Cullen Roche interview

[Gumby]

When banks create money...they create money right? Do you agree with that?

Yes. If banks "create money" they create money.

[Kshartle]

When banks create money...they create money right? Do you agree with that?

Yes. If banks "create money" they create money.

And when they create it to buy bonds this adds to the money supply right?

[Gumby]

And they lose the asset that was purchased.

If I buy an apple from your fruit stand for a dollar you have one more dollar and one less apple.

If I borrow the dollar from you and give you a note, then buy the apple you end up with the same dollar you had, a note from me and one less apple.

Huh? You wouldn't "borrow" the dollar from me if I'm the government. If I'm the government, I would give you the dollar (maybe for you to do a little jig or something) and you would wind up with an apple and a dollar. Therefore, you would receive a net deposit of an apple. Get it?

ahahahha, you better hope I pay because you are down an apple and I'm up one!

[Facepalm] You just proved my point. You received a net deposit of an apple!

[Gumby]

When banks create money...they create money right? Do you agree with that?

Yes. If banks "create money" they create money.

And when they create it to buy bonds this adds to the money supply right?

You are just proving my point. Yes. Fiscal spending from the Treasury adds to the broad money supply. We've been saying that for years.

But this whole conversation is about QE, which is an example of monetary spending and QE does not result in a net deposit in the private sector.

[Gumby]

KShartle, I think if you go back and read Tom's posts you will see that the bond already existed in the private sector before QE takes place. So, the increase in the broader money supply really comes from the bond issuance via Congressional fiscal spending. All QE does is change the composition of the private sector's equity.

[Kshartle]

When banks create money to buy bonds this adds to the money supply right?

[Kshartle]

And they lose the asset that was purchased.

If I buy an apple from your fruit stand for a dollar you have one more dollar and one less apple.

If I borrow the dollar from you and give you a note, then buy the apple you end up with the same dollar you had, a note from me and one less apple.

Huh? You wouldn't "borrow" the dollar from me if I'm the government. If I'm the government, I would give you the dollar (maybe for you to do a little jig or something) and you would wind up with an apple and a dollar. Therefore, you would receive a net deposit of an apple. Get it?

You're changing the subject. You said when the government borrows the private sector ends up with the bond and the money. I was just pointing out they have to give up something in return.

In my example I am the government. I borrowed from you then spent the money right back. You've got your same amount of money as before, you're down the asset I purchased (the apple) and you've got a note from me.

The government borrowing and spending does not create equity. It takes your real asset (the apple) and hands you a promise to pay later. Of course the only way to pay you is to borrow from someone else (maybe you), steal the money from someone else (maybe you) or print the money and steal purchasing power from everyone.

[Gumby]

When banks create money to buy bonds this adds to the money supply right?

KShartle, banks don't create money to buy bonds (they use reserves that come from the government). Banks create money by creating deposits. Deposits can be used by individuals to buy bonds, but all that happens is that individuals are virtually giving money to some random government contractor and the individual receives a bond in the process (i.e. a net deposit of a Treasury Bond in the private sector).

[Gumby]

In my example I am the government. I borrowed from you then spent the money right back. You've got your same amount of money as before, you're down the asset I purchased (the apple) and you've got a note from me.

Then it was a bad example, because if you were the government, you wouldn't take the apple and you would have given me a bond or IOU in return. That's why you need to use a real world example.

I would keep the apple (or a bridge). And you would give me an IOU. And you would give me the money for that apple (bridge) that I got to keep. The end result is a net deposit of an IOU in my account (and I get to use the asset)!

[Kshartle]

When banks create money to buy bonds this adds to the money supply right?

KShartle, banks don't create money to buy bonds (they use reserves that come from the government). Banks create money by creating deposits.

Ok you mean when they extend credit? When they issue a loan (a promise to pay, a bond) to someone right?

If I borrow $1,000 from the bank and take the money home with me I have money, the bank has the bond or note or promise for me to pay or whatever and they "created" the money right?

The bank essentially created money and bought a bond with it right? Let's boil away the minutia and get down to the bone.

[Kshartle]

In my example I am the government. I borrowed from you then spent the money right back. You've got your same amount of money as before, you're down the asset I purchased (the apple) and you've got a note from me.

Then it was a bad example, because if you were the government, you wouldn't take the apple and you would have given me a bond or IOU in return. That's why you need to use a real world example.

I would keep the apple (or a bridge). And you would give me an IOU. And you would give me the money for that apple (bridge) that I got to keep. The end result is a net deposit of an IOU in my account (and I get to use the asset)!

You don't think the government buys apples?

I was in the Army. Trust me, the government buys apples. Soldiers eat them.

[Gumby]

Ok you mean when they extend credit? When they issue a loan (a promise to pay, a bond) to someone right?

You mean a liability. There is no bond when a bank creates a loan.

If I borrow $1,000 from the bank and take the money home with me I have money, the bank has the bond or note or promise for me to pay or whatever

The bank gets collateral if you don't pay. They don't get an IOU-type asset from you.

and they "created" the money right?

No, they created a deposit on their books and you withdrew some of their government-issued reserves (FRNs).

The bank essentially created money and bought a bond with it right?

The bank created a deposit. The deposit isn't money, but I would consider it to be a form of broad money. But they didn't create the FRNs that you took home.

[Kshartle]

I would keep the apple (or a bridge). And you would give me an IOU. And you would give me the money for that apple (bridge) that I got to keep. The end result is a net deposit of an IOU in my account (and I get to use the asset)!

When the government borrows money and buys the resources to build it, it owns the bridge. People get to use it but everyone paid for it in inflation or taxes or tolls.

As New Jersey demonstrates it's not good when the government owns and controls the bridges.

[Tom Brown]

Gumby & Kshartle,

I honestly think the best thing to do to resolve some of these questions is to just work it out on the balance sheets for yourselves. That's what I've done. I'm not guaranteeing that my examples are error free, but you might take a look. For example, if you want to see one possible sequence for government deficit spending, see if this makes sense:

http://brown-blog-5.blogspot.com/2013/0 ... ficit.html

Fed holding T-bonds to maturity:

http://brown-blog-5.blogspot.com/2013/0 ... bt-to.html

Paying taxes:

http://brown-blog-5.blogspot.com/2013/0 ... taxes.html

All my examples are static and pretty contrived. A MUCH cooler interactive tool is here:

http://econviz.org/macroeconomic-balanc ... isualizer/

At first I'd try to use that tool to explain things to newbies on Cullen's site, but it never worked out because people wouldn't actually try what I described, so that's the whole reason for my static examples... some concrete numbers and steps I could point to if people had questions.

One of the details you can explore with that econviz tool that I gloss over is exactly how Tsy bond buying is accomplished by banks. That uses something called a TT&L account. So literally what happens is that the banks buy bonds by crediting Tsy's TT&L accounts (that's how banks buy everything, BTW, they credit bank deposits). TT&L accounts are Tsy's bank accounts, but Tsy can't spend from them. Instead they must request that the TT&L balances be transferred into their TGA (Trsy General Account) which is a Fed deposit. Tsy spends from its TGA. So banks can transfer their reserves to the TGA to accomplish this (while at the same time debiting the TT&Ls). Anyway, that's too many details for most people, but I found it interesting. I completely skip all those steps, and just show how the TGA is credited directly in exchange for the bonds.

I recommend checking out that econviz tool... it will answer many of your questions I think.

BTW, I do have an example about how banks buy things (i.e. crediting bank deposits to buy things):

http://brown-blog-5.blogspot.com/2013/0 ... xcess.html

[Gumby]

You don't think the government buys apples?

I was in the Army. Trust me, the government buys apples. Soldiers eat them.

Most government spending goes into the private sector. Anyway, it makes no difference because this conversation is about financial assets, not apples. In your own example, there should have been a net deposit of an IOU.

[Tom Brown]

... it'd be more accurate to say that banks in aggregate buy everything (loans, computers, employee's time) by crediting bank deposits. Likewise, banks in aggregate accept payment (fees, points, interest) by debiting bank deposits. Or they can use cash for either as well.

Individual banks may need to transfer reserves for buying & selling though.

[Gumby]

Gumby & Kshartle,

I honestly think the best thing to do to resolve some of these questions is to just work it out on the balance sheets for yourselves. That's what I've done.

Thanks, Tom! I already agree with Cullen and have found his explanations to be extremely helpful.

Correct me if I'm wrong, but don't your accounting examples confirm a net deposit of a Treasury Bond in the private sector with government fiscal spending?

That seems to be all we need sorted out here. Cullen says that fiscal spending results in a net deposit of a Treasury Bond in the private sector, whereas a QE transaction results in no new equity in the private sector. My interpretation of your accounting says that you have confirmed this.

[Tom Brown]

Gumby, yes, you are correct. Cullen of course is assuming that the Tsy spends every dollar it gets, but given that you are correct on both counts.

In my Example #11, I have a variable "Ut" to account for any unspent Tsy funds in its TGA. That was an attempt to make it a little more general.

[Kshartle]

Ok you mean when they extend credit? When they issue a loan (a promise to pay, a bond) to someone right?

You mean a liability. There is no bond when a bank creates a loan.

If I borrow $1,000 from the bank and take the money home with me I have money, the bank has the bond or note or promise for me to pay or whatever

The bank gets collateral if you don't pay. They don't get an IOU-type asset from you.

You're just being argumentative now because you know where this is leading. I'll skip to it since you're not going to cooperate. It will save time for anyone who is following along.

When I borrow money from the bank they don't go into the vault to fetch it. They create it.

I can withdraw the money and spend it. This bids up prices. There is more money floating around than before and it was conjured out of thin air. This is inflation.

I am obligated to pay the bank back. My obligation is the bank's asset. They have essentially created money and purchased a bond (my obligation to pay).

When I borrow money from you no money is created.

When the government borrows money from me (I buy a bond) no money is created.

When the government borrows money from the FED via QE....money is created. Just like when I borrow from the bank.

More money exists than before, just like when I borrow from the bank.

More money + same amount of goods and services available = higher general price level.

This talk about asset swaps blady blah has nothing to do with the price of rice. The assets being "swapped" are not the same. One is dollars...which is used to bid for goods and services...the other is an obligation of the gubmit to pay which they are not able to do without printing it themselves.

They cannot stop inflating for long without causing a crash and they must continue to inflate at an increasing pace over time. And this is what I am betting they will do.

[Gumby]

You mean "deficit spending", not "fiscal spending", correct?

Correct. Most fiscal spending tends to be deficit spending, but "deficit spending" is more accurate. I was trying to explain the difference between fiscal policy and monetary policy.

[Gumby]

You're just being argumentative

KShartle, I don't think anyone here would characterize my statements in this thread as "argumentative".

And, I think you might want to take Tom Brown's advice in terms of trying to explain your position with accounting. His accounting confirms what I have been saying all along. If you want to argue against that accounting, you're going to need to point out where Tom's errors are.

[Kshartle]

I think you might want to take Tom Brown's advice in terms of trying to explain your position with accounting. His accounting confirms what I have been saying all along.

Which is what?

[Gumby]

I think you might want to take Tom Brown's advice in terms of trying to explain your position with accounting. His accounting confirms what I have been saying all along.

Which is what?

Among other things, that (fiscal) deficit spending results in a net deposit of a Treasury Bond in the private sector, whereas a (monetary) QE transaction results in no new equity in the private sector.

[Kshartle]

explain your position with accounting.

How is this:

Before QE:
Government              Bank            FED
  $0                        $100            $0



After QE:
Government              Bank            FED
  $100                    $100          $100 bond


The bank might end up with a small premium but this is not material. There is more money in the hands of the government chasing the same amount of goods and services.

If the FED doesn't buy the bonds from the bank the bank will not be able continue adding bonds to it's balance sheet and government will be forced to tax more or print to maintain it's level of spending and increase it to meet the growing unfunded liabilites.

The QE is the backdoor way the gubmit prints.

[Kshartle]

I think you might want to take Tom Brown's advice in terms of trying to explain your position with accounting. His accounting confirms what I have been saying all along.

Which is what?

Among other things, that (fiscal) deficit spending results in a net deposit of a Treasury Bond in the private sector, whereas a (monetary) QE transaction results in no new equity in the private sector.

And what does that mean? What is the practical application of this belief? What does it mean with respect to the economy, general price level, investments etc?