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Thursday, July 16, 2020

Banks And MMT: J.W. Mason's Comments

J.W. Mason wrote a review of Stephanie Kelton's The Deficit Myth. For my purposes, I am looking at various critiques of MMT, and he makes some statements about banking that are of interest.

Note: My publication schedule is likely to remain erratic. I added in primers that were previously written, and the word count of my MMT manuscript has hit 29,000 words (and my target was 20,000-25,000 words). I am now mainly editing and cutting text, with only a few sections to be written.

J.W. Mason writes:
The big weakness is the book’s central theoretical claim that government has a monopoly in money creation, a theory known as “chartalism.” This claim has a serious problem: the existence of banks. It is true that government has a monopoly on currency. But most of the money we use in our daily lives is not coins and bills issued by the government, but ledger entries created by banks. Banks are money issuers every bit as much as the government. Government has tools to influence how much money is created by private banks, but its control isn’t absolute. And when its control is effective, that’s a function of the regulations and institutions of the financial system; it has nothing to do with the government monopoly on currency.
The first thing to note that this quote comes in the context of a review of a popular book. Unsurprisingly, the book is missing a lot of theoretical content. My assumption is that J.W. Mason views this critique as applying to the MMT project as a whole (which it seems to be by context). I would note that J.W. Mason is not the first to make claims similar to this, so I my objective here is to use this quotation as an example, and not worry whether this is the most effective version of the critique.

Semantic Wrangling

(Update: I have re-written the manuscript, and I think the following bit covers most of the debate.)

The simplest possible explanation for this debate is that Mason and MMT proponents are using “money” to refer to two different things. In particular, MMT proponents can be seen as referring to what is technically known as the monetary base (which consists of currency in circulation and settlement balances at the central bank), while Mason is referring to a broad monetary aggregate (e.g., M1 or M2).

I view the source of this difference as being the perspective taken on the analysis of the economy. The MMT perspective is viewing the economy from the point of view of the government, while the opposing view is taking the perspective of a member of the public.

From the perspective of the government, the government has a monopoly over the means of payment – currency in circulation, net positions in the wholesale payments system. Private “moneys” are subordinate, and layered on top of the monetary base. (This is exactly how private money is described in MMT primers, so this is not something that was forgotten about.)

Critics seem to be looking at this from the perspective of private sector actors, and thinking about how the private sector settles payments. From this perspective, bank deposits are the primary form of money, with banknotes being used for small transactions. In this case, the government does not appear to have a monopoly.

My concern with this private sector perspective is that it offers no useful information about the economy. Why don’t banks float multiple domestic currencies? Why do these private currencies have value, other than the circular argument that they are used in exchange? Why does a floating currency sovereign have no reason to fear default? We are back at the conventional view – which has very clear analytical defects.

In any event, the reader will have to accept that this is a semantic story. One can be distressed that MMT proponent define “money” in a way that does not match one’s intuitions. However, complaining about a cosmetic wording issue when people like myself have no problems understanding the meaning from context is not particularly impressive. Having written the book Abolish Money (From Economics)!, it is rather clear that I am not particularly impressed with semantic squabbling about the word “money.”

The rest of this article looks to see whether there are non-semantic issues.

Difference Between Government and Bank Money Artificial

The first thing to immediately note is that MMT proponents hardly ignore banking in other contexts. Chapter 10 of Macroeconomics has the title "Money and Banking." Eric Tymoigne has a long sequence of primers on banking available at the New Economic Perspectives website: Correspondingly, it makes no sense to argue that MMTers are unaware of the existence of banking and money creation (as some other critics claim).

The next issue is that MMT researchers spent a good deal of time researching the details of monetary operations, both legal and institutional. The summary version I use is that banks are utilities -- their money creation powers are overseen by the state to achieve particular objectives. As Minsky argued, all private sector entities can be analysed like banks -- they want to issue liabilities that are used as money. The trick is getting other entities to accept those liabilities as money. The state set up the legal apparatus to give banks a special status, so that this private sector money creation can be concentrated under the eyes of regulators.

In any event , the division between "bank money" and "government money" is largely artificial. Although the private sector can set up rinky-dink payments systems like crypto-currencies, modern industrial capitalism is the story of large entities that send large payments to each other. Taking Canada as an example, that payment system at the time of writing is the Large Value Transfer System (LVTS). (The LVTS it is to be replaced by a real-time system.) This payment system is backstopped by the central bank (LVTS backgrounder, URL:
The Bank of Canada guarantees settlement of payments in the system in the extremely unlikely event that more than one participant fails during the LVTS operating day, and the amount owed by the failing participants exceeds the value of collateral pledged to the Bank of Canada.
Banks make payments to and from the LVTS, and have a corresponding balance. Under normal conditions, banks kept their balances as close to zero as possible by the end of the day. (In 2020, the Bank of Canada hopped onto the Quantitative Easing bandwagon, and forced its balance to be negative at the end of day, which by implication left the private sector in aggregate with a positive balance. These settlement balances would be called "excess reserves" in American economics 101 textbook jargon, but that is a misnomer, since Canadian banks do not have deposit reserve requirement.)

Given the central nature of the wholesale payments system, other forms of money are of secondary importance. (Very few legitimate businesses undertake large transactions with banknotes.) Balances with the payments system are the unit of measurement (account), and there is no difference between "government money" and "bank money": a balance is a balance.

Despite feverish arguments you see on the internet, bank money creation is hardly a cost-free exercise. Bank money is generally created by extending loans, which is an activity that banks do under the watch of government regulators, which exposes the banks to credit risk. Meanwhile those deposits can go walkies via the payment system, and the bank needs to have the capacity to raise a countervailing cash flow the same day (except in the case where it is sitting on a large positive settlement balance, which is more common in the era of QE). Banks face very real constraints on money creation, and the government controls many of those constraints.

This is very different than the (consolidated) government that is a currency sovereign. It writes a cheque, and the only thing stopping the transfer are self-imposed constraints on intra-governmental accounting. External actors have little say in the matter.

This explains why governments keep bailing out the banking sector, and not the other way around. Given that most MMT primers (like The Deficit Myth) are discussing government policy and its constraints, it is clear that it makes no sense to treat bank money as equivalent to government money.

Paying Taxes with Private Money?

Update: Added this section from my manuscript. Unfortunately, missing cross-reference text.

One argument that I ran into years ago made an argument to the effect that taxes are paid via cheque (or bank transfer), and not with “government money.” Furthermore, the means to make payment could have been borrowed from a bank – hence the money was created by the private sector. Does this contradict the Monetary Monopoly Model?

This logic is obviously weak. Even though the taxpayer used a cheque, the cheque is effectively an instrument that forces the taxpayer’s agent (the bank) to make a transfer to the government in the payments system. The bank will be forced to lose to liquid assets to meet the tax obligation. If it lent the taxpayer the money, it has replaced a liquid asset with an illiquid loan asset. Government regulators limit bank’s capacity to do such transformations.

As discussed in the linked article the Monetary Monopoly model does not preclude private currencies from circulating. The key is that government money – which is the unit of account in the wholesale payments system – is the money used to settle tax obligations.

Business Cycles

If the discussion is about the business cycle more generally, then yes, private sector credit growth matters. But it is archaic to argue that bank money creation is of primary importance; we live in a world where credit growth is increasingly in the hands of non-bank financing (also known as shadow banking). That said, this is a change of subject relative to most MMT primers. Given that the usual objective of fiscal policy is to be counter-cyclical, there needs to be other forces that generate the business cycle.

If the complaint is that there is no MMT magic solution to predicting the business cycle, I would argue that every other school of economic thought is in exactly the same boat. My interpretation of Keynesian business cycle theory is that the business cycle is inherently hard to predict, and so nobody should expect  that any tractable model can predict the cycle.

(c) Brian Romanchuk 2020


  1. Brian,

    I don't think you did a very good job of countering Mason's point about banks. The reason this is so is that Mason's point is valid and is difficult to counter. You raise a number of matters but they are all very much tangential to his point. Banks create massive amounts of money which drive a good deal of spending. And like government money which is destroyed when taxes are paid, bank created money is destroyed as loans are repaid. The are two differences: one is the type of goods and services the object of the concomitant expenditure, the other is the timing of removal of spending power from the economy.

    Why MMT persists with this claim of monopoly power I don't understand. Macroprudential authorities can control the rate of lending, to varying degrees, but this is not the same as adding to the government's monopoly power. CBs can remove money from private hands by issuing bonds, but even MMT admits this has little effect on spending.

    Henry Rech

    1. Can banks create the settlement balances needed to clear tax payments, or buy bonds? No they cannot. Only the government can.

      The creation of private credit is on top of the monetary base. I added some comments already in my manuscript copy, I might copy them back here.

    2. Update: I added the section in.

    3. What happens when there is a government surplus - taxation > spending.

      Where does the money to pay the taxation over and above spending come from?

      Henry Rech

    4. "This logic is obviously weak."

      The fact is the bank created the money.

      Henry Rech

    5. "Can banks create the settlement balances needed to clear tax payments, or buy bonds?"

      What if there was a private clearing system in place with no government involvement?

    6. 1) If the government runs a surplus, previous money stock is run down. Or the government monetises something from the private sector - which is a cash outflow that does not count as an expense.

      2) The tax liability was paid off with government money. The private sector can create whatever liabilities it wants, base money only comes from the government.

      3) There are private monies, as I noted. Look at Bitcoin. Who cares? The action is in the wholesale clearing system. People are fascinated with the technology of payments systems, but the challenge is economic - the huge bilateral flows and the associated credit risk.

    7. Henry Rech- it is not clear to me what you are saying or claiming. While this book may elide some details, the body of MMT theory does not.

      What happens when people pay their taxes with checks is explained in full detail, e.g. in Wray's first MMT book, Understanding Modern Money. That people can do this is a great privilege given by the government to the banks, the core of the acceptance of bank money as equivalent to the government's - for purposes outside the banking sector. As Brian says, while the state accepts bank checks from individuals and firms, from the banks it only accepts state money. Money which was created by the state, NOT the bank. Government taxation, government money and government bonds involve the government by definition. So a private clearing system that doesn't involve it is a contradiction, logically impossible.

      Governments have a monopoly over their own money. Only governments can create government-money (reserves etc) government-money means government-created money. So do banks. Bank money = bank-created money. As Minsky noted, there is nothing intrinsically and conceptually different about any body's money. The differences are empirical. In our world, government money is the top money. That's the norm in history, but there were situations in medieval Europe for instance, when it wasn't.

      It is surprising that Mason makes such points; I would think him better read in MMT. In other words, say that Kelton explains her own theory in a misleading way. I might agree with him a little bit there. IMHO, the general tendency of almost all popularization of anything is to simplify by eliminating the core, but keep many confusing details.

    8. MMT says government spending finances taxes.

      Where an individual pays his tax with a bank loan, there is no government spending. The tax bill is paid with bank created money but payment is settled with government created money. However, the government has spent (i.e. purchased) nothing.

      Where taxation is greater than government spending the difference might be financed by a run down of cash stocks but where did the cash come from? It could have come from private bank created money (and settled with government created money). (Back to paragraph two.)

      Henry Rech

    9. 1) You made up “MMT says government spending finances taxes” and the alleged implication that every tax transaction can be immediately traced to spending. The tax was settled by government-issued money, and it had to exist before (or was created by the central bank to allow the daily settlement process to clear).

      The private sector layers money on top of government money. It is no surprise that some entities will transact solely using private money before taxes come due. The private sector in aggregate still needs to get its hands on gov’t money.

      2) It is impossible for banks to create base money (legally), and base money used to settle tax payments sent to the Treasury’s account. You are just repeating “banks create money” without thinking. A bank can create a deposit on itself via extending a loan. It cannot create a settlement balance unilaterally - it has to do an exchange to either get an existing balance transferred to it from another bank, or it has to transact with the government (possibly on the behalf of a client) to get a new balance.

    10. It is common for MMT economists to explain that government spending comes first- that it provides the money that the private sector can then use to pay the taxes (or purchase bonds). Maybe that is not exactly the same as 'financing' the taxes but it is not just 'made up' out of nowhere either.


    11. The base money has to be created first, and that is what MMT says. If a private sector emits a liability to another entity to get its hand on reserves is not of interest. I don’t care whether some primer uses terminology wrong, Henry Rech needs to make a good faith argument.

    12. Brian,

      Which ever way you put it, according to MMT, government spending has to precede the payment of taxes. If government created money is used to pay tax bills the government has to spend that money into the economy. No ifs or buts.

      If private bank money is used to pay tax bills then, I agree, settlement is in government created money but not money spent into the economy. There is a difference.

      I can't see the importance of your statement that private bank money is built on a base of government money. It is irrelevant. Purhases are made with both forms of money.

      I cannot see why MMT is hung up on this notion of government money being used to pay tax bills. I think it is a grand distraction and largely irrelevant. The claim is made by MMT so that weight is added to the claim that taxes do not finance government expenditure and that the government faces no budget constraint. These can be argued without having to mention how tax bills are paid.

      Henry Rech

    13. You’re being deliberately obtuse. In order for the payment to clear, a bank needs base money. That base money *has* to be created by the government. That is why the Monetary Monopoly Model applies. If it’s irrelevant, just admit you don’t understand a very simple concept.

    14. Brian,

      I am not being deliberately obtuse.

      I agree, clearing and settlement happen with government money. I've said it several times.

      But tax bill payment can be in any type of money. Do you accept that?

      The government has a monopoly of base money. Yes it does. This is where you want to slide the argument over to because it seems you can't bring yourself to say that private bank money can be used to pay tax bills.

      It's irrelevant because it is not entirely 100% accurate, because not all money used to pay tax bills is spent into the economy by government. It's irrelevant because the central tenet of MMT is that the government does not face a budget constraint. That's what MMT proponents should focus on as the prime message. Not saying tax bills have to be paid by government created money, which by my reckoning is inaccurate, will obviate MMT proponents being distracted from their main message by people like me who take issue with the claim that government money is always used to pay tax bills.

      Henry Rech

    15. This is really simple, and you are a wonderful demonstration of how bad faith MMT critics have a raw inability to make any sense when attacking MMT.

      A taxpayer can write a cheque to pay a tax bill.

      The obligation is not voided unless the cheque clearing. Cheque clearing *requires* base money in the banking system. The handing over of the cheque Is just one step in the transaction.

      Under your “theory” just writing a NSF cheque is enough to clear a tax payment. That is definitely not the case.

    16. Nonbanks use bank money (M1-M3) to pay taxes. The increase of bank money comes from either government spending or lending to a nonbank, or from deals that the aggregate banks make with the aggregate nonbanks in the money and credit markets. When banks clear payment between the nonbanks and the government reserves in base money(M0) tag along with the bank money (M1). If the government uses taxes to offset spending then there appears to be a circulation of existing base money and bank money rather then spending coming before taxes and borrowing. The two models here are creation and destruction of base money versus conservation of base money flowing in a payment circuit. Both models make sense in the operational context since what is really going on is a message is transmitted by check or electronic communication and account balances are adjusted in the record keeping systems. Some transactions involve new base money or bank money and some transactions involve what appears to be a transfer of existing base money or bank money.

    17. A cheque (or electronic transfer) is an instruction to transfer base money. If the bank does not transfer the base money on the behalf of the client, the tax obligation is not voided. The nonbank entity relies on the banks holding base money, and this is entirely word games with zero value added.

    18. Brian,

      "Cheque clearing *requires* base money in the banking system. The handing over of the cheque Is just one step in the transaction."

      I think you should reread my comments. I have clearly said what you have said above. You have repeatedly stated I do not accept this. I do.

      "Under your “theory” just writing a NSF cheque is enough to clear a tax payment."

      Where did I say this?

      I find it unfortunate that you regard every comment not in total alignment with MMT as an "attack".

      Henry Rech

    19. If the transfer of funds involves two customers of the same bank then a check (or electronic transfer) is an instruction to transfer bank money (M1) from the account of one customer to another customer. This type of transaction does not involve any transfer or change in base money (M0). Individual banks should gain a strategic advantage in reserve management operations by having more customers transact with each other, rather than with customers of another bank, among a given population of banks and nonbank customers. The bank money is created as M1 during some set of generating transactions, destroyed from M1 via some other set of consuming transactions, and circulates in M1 via some third set of payment clearing transactions. Often after new M1 is created, as example by a loan which creates new deposits, then payment is made in M1, for example to purchase an asset, and then if the payee wants to save at interest, the M1 is destroyed and M2, M3, or other bank liabilities or equity are created by an act of saving via bank liabilities and equity instruments.

      As you well know the credit deal of banks and nonbank credit markets can fuel asset or consumer price inflation, disinflation, or deflation working always in parallel simultaneously with government surplus or deficit spending policies. This is what JW Mason means by too narrow a focus on sovereign spend, tax, and borrowing operations. Warren Mosler, of MMT, advocates regulations to discipline the credit system and I think often argues that monetary policy is largely ineffective for controlling price stability. So the real disputes are over the role of fiscal and monetary policy and credit regulations not whether the government must spend before it can lend or borrow.

      When the Treasury in the United States collects taxes into Treasury Tax and Loan accounts (TTL) the initial transfer is from M1 into TTL on the books of the aggregate bank balance sheet with zero transfer of bank reserves in monetary base, base money, or so-called M0.

    20. Brian,

      "The nonbank entity relies on the banks holding base money, and this is entirely word games with zero value added."

      MMT proponents say government spending precedes the payment of tax. Where private bank money is used to pay a tax bill this is not the case. While a tax bill payment using money created by a private bank requires settlement in government money, this money is not money that has been spent into the economy by the government.

      These are not word games. MMT proponents should tighten up the language they use.

      Henry Rech

    21. Brian,

      And you still have not adequately dealt with the question of a government surplus where required tax payments exceed the amount of money a government has spent into an economy.

      Henry Rech

    22. Henry - With regard to a tax surplus refer to the Nongovernment Tin Shed in this post by MMT expert Bill Mitchell:

      In the United States the Treasury issues net new securities to cover a deficit period and retires government securities to dispose of a surplus. Since government securities are not counted in monetary base M0 the deficit spending does not increase M0 and the surplus does not decrease M0. MMT says we should consolidate the balance sheets of the central government (Treasury department) and central bank (FED in USA). Then deficits add financial assets to the Tin Shed of the nongovernment sector and a surplus removes assets previously added by the net deficit periods from the past. The government would have to run a persistent surplus on average and then it is not clear to me what would happen when there are no more government bonds left to retire to dispose of the surplus.

    23. Henry - find me references that backs up your statements. I didn’t write them, and I don’t care if someone was wrong on the internet.

      As for a surplus, what are you even talking about? Are you suggesting that a government has run a surplus for all time? Has this ever happened? The only way it is possible is if the government is monetised private sector assets. MMT primers don’t normally discuss that, since it is not common.

      If you are referring to a surplus in between deficits, that is a ridiculous argument. The government swings between Financial surplus and deficit on a daily/weekly basis. The surpluses run down previously issued liabilities.

      You have a ridiculous interpretation of MMT that no serious MMTer agrees with, and you wonder why I am losing patience?

    24. " find me references"

      Here's one:

      "Modern Monetary Theory (MMT) makes clear that the spending of a currency-issuing government necessarily precedes tax payments and bond sales to non-government. "


      What does it matter how common surpluses are or are not?

      I have no interest in whether your patience is being tested. You seem to be unwilling to face the facts.

      Henry Rech

    25. 1) Did it say that “taxes are financed” by spending? No it did not. That’s something you made up.
      2) This is an online primer. Take up wording problems with the author.
      3) The primer is ignoring that the central bank could finance the operation. That is an issue that more advanced discussions of operations would note. Gosh, maybe primers aren’t the last word?
      4) The payment will not clear unless base money pre-existed to allow the clearing (or the central bank needs to step in to finance it). That is consistent with the text, other than the CB financing angle. That’s what I explained to you several times.

    26. Brian,

      "Did it say that “taxes are financed” by spending? No it did not. That’s something you made up."

      Yes, it probably is something I made up although it seems to me to be a corollary of the "government spending has to precede payment of taxes" line.

      "This is an online primer. Take up wording problems with the author."

      This "online primer", as you call it, is from a blog which is on Bill Mitchell's very short bloglist. Perhaps you should advise Bill to remove the blog from his list.

      "That’s what I explained to you several times."

      Yes and I have acknowledged that I agree with this several times. You obviously can't be bothered reading my comments in toto.

      Henry Rech

    27. Joe,

      Thanks for the link. I am aware of Bill Mitchell's series. I'll have another closer look.


    28. Brian,

      You asked for references. So far I have only provided one. Here is another one:

      "....government must spend (or lend) the currency into the economy before taxpayers can pay their taxes in the form of currency."

      This is from p.323 of "Macroeconomics" by Mitchell, Wray, Watts.

      Perhaps, given that this quotation meets your standard of having come from a primer, you should advise Bill Mitchell to change the title to "Macroeconomics - A Primer".

      Henry Rech

    29. Perhaps you should learn to read.

      1) The text did not say “finance,” which was your fantasy wording.
      2) You still have not answered the question as to how a bank can transmit payment unless base money was created before. In the absence of liquid governmental assets, banks cannot risk making loans. Liquidity requirements would shut them down.

      You are just making yourself look really, really, obtuse.

    30. Addendum:

      You really have to work on your reading comprehension.

      (1) It says “(or lend)” which covers all central bank operations. So if a bank needs to borrow settlement balances to make the transfer, that’s not an exception.
      (2) It says “currency”, not “money.” Currency typically refers to “currency in circulation.” Base money would be better. But in any event, it precludes private sector luabilities.

    31. Brian,

      "The text did not say “finance,” which was your fantasy wording."

      Yes, I accept that is probably my invention etc. as above (I have to repeat myself again).

      "You still have not answered the question as to how a bank can transmit payment....."

      Yes, I have said several times I agree with your explanation.

      "It says “(or lend)” which covers all central bank operations....."

      Yes fair enough, but so what?

      "It says “currency”, not “money.”"

      Yes, it does, but if you read the passage (I presume you have the book)it is from "currency" is clearly a reference to "money".

      "You are just making yourself look really, really, obtuse."

      On the contrary, your inability to accept I have repeatedly agreed with you makes you look churlish.

      So you have two of the creators of MMT saying government spending precedes payment of taxes. It is core MMT. You seem to be the only one not on board with this. Which is fine with me but this leaves with you a problem.

      Henry Rech

    32. In summary, you were wrong about everything. So why did you keep posting?

      I do not disagree with that statement. At most, I would adjust the wording.

    33. Brian,

      In summary, I agreed with most of what you said. You persist in misrepresenting me.

      My only mistake was thinking you subscribed to the core MMT proposition that government spending precedes payment of taxes.

      You made the mistake of adamantly saying it was not at the core of MMT when it clearly is. Now you are saying you would adjust the wording, it having been demonstrated to you that it is MMT core.

      You have not adequately responded to the question of a government surplus.

      And I am correct about private bank money being used to pay tax bills (and I agree, settlement is in base money).


    34. Henry,

      "So you have two of the creators of MMT saying government spending precedes payment of taxes."

      Maybe they were referring to the simple two sector model of the economy with no banking sector.

      From Q and A Japan part 1:

      "But it is clear, in that instances, taxes can be paid without government’s spending the money into existence first. That is because there are real world institutions such as commercial banks that create deposits when they make loans, and which are absent from the simple heuristic models.
      This doesn’t invalidate the insights in the simple models. It just adds layers of complexity that have to be augmented with deeper insights."

      And that,

      "But clearly, when I tell the government I am paying my taxes and transfer funds from the deposit the bank has created as part of my loan, the government instructs the central bank to debit the reserve accounts of the bank in question and credit its own account with the amount of the tax payment.
      If the bank in question has insufficient reserves or there are insufficient reserves within the banking system at that time, then the only place those reserves can come from is the central bank (which in MMT is considered to be part of the consolidated government sector)."

      As Brian mentioned, writing out a cheque to pay tax is only the first part of a transaction.

    35. Allan,

      " As Brian mentioned, writing out a cheque to pay tax is only the first part of a transaction."\

      As I acknowledged several times.


  2. Bill Mitchell often explains that if the central bank is targeting 'interest rates' it more or less requires the central bank to supply reserves to banks around that target rate or lose control of the rate or even worse, have the payments system crash, which is a big no no for central banks. At least that is how I understand what he has written. So while the government may have the ultimate monopoly on money creation, the government's agent, the central bank, can't really control the supply of created money if it is controlling the price of it. Or something like that.

    So I don't think Mason is off when he says government control over money creation isn't absolute, at least the way things work given that the central bank seems to target an interest rate as policy.

    1. “Control” in the sense of setting the level of any monetary aggregate is a red herring - the issue is whether the government is a monopoly supplier.

      If we realise that MMTers are talking about M0 (monetary base) and Mason is talking about M1-M3, then the whole thing is easier to grasp. I realised this after writing, and will probably re-write.

  3. One of their main arguements always comes back to the riddle of money by Phillip George.

    It is about stock vs. flow or Alfred Marshall's "cash balances" (demand for money).

    The complete deregulation of interest rates for the commercial banks, indeed sponsored by the most dominant economic predator, the oligarch: the American Bankers Association, is vitiated on largely false premises on which deregulation is based, viz.,

    "that deposits in commercial banks constitute the “savings’ of the depositors, that these are “lent” to the banks, and that the commercial banks are only a “medium” through which this end is affected."

    Bank-held savings are frozen because they cannot be lent out. Banks pay for their earning assets with new money not existing deposits (loans = deposits). And they are not extinguished or withdrawn unless currency is hoarded or converted to other national currencies.

    Savings, from a macro-accounting perspective, can only be lent by their owners (directly or indirectly), if they are activated by transferring those funds through (not to), a non-bank conduit (which represents an increase in the supply of loan-funds, but no increase in the existing supply of money, a velocity relationship).

    Savings flowing through the non-banks never leaves the commercial banking system, where all savings originate (there is just a transfer of ownership in existing DFI deposit classifications).

  4. They have created their own version of the money supply.

    As seen in the riddle of money by Phillip George. Which they call the corrected money supply.

    "Now something important has happened in 2019. For the first time since 2006 the growth in Corrected Money Supply (their measure of money) has dipped below 0%. "

    Then they go on to say....

    better measure of money would be Bank Credit, All Commercial Banks (TOTBKCR)

    But you'd have to add CU and Savings and Loan association credit to that figure.

  5. The issue with MMT and other economic analysis is whether the political system can control prices, via central government fiscal policy with automatic stabilizers, or whether the private credit systems and central bank are the better solution. There is no counter-factual world where either the fiat central government or the private credit systems are the isolated sole cause of aggregate demand. Therefore one can argue that it is better to control aggregate demand via central government policies with automatic stabilizers, which is the product of a political process, or via regulation of the private credit markets and operations of the central bank, where market deals and central bank decisions are imagined to be somewhat independent of the political process. How taxes are paid is a sideshow argument.

  6. Might be worth doing a separate post on the riddle of money by Phillip George Brian ?

    Every debate comes back to this. Always comes back to what is the corrected money supply. They swear by this.

    1. I wrote “Abolish Money (From Economics)!” which is a pretty good summary of what I think about being obsessed by the money supply.

      Less sarcastically, I am in the final stretch of a manuscript on MMT. I am not in a mood for distractions; I want this thing written.

  7. I know I was in Loch Tay for a week last week and read all your books. Abolish money from economics and recessions volume one was my favourites.

  8. If banks are modeled as being but one national entity, then we can come to only one conclusion: Any money loaned by a bank can only come back to the bank OR be privately saved.

    We can stay within that undeniable framework and still argue about ownership and sequential ownership.

  9. MMT urges governments to act like a bank, by making a loan to itself, to enable government to spend as if government was a member of the private sector.

    Furthermore, MMT assumes that the JG program, enabled by the self-loan, will do good things (or at least good will outweigh bad).

    It's hard to prove this thesis wrong. Or right.

  10. Hi Brian,

    Sorry just pointing out an inconsistency quite common in MMT. Both these statement cannot be technically true at the same time:

    1) Blog: "In particular, MMT proponents can be seen as referring to what is technically known as the monetary base (which consists of currency in circulation and settlement balances at the central bank)..."

    2) Comment - by Brian: "If the government runs a surplus, previous money stock is run down. Or the government monetises something from the private sector - which is a cash outflow that does not count as an expense."

    When the government runs a surplus, it pays back bond holders - with what? What gets destroyed in government bonds (which MMTers refer to as money) not the monetary base which you seem to give the impression of...


    1. 1) MMTers do not refer to bonds as “money.”
      2) When the government runs a fiscal surplus (without monetisation shenanigans), net emission of government liabilities is negative. This could be he reduction of the monetary base, or net negative bond issuance.

      Government bonds pay according to a contractual schedule, and those payments are unaffected by the fiscal balance. The payments themselves are cleared as settlement balances at the central bank.

  11. Thanks, that makes sense. So when the government runs a surplus the previous money stock is run down or it doesn't issue as many bonds. Have I framed that right? Appreciate you taking the time.

    1. There’s a continuous cycle of creation/destruction of “money” (central bank settlement balances) as transactions go in/out the Treasury’s account. The fiscal balance tells us the tendency over the year (there are seasonal swings).

      In order for the stock of government debt to be stable, new issues have to replace maturing issues. There is a lot of short-term debt that is rolled over. E,g., if the government has $100 billion in one-month T-Bills, it rolls them over 12 times, implying $1.2 trillion in auctions (roughly). As such, the gross issuance in a year is much larger than the fiscal deficit.

      The usual way of accommodating swings in the government balance is by adjusting the Treasury bill supply. These are continuously rolled over, and the government just issues more or less based on its outlook for its balance.


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