@Gerard Borg Do you know what a T account is? Did the paper I sent you have them in it? Did you ever look at my book on kindle (free)? I write T accounts, which have Assets the Left and Liabilities on the right, but since I can’t make T account charts here, I write them like this: BoE BS Expansion +A (+Treasury Loan) +L (+Reserves) HM Treasury BS Expansion +A (+Reserves) +L (BoE Loan) Did the version I sent you have T account? If so, once you see them this should make better sense. The above is what happens when the BoE completes all payments, but HM Treasury does not have enough reserves in their account yo debit to complete all payments, so the BoE has to ‘lend’ the Treasury newly created reserves on the Ways and Means Facility/the Treasury credit line. BOTH the BoE has to expand their BS to issue, and Treasury has to expand their BS to borrow. But this is still Model 2, not model 1. Your shorthand notation is difficult to follow. DEBK means double entry: if the Treasury issues +A and +L Again, that’s model 2, but The Treasury has no need to buy +A like a central bank does, it can do Model 1 like MMT promotes, the Treasury can just carry the negative Equity for the year until they receive taxes the next year. Under a balanced budget the Treasury spends $5T in new money which generates -$5T in negative Equity. +L = -E +$5TL = -$5T Equity When Treasury receives $5 T in tax revenue, that satisfies outstanding $5T in liabilities, and increases Treasury Equity by $5T. -$5TL = +$5T Equity +5T - 5T = 0 +A +L is Model 2, issue by BS expansion, and is what Central Banks do today so they don’t generate negative Equity. If a Treasury was to issue new money to spend, without buying assets, so new A =0, it would he +L = -E or Model 1, which is what MMT explains. then the CB must have +L and +A. That’s Model 2, issuance through BS expansion. So is this my Minsky model here? I can’t read it like this. Can you use my notation for each entity? What’s the order?

Yes, here are the T-Accounts or charts. Hopefully this makes my notation clearer. Now let’s take another look at K-K. What does the ravel ACTUALLY SAY? Let’s start by making sure we agree using my notation. 1. Treasury spends their Assets -Assets (-Spendg) -Equity -(Spendg) 2. Central Bank Liability Swap -Liabilities (-Spendg Treasury) +Liabilities (+Spendg +Reserves Bank) 3. Bank +Assets (+Spendg +Reserves) +Liabilities (+Spendg Deposits) 4. Private Sector +Assets (+Spendg) +Equity (+Spendg) —- 5. Private Sector Tax Payment -Assets (-Tax) -Equity (-Tax) 6. Bank -Assets (-Tax -Reserves) -Liabilities (-Tax -Deposits) 7. Central Bank -Liabilities (-Tax -Reserves bank) +Liabilities (+Tax +Reserves Treasury) 8. Treasury +Assets (Tax) +Equity (Tax) Do you see that this accurately reflects what is written in K-K? Do you see any problems with this?

Hey @Nadine Gizak Great to hear from you! From what I am hearing, he wants to shrink the size of the Fred’s Balance Sheet, During Covid, Central Banks purchased a lot of bonds on the secondary market, which allowed Treasury to sell new bonds to the private market. The Fed does this through Balance Sheet (BS) expansion via Open Market Operations OMO, or expanding the quantity of the supply of reserve account credits aka ‘reserves’ by buying assets from banks aka QE. Fed BS Expansion: +Assets (+bonds) +Liabilities (+reserves). This allowed the Treasury to expand their BS by selling new bonds to the private market to fund the stimulus. Treasury BS Expansion: +Assets (+reserves) +Liabilities (+bonds) Interestingly, which nobody seems to understand or cover, when these bonds mature, if nothing is done the Treasury pays off Principal and Interest (P&I) to the Fed, which contracts BOTH the Fed BS and Treasury BS, which contracts the supply of reserve account credits aka reserves: Fed BS Contraction -Assets (-bonds) -Liabilities (-reserve account credits or reserves) Treasury BS Contraction: -Assets (-reserve account credits to pay P&I) -Liabilities (-Bonds) The Fed determines optimal supply, which today is thought to be where they are at, around $3T. So if the supply drops below target, the Fed has to either do new OMO, OR, just swap maturing bonds with Treasury for new bonds after the bond market closes and sets the daily price. This is called a paper swap. But, Warsh seems to be signaling that he wants to contract the Fred’s BS, and one easy way to do that is just let Treasury sell new bonds to the public to payoff old bonds held by the Fed, which both reduces the Fed BS AND reduces the supply of reserves. Banks will sat the payment function of the Fed will not function properly if the Fed reduces reserves, but the Fed is paying Interrst On Resetve Balances IORB for banks to park reserves. If they quit doing that, banks will buy more Tressuries, which will drive rates down, which will grow the real economy. Do we want to maximize GDP? Yes!

@Gerard Borg remember, New Reserve creation always means Central Bank Balance Sheet expansion..

@Gerard Borg So to be clear. Do you agree that the McLeay paper "only describes one-half of the monetary engine." No. “and it fails to address the fiscal side of the ledger” Explain what this means to you. “where government deficits create money directly” This ‘statement’ is not backed up by any math or accounting. And when we check the forensic accounting, there is no evidence that deficit spending increases either deposits or reserves, other than what I have outlined when banks buy the bonds and the Gov spends. I am not talking philosophy, I am discussing the math. 1. From an accounting perspective, an issuer can issue currency as a Liability with no corresponding Asset acquisition, which is spending their Equity: Equity = Assets -Liabilities +Liabilities (+reserves/fiat) = 0 Assets - Equity +Fiat = - Equity Central Banks never do this or they become insolvent within days. 2. Or an issuer can expand their Balance Sheet to buy new assets, which creates new money. Equity = Assets - Liabilities 0 = HQLA - Fiat +Liabilities (+reserves/fiat) = +Assets (+HQLA) You have never provided an accounting framework showing how in the U.S. today, new money is created by deficit spending. In England, the Treasury can borrow if they ALSO expand their Balance Sheet along with the BoE. So the BoE is creating new money through Gov deficit spending. Unfortunately, the BoE says this has not happened in 18 years. That means it is not required, the Gov is deficit spending every year, but without creating any new Fiat, and as mentioned banks create a very small amount of new deposits, 2% - 5% of the bond sale. This is not the Gov creating new money to spend, this is the result of the Gov incurring negative equity through new financial assets they owe, and transferring equity to the public. But the new equity is NOT the bonds, the public buys those as an asst swap, agreed? The new equity is the new deposits the public would not have had without Gov deficit spending, and those new deposits are the result of the Gov borrowing existing money from the public, then spending it +Equity public, and long run the government has to repay the public -Equity Gov.

@Demetrios Gizelis spittin’ straight talk! NBT - Nothin’ But the Truth! You should publish this somewhere… Amen brother!

@Ellen Braddock Thx Ellen. Have you read the attached article? Were you aware ‘Banks create deposits when they lend.’