paid interest on their reserves and short-term rates are very low, raising reserve requirements should not exact too much of a penalty on the banking system, and the long-term gains of the lessened inflation would many times over warrant whatever short-term costs there might be.

No penalty and no inflation consequences either.

Alas, I doubt very much that the Fed will do what is necessary to guard against future inflation and higher interest rates. If the Fed were to reduce the monetary base by $1 trillion, it would need to sell a net $1 trillion in bonds. This would put the Fed in direct competition with Treasury’s planned issuance of about $2 trillion worth of bonds over the coming 12 months. Failed auctions would become the norm and bond prices would tumble, reflecting a massive oversupply of government bonds.

Yes, yields would go higher, though not as disorderly as he forecasts.

And, as previously discussed, there’s no reason to do that unless the fed wants higher rates.

In addition, a rapid contraction of the monetary base as I propose would cause a contraction in bank lending, or at best limited expansion. This is exactly what happened in 2000 and 2001 when the Fed contracted the monetary base the last time. The economy quickly dipped into recession.

He knows the contraction of the base back then did not cause anything.

While the short-term pain of a deepened recession is quite sharp, the long-term consequences of double-digit inflation are devastating. For Fed Chairman Ben Bernanke it’s a Hobson’s choice. For me the issue is how to protect assets for my grandchildren.

The best gift he could give his grand children is to tell the story right way around as he knows is the case.

Mr. Laffer is the chairman of Laffer Associates and co-author of “The End of Prosperity: How Higher Taxes Will Doom the Economy — If We Let It Happen” (Threshold, 2008).

http://moslereconomics.com/2009/06/10/l ... ion-piece/

Laffer knows. What's going on?

I'll try to answer that question in my next post or soonest. Be great to hear others' thoughts too. Take a break from the news cycle, Go Big Picture for a spell.

[Elvis]

Just heard an interviewer on BBC World Service say about the U.S.:

"Taxpayer money was used to bail out the big banks."

In the media you hear this kind of stuff all day long.

Well, I guess you could say the money belonged to "taxpayers" if you mean all citizens. But the money didn't come from taxpayers.

[Elvis]

Some additions, if only so I can close some tabs on my browser (I keep pertinent ones open so the material doesn't get forgotten in a growing folder).

First just a thought. They say that TARP, QE, etc. added $30T to the system to keep the banking system going & 'sound'. It worked, more or less, with no hyperinflation, but so far no boom and little seeming direct benefit to taxpayers, families etc.

Rough calculation shows that if the $30T was distributed among U.S. families, each family would get about $200,000.

Maybe that's too simplistic, and not sure the effect on the economy, but my guess?? Biggest economic boom ever.

[JackRiddler]

Remember the $30 trillion never existed all at the same time. Most of that money no longer exists. Such figures are cumulative totals of short-term, often overnight, mostly zero or near-zero interest loans from the Fed discount windows following ZIRP (zero-interest rate policy). Except in the case of defaults, all of it gets repaid (and thus erased again). The function was to keep the fucking miscreants liquid to avoid defaults while they rebuilt revenue streams. It worked. (Again, if you look at the Wall Street thread far enough back, you will find me doubting that it would work; I didn't understand how it worked because like most people, most economists in fact, I labored under false monetarist assumptions.)

So it is not comparable to issuing $30 trillion all at once and distributing it as a head bonus to all Americans. Which I'm guessing even if it were not too much stimulation would still be pretty disastrous due to the psychological effect, which should never be ignored. My continuing objection to the bailouts is that they were done to avoid liquidation and socialization of enterprises that had proven themselves to be criminal, and who would effectively confess it without consequence in the long train of settlements that followed. Serially criminal managements were generously rescued to search for new plunder. and of course they remained the opposite of generous with their own borrowers. Banks could borrow at ZIRP and get 3% or more from t-bills, which is quite the scam. Now there's the kind of thing they could have made available to all of us, don't you think? The size of the bailouts also makes clear they had the power to cover all deposits no matter how many banks defaulted, so "too big to fail" was a notional bogeyman.

.

[Elvis]

Many exponents of MMT (as the OP article does) lead with the attention grabber, "taxes do not pay for federal spending." Proving or disproving this seems more difficult than it should be.

Equally credentialed economists differ on this wildly. HUGE discussion of this question, and what is the best way to frame MMT, here:
http://neweconomicperspectives.org/2012 ... aming.html

Despite insistences by Wray, Mosler, Kelton et al., the questions of whether or not tax payments are canceled out/destroyed, or whether some or all are rechanneled back into spending, may not matter that much in the big MMT picture. In other words, I may be getting further into the nuts & bolts than I need to, but I've always been curious about this, and wanting answers doesn't seem unreasonable.

What actually becomes of those tax payments and paycheck witholdings? What is the path and what is the final destination/disposition of those payments?

So far, I've learned that when the IRS receives tax checks—trillions of dollars annually—the IRS sends them straight off to a "TT&L" account, federal gov't accounts in several hundred selected commercial banks around the country, set up to receive all (or most) payments of federal taxes, including all Social Security FICA taxes. To start see: https://en.wikipedia.org/wiki/Treasury_Tax_and_Loan

The TT&Ls (Tax and Loan) were originally "Liberty Loans" during WWI and gradually became what they are today. Here's a 1979 St. Louis Fed bank paper giving a history TT&Ls (I'm about halfway through): https://files.stlouisfed.org/files/htdo ... ct1979.pdf

Among other purposes, the TTLs bolster bank reserves, and help spread out the processing of these many, many checks. And seemingly, as it works today, to give the banking system a crack at briefly using some of the money, a constant flow of quarterly and other federal tax payments. I haven't seen anything stating explicitly, "then, your taxes are played with by commercial banks before being sent on to the Treasury." I see no reason why the banking industry would not want access to that cash (while it's still cash).

So anyway—this is where the tax checks are cleared, in the TT&Ls. With some TT&L accounts, the money is sent on to the Treasury the next day. Other TT&L accounts (there are basically two types) allow the commercial bank to keep the money for some weeks or months and invest it or loan it out. Then, either they send it along to the Treasury as scheduled, or the Treasury makes a withdrawl "as needed."

So the tax payment money eventually does go to the Treasury account at the Fed. "The" Treasury account I believe is called the "General Account" and may be what most people think of as the country's "general fund" you always hear mentioned.

"May be"—who the fuck knows for sure? Links lead me to the actual statutes, and good luck to the layman trying to decode all that. Maybe that's why they call it the tax code?


Then what happens?

Some say the Treasury then re-spends this money, sometimes withdrawing it from TT&Ls "when Treasury needs to pay some bills." (Hmm.)

Some say that through some bond mechanism, the money is retired, "destroyed." (As we know, MMT proponents generally hold this view.)

Others say it's not so simple, that the money is not exactly returned to the economy, but by bookkeeping is considered to be re-spent when Treasury creates new money for spending. Or something.

Here's a 2007 New York Fed description of the TT&Ls: https://www.newyorkfed.org/aboutthefed/ ... fed21.html

Treasury and Tax and Loan Program

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.

TT&L accounts help to stabilize the supply of reserves in the banking system, increasing the stability of financial markets and simplifying the implementation of monetary policy.

Over 80 percent of the TT&L institutions are collectors that transfer funds to the Treasury's accounts at the Federal reserve the same day, or after, they receive them. The remainder are "note option" depositories, which hold the tax funds longer.

What stands out in all this?

Could the main function of income taxes and growing FICA taxes (FICA tax was only 1% in 1935) actually be to stabilize the supply of reserves in the banking system? Plausible since that's always listed as the first function of the TTL accounts, and it's a fuck of a lot of money at any one time.

If anyone knows answers or has better questions, please post!


FWIW (irrelevant?), here's a 2003 BIS report on Payment systems in the United States; the word "tax" appears exactly three times, the word "revenue" once; TT&Ls are not mentioned at all. https://www.bis.org/cpmi/paysys/unitedstatescomp.pdf

[Elvis]

Excellent and right on reply, Jack, thank you.

I didn't forget it, but did ignore the fact that the $30 trillion never existed all at the same time, I guess mainly wanting to have some analogous figure going to families, so even if they distributed $20K annually for ten years (still not a perfect comparison), that might be something. The one-time TARP injection, divided among all families, would be around $25K as I recall, that alone would have been a huge stimulus. (Certainly compared to the slow recovery people experienced.)

Above all, I'm reminded of what a friend said about all this: economics comes down mostly to psychology.

Remember the $30 trillion never existed all at the same time. Most of that money no longer exists. Such figures are cumulative totals of short-term, often overnight, mostly zero or near-zero interest loans from the Fed discount windows following ZIRP (zero-interest rate policy). Except in the case of defaults, all of it gets repaid (and thus erased again). The function was to keep the fucking miscreants liquid to avoid defaults while they rebuilt revenue streams. It worked. (Again, if you look at the Wall Street thread far enough back, you will find me doubting that it would work; I didn't understand how it worked because like most people, most economists in fact, I labored under false monetarist assumptions.)

So it is not comparable to issuing $30 trillion all at once and distributing it as a head bonus to all Americans. Which I'm guessing even if it were not too much stimulation would still be pretty disastrous due to the psychological effect, which should never be ignored. My continuing objection to the bailouts is that they were done to avoid liquidation and socialization of enterprises that had proven themselves to be criminal, and who would effectively confess it without consequence in the long train of settlements that followed. Serially criminal managements were generously rescued to search for new plunder. and of course they remained the opposite of generous with their own borrowers. Banks could borrow at ZIRP and get 3% or more from t-bills, which is quite the scam. Now there's the kind of thing they could have made available to all of us, don't you think? The size of the bailouts also makes clear they had the power to cover all deposits no matter how many banks defaulted, so "too big to fail" was a notional bogeyman.

[Elvis]

I wrote:
As I understand it, MMT obviates such taxes.

JackRiddler wrote:
Taxes are essential to MMT, however.

I was reading back for a summary, and noticed that I should have written, "such high taxes" or similar, but recall feeling that the qualifier "such taxes" sufficiently referred to Denmark's 'steep income taxes that pay for social programs.'

Also understand the functions of income taxes. But excellent extended explanation, thanks again!

[Elvis]

Stephanie Kelton to the rescue! Before writing my post quoted at bottom, I should have read this 1998 paper:

Can Taxes and Bonds Finance Government Spending?

(Stephanie Bell=Stephanie Kelton)
(Note the acknowledgement to Randall Wray.)

If anyone doesn't quite understand the relationships among bank reserves, Treasury bonds, federal spending and taxes, she explains how Treasury inputs and outputs to the TT&L accounts stabilize bank reserves. Essentially, banks don't want excess reserves because they don't earn any money (although see below that since 2008 this has changed somewhat). But when the federal gov't spends, it increases reserves. So by adjusting amounts in the TT&Ls, Treasury can smooth the bumps in reserves.

Kelton further explains how the tax monies in the TT&Ls are "destroyed" when moved to a Treasury account, and thus could not possibly pay for federal spending. Argument against this abound, but this is the clearest explanation of the system I've seen.

I don't feel too bad about barely grasping these convoluted maneuvers, knowing that Lawrence fucking Summers "doesn't really understand" them either.

The PDF isn't copy/pastable, click to read the 28-page paper.

An important aspect in all this is the federal funds market: https://en.wikipedia.org/wiki/Federal_funds

In the United States, federal funds are overnight borrowings between banks and other entities to maintain their bank reserves at the Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions. Transactions in the federal funds market enable depository institutions with reserve balances in excess of reserve requirements to lend reserves to institutions with reserve deficiencies. These loans are usually made for one day only, that is, "overnight". The interest rate at which these deals are done is called the federal funds rate. Federal funds are not collateralized; like eurodollars, they are an unsecured interbank loan.[1]

Federal funds transactions by regulated financial institutions neither increase nor decrease total bank reserves. Instead, they redistribute reserves. Before 2008, this meant that otherwise idle funds could yield a return. (Since 2008, the Fed has paid interest on reserves, including excess reserves.) Banks may borrow these funds to avoid an overdraft (that is, the balance going below reserve requirement) of their reserve account, or in order to meet the reserves required to back their deposits. Federal funds are definitive money, meaning that they are available for immediate spending, while checks and many other forms of money must be cleared by banks and typically take several days before becoming available for spending.

Participants in the federal funds market include commercial banks, savings and loan associations, government-sponsored enterprises, branches of foreign banks in the United States, federal agencies, and securities firms. Many relatively small institutions that accumulate reserves in excess of their requirements lend reserves overnight to money center and large regional banks, as well as to foreign banks operating in the United States. Federal agencies also lend idle funds in the federal funds market.

A word in Kelton's paper jumped out at me: "mask":

is the coordination of taxation and bond sales with (deficit) spending due to necessity or does it mask a more pragmatic operation?

Many exponents of MMT (as the OP article does) lead with the attention grabber, "taxes do not pay for federal spending." Proving or disproving this seems more difficult than it should be.

Equally credentialed economists differ on this wildly. HUGE discussion of this question, and what is the best way to frame MMT, here:
http://neweconomicperspectives.org/2012 ... aming.html

Despite insistences by Wray, Mosler, Kelton et al., the questions of whether or not tax payments are canceled out/destroyed, or whether some or all are rechanneled back into spending, may not matter that much in the big MMT picture. In other words, I may be getting further into the nuts & bolts than I need to, but I've always been curious about this, and wanting answers doesn't seem unreasonable.

What actually becomes of those tax payments and paycheck witholdings? What is the path and what is the final destination/disposition of those payments?

So far, I've learned that when the IRS receives tax checks—trillions of dollars annually—the IRS sends them straight off to a "TT&L" account, federal gov't accounts in several hundred selected commercial banks around the country, set up to receive all (or most) payments of federal taxes, including all Social Security FICA taxes. To start see: https://en.wikipedia.org/wiki/Treasury_Tax_and_Loan

The TT&Ls (Tax and Loan) were originally "Liberty Loans" during WWI and gradually became what they are today. Here's a 1979 St. Louis Fed bank paper giving a history TT&Ls (I'm about halfway through): https://files.stlouisfed.org/files/htdo ... ct1979.pdf

[. . .]

[JackRiddler]

I want to know the exact answer too, but it occurs to me it's the same either way. Whether the Treasury books dollars as "spent" out of the account in which it earlier deposited tax revenues (after their weird trip through commercial banks, I'd never known!), or issues money to cover an allocation, it's money creation either way.

More to say on this but tired right now. This point fascinates me.