This is a great clarifying piece from the thought leaders of MMT responding to their critics. They make the point to differentiate between a generalized description of money mechanics vs. specific implementation like the U.S. model. As has pointed out in the past, they clearly understand how the U.S. system clearly works under today’s self selected fiscal and legal constraints, such as the TGA must be funded prior to spending, no Treasury overdraft at the Fed, and the Fed cannot buy bonds directly from the Treasury. Supporters of MMT often conflate the need for the Fed/CB to create new Reserves by spending or lending, with the Treasury creating new reserves by Gov spending, but which the authors do not. Anything here anybody would like to point out or discuss? Anything anybody would like to add?

To me, this is the most iconic article on money ever written, and left us is with this:: “Lending creates deposits” That’s the beginning of the end for traditional neocon models…or maybe just the end! It was so powerful I extrapolated it into a 300+ page book with 40 charts: https://a.co/d/4nRyMJs What have you read by a central bank that you thought was insightful? Please post links or papers, feel free to share commentary…

There are a few people I greatly respect for their wisdom in economics and the monetary system who are fans of MMT, and they have tried to explain to me what MMT is and how it works. The major MMT premise from what I can gather is something like this: "The Government issues money to spend first, and receives tax revenue and bond sales revenue later, so tax and bond sales revenue do not fund government spending and deficits don’t matter because the Gov can always issue new money to pay off the bonds." MMT as a whole can be summarized from what I have read primarily by some version of the 11 arguments below: 1. Gov tax receipts and bond sales revenue do not fund Gov spending. 2. The Gov issues new money to pay Gov bills. 3. The Fed issues new money for the Gov to spend by crediting the account of the Gov at the Fed. 4. The Bank of England issues new money for the Gov to spend by crediting the reserve accounts of the banks of Gov payees, paying Gov bills on the Government’s behalf. 5. Gov deficit spending causes negative Gov equity and positive public equity by the Gov printing more money to cover deficit spending. 6. The Gov sells bonds to reduce the supply of reserves and influence interest rates. 7. The Gov cannot go bankrupt and Gov deficits and debt aren’t a problem because the Gov can always print more money to pay off Gov debt. 8. What matters when the Gov runs a deficit is whether there is excess capacity in the real economy to put the money to use, and we should increase Gov deficit spending until inflation starts, which only happens when there is not any more capacity absorb new money, so new money at that point just starts to increase prices. 9. Interest rates should be 2% (or lower) to maximize output in the real economy, and deliver economic opportunity to the most amount of people, ideally everyone. 10. Gov deficits should not be feared and should be run to achieve full employment, otherwise we are wasting the opportunity to deliver full production, and build the largest economic pie for the everyone to share.

A. Tax and spend creates no new net reserves and no net new deposits. Public paying taxes reduces public Assets -Assets (-deposits) Bank contracts BS making tax payments: -Assets (-reserves) -Liabilities (-deposits) Fed facilitates bank payments to UST via Liability Swap: -Liabilities (-reserves Treasury) +Liabilities (+reserves receiving bank) Treasury increases assets receiving taxes +Assets (+reserves) —-Treasury Spends—- Treasury spending causes a reduction in UST Assets: -Assets (-reserves) Fed facilitates UST payments to banks via Liability Swap: -Liabilities (-reserves Treasury) +Liabilities (+reserves receiving bank) Banks expand their BS when receiving Treasury payments on behalf of the public +Assets (+reserves) +Liabilities (+deposits) Public receiving Gov payment increases Assets +Assets (+deposits) UST Tax and spend: -D -R +R -R +R +D = 0 Ravel will show the same. —- B. Deficit Spending creates no new net Reserves and no new net deposits when the new bonds are sold to the public. Treasury expands their BS selling bonds: +Assets (+reserves) +Liabilities (Bonds) Public does an asset swap buying bonds: -Asset (-deposits) +Assets (+bonds) Bond buyer’s bank contracts their BS when their customers buy bonds: -Assets (-reserves) -Liabilities (-deposits) —-Treasury Spends Bond Sale Proceeds—- Treasury spending causes a reduction in UST Assets: -Assets (-reserves) Fed facilitates UST payments to banks via Liability Swap: -Liabilities (-reserves Treasury) +Liabilities (+reserves receiving bank) Banks expand their BS when receiving Treasury payments on behalf of the public +Assets (+reserves) +Liabilities (+deposits) Public receiving Gov payment increases Assets +Assets (+deposits) UST Borrow/Bond sale and deficit spend: -D -R +R +Bond -R +R +D = +B No net new reserves or net new deposits, but public equity increases by receiving new deposits equal to the bond, and the Gov equity decreases by amount of bond.

When the Fed undertakes Quantitative Easing QE , they expand their Balance Sheet BS when they buy High Quality Liquid Assets HQLA (+A) from banks, and increase their Liabilities (+L) when they issue new reserve account credits in the reserve account of the selling bank, which increases the total supply of reserves. Fed BS: +Assets (+HQLA) +Liabilities (+reserves) This is sometimes mocked by memes showing Powell using the Fed’s ‘money gun,’ and is generally seen as “printing money.” However, the bank is completing an Asset Swap, selling High Quality Liquid Assets HQLA (-Assets), and receiving new reserve account credits, aka ‘reserves’ (+Assets). This means there is not an increase in Assets for banks, no new assets in the banking system, only an increase in the liquidity of bank Assets. Banks do not need reserves to make loans, so this increased liquidity results in no increase in loans or economic activity. And since the Fed sets rates using Interest On Reserve Balances IORB, the increase in bank liquidity has no effect on interest rates, although ample Ressrves can reduce the overnight rate that banks lend excess reserves to each other. So QE doesn’t seem to do much for banks in the current environment.. For the Treasury, they still have to pay Principal & Interest on the bond P&I regardless of who owns it. An interesting reality emerges when we look closely at bond repayment for bonds owned by the Fed. When the Fed receives payment from the Treasury bonds they have purchased, they often or normally ‘reinvest’ the maturing principal by swapping out expiring bonds for new bonds, sometimes called ‘swapping paper.’ However, in some circumstances the Treasury has to complete payment to the Fed, so they sell new bonds and transfer those reserves to When the Fed receives payment from the Treasury for bonds the Fed owns, this contracts the Fed’s BS. Fed BS: -Assets (-bonds) -Liabilities (-reserves) So the Fed owns $4T in UST bonds, but if they do nothing, the Treasury will pay $4T to the Fed and those reserves will be de-issued, and disappear forever.