2012 performance

[Storm]

Thanks Gumby, for clarifying.  I do believe that MMT/MMR is sound, however, Warren Mosler does a disservice when he gets certain basic facts wrong.  You're correct, in that the money to pay taxes initially was created by government debt, so it really doesn't matter what the government does with that money after it comes back to their checking account in the form of revenue.

I guess Mosler is just trying to explain it in as simple a way as possible, but when his explanation directly contradicts the reality, it does a disservice to his broader message, because most intelligent people are likely to tune out any conspiracy theory when they discover that the theorist is playing fast and loose with the facts.

[Lone Wolf]

The Treasury's account at the Fed is really just a spreadsheet. In fact, all bank accounts are really spreadsheets.

So you now acknowledge that this MMT idea of taxation "destroying base money" or the Treasury "spending money into existence" is figurative / allegorical / metaphorical, etc. rather than operational reality?  Because earlier you said:

There is no transfer of money into a giant Treasury bank account.

But we have established that there is in fact a transfer of money into giant Treasury bank account.  Were you were speaking in terms of MMT allegories (without explaining that you were doing so) or were you simply mistaken?

This is foundational to MMT.  No sound theory would build its operational model on a metaphor.

The reason why MMTers and MMRers say that the money is just "deleted" is because that's what's happening to the private sector's reserve accounts. Once that taxes money leaves the private sector (whether through deletion or transferring to the Treasury's account) makes no difference because the private sector doesn't have access to that base money anymore.

The Treasury immediately spends that money back into circulation to make more purchases and make interest payments.  There is no deletion.

I could be wrong, but I suspect the reason why Lone Wolf hasn't been able to grasp MMT is because

You are viewing me as the guy who doesn't come to church often enough to "understand" your sermons.  No.  I am the guy nailing these points to the door of your church.  These are basic, fundamental, and extremely straightforward arguments.  The fact that MMT fails to address these basic points is why you will not find me sitting in the pews.

it either comes from the Treasury printing up base money — and issuing corresponding government debt — or by the Fed swapping assets (usually Treasuries) with Primary Dealers

The rest of your reply is premised once again on this false idea that the Treasury can "print up base money".  It does not.  It populates its account at the Fed with tax revenue (which it then spends.)  In addition, it borrows from the private sector by auctioning Treasury debt.  The proceeds of these auctions flow into this Fed account and then right back into circulation.

So we see that MMT is, operationally speaking, just plain wrong on this point.  (Or, at best, speaking in terms of metaphor.)

This theory simply doesn't hold together once you irradiate it with enough critical thinking.  View it again through the eyes of a heretic.  If you find it withering under your gaze, discard it.  You owe it nothing.

[Gumby]

The Treasury's account at the Fed is really just a spreadsheet. In fact, all bank accounts are really spreadsheets.

So you now acknowledge that this MMT idea of taxation "destroying base money" or the Treasury "spending money into existence" is figurative / allegorical / metaphorical, etc. rather than operational reality?  Because earlier you said:

There is no transfer of money into a giant Treasury bank account.

But we have established that there is in fact a transfer of money into giant Treasury bank account.  Were you were speaking in terms of MMT allegories (without explaining that you were doing so) or were you simply mistaken?

LW... An electronic bank account is a spreadsheet. Period. Everyone knows this. It makes no difference.

This is foundational to MMT.  No sound theory would build its operational model on a metaphor.

Wrong. You're grasping at straws and everyone here knows it. It makes no difference if your bank account is delivered to you on a printed spreadsheet or a computer spreadsheet. It's just a spreadsheet.

Money is deleted from the private sector when you pay taxes. That's all that matters.

The Treasury immediately spends that money back into circulation to make more purchases and make interest payments.  There is no deletion.

And where did that money come from? It came from debt issuance. For some reason you're unable to grasp that. Not sure why that is.

The fact that MMT fails to address these basic points is why you will not find me sitting in the pews.

I can't help it if you don't understand what the word "fiat" means. The government creates the same money that we pay taxes with by issuing simultaneous debt. You're unable to grasp that. Your logic suggests that you still think there's some convertibility to gold. There isn't.

The rest of your reply is premised once again on this false idea that the Treasury can "print up base money".  It does not.

Really? Because last time I checked, the Treasury sends out as many checks as it wants to all the time. It does this by issuing debt. That's where are money supply comes from.

http://en.wikipedia.org/wiki/Debt-based_monetary_system

It populates its account at the Fed with tax revenue (which it then spends.)

Uh, no. Because where did that money come from?? You say it comes from "tax revenue" but you can't explain where the money originated from. It all comes from debt-issuance.

In addition, it borrows from the private sector by auctioning Treasury debt.  The proceeds of these auctions flow into this Fed account and then right back into circulation.

And where did the money to buy Treasuries at auction come from?? Say it with me, LW.... The money to buy Treasuries come from the issuance of debt (or swaps from the Fed).

http://en.wikipedia.org/wiki/Debt-based_monetary_system

So we see that MMT is, operationally speaking, just plain wrong on this point.  (Or, at best, speaking in terms of metaphor.)

This theory simply doesn't hold together once you irradiate it with enough critical thinking.

Hah.. LW... If only you could explain where money to buy Treasuries came from. I can understand that must be frustrating for you. Think it through. The money to buy Treasury bonds and pay taxes comes from government spending. That's how base money is created and the Fed will only transfer base money into the Treasury's account.

[MediumTex]

You are viewing me as the guy who doesn't come to church often enough to "understand" your sermons.  No.  I am the guy nailing these points to the door of your church.  These are basic, fundamental, and extremely straightforward arguments.  The fact that MMT fails to address these basic points is why you will not find me sitting in the pews.

***

This theory simply doesn't hold together once you irradiate it with enough critical thinking.  View it again through the eyes of a heretic.  If you find it withering under your gaze, discard it.  You owe it nothing.

Very nice imagery.

I love the idea of you disturbing the church service with your hammer nailing a document to the door of the church, and then when people come out to investigate, there you are outside the church with your theory irradiation device working through their foundational documents.

When asked what you are doing, you say "I'm fixing this junk!", but you say it like Crispin Glover said "I'm making my lunch!" in Wild At Heart.

http://youtu.be/0Bj-_qLXIWw (:19)

[moda0306]

LW,

If the ignoring of a bank account is a metaphor, it's because the balance of the account is truly irrelevant to the private and public sector.  You can't look at a "number on a spreadsheet" and call it an operational reality without looking at the fact that the treasury & fed operate together, not independently (for all the important pieces, anyway).  The account is only an operational reality to the degree that there is some weight to the balance of that account on our economy.  If the fed controls interest rates and ensures treasury auctions can't fail, by logical extension, the balance of this account is irrelevant. The logic flows like this.

If the treasury's account becomes low, it will issue debt.

The fed both controls the cost of that debt, and guarantees there are member bank buyers of that debt.

Therefore, the balance of this account is much less "operational reality," and much more "accounting gimmick."

Therefore (also), taxation is effectively destruction of money, because the balance of this account is irrelevent to both operations of the public and private sector, but taxation is NOT irrelevant to the private sector.  It is a destruction of the private sector's money if it is not spent back into the economy, which is admittedly rare, but I don't see how that is really relevant, especially if you look at spending and taxation as two different events/decisions.  We could slash taxes (and most MMR/MMTers are very much for this) and be "destroying less money," as we'd be filling up this utterly irrelevant account slower, and allowing people to keep more of the utterly relevant money in thier accounts.

[Gumby]

He'd only be disturbing the church service if he could explain where the base money to pay taxes and buy government bonds comes from. Base money comes from debt-issuance and Fed swaps (usually Treasury POMOs) with Primary Dealers. Period. He seems to be unwilling to admit this simple fact of life.

[Gumby]

I think what's important to realize about MMR/MMT is that it's a model for understanding fiat currency systems. In fact, it's the only model that even begins to describe fiat currency. All of the other economic models are based on convertibility to gold.

You can disagree with MMT/MMR all you want, but the model tends to work extremely well. I mean it's certainly easy to criticize Warren Mosler, but he's made billions of dollars by applying MMT models to the world bond markets — which is not an easy thing to do.

[Gumby]

If there was any doubt that Treasury debt is where our base money supply and private sector savings comes from, here are two revealing charts:

[align=center][/align]

The Treasury spends this money into existence (as base money), and the private sector uses this money to back private credit...


[align=center][/align]

Once again... The Treasury issues debt, and simultaneously spends base money into existence. Private credit (the second chart) is backed by that base money, and is used to help pay down private credit. As reserves increase, the money is drained back into future risk-free Treasuries. It's all debt-based money. And the ever increasing private credit issuance often necessitates the need for new debt-based base money to help the private sector pay it's own credit down in time.

The Fed will only move base money in and out of the Treasury's account, so the money to buy government bonds and pay taxes can only come from debt issuance (or POMO swaps).

[moda0306]

If you look at the treasury or the fed alone, one might come to the conclusion that LW is right.  The fed is independent, and the treasury has an account there... the fed simply prints up money to control interest rates and generate inflation when the economy gets bad.

However, and MMR & MMT have dove into this in some really good detail, when you look at how the fed operates, you realize that it's essentially latched on to the treasury, using gold standard (currency user) accounting gimmicks to describe their interactions with each other.  MMT/MMR takes all these "wink-wink-nudge-nudge" (actually, these are backed by law, so it's not really like that, though it may appear to be) actions between the treasury and fed and says, "ok, if this account will ALWAYS be replenished by member banks, and the fed can control interest rates on the debt being held by the private sector, then let's look at all this for what it truly is, not what accounting identities try to tell us it is.  I'm not going to let a gimmicky, irrelevent account balance fool me as to how this machine truly operates in aggregate."

LW, when you put money in the mattress or in the bank, money is not destroyed, because that balance actually means something to you.  You can lose it and not be able to pay your bills.  You aren't a currency issuer.  You don't have an entity that effectively makes your account balance irrelevant because they are the other side of your fiat-money-issuer coin.

Lastly, bonds are money... in fact, money being somewhat nebulous (anything can be used as a medium of exchange), it probably helps quite a bit more to look at "financial assets," almost all of which could be used as money if people so chose.  The treasury issues money when it spends because it increases the bank account of one person, while converting another persons money into bond-money.  That equals net-creation of money... or net creation of financial assets.  Swapping green money for blue money, which the fed does, is not creating anything in net, but simply changing the makeup of type of money/FA's in the economy.  There, further, is NO expectation by treasury bond holders that the dollars be taken from somewhere else in the private sector (through taxation or bond-issuance) to pay them back.  In fact, we invest in treasuries under the firm expectation that Geithner doesn't have to go dollar-hunting to pay us back.  We wouldn't invest in the PP if we did have that expectation.

[Storm]

To get back on topic - my wife's 4xPP with TLT, SPY, IAU, started on Feb. 6th, 2012, is down 1.06% so far.  She missed some of the early run in stocks that has kept our portfolios in the black so far this year.

My guess is that today is an excellent day to start a PP - pretty much everything is down, especially gold.

[Lone Wolf]

LW... An electronic bank account is a spreadsheet. Period. Everyone knows this. It makes no difference.

You insisted that: "There is no transfer of money into a giant Treasury bank account."  Now we've moved on to "Okay, okay, there actually was a giant Treasury bank account the whole time... but it doesn't matter!"

This sells with the already converted.  With a skeptic you're off to an extremely rocky start.

The Treasury immediately spends that money back into circulation to make more purchases and make interest payments.  There is no deletion.

And where did that money come from? It came from debt issuance. For some reason you're unable to grasp that... I can't help it if you don't understand what the word "fiat" means.

That's a dodge followed by an insult, not an answer.  Quite simply, tax money flowed into the Treasury's account at the Fed and then right back out again as expenditures.  So I repeat my extremely simple request -- explain how this is a "deletion".

You have still not supported your assertion that the Treasury "spends money into existence" and "taxes it out of existence".  If you have a defense to offer for these keystone tenets of MMT, it's time to break it out.  There is no tomorrow.

The rest of your reply is premised once again on this false idea that the Treasury can "print up base money".  It does not.

Really? Because last time I checked, the Treasury sends out as many checks as it wants to all the time. It does this by issuing debt. That's where are money supply comes from.

If I borrow $5 from you and hand you a Wolf-Bond in return, I am not "spending $5 into existence".  I am borrowing $5 from you that you no longer have.  You accept a bond in return.  Show me how when the Treasury does this same thing it is "spending money into existence".

All of MMT hinges on this point.  It should be trivial for you to explain this in a simple, direct fashion.  All of this squirming shouldn't be necessary.  Don't tell me you can explain it -- show me.

And where did the money to buy Treasuries at auction come from??

Dollars are created out of thin air when the Federal Reserve purchases securities (such as Treasuries, mortgage-backed securities, or gold) via its open market operations.  They are not "spent into existence" by the Treasury.  As you now realize, there is a "giant Treasury bank account" that is filled with tax revenue and borrowed money.

Now that I've explained where dollars come from, please try to address my points.  MMT asserts that all central bankers and mainstream economists are uneducated boobs or malevolent obfuscators.  Normally this would be backed up by a battery of clear-cut, straightforward, airtight facts.  Instead the whole theory is based on replacing operational reality with some metaphor.  That sort of foundation is not built to survive skeptical analysis.  That's IMO why you find MMT floundering here.

[MediumTex]

Lone Wolf,

What is your perception of the relationship between tax collections and government spending?

In your view, how important is it for tax collections to be in the same neighborhood as government spending?

Part of the reason I ask is that since 1981 or so the government has basically abandoned any pretense of matching up government spending with tax collections, and yet during this period the economy has been highly productive.  If de-linking government spending from tax collections hasn't led to any disruption in private sector productivity, doesn't that validate at least some portion of the MMT line of thinking?

[Pointedstick]

Quite simply, tax money flowed into the Treasury's account at the Fed and then right back out again as expenditures.  So I repeat my extremely simple request -- explain how this is a "deletion".

You have still not supported your assertion that the Treasury "spends money into existence" and "taxes it out of existence".  If you have a defense to offer for these keystone tenets of MMT, it's time to break it out.  There is no tomorrow.

I'm certainly no expert, but try to visualize what would happen if hypothetically government spending was zero in a particular year. The treasury's account rises, and… then what? That money is taxed out of circulation and nothing is done to put it back into circulation. The money supply has fallen. From the perspective of the private sector, we could say that the money was destroyed, no?

Now, in practice, government spending is always non-zero. But in a year when government spending is less than tax receipts, the treasury's account would be rising because more money is being taxed away from the private sector than is being returned to it through government spending. The removed money is again, from the perspective of the private sector, effectively destroyed at that point, no?

Now imagine tax revenue is zero in a particular year. Crap, tax evasion is 100%, or else there's been an economic collapse! is that any barrier to spending? Nope. Not at all. The treasury just creates some bonds and sells them to the primary dealers, or has the fed swap them for printed dollars it can spend. This is of course a disastrous situation, but the point remains that the treasury can spend when the account is empty.

So basically, while technically the treasury is spending the money in its account at the fed, its spending is in no way constrained by the amount in the account. It could spend money if the account was empty. In practice, the amount of money entering the treasury's account really doesn't matter to the treasury. There could in fact be no account at all and the treasury would still be able to spend. It's all an elaborate game of smoke and mirrors.

[Storm]

LW, we understand that when you pay your taxes the money goes right back into the economy through government expenses.  That is deflation and inflation in perfect balance.

What Gumby seems to be saying, is that the only way anybody got their greenbacks in the first place, so they could even pay taxes, is through government spending.  This is the core of MMT and I don't think anyone can disagree.

How did the very first dollar come into existence?  It surely didn't come from the private sector.  Mosler covers this very well in his article:

The following is not merely a theoretical concept. It’s exactly
what happened in Africa in the 1800’s, when the British established
colonies there to grow crops. The British offered jobs to the local
population, but none of them were interested in earning British
coins. So the British placed a “hut tax”? on all of their dwellings,
payable only in British coins. Suddenly, the area was “monetized,”?
as everyone now needed British coins, and the local population
started offering things for sale, as well as their labor, to get the
needed coins. The British could then hire them and pay them in
British coins to work the fields and grow their crops.

Imagine a brand new government that just printed it's own currency.  Nobody wants this currency as they are happily bartering with their neighbors for things that hold actual value, like food, livestock, and gold.  In order for the government to get people to actually accept the currency they have to enact a property tax, payable only in government currency, through threat of property seizure.  The very first money is printed into existence and used to pay soldiers salaries that enforce the property tax.  The people begin to sell goods and services to the soldiers so that they can pay their tax.  Eventually, enough currency is in circulation that people can trade it to each other for goods and services without having to sell to a soldier or other government employee.

This is exactly what happened with every currency known to man.  When the government printed more money than it collected in taxes, this was called deficit spending and was inflationary, but also causes growth if used mildly.  When the government took in a surplus they're essentially removing currency from circulation which is deflationary.

I don't see any cogent argument that taxing is not removing money from the money supply, which is the core of MMT.  Whether it gets added back again by government spending is entirely optional and irrelevant to the question at hand.  Thus, Mosler's argument that running a government surplus is deflationary and would eventually lead to no money in circulation seems entirely plausible to me.

[moda0306]

LW,

What MMT/MMT does is looks at the system for what it really means, and not based on what some gold standard accounting identities imply it to mean.  We could very well have a system where the fed & treasury's roles are combined, no debt is issued at the point of spending, and taxation is dumped into no account at all, but simply destroys money.  At that point, the government could give people/institutions access to savings accounts that pay interest if they so choose, as a combined monetary tool, or for other reasons.

MMT/MMR realize that for all the accounting gimmicks that would imply otherwise, considering the relationship between the fed, treasury, and member banks, that this is essentially the system we have.  Gumby may have described things poorly in that one instance, but these guys get so deep into fed/treasury operations it's dizzying.  They probably simply accepted long ago that the balance of the treasury's account at the fed is so irrelevant that it might as well be ignored.  Rest assured, if you visit the MMR site, you will feel like if anyone understands the way the fed & treasury work, it's these guys.

[Gumby]

You insisted that: "There is no transfer of money into a giant Treasury bank account."  Now we've moved on to "Okay, okay, there actually was a giant Treasury bank account the whole time... but it doesn't matter!"

This sells with the already converted.  With a skeptic you're off to an extremely rocky start.

You're grasping at straws. A bank account is nothing more than a spreadsheet.

That's a dodge followed by an insult, not an answer.  Quite simply, tax money flowed into the Treasury's account at the Fed and then right back out again as expenditures.  So I repeat my extremely simple request -- explain how this is a "deletion".

If the Treasury is taking in more than it is spending, then there is a net deletion there. But, the point you're missing is that when you pay a friend, you are transferring money to another bank (i.e. deleting from your account and crediting to another account). But, when you pay the government money, the money is not transferred to someone else in the private sector...it's deleted from the private sector (albeit temporarily, in most situations). If the government does enough net deletions, it just sucks base money out of the private sector.

You have still not supported your assertion that the Treasury "spends money into existence" and "taxes it out of existence".  If you have a defense to offer for these keystone tenets of MMT, it's time to break it out.  There is no tomorrow.

I just explained it. Nobody else here seems to be confused about this except you. Do you deny that we have a "debt-based monetary system"? ? ?

http://en.wikipedia.org/wiki/Debt-based_monetary_system

All our money comes from debt! It's a fact.

If I borrow $5 from you and hand you a Wolf-Bond in return, I am not "spending $5 into existence".  I am borrowing $5 from you that you no longer have.  You accept a bond in return.  Show me how when the Treasury does this same thing it is "spending money into existence".

Well, first of all, the bond the government gives you is just as good as cash — we know this from our own Permanent Portfolios. So, when the government hands you a bond in exchange for your base money, the private sector gets to own the bond. So the private sector has $5 in bonds AND $5 new government spending from the bond issuance. In other words, the private sector now has $10 in financial assets. The Treasury has added net financial assets to the private sector. And it can do this as much as it wants to (since we are fiat).

But, here's what you're missing, LW... Please take 5 minutes to think about this.......

Where do you think the $5 that the government "borrowed" from us came from? ? ? ? ? ? Hint: It didn't come from me or from you. No. It originally comes from deficit spending by the Treasury. The Fed can create base money too, but only by doing swaps with Primary Dealers (typically POMO with Treasury securities). In other words, our debt-based money supply would not exist without government debt.

http://en.wikipedia.org/wiki/Debt-based_monetary_system

The $5 had to come from the government spending it into existence (via debt issuance or POMO swaps, typically on Treasury debt).

All of MMT hinges on this point.  It should be trivial for you to explain this in a simple, direct fashion.  All of this squirming shouldn't be necessary.  Don't tell me you can explain it -- show me.

I just did explain it. Everyone here seems to understand this but you. Please ask more questions if you are having trouble following along!

Dollars are created out of thin air when the Federal Reserve purchases securities (such as Treasuries, mortgage-backed securities, or gold) via its open market operations.

Listen to what you are saying. The government no longer purchases gold via POMO — that stopped happening a long time ago. So, that example is obsolete. Yes, they keep gold on the books, but that only accounts for a small amount of the balance sheet, and it is fixed at $47/ounce on the books. The Fed generally only purchases MBS and agency debt in an emergency situation... we do not typically seek to back currency with MBS or agency debt, nor would we want to do this. Keep in mind that even MBS or agency debt would not exist without some leveraged base money to back the private credit, in some form. So.....

That leaves us with Treasuries!!!! Ding, ding, ding, ding! We have a winner!

So, you've just admitted that the Fed could not create base money if Treasury debt did not exist in the first place. So, there we have it folks. Let's walk through it from the top...

In order for the Fed to create base money from Treasuries, the Fed must acquire those Treasuries somehow. But, let's see... how can the Fed acquire Treasuries if the Fed isn't allowed to purchase them directly from the Treasury (as Japan's central bank can do)?

The answer of course is that Treasuries must exist in the hands of the Primary Dealers before the Fed can purchase it from those Primary Dealers. So... how does the private sector purchase those Treasuries? There are a few ways, but the most common is that the money for the private sector to purchase Treasuries comes from previous government spending. This is called a reserve drain. It serves to drain excess reserves into risk-free Treasuries. And if the money from previous government spending cannot be targeted, the Fed can give the Primary Dealers overnight loans or repos — which must soon be paid back with base money that the private sector must find on its own. In other words...from government spending by the Treasury — which is the only government agency that can create net financial assets in the private sector (as I explained above).

They are not "spent into existence" by the Treasury.

Yep. They sure are. I just explained it. All our base money comes from government spending (or the occasional POMO swaps).

Now that I've explained where dollars come from, please try to address my points.

I just did. Now that I've explained it. Please read it over and over again until you understand it or have questions.

MMT asserts that all central bankers and mainstream economists are uneducated boobs or malevolent obfuscators.  Normally this would be backed up by a battery of clear-cut, straightforward, airtight facts.  Instead the whole theory is based on replacing operational reality with some metaphor.  That sort of foundation is not built to survive skeptical analysis.  That's IMO why you find MMT floundering here.

If I were floundering so much, I suspect others would be echoing your criticisms. You have yet to admit that our money is "debt-based" even though it's a cold hard fact.

http://en.wikipedia.org/wiki/Debt-based_monetary_system

The money to buy government bonds or pay taxes can only come from previous government spending (or POMO swaps).

[MediumTex]

Gents,

Do you mind if we pause here for a moment and see what points we may agree on?

Lone Wolf, do you see any points in moda's or Gumby's arguments that you would agree with?

I am assuming that Lone Wolf is speaking for a large contingent of people who may not understand or who may disagree with some or all of MMT.  I don't want it to seem like the argument hinges on the number of people on one side or another, though I assume Lone Wolf is comfortable in the role of being a lone voice (otherwise he might call himself "Collective Wolf").

[moda0306]

Good call, mt.

I agree that we should NOT be claiming untrue facts about the treasury/fed, even if they are deemed to simply be accounting gimmicks.  When LW talks about there being an account there, He's right, and was right for pointing out what he believed to be obfuscation.

I also think that if Gumby and I truly believe the entire dance really represents a system where treasuries are simply "savings accounts with the fed," that we should make sure that this unnecessarily complex way of getting there doesn't have a hiccup we're not seeing that could cause default, and completely undermine what we say that the system truly represents... As well as HB's assertions about half of the PP.

[Gumby]

Yes, you'll have to forgive me for slightly misspeaking. But, the operational reality is that the account is only used for check clearing purposes. It's not a traditional banking account in the way we think of. The balance of that account is irrelevant, from an operational standpoint, because the Treasury must always be able to make a payment whenever it needs to. The computers that run that "account" are actually programmed to create real dollars no matter what the balance of the "account" is. Our nation's ability to function depends on it working that way.

Warren Mosler explains:

Treasury default requires reprogramming

Posted by Warren Mosler, July 26th, 2011

In case anyone thinks spending is operationally revenue constrained. Unless they reprogram the computers, the Treasury will routinely make all payments on a timely basis. And those payments create ‘real dollars’ in private bank accounts that can be spent regardless of tax revenues, and without borrowing from the likes of China.

And tonight’s speeches seemed to me confirmation of a power move by the Speaker of the House. He announced that on Wed the house will pass a modified bill that the Senate will also pass and send to the President’s desk for signature. If he succeeds, he will emerge as the leader who, from now on, will be the one to organize and have bills introduced and passed by both Houses. And on the odd chance that the economy improves, he’s positioned himself to be the Republican candidate for President.

“Steve McMillin, a former deputy director of the White House Office of Management and Budget under Bush, said Treasury has options but most of them are “pretty ugly.”?

If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due — a massive and difficult undertaking. Treasury makes about 3 million payments each day.”?

Source: http://moslereconomics.com/2011/07/26/t ... ogramming/
Source for McMillin quote: http://www.reuters.com/article/2011/07/ ... GE20110707

In other words, the Treasury’s account at the Fed is just a way for it to print and collect real base money through automated keystrokes. It is only useful for check clearing purposes, but its balance doesn’t matter since the base money payments are always made on time no matter what. It's not a traditional banking account.

The speeches Mosler is referring to is the Balanced Budget Amendment. In the primetime speech, Speaker Boehner said:

"Last week, the House passed such a plan, and with bipartisan support. It's called the ‘Cut, Cap, and Balance' Act. It CUTS and CAPS government spending and paves the way for a Balanced Budget Amendment to the Constitution, which we believe is the best way to stop Washington from spending money it doesn't have." — John Boehner
Source: http://www.abc12.com/story/15145218/tex ... ebt-speech

[Lone Wolf]

You're grasping at straws. A bank account is nothing more than a spreadsheet.

Disappointing.  I was hoping for an actual answer.  You're like Lucy with the football.    We've gone from "There is no bank account" to "The bank account doesn't matter" to "You're grasping at straws".

But, when you pay the government money, the money is not transferred to someone else in the private sector...it's deleted from the private sector (albeit temporarily, in most situations).

This distinction is nonsense.  When someone pays me money, this money is not deleted from the "everybody but Lone Wolf" sector and then "spent into existence" when I make use of it.  The money flows throughout the economy.  The Treasury is an entity that takes money into its bank account and makes expenditures from its bank account.

The Treasury is just one more player.  In actual operational reality, money does not blink in and out of existence.  It flows through the Treasury's account at the Fed to other recipients.

It originally comes from deficit spending by the Treasury. The Fed can create base money too, but only by doing swaps with Primary Dealers (typically POMO with Treasury securities). In other words, our debt-based money supply would not exist without government debt.

You (and MMT) are incorrect.  The Fed doesn't merely create base money "too".  Apart from coins, bills, etc. the Fed is the only entity that creates base money!  Misunderstanding this is guaranteed to lead you to all sorts of painfully erroneous conclusions.  (Such as MMT.)

Do we seriously disagree on this fundamental point?  Is this yet another rotten MMT tenet that sprang from this "tax money out of existence" metaphor?

If you do understand that the Fed is the sole creator of base money, answer this: why would additional government debt be needed in order to create additional base money?  If we need more base money, the Fed can create it at will by purchasing as much of the $15 trillion in outstanding government debt that it likes.  In no way, shape or form do we need more government overspending in order to increase the money supply.  Even a balanced budget would leave the debt at... $15 trillion.

Lone Wolf, do you see any points in moda's or Gumby's arguments that you would agree with?

Not really, but hope springs eternal.    I'm intentionally striking at what I view to be foundational weaknesses so it's to be expected that we don't see eye to eye.

[MediumTex]

Lone Wolf, do you see any points in moda's or Gumby's arguments that you would agree with?

Not really, but hope springs eternal.    I'm intentionally striking at what I view to be foundational weaknesses so it's to be expected that we don't see eye to eye.

Do you agree that if the government completely stopped spending money but kept tax rates at their current levels, it would be deflationary across the whole economy (assuming private sector credit was expanding at the same rate whether the government was spending money or not)?

If you agree that this scenario would be deflationary, does that provide us with any useful information about the prospects for austerity programs in the midst of a generally deflationary set of economic conditions?

[Gumby]

You're grasping at straws. A bank account is nothing more than a spreadsheet.

Disappointing.  I was hoping for an actual answer.  You're like Lucy with the football.  :)  We've gone from "There is no bank account" to "The bank account doesn't matter" to "You're grasping at straws".

You are clearly grasping at straws. Take a look at the explanation I just posted above. You will see that I am right. The Treasury does not have a traditional bank account in the way you want to think it does. Real dollars are spent into existence, by automated computers, regardless of the Treasury's "account" balance.

This distinction is nonsense.  When someone pays me money, this money is not deleted from the "everybody but Lone Wolf" sector and then "spent into existence" when I make use of it.  The money flows throughout the economy.  The Treasury is an entity that takes money into its bank account and makes expenditures from its bank account.

No. As I just explained above, the bank account is not a real bank account. It's just there for check clearing purposes. Payments are made regardless of the balance.

The Treasury is just one more player.  In actual operational reality, money does not blink in and out of existence.  It flows through the Treasury's account at the Fed to other recipients.

You're wrong. The McMillin quote, above, proves you are wrong.

Apart from coins, bills, etc. the Fed is the only entity that creates base money!

Really? You honestly believe that? The Treasury creates millions of dollars in base money every day... every time it spends money into existence! And there are something like $16 trillion in risk-free savings in the private sector. Those assets came from the Treasury, not the Fed. The Fed also uses some of those Treasuries to create more base money when the banking system needs it to. Therefore, the base money would not exist if it weren't for the Treasury debt in the first place.

why would additional government debt be needed in order to create additional base money?  If we need more base money, the Fed can create it at will by purchasing as much of the $15 trillion in outstanding government debt that it likes.  In no way, shape or form do we need more government overspending in order to increase the money supply.  Even a balanced budget would leave the debt at... $15 trillion.

You just answered your own question. The Fed would not be able to create any base money if the Treasury debt did not exist in the first place. And every bond the Treasury issues is offset by real base dollars that entered the private sector. So, therefore, only the Treasury creates net financial assets in the private sector. That's how a debt-based monetary system works.

Anyway, the McMillin quote, above, proves that you are wrong about the Treasury account — which was your entire argument. The Treasury does not have a traditional banking account like you think it does.

[MediumTex]

Gumby,

I get where you are coming from, but once a discussion turns into an argument people dig in their heels and often lose the mental pliability needed to learn new things.

I just don't like seeing that over such an interesting topic.

Maybe it would be useful to revisit some of the assumptions we are using and see if perhaps Lone Wolf is proceeding from different assumptions and thus arriving at different conclusions.

[Gumby]

Gumby,

I get where you are coming from, but once a discussion turns into an argument people dig in their heels and often lose the mental pliability needed to learn new things.

I just don't like seeing that over such an interesting topic.

Maybe it would be useful to revisit some of the assumptions we are using and see if perhaps Lone Wolf is proceeding from different assumptions and thus arriving at different conclusions.

Agreed. Though, I wouldn't say he's been trying to understand it. He's just trying to refute it. It's difficult to explain something to someone who is only trying to refute and is unwilling to see your point of view.

[Storm]

This distinction is nonsense.  When someone pays me money, this money is not deleted from the "everybody but Lone Wolf" sector and then "spent into existence" when I make use of it.  The money flows throughout the economy.  The Treasury is an entity that takes money into its bank account and makes expenditures from its bank account.

LW, you have to agree that there is a fundamental difference between someone paying you and someone paying their taxes.  When you write a check, if there isn't enough funds in your account, it bounces.  I've never seen a check from the US Treasury bounce.

Also, you still haven't addressed the question about what happens if everyone pays you some money every year but you never spend any money?  What then?  It could be LW, or it could be the Fed, or the Treasury, or whoever, but if you never spend that money, you might as well stick it in your mattress because it's out of circulation and deflationary.

In my opinion, you're creating straw men to poke holes in MMT.  The fundamentals seem intact, even though the details may seem sketch on first glance due to a misunderstanding of the roles of the Fed and the Treasury.

Here's how I understand it - please (anyone) correct me if I'm wrong:

Treasury: writes checks (government spending) and receives revenue (taxes).
Fed: Manages primary debt auctions and reserve accounts for all of the banks.  Performs POMO when needed in coordination with the Treasury.

It seems to me that both can print money (in a sense).  The Treasury can print money simply by the fact that every check they write is automatically good - no risk of a bounced check.  The Fed can print money through QE.