“Saving” ≠ “Saving Resources”*

April 7th, 2013

Many economists — mostly the freshwater/neoclassical/supply-side/conservative types, but also many on the left — hold in their heads a very peculiar model of how economies work. It’s a model of a barter/real-goods economy in which money only plays the role of convenience.

In this model, if you don’t eat some portion of the corn you grew this year, you’ve “saved.” You can eat it next year. Makes perfect sense.

You can see this thinking played out in Scott Sumner’s justification for consumption taxes:

I’d tax people on the basis of how many resources they consume, or take out of society, not what they produce.

He describes the opposite approach — taxing returns on financial investments or “savings” — as “morally grotesque.”

Now let’s think about this, and think about how these economists think about this. They’re assuming that if you “save” (a.k.a. don’t spend), you don’t “consume resources.” You “save” them, and don’t “take them out of society.”

This makes absolutely no sense. If you forego a massage this week, or wait a few years to get your house painted, is the labor for that massage or paint job “saved”? How about this year’s sunlight — the ultimate source of that labor power? Can you use it next week, or next year? Understand: services comprise 80% of U.S. GDP. And that’s before you even think about Apple and similar, with their just-in-time, on-demand supply chains — when you buy it, and only when you buy it, they produce it.

If you don’t buy it, it doesn’t get produced.

And if you don’t buy it, and they don’t expect you to buy it soon, they don’t invest to build the capacity needed to produce more in the future. (That investment and real-capacity building is true “national saving.” S really is I.)

That mental model, which is so widely prevalent, is a fundamental error of composition: confusing the individual with the aggregate. (And a confution of money-saving and real saving.) Sure, you’ve saved money for your (or your great-grandchildren’s) future. And when you don’t get a massage, others can sign up for that time slot, or buy a massage for a lower price. This is about competition among individuals, not how many resources we as a society produce and consume. If we all consume less, as a society we produce (and “save”) less — both for current consumption and for future production.

So in a very real (dynamic) sense, it’s the savers who are “taking resources out of society.” (And in a somewhat abstract sense, you can imagine those foregone resources being stored, hoarded, and  rendered impotent in ever-growing and largely inert Cayman-island bank accounts.)

This is not really revelatory; I know these economists understand the paradox of thrift. But they ignore and eschew it in their real-good, barter-based mental economic models. I would suggest that the explanation for this error of composition is revealed by Scott’s words: “morally grotesque.” Moralistic beliefs about how individual humans should behave make it impossible for many economists to embrace an aggregate economic reality of which they are fully cognizant.

* Yes: non-renewable natural resources are consumed when people produce, buy, and consume stuff (both goods and services). But 1. Compared to human effort, those resources constitute a small part of the inputs to GDP, and 2. this is not what economists who are subject to this thinking are talking about. All those in-ground resources are not counted as existing “capital” in the national accounts, for instance — so they can’t be depleted from those accounts — and the accounted “cost” of those resources consists almost entirely of the cost of digging them up. This is the subject for another post.

Cross-posted at Angry Bear.


  1. Jay
    April 7th, 2013 at 18:11 | #1

    So, just for clarity, i take it you would tax idle assets? Wealth?

  2. April 7th, 2013 at 19:46 | #2


    I have bruited the notion of a wealth tax:


    But I’d really be for land taxes. Here’s the last wish-list I wrote up:


  3. April 8th, 2013 at 10:52 | #3

    I don’t understand how “saving” money in a bank is hoarding or removing, when there should most likely an equivalent amount of lending made by the bank.

    Just trying to figure out what you’re getting at.

  4. April 8th, 2013 at 11:46 | #4

    @Jules Pitt:

    The key concept: deposits don’t create loans (banks create new money for lending out of thin air, subject to their equity/capital limits). Loans create deposits.

    See my 1:03 PM comment here:


    And google some of the phrases from this reply to get a plethora of understanding from the world of Modern Monetary Theory. Great stuff…

  5. April 8th, 2013 at 12:53 | #5


    I see what you’re saying a bit – but as far as I can tell, it is a little muddy as the accounting isn’t straightforward.

    Any return a saver receives for their deposited money comes from the asset side of the bank’s balance sheet, and should the bank not have cash on hand to process withdrawals they will liquidate their assets. So there is some interchangeability or relation – but not a strict equivalence, as you point out, loans are issued based on capital levels alone.

    I’ve always had a hard time grasping with what precisely the deposits have to do with the asset side, and I may be doing so yet again. But my best vague feeling about it is that rather than everything being in its neat little categories and places, a bank is a sort of asset/liability soup.

  6. April 8th, 2013 at 12:54 | #6

    @Jules Pitt

    Jules, lending creates deposits not vice versa. Banks don’t lend out savings. They lend against capital to meet demand for credit on the part of creditworthy customers and use deposits as an inexpensive funding source after loans are made. Here’s a simple example to think about it.

    A bank makes a loan and credits the customer’s deposit account. The customer spends the deposit by cutting a check that is deposited in another bank. The customer’s bank then has to transfer bank reserve to the other bank to clear the check. Say the customer’s bank is short reserves in its Fed account that day and has to borrow them and pay interest. It’s cost-saving to recruit a demand deposits that pays no interest which transfers reserves to the bank and which the bank can use to pay off the borrowed reserves and save the interest payment. So it offers some toasters to attract demand deposits that day.

  7. April 8th, 2013 at 14:25 | #7

    @Tom Hickey: To be more clear, I’m half agreeing – Lending creates deposits, but “savings” deposits (by which I mean non-demand deposits) create some claims on that banks lending. I don’t mean demand deposits, I mean non-demand savings accounts & certificates of deposit.

    It’s the terminology that is getting me mixed up here – I was assuming this post was talking about M2 minus M1 when mentioning “savings” – but you seem to be talking about M1 exclusively.

    Long story short – I haven’t ever considered demand deposits savings, and I presumed that was generally agreed upon.

  8. ftm
    April 8th, 2013 at 15:10 | #8

    I’m not sure I necessarily see inconsistency between your view and sumner’s . In his piece he’s railing against excess consumption by the wealthy and swooning over investment by the wealthy — so he’s presenting a choice between consumption and investment ( where savings == desired investment).

    In your piece, you’re criticizing the accumulation of idle money balances (where savings != desired investment). I don’t know his shtick well but he seems to recognize that savings and investment can get out of whack.

    It seems like you might both agree that excess consumption by the wealthy and hoarding of money is undesirable and savings that is immediately invested is desirable. But maybe I’m missing something.

  9. April 8th, 2013 at 15:41 | #9

    @Jules Pitt

    Funding loans with deposits is essentially the same function operationally regardless of deposit term. Demand deposits are short term demand loans to the bank, while time deposits are longer term time loans. The term determines the amount of interest the bank has to pay on the loan. Banks balance short term and long term funding wrt maturity transformation. The way that banks make a profit is through the spread, and they use risk management to do this prudently in borrowing short term and loaning longer term. The bank want to pay the least amount for its funding without taking on risk imprudently.

  10. ftm
    April 8th, 2013 at 17:59 | #10

    @Jules Pitt

    You’ve put your finger on what is generally underplayed in the mmt story. Deposits created by loans are M1 and not sticky whereas deposits that are opened with cash or reserves are m2 and stickier (mixture of Term deposits and demand deposits).

    While MMT is correct that loans create deposits, but people don’t take out loans to leave the deposit in the bank. They use the loan proceeds for transactions and those transactions need to funded by existing reserves. And the cheapest source of reserves are existing deposits (m2) (hence the toasters).

    Eventhough there is no recycling of old money (existing reserves) when a new loan is created, old money is required to fund the transactions resulting from the loan. So banks do need deposits to fund a loan just not exactly at moment the loan is created and in the exact magnitude of the loan.

    The common notion that banks are in the business of collecting deposits and then loaning them out is both true and not true. They do collect deposits in proportion to the loans they create but they don’t need the deposits when they create new loans, they need deposits to fund the transactions which result from the loans.

    Hopefully that makes some sense,.

  11. April 8th, 2013 at 19:52 | #11


    The deposits that banks use to fund loans come either from loans that created deposits previously or deposits created by govt expenditure.

  12. ftm
    April 8th, 2013 at 22:15 | #12

    @Tom Hickey

    “The deposits that banks use to fund loans come either from loans that created deposits previously.”

    Yes right, but I guess I would also want to add that the prior generation of loans ( those that gave rise to the funding deposits) had to be originated by another bank. Otherwise a single bank could be an infinite money machine just generating loans which generate deposits which generate loans ( and that would only be possible with irrational borrowers who pay loan fees to leave the loan proceeds on deposit for the loan term). Its only via transactions with another bank or the fed that the bank can obtain additional reserves to fund the transactions necessarily following new loans. It is the interbank borrowing of costly reserves mediated by the fed that is supposed to put a brake on money creation by single renegade bank.

    “or deposits created by govt expenditure.”

    This part I’m not sure i see what you mean. I’m assuming you mean treasury expenditures and that runs counter to how I thought the system works. The treasury can only spend what it collects in taxes or the proceeds of borrowing. In either case it is not creating deposits, but in one case legally compelling the transfer of existing deposits and in the other case trading a bond for an existing deposits. In its standard operation, the fed creates and destroys reserves by trading banks reserves for treasury bills. So in its standard operation, the fed can’t create bank deposits. I guess the fed has deposits in the banking system when it receives treasury debt service for its holdings but here again these seem like a transfer of existing deposits from the treasury bank accounts.

    Maybe if you look at the fed and treasury as a unified institution? but even then I don’t see bank deposit creation.

    I’m fairly new to monetary thinking, so I am curious to hear where I’ve gone off course.

  13. April 9th, 2013 at 07:41 | #13

    “This makes absolutely no sense. If you forego a massage this week, or wait a few years to get your house painted, is the labor for that massage or paint job “saved”? How about this year’s sunlight — the ultimate source of that labor power? Can you use it next week, or next year? Understand: services comprise 80% of U.S. GDP. And that’s before you even think about Apple and similar, with their just-in-time, on-demand supply chains — when you buy it, and only when you buy it, they produce it.”

    I don’t follow this paragraph. When I spend or don’t spend on services, this has a (small) direct effect on the labor market for those services, no? If I get more massages, then at the margin more laborers become masseuses. If I leave money in the bank or an investment vehicle, then at the margin more people work for companies that need financing. If I give money to charity, then at the margin more people go to work for non-profits.

    I can see why at a policy level we might want to incentivize the 2nd and 3rd options more than the 1st.

  14. April 9th, 2013 at 08:21 | #14


    Banks need reserve balances (rb) to clear interbank transactions by Fedwire, i.e., those that are not netted through a clearing house, as well as to obtain vault cash. Those rb’s have to come from somewhere and the only entity that is authorized (in the US by Congress) to create rb is the central bank (Fed in US).

    So in the US the rb come from either Fed lending to banks or from reserves from the TGA injected through govt expenditure (spending and transfers). If the govt has to get reserves from the private sector then all rb interbank system end up being borrowed by banks from the Fed either by repo-ing govt securities or through the discount window at the penalty rate. That’s not the case. The private sector endogenous money system does not finance all transactions in the payments system directly through the central bank by central bank lending to individual banks.

    Treasury injections create rb reflected in deposits, and bond issuance drains excess rb from banks so that the cb (Fed in US) can hit its target rate if it desires to set a rate greater than zero and does not pay interest on reserves.

  15. April 9th, 2013 at 11:54 | #15

    @Ben “If I leave money in the bank or an investment vehicle, then at the margin more people work for companies that need financing.”

    This is what doesn’t make sense. See my latest post.

  16. ftm
    April 9th, 2013 at 14:43 | #16

    @Tom Hickey
    Tom, thanks for the patient and detailed explanation. I been hunting around trying to understand the idea that treasury spending creates reserves and I see a lot has been written about it but none of the arguments seem definitive. Everyone seems to agree that the fed faces a legal no overdraft constraint. Which could imply, that the treasury obtains reserves only in exchange for bonds and no new reserves are created. But there are other possibilities. For instance, the fed might loan new reserves to treasury in an amount less than the balance in the regional TT&L accounts in which case the No overdraft rule would hold and treasury spending would increase reserves in circulation ( but i’ve not seen any discussion of this). But if this increase in reserves is only temporary to tide the treasury over until it can sell bonds , then it would be a fairly inconsequential kind of money creation. Particularly given the fed could neutralize it via open market operations.

    Are there any papers or posts that seem particularly convincing about fed /treasury interaction?

    What seems strange about treasury spending actually increasing reserves in circulation is why would the fed even partially surrender its key policy lever to the vagaries of treasury spending?

    thanks again for your help

  17. ftm
    April 9th, 2013 at 15:04 | #17

    @Tom Hickey
    My prior comment needs revision — the policy lever is the rate not the quantity of reserves so as long as the system can accomodate the new reserves at the policy target the fed maintains control.

    So my questions are, what is the accounting arrangement between the
    fed and the treasury that gives rise to new reserves, how does that relate to the no overdraft constraint and is the reserve creation more permanent or just transitory.

    apologies for the confusion.

  18. April 9th, 2013 at 16:08 | #18


    “Everyone seems to agree that the fed faces a legal no overdraft constraint. Which could imply, that the treasury obtains reserves only in exchange for bonds and no new reserves are created. But there are other possibilities. For instance, the fed might loan new reserves to treasury in an amount less than the balance in the regional TT&L accounts”

    As I understand it, Fed loans to Treasury are not permitted. The only way that reserves get credited to the Treasury is through the sale of bonds to the primary dealers.

    “Are there any papers or posts that seem particularly convincing about fed /treasury interaction?”

    One of the most detailed accounting-wise is JKH’s “Treasury and the Central Bank – A Contingent Institutional Approach” at Monetary Realism. This is an area of some contention, however. I think that the accounting is agreed upon but what it implies may not be.

  19. April 9th, 2013 at 16:34 | #19

    “So my questions are, what is the accounting arrangement between the
    fed and the treasury that gives rise to new reserves, how does that relate to the no overdraft constraint and is the reserve creation more permanent or just transitory.”

    There are two ways that reserves get into the Treasury account. The first is credits from revenue — taxes, fees and fines.

    The second is issuance of Treasury securities, which the Fed auctions to the primary dealers and credits the rb received in payment to the Treasury account. This is necessary when revenue does not cover planned expenditure.

    When the Treasury spends on the govt’s behalf, it tells its bank, the Fed to make the payments. Bank’s rb accounts get marked up at the Fed and the banks mark up the corresponding customer accounts. The result is that the amount of rb that was used to purchase the bonds is returned to the banks’ Fed account. In aggregate, it’s a wash.

    However, there are also the new bonds held by the private sector. They count as an addition to consolidated non-govt net financial assets in aggregate. The Fed then uses open market operations to purchase and sell bonds to hit its target rate by keeping just enough excess reserves available to provide the needed liquidity to clear in the payments system.

    Consolidated non-govt net financial assets — wealth in the form of financial savings without corresponding liability in non-govt — increases by the amount of the deficit through this operation.

  20. ftm
    April 9th, 2013 at 21:14 | #20


    thanks for explanations of the accounting and the JKH reference now I see the key issue between MMT and MR over whether treasury expenditure from fed account creates new money(reserves) or just reintroduces old reserves into the banking system. I come down on the (MR) side of only the fed creating reserves and the treasury holding them in their fed account for later use. The key is the accounting. Since reserves only get into the Fed account via tax receipts and bond sales — two transactions that draw on existing bank reserves– those transactions pin down the source and magnitude of the reserves available for treasury spending. The treasury can’t conger up reserves from thin air like the fed , it can only spend reserves that were originally drawn from the banking system via transactions. I’m basically back where I started with your sentence and now the added qualification,

    “The deposits that banks use to fund loans come either from loans that created deposits previously or”

    from a net spending draw down of the treasury’s fed account that reintroduces old Fed created reserves back into bank circulation.

    Its all a bit of a tempest in a teapot because the balance in the treasury fed account is kept very steady to avoid causing unnecessary volatility in the reserve stock. Maybe so steady that we can think about ignoring treasury spending as a source of deposits?

  21. April 10th, 2013 at 12:39 | #21

    Treasury spending is definitely a source of deposits. The question is whether this creates “new money.” The MMT answer is yes, through the joint operation of the Treasury and central bank as agencies of the govt. It is not the Treasury that spends. The govt spends through its appropriations. It uses its agencies to do that spending through the banking system and payments system. Govt spending is done through bond issuance rather than note (“greenback”) issuance. Money creation through bond issuance is for the Fed to set the interest rate and hit its target through OMO without paying IOR if the rate it sets is above zero. If the Fed would set the rate to zero or use IOR, then bonds would not be needed operationally and could be dispensed with. The result of this would be withdrawing the subsidy of interest on the bonds payed to non-govt along with reduction of save assets in the financial system. But there is no substantial difference between issuance of note or bonds other than the interest, but the interest is just funded with more govt issuance anyway, so it’s not a financial issue. The only issues are availability of real resources and inflation.

    The differences have to do not with the accounting, which is straight forward and everyone agrees upon, but rather with the significance and role of Treasury securities (tsys). MMT holds that tsys are currency equivalent due to some being near currency substitutes (T-bills) and their role in repo and as top level collateral. Moreover, the Fed uses tsys in its ordinary operations seamlessly switching between reserves and tsys to regulate liquidity in the interbank market to hit its target rate. Thus, the tys that are issued are converted to reserves as needed as a matter of govt operations wrt its monetary authority.

    The alternative view is that govt borrows from the private sector to fund itself. That can only be done if the private sector borrows reserves from the Fed, since that is their only source. But that is not how banks operate as shown by the level of rb borrowed from the Fed by banks. What actually happen is that the Fed uses expands and contracts its balance sheet using tsys to provide the level of excess rb needed to run the payments system at the rate the Fed sets.

    Reserves are just accounting entries. A reserve dollar as a unit of account doesn’t move from one place to another as such. When a tax liability is paid, the Treasury account is marked up and that liability is eliminated, which withdraws that amount of dollars from non-govt accounts. (MMT says that taxation “destroys money.”) That tax credit is then marked up at the Treasury account, where it is used for tsy redemption by marking up non-govt accounts or to mark up non-govt accounts with tax credits in exchange for transfer of resources to public use (“spending”) or as transfer payments like SS. These payments inject new money into non-govt. (MMT says that govt expenditure “creates money”). Money is created (injected) and destroyed (withdrawn) to and from non-govt through expenditure and taxation, but nothing is ever lost in the accounting. The books always balance.

    What this means from the macro perspective is that govt issuance through combined tsy and reserve issuance (in lieu of direct issuance of notes) adds net financial assets to non-govt instead of borrowing financial assets from the non-govt stock created by non-govt borrowing from banks without changing the net position of non-govt finance, which is always zero, every asset created by non-govt having a corresponding liability. Govt increases net financial assets in non-govt when non-govt holds financial assets that do not have a corresponding liability in non-govt, such as tsys.

  22. ftm
    April 10th, 2013 at 21:50 | #22

    @Tom Hickey
    Thanks tom I feel like I have a fairly good handle on the issues, I think my
    language is still not precise enough and that may be the problem. I worry that
    you might not be getting as much from this exchange as I since you’re obviously well
    versed in this debate. But I’ll have a another go at the issue of does “treasury spending create money”

    I understand that MMT has a extensive set of claims, but since I’m new to this I want to keep it simple and focus on what seems essential. And the core difference in interpretation concerns the transactions with the Fed treasury account (TGA).

    “Treasury spending is definitely a source of deposits. The question is whether this

    creates “new money.” ”

    The first thing that comes to mind is that the technical definition of money one chooses prefigures ones interpretation. If total fed reserves are included in the definition of money, then treasury cannot “create money”. And on the other hand, if only commercial bank reserves are included, then treasury will in certain circumstances “create money” by expenditure. This observation does not resolve anything but it does highlight a question, Why arethe treasury balances at the fed not money? They are denominated in dollars, exchangeable for deposits in commercial banks and accepted for transaction settlement. What characteristic of money are they missing?

    But assume the MMT position( TGA balances are not money), then net inflows out of and into the TGA account “create and destroy money”. Given the definition of money chosen, this is unassailably true. The key question is does this creation and destruction of money significantly impact the operation of the banking system or is it just one among many sources of variation in reserves the fed must deal with?

    The Fed’s own literature http://www.newyorkfed.org/research/current_issues/ci18-3.pdf demonstrates that before the financial crisis the balance on the TGA account held close to the $ 5 billion target level (no or little net money creation due to variationin theTGA balance). The publication also states that in normal times Treasury actively tries to supress variance in the TGA balance to cancel its impact banking system reserves. (Since the fed started paying IOR, the treasury has elected to hold large volatile balances in the TGA to help the fed avoid paying IOR on reserves held for ttl accounts. However, since the system in awash in reserves the TGA volatility has had no impact on banks’ reserve needs). Nothing in the Fed publication suggests any impact of treasury activity on the reserves available in the banking system or that treasury expenditures has any role in “money creation”.

    My original conception, that money featuring endogenous money and outside money supplied by the Fed , still seems persuasive.

  23. ftm
    April 11th, 2013 at 07:13 | #23

    @Tom Hickey
    my last sentence should read

    My original conception, that money consists of endogenous money and money supplied by the Fed, still seems persuasive.

  24. April 11th, 2013 at 10:25 | #24


    You are correct in saying that this hinges on the use of the word “money.” MMT pros prefer not to use the term “money” other that in the most generic sense. There are many types of money, e.g., M0, MB, M1, M2, M3, MZM, and confusion arises when one doesn’t not specify which type of money one means in context.

    MMT is generally most concerned with aggregates. Inside money (“bank money” or “credit money”) must net to zero iaw the rules of double entry, in which all accounts balance wrt assets and liabilities. This is treated in great deal in circuit theory, with which MMT is in agreement and presumes in its analysis.

    What MMT adds is an analysis outside money (“govt money”, “state money,” “currency”), that is money where the asset lies with the private sector and the liability with the government. This allows govt to create and destroy net financial assets wrt to non-govt taken as the consolidated domestic private sector and the external sector. The government does this through injecting its currency into non-govt by crediting bank accounts, which increases consolidated non-govt net financial assets in aggregate and also by withdrawing its currency from non-govt through taxes, fees, fines, and tariffs, which correspondingly reduces consolidated non-govt net financial assets in aggregate.

    This understanding is then applied to the sectoral balance identity to develop a macro approach based on stock-flow consistent macro modeling following the approach of Wynne Godley. The objective is maintaining a full employment budget at optimal output capacity while also maintaing price stability as the most effective and efficient macro policy solution.

    According to MMT, the government is able to use its monetary authority to establish its unit of account and issue its currency, operating either directly through the Treasury, as the US does only with coinage, or through the joint operations of the central bank creating reserves and the Treasury issuing bonds to issue its currency into non-government as outside money. I

    In doing this government controls the interest rate if it chooses, either through the Treasury or central bank. In the US the politically independent Fed is authorized to set the interest rate, ordinarily by adjusting the level of bank reserves through open market operations (OMO). This is just another way of operating instead of the Treasury injecting outside money by creating accounts, operating the payment system, and setting the interest rate. That is to say, the central bank-Treasury bond-reserve system is operationally unnecessary and one entity could be authorized to do this instead with the same result. The difference would be the retraction of the subsidy of interest and the safe assets provided by govt. It would also end the illusion that govt is borrowing and taxing inside money, thereby competing with the private sector for “loanable funds.” It would also end the political independence of central banking, which many now advocate, including at least some MMT economists, but this is another story.

    BTW, the reserves credited to the Treasury general account (TGA) are not counted toward bank reserves, which are reserve balances at the Fed owned by banks with accounts the FRS plus their vault reserves. Reserves in the TGA do not count toward any of the measures of money supply — M0, MB, M1, M2, M3, or MZM. Are they “money”? As Warren Mosler says, “the government neither has nor does not have money.” When taxes are paid, “money” as in the measures of the money stock decreases,, i.e., is “destroyed.” When govt spends, deposit account are marked up and this is reflected as an increase in the money stock, both the monetary base and M1 (demand deposits).

  25. April 11th, 2013 at 10:45 | #25


    “My original conception, that money featuring endogenous money and outside money supplied by the Fed , still seems persuasive.”

    The Fed credits and debits accounts with reserves as the only source authorized to create reserves, being the owner of the payments system spreadsheet. Some of those reserves correlate to accounts in banks that are inside money, i.e., money created through bank credit, with the asset and liability in non-govt, which nets to zero. Some of those reserves correlate to outside money, i.e., money created through govt spending that marks up bank accounts, where the asset is in non-govt and the liability in govt. Only outside money can result in net financial assets unequal to zero. Net positive liabilities of govt are owned by non-govt as net financial assets in the form of US Treasury securities. These are the net financial wealth of the nation, some of which is held by the consolidated domestic private sector and some by the consolidated external sector. Some also is held by the central bank owing to its operations as it expands and contracts its balance sheet iaw its policy objectives. When the central bank moves tsys to its balance sheet, the amount of net financial assets of non-govt remain constant since the Fed credits bank accounts of the sellers with reserve balances that are reflected in demand deposits.

  26. ftm
    April 11th, 2013 at 12:37 | #26

    First an aside, i know the TGA balance is definitely not counted as bank reserves, the key issue is whether it is money. Moving reserves to the TGA account could just demote and outside money to inside money and the reverse on the trip out. But if it remains money even just inside money, the basic MMT story of “destruction and creation of money” due to treasury spending does not make sense — as I think we both see.

    Ok,I think I’m now capable of describing MMT and MR in a way that isn’t pejorative but you let me know.

    MMT is striving to lay out a general framework for monetary economies without a specific attachment to the institutional details of any particular existing economy. They view the US monetary institutions — a separate monetary authority in control of a policy rate in the short term government securities market — as a particular institutional choice and not necessarily the best choice for a monetary system. Therefore their work has primarily a prescriptive or normative purpose — they weigh institutional alternatives to the US and other countries current monetary systems.

    MR on the other hand has a descriptive purpose. They want to describe and understand how existing monetary economies and institutions work.

    If these descriptions of MMT and MR are correct, then we can explain the US economy as a particular case of a monetary economy where the state has given control of reserve policy to an independent monetary authority (Fed). In the US system, the treasury defers to fed control of the reserve supply and as such there is no institutional mechanism for the treasury to “create money” . However another system could have the treasury control the reserve supply –and the monetary authority take a backseat — by simply moving treasury deposit balances into and out of the banking system creating and destroying reserves and money at will.

    Maybe the MMT folks have said something like this somewhere, if I had read this it would have made their work much easier to understand. And if this does accurately describe what MMT is about, then they are definitely engaged in a legitimate academic pursuit. I think though their normative purpose should be more explicitly acknowledged rather than intermixed into arcane discussions about fed accounts and transactions. But many of them work at state funded institutions so that may explain their reticence to describe their work as normative.

  27. April 11th, 2013 at 12:58 | #27

    I don’t think that this is correct from the MMT PV. I can’t speak for MR.

  28. ftm
    April 13th, 2013 at 06:38 | #28

    @Tom Hickey
    Hey tom, thanks for the lengthy exchange. As neither of us budged one iota from our starting positions it’s definitely time to let this rest. I’ll just say I had the much easier job — stating my opinion — where you took on the task of representing the diverse group that’s come to be known as MMT. Hopefully, if someone ever runs across this thread they’ll get some insight from our discussion.

  29. Kaleberg
    April 14th, 2013 at 21:12 | #29

    A better way to think of it is to consider that not spending reduces the velocity of money. Most savings are held by relatively wealthy people, so they don’t spend much in general. (If they did, they wouldn’t be as wealthy.) Sure, some of their money may get lent to someone who spends it or invested in some productive asset, but most of it just gets moved to another financial account as a change in ownership position. We have a huge financial sector supported by a huge savings glut. This glut continues to grow and remove money from circulation within the actual economy. (Yes, finance is technically a service, but most of the money goes from account to account, rather than being spent on remodeling Park Avenue apartments or something that might benefit the economy.) I think you get the basic idea, but need to refine it a bit more.

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