Comment: Central banks dump up to $260 billion FX reserves in second quarter.

Mosler: At least partially selling $ reserves to fund expenditures as oil revenues fell?

Comment: China Slashes U.S. Debt Stake by $180 Billion, Bonds Shrug.

Mosler: Shifting/rebalancing fx reserves from $ to euro?

Comment: My latest on China's big bang and its implications on Fed policy and stock markets.

Mosler: China doesn't want to spend any more $ reserves to defend a peg.

Comment: Yes, but to provide safe assets is not socially very useful for 80% of the people, just monetize it!

Mosler: Monetizing creates equally safe $ balances at the Fed called reserves.

Mosler: Bank reserve accounts at Fed are debited when taxes are paid with commercial bank deposits. Please read my book thanks!

Comment: Conceptual question: if the natural rate of interest is 0 when the gov runs a deficit, what is it when the gov runs a surplus?

Mosler: That would be the rate the govt. charges for reserves when balances go negative.

Comment: How can you tell it's traders who lower the Euro and not the demise of Euro land economy which simply deserves a weaker currency?

Mosler: CB reserve reports and euro manager allocation reports I've posted at http://moslereconomics.com periodically for example.

Comment: "=" is ;vague. The market for T bonds is deep and liquid.

Mosler: It's just a reserve drain to offset operating factors, to use Fed speak ;)

Comment: The Treasury only accepts Central Bank liabilities in payment of taxes.

Mosler: The Fed debits the member bank reserve accounts when taxes are paid.

Comment: Banks do not lend because they have reserves. They get reserves because they have lent! Loans create deposits and then reserves are added.

Mosler: More precisely, loans create both deposits and required reserves, all as a matter of accounting.

Comment: Photo that shows hope etched on their faces for someone to please listen, help them.

Mosler: Fed/Congress/Gov directly regulates the lending that creates the deposits and reserve balances.

Comment: But what do they need the deposits for (assuming there are no reserve requirements like in Canada).

Mosler: To replace what would be an overdraft in their reserve acct. at the Fed if those deposits were transferred to another bank.

Comment: So is there an internal rule that banks go by as to how much they allow themselves to leverage bank reserves via deposit creation?

Mosler: No, leverage calculation is based on bank capital. Reserves are just part of bank assets.

Comment: Duration is hot right now and $7.4B of the "most overpriced security on the face of the Earth" hitting market.

Mosler: Just a reserve drain. Tsy Secs are the only alternative accounts to reserve accounts (clearing balances) at Central Banks.

Comment: "90% of income growth has gone to the top 1%." We see a problem.

Mosler: Replacing treasury securities with interest on reserves is a good start- eliminates all the income generated by bond trading.

Comment: Not really *my* model. Simple version model ("Finite horizon models of inflation as the horizon goes to infinity")) of Neo-Fisherian just to illustrate my point about infinite horizons @kocherlakota009.

Mosler: Those tend to apply only to fixed fx regimes. + CB as sole supplier of net reserves obviates money neutrality.

Comment: Seems like deficit spending results in no increase of deposits in non-gov sector. It does increase bond quantity.

Mosler: Tsy bonds are but $ deposits at the Federal Reserve Bank.

Comment: I just published “Macroeconomics — a view from the peanut gallery”.

Mosler: Gov debt is 'repaid' via the CB crediting a reserve account and debiting a securities account, all on its own spreadsheet.

Comment: Once @federalreserve buys the bonds, it's as if @USTreasury never issued them in the first place.

Mosler: I said same to Bernanke years ago who responded 'No, when the Fed buys bonds, it adds reserves.' I just let it go- it was too hard for him.

Comment: In D.C. spending, there's #SocialSecurity, #Medicare, #Medicaid, & #Defense. Everything else is chump change.

Mosler: The 20T is the $ spent by Gov that haven't yet been used to pay taxes, resting in Fed reserve accts, securities accts (Tsy Secs) and cash.

Comment: Bonds are not necessary for the US, if the Fed could issue dollars directly to buy goods and services.

Mosler: They already do that. Tsy secs sales then shift those $s from reserve accounts to securities accounts at the fed.

Comment: The federal deficit is projected to rise over the next 10 years. What’s behind the increase?

Mosler: Growth of savings desires fueled by pre tax contributions- pensions, ira's, corp reserves etc. Cash needs, foreign $ reserve growth, etc.

Mosler: The public debt is just the $ spent by Gov that haven't yet been used to pay taxes.

Mosler: Those $ sit as balances in fed reserve accounts, securities accounts and some as actual cash.

Mosler: The national debt = cash + reserves + securities which = total net financial assets. Think of it as the net money supply.

Mosler: Close examination shows Gov from inception spends first and then can collect taxes or sell securities, as the $ to pay tax or buy securities come only from Gov.

Mosler: “It fills our children and grandchildren’s boats with additional debt. They are losers,” said Sen. Richard Blumenthal (D-Conn.) NOT!

Mosler: In fed speak, you can't do a reserve drain without first doing a reserve add as a point of logic.

Comment: But if the central bank just sets rates in the model, isn't that the definition of public monopoly? I will admit, this is a type III error on the part of academic economists. Right but for the wrong reason.

Mosler: And yes, mainstream recognizes the CB as monopoly supplier of reserves and therefore price setter of the interest rate.

Mosler: But reserves are also required to pay taxes, making the price level necessarily a function of prices paid by the state when it spends.

Comment: Just think, a couple of days ago people were saying, "who's going to buy all that Treasury paper? Yields gotta go up!!" Now: "Good thing we have all those safe assets coming online. People really need them."

Mosler: And in any case, it's just a reserve drain so get over it! ;)

Comment: So what would you call what economists call tax financed spending, bond financed spending and money financed spending?

Mosler: I call it spending which creates reserves followed by selling Treasury securities that function as interest rate support and not funding.

Comment: It looks like borrowing, and it is borrowing, so arguing that is too difficult.

Mosler: State spending or lending adds $ to reserve accounts at the fed then borrowing shifts the $ to securities accounts also at the fed.

Comment: That BI (for people with $) is getting much bigger - thanks, I guess, to all the Fed Rate hikes? U would think Fed remittance to Trsy would be going up, in tandem with rate hikes, no?

Mosler: No, the fed has to pay more interest on reserve account balances.

Comment: Here are six things you might like to know about the Congressional Budget Office’s 2018 Long-Term Budget Outlook, which was released on Tuesday.

Mosler: The public debt is nothing more than the $ spent by gov that haven't yet been used to pay taxes. They sit in the economy as cash and as $ in reserve accounts and securities accounts (tsy secs) on the Fed's books. It functions as the net money supply.

Comment: Having trouble following this thread but seems to have started as some semantic thing about money vs net financial assets. My view is taxes destroy "money", surpluses destroy "net financial assets". Now have to get back to family TV viewing :).

Mosler: Tax payments are debits (reductions) to a member bank's reserve account at the fed, and ultimately) credits to the tsy's account at the fed. Tsy is part of govt so its balance is accounting information of no consequence to the economy.

Comment: One cannot buy things (goods and services - G&S) with T-Bills, but only cash, deposits (debit), or credit cards (credit). The only thing one can buy with T-Bills is money, but not G&S. Therefore, although given the rate of interest, T-Bills are very liquid, they lack moneyness.

Mosler: True, but the Fed's quantitative easing policy has demonstrated that the mix between reserves and securities is of no detectable macro economic consequence. ;)

Comment: Well, today was a fun foray into the MMT Twitterverse.As an encore, next weekend I will post a film of me sticking my hand into an active hive of angry bees.Net effect should be similar.Good night, all. And remember, deficits matter. :-)

Mosler: It's just a reserve drain, get over it! ;)

Comment: it can still intend to recapture the difference/deficit/net injection, 5, not through the goods market (taxes) but through money and capital markets (selling/issuing T-Bills & Bonds, selling FX reserves or privatizing assets)

Mosler: Treasury securities sales and maturities simply shift $ balances between bank accounts at the Fed called reserve accounts and securities accounts.

Comment: Well, if it injects/spends 100 and collects/taxes 95, it can still intend to recapture the difference/deficit/net injection, 5, not through the goods market (taxes) but through money and capital markets (selling/issuing T-Bills & Bonds, selling FX reserves or privatizing assets).

Mosler: Treasury securities sales and maturities simply shift $ balances between bank accounts at the Fed called reserve accounts and securities accounts.

Mosler: I just see they have $128 billion of fx reserves! That means the Gov has somehow directly or indirectly been selling lira to buy fx and driving the currency down.

Mosler: Correction, I now see that those fx reserves more likely were borrowed.

Comment: : In 2010, Derryl Hermanutz asked:"Why do countries have to borrow their own currency from private banks who merely create it out of thin air?"We don't have the answer yet but at least more people are talking about it.

Mosler: They borrow to support rates that would otherwise go to 0 (not to fund themselves) and the banks are, functionally, agents of Congress via the Fed Reserve Act, all in my book.

Mosler: Responses to 'how are you going to pay for it?': 1. The Tsy instructs the Fed to credit the appropriate account. 2. The $ to buy bonds or pay taxes comes only from the gov and its agents, so gov spends first, and then taxes are paid or bonds paid for.

Mosler: 3. So gov borrowing supports rates, it doesn't fund expenditures. 4. Likewise interest is paid by instructing the Fed to credit the appropriate accounts, and likewise those $ are paid first, and then taxes are paid or bonds are paid for.

Mosler: 3The public debt is the $ paid by gov that haven't yet been used to pay taxes and remain outstanding as cash, balances in reserve accounts at the Fed, or balances in securities accounts (tsy secs) at the Fed until used to pay taxes.

Mosler: What about inflation?' The funds to pay taxes come only from gov or its agents, so gov is necessarily 'price setter', and the price level is a function of prices paid by gov when it spends. And don't confuse a relative value story with an inflation story thanks!.

Mosler: Thought exercise- if all prices go up and the gov doesn't pay those higher prices, gov spending goes to 0 and the price level deflates until gov spending is sufficient for tax payments due. Not that it's 'good policy' to do that, but to reveal the source of the price level!

Mosler: And it's all in my very short free online non technical book thanks!

Mosler: Including the understanding that tax liabilities function to create sellers of goods and services (who then need that currency) so the gov. can then spend it's otherwise worthless currency.

Comment: So, if one commercial bank wishes to make payment (removing money from its account) to another commercial bank, then it pays in physical banknotes and coins?.

Mosler: No, it instructs the Fed to debit its reserve account and credit the reserve account of the recipient bank.

Comment: In his historical work on U.S. bank panics during the U.S. National Banking Era, Gary Gorton reports that depositor losses were typically minuscule--suggesting collateral generally good (problem was with liquidity).

Mosler: It's about whether it serves public purpose, not whether it's 'safe'. Gov is there to serve public purpose via 'public infrastructure' broadly defined. Banks are the creation of the Federal Reserve Act, presumably to serve public purpose.

Comment: No. You think the Gov cannot go bankrupt b/c you think that the Treasury can create tax revenue. It CANNOT. If the Gov loses enough tax revenue, it will go bankrupt. Just like a corp. The Fed is separate & can only buy the debt. The Fed cannot create tax revenue either.

Mosler: The Fed today is nothing other than an agent of Congress as per The Federal Reserve Act.

Comment: Less of a question, more a suggestion about another way of seeing the world. With that vertical LM curve, we get the (otherwise false) Loanable Funds theory (government deficits crowd out private (I-S) 100%). And Gov deficits are not money-financed, because M falls in response.

Mosler: Seems you are then assuming floating fx where the monetary system is not reserve constrained?.

Comment: Personally, biggest ones for me would be the idea that fully abolishing CB independence won't have seriously negative effects (when we have great reasons to worry about that), or that permanent ZIRP won't have negative effects.

Mosler: Understood. First, I argue that the base case for a floating fx currency is ZIRP, and operationally it takes continuous state intervention to support rates at higher levels- treasury securities, interest on reserves, etc.

Comment: Following today's delivery I might be in a position to comment some time in the near future.

Mosler: That is, with a floating exchange rate, bank lending is not (operationally) reserve constrained, but instead constrained by regulation.

Comment: I'm just curious what the mainstream response is to Warren's claim that (in mainstream language) the IS curve slopes up. I find that an interesting idea, and the empirical evidence doesn't seem inconsistent with it. Purely theoretical interest atm.

Comment: Just fyi . . . it's not just Warren that questioned IS curve slope. Joan Robinson, for instance. Many others. Also, mainstream wants to limit fiscal policy precisely because too much Gov debt makes IS curve slope up, ruining monetary policy effectiveness.

Comment: Oh I know! I've written a lot about JR and hope to publish a new annotated edition of her 'Economic Philosophy'. But Warren's specific argument - about the term-structure of prices matching the term-structure of rates is really interesting to me. The argument here is what interests me, and I haven't found anything quite like *that* in JR (though I stand to be corrected). There Is No Right Time for the Fed to Raise Rates!

Comment: I haven't seen anyone else make that same point. But--like a lot of Warren's stuff--it's staring all of us in the face since he's simply using the future-spot parity formula every economist surely knows. JR actually has something *close* to this in ch.24 of The Accumulation of Capital, done in classic Keynesian ex post/ex ante language of course. But she doesn't stress the point and for the most part assumes the ordinary causation for monetary policy.

Comment: I think lots of this discussion involves the loanable funds theory of the rate of interest - and the issue of macroeconomic equilibrium, S=I. In my view, those are somehow very much part of ‘CA’ or primacy of monetary policy, but the LFT is complicated....In a way, this part of JR critique to the IS slope - and I’m not so sure Warren’s point is similar to hers. JR is criticising the theory of investment and of capital as represented in the IS curve... the inverse relationship between I and r due to the MEC isn’t so clear for JR.

Mosler: Reads to me like that analysis at best would be applicable to fixed fx regimes.

Comment: Okay, why?

Mosler: You have to be reserve constrained for interest rates to be a function of those variables.

Comment: OK, yes, to target a rate, they have to create and destroy reserves. But I think PK is saying merely that if they target a high enough rate, the money supply will not increase (all else equal), loose fiscal policy notwithstanding (but @wbmosler is arguing to include tsy secs...)

Mosler: Think of the fed as pricing reserves to target a rate rather that creating/destroying reserves. And PK is not wrong but using a narrow definition of money which doesn't change.

Comment: More MMT musing: Gov doesn’t create much currency (bank credit does). I think what MMTers are saying is that the Gov is a dominant actor that can control money velocity, and this impacts savings & employment levels.

Mosler: And Fed member banks are agents of the Gov. As per the Federal Reserve Act of Congress.

Comment: Why do you claim:-The currency is a public monopoly-The US government, as sole supplier of those $US, what about all the $US created by private banks when they make loans?

Mosler: Banks are agents of the fed, fully regulated and supervised, and tax payments ultimately debit reserves which come only from the fed.

Comment: Can you clarify who the agents are in this statement. “MMT Alone Recognizes that the US Government and its Agents are the Only Supplier of That Which it Demands for Payment of Taxes. ”Are private commercial banks agents? Can these banks created credit settle taxes in aggregate?

Mosler: Yes, as permitted, regulated and supervised as per the Federal Reserve Act of Congress.

Comment: John C. Williams, President of NY @federalreserve speaking of #MMT in #PuertoRico Any thoughts?

Mosler: Wrong answer from a Fed President. Would have said MMT correctly identifies the selling of securities by Treasury as a reserve drain that functions to support rates rather than a funding operation, if he understood monetary operations.

Comment: America's big budget deficits are solving a big problem for markets.

Mosler: 1. The so called "safe assets" includes reserve account balances 2. And in any case it's about the demand for "net financial assets".

Mosler: A Fed Chair that understood reserve accounting wouldn't care if member bank balances were in reserve accounts or securities accounts: The Fed is looking at a new program that could be another version of 'quantitative easing'.

Comment: I think swaps characterize the event well. But yeah, drill down to the characteristics of the instruments being swapped: 1. Fixed-price (hence Fed-set aggr stock), Fed-set rate, zero-maturity for:2. Variable-priced (so variable stock), market-set rates (?), dated maturities.

Mosler: Both reserves and tsy secs are deposits at the Fed defined as "money" under broader definitions of money, and the same goes for checking and savings accounts at other bank's.

Comment: It does when banking regulations require you hold reserves.

Mosler: For all practical purposes, no. The CB buying securities or doing repo just for offsetting operating factors and adding required reserves isn't called QE.

Mosler: I propose both, which for the US can most readily be done, functionally, with a permanent 0% policy rate (no interest on reserves) and tsy sales of only 3 month t bills to all be in compliance with current law.

Mosler: I've proposed a permanent 0% policy rate (via a net long reserve position and no interest paid on reserves) and the Treasury limited to 3 month bills, as this requires no change of institutional structure and can immediately 'get the job done'.

Comment: From whomever we are running a trade imbalance with, they send us products. We send them dollars. They lend the dollars back.

Mosler: As they say at the Fed, you can't do a reserve drain without a prior add. (Gov spends or lends first, then borrows its own $ back)

Comment: It's simply shifting credit balances from securities accounts to reserve accounts. Both are just entries on the CB's ledger.

Mosler: Alternatively isn’t it a payment to debtors. So if a central bank is owning sovereign debt, it is reducing the debt of the countries.

Comment: How would a permanent zero rate make the job easier -for those who have the power to set a permanent zero rate?

Mosler: Don't pay interest on reserves and don't sell treasury securities so the system stays net long reserves.

Comment: You had total control for two years. You don't need China or anyone else to spur activity at Caterpillar, John Deere, auto makers, etc. You should have done massive infrastructure and tax cuts that materially benefited the bottom 80%

Mosler: Don't be surprised if the President doesn't again go counter to advice and begin purchasing foreign currencies to weaken the US dollar, claiming that building FX reserves adds to American greatness and puts us on equal footing with the nations holding US dollar reserves... :(

Comment: "This man" doesn't understand how banks work - the first sign of banking ignorance being when someone mentions "fractional reserve banking". Anything else said after those magical three words may be reliably ignored. Which really helps save time. I recommend it.

Mosler: Yes, any insider in monetary operations knows reserves are a residual...

Comment: Buy this man a beer! You're the first to say it was nonsense...you're wrong but I always respect contrarians.

Mosler: Federal Reserve Act= Fed and member banks are regulated and supervised agents of Congress.

Comment: "No time to read this full thread, but the FRB is an administrative agency of the federal government, on a par with EPA, FDA, SEC, etc."

Mosler: Yes, the Fed and its member banks are agents of Congress, via the Federal Reserve Act of Congress.

Comment: I thought the Fed pays interest on reserves. Are you saying the interest on reserves paid to banks is automatically transferred to people's accounts?

Mosler: No. Reserves are bank assets, 'offset' by bank client deposits which are liabilities. Banks in general compete with each other for deposits, so when interest paid on reserves rises, that competition results in banks paying that much more for deposits.

Comment: They just defaulted on local currency debt. Have a history of high inflation and deposit freezes. There is no functioning domestic currency market. And it’s not like they haven’t issued tons of local currency in the past.

Mosler: It's just a reserve drain. Close examination shows they necessarily spend first and then offer securities for sale. Please read my 7dif book thanks.

Comment: Can someone explain 3:20 for me? He begins with his recollection of when Fed raised reserve requirement. An increase in RR necessitates an increase in reserves? Sounds like he's describing what he thinks is likely to happen, not what must necessarily happen (e.g., banks might instead reduce their lending). Yes/no?

Mosler: An increase in reserve requirements, assuming a bank is at the minimum initially, on settlement day, if nothing changes would be booked by the Fed as an overdraft in that banks reserve account. Functionally an overdraft is a loan, so functionally the requirement itself is a loan.

Comment: Price and quantity isomorphic in this context. Surely, this is not all you meant to imply at 3:20 mark of interview?

Mosler: Yes. Assuming no excess reserves, raising reserve requirements is per se an increase in total reserves, as the consequential overdrafts are per se a de facto 'reserve add'. Anything banks do to lower requirements in that statement period reduce those overdrafts/reserve adds.

Mosler: On John Kenneth Galbraith's "Economics of Innocent Fraud" (2004): #8- The illusion that the Federal Reserve, by raising or lowering interest rates, has any effect whatsoever on spurring growth or preventing inflation. (Wikipedia).

Comment: "The action described above looks like A is accepting deposits which it can then lend out. But this is misleading. If A needs reserves, it could also borrow them from inter-bank market or CB." Why "misleading"? Why not say banks can fund their lending in several different ways?

Mosler: A 'need' for reserves is a deficiency in a bank's reserve account, which is functionally a loan from the fed and booked as such on statement day if it persists. The 'need' is to replace the loan from the fed with 'cheaper' funding.

Comment: Right. Deposits are bank liabilities and so in this sense, they "fund" a bank. But likewise with equity. Bank A may want bank B's deposits. Why? Because there'd be a corresponding flow of reserves from B to A. If interest on reserves > interest on deposits, A profits.

Mosler: And a bank can't ever be 'not funded' in that (assuming the first bank has no fed balances) if a depositor moves funds to another bank the first bank then has a negative reserve balance which is functionally a loan from the fed that is 'funding' the bank.

Mosler: Venezuela to add Bitcoin and Ethereum in central bank's reserves.

Comment: The point is, government debt is money owed to other parties, e.g., investors, China. We don't owe it to ourselves. If we don't pay it back, there's trouble ahead. If we lose world's reserve currency status, we're screwed. Krugman is wrong... again.

Mosler: The public debt is dollars in Fed securities accounts. It's already 'the money.' At maturity the Fed debits securities accts and credits reserve accts, thus shifting the balances between Fed accounts without taxpayers or grandchildren in sight. That's called 'paying it back.'

Comment: Do you agree this statement, if IOER were 100 basis point belows FFR would lead to decrease in reserves?.

Mosler: Fundamentally, the Fed has 2 choices- 1) Keep the system (functionally) net borrowed and set rates via the resulting reserve add, as was the case before QE or 2) Keep the system (functionally) net long and set rates via paying interest on reserves which it's been doing post QE.

Mosler: Public debt=cash+reserves+tsy secs=total $ spent by gov that haven't yet been used to pay taxes=total outstanding "tax credits"=net "money supply".

Comment: Does your book explain how to have deficits w/o adding to the debt?

Mosler: Rather than issue securities, the Tsy could simply be allowed to have a negative balance in its Fed account. A positive policy rate would still require Gov payment of interest, but it would be the Fed paying interest on reserves rather than the Tsy paying interest on securities.

Comment: Great thread on why #MMT as a framework is the best framework for understanding how the system works/has worked. Saying “MMT is here” doesn’t make much sense, it already was here.

Mosler: As they say in the Fed, you can't do a reserve drain without a prior reserve add. ;)

Mosler: Don't even bother reading this type of stuff about funding the Federal deficit. Treasury securities are just what the Fed calls a 'reserve drain' of no economic consequence.

Mosler: The public debt *is* 'the money' in that it's just $US in time deposits at the Federal Reserve Bank, which are functionally just like time deposits in commercial banks.

Comment: The vendor’s bank will have to reduce their balance at the Fed by the amount of his taxes. True. But who created “the dollar”? The US government..? Well, if the vendor’s bank was short of reserves, sure. The Fed will monetise something to get money into the bank’s hands.

Mosler: Banks are agents of Gov via the Fed reserve act. They can only lend as permitted by regulation.

Comment: Hello Warren, why?

Mosler: The T bills are 90 day $ deposits in client securities accounts at the Fed. If the Fed buys them, they pay for them by crediting $ reserve accounts at the Fed for the same clients, and debits their securities accounts. Either way clients have their $ in Fed accounts.

Comment: "Bonds are a gift to investors, not a sign of dependency on them."

Mosler: A positive policy rate of interest is the gift, whether paid via bonds by the treasury or via interest on reserves by the Fed. I call it basic income for people who already have money.

Comment: Thus, the important point: the Fed currently can borrow reserves at low interest rates that do not price the risk of US government funding crisis. So they can hide this price in the bond market (with help from people buying based on past returns & for regulatory reasons).

Mosler: The Fed doesn't borrow reserves. The Fed pays for purchases by crediting reserve accounts (on its books).

Mosler: Gold standard stuff. Note how many more 'convertible dollars' were outstanding vs the amount of actual gold. The US was carrying on its own version of fractional reserve banking... ;)

Mosler: The $T coin proposal shifts residual $US created from deficits to short term-reserves-vs longer term-Treasury securities, a policy I have long supported, but this requires the understanding the Fed has the interest rate thing backwards as it makes rate hikes that much more toxic.

Comment: To Warren’s point, though, debt ceiling is suspended until Aug 2021 (which make sense, deficits only matter when Dems in WH). So whether Tsy funds deficits by selling T-bills (which Fed buys up on market), or by selling coins directly to Fed is 6 of 1, half a dozen of the other.

Mosler: Note that when the Fed buys the debt it can be said to have gone away, and many have made that point. But the additional Fed liabilities- reserves- are then said by the Fed and others to be even more inflationary and that the net spending is the problem.

Comment: How does the "Trillion U.S. Dollar Coin" proposal "shift residual U.S. Dollars created from deficits to short-term-reserves from longer-term-Treasury-securities"? It does not.

Mosler: To short term reserves from longer term treasury securities over time as securities mature and are replaced with reserves...

Comment: Warren could you clear up what option 1, 2a and 2b are in that paper? They don’t seem clearly marked to me. The three choices are: 1. Hold rubles in a clearing account at the Central Bank. Exchange ruble clearing balances for something else at the CB. 2 a. Buy a Russian GKO (tsy sec), which is an interest bearing account at the CB. 2 b. Exchange rubles for $ at the official rate at the CB.

Mosler: For fixed fx: 1. Reserves 2a. Tsy Securities 2b. Convert to gold (or whatever the currency is fixed to). No 2b. for floating fx. So the question is, 2b. or not 2b. ;)

Comment: This is one of the core heterodox-mainstream debates. The "credit theory of money" treats CB liabilities as endogenously determined by the banking system, whereas the "monetary theory of credit" treats CB liabilities as an exogenous variable.

Mosler: I assume this is in reference to member bank $US balances credited to reserve accounts at the Fed?

Comment: When Gov pays salaries it does via bank deposits, right? Those bank deposits aren't created via lending, right?

Mosler: The Fed credits your bank's reserve account at the Fed (noted as for further credit to you), and that Fed liability is then an asset of your bank, and your bank at the same time credits your account on its books, which is then a liability of your bank.

Comment: "The Fed credits your bank's reserve account at the Fed", something I have been wondering, what is the corresponding debit entry on the Feds balance sheet?

Mosler: It accounts for it by debiting another member's reserve account, or the Fed's capital account, etc. for example.

Comment: Japanese Gov talks constantly about the need to bring debt down. People believe this talk. And, indeed, Gov is backing it up by raising sales taxes at most inopportune time. The projection of higher taxes reduces net wealth. This is one source of deflationary pressure.

Comment: Situation similar to U.S. in 1980s. Apart from initial tax cut, Reagan administration raised taxes 8-10 times after that, largest in 1986. There was broad bipartisan support to "bring fiscal house in order"-- which provided the nominal anchor. It was this, not Volcker, that...

Comment: … permitted inflation to decline permanently (of course, Volcker brought inflation down temporarily by creating a temporary recession).

Mosler: You don't attribute that recession to the fiscal tightening? The real public debt contraction due to the inflation, bracket creep, etc?

Comment: Good point on bracket creep, though I don't recall people talking about it at the time. Oil price shock (Iran-Iraq war) probably main driver, together with Volcker's tight money policy.

Mosler: Cost push from Saudi price setting, and my narrative is the high rates supported and prolonged the inflation even as oil prices fell.

Comment: The recession plus substitution assisted longer term by the 1978 dereg of nat gas, etc. reduced the demand for oil as OPEC cut production by some 15 million bpd which wasn't enough. Prices fell, alleviating what had been a cost push inflation.

Mosler: Also, as a point of logic, with the Fed sole supplier of reserves ultimately required for tax payment, the Gov is 'price setter.' That is, the source of the price level is prices paid by Gov when it spends. And note the Fed as single supplier votes on rates (the own rate).

Mosler: He tried to cap borrowed reserves with, I recall, 2 week lagged accounting in place. Put the NY Fed in a bind!.

Comment: The lessons from these three examples are these: 1. The fact that people die has important consequences for the implications of fiscal policy. It matter whether government purchases are funded by debt or taxes because the people who repay the debt ...

Mosler: Repaying the debt = Fed debiting securities accounts/crediting reserve accounts=shifting $ from one Fed account to another as any bank does when savings accounts mature and $ shift from savings to checking. The debt already is 'the money'-$ spent by gov not yet used to pay taxes.

Comment: Paul, you hedge with language taking about things like, “people are still willing to lend to the US,” I haven’t heard you say in uncertain terms that the only restriction on US federal spending is potential inflation. Full stop.

Mosler: In fact, from inception, with $ to pay taxes coming only from the Gov or its agents, Gov necessarily spends first, and then taxes can be paid and bonds purchased. In Fed speak, you can't do a reserve drain without a prior reserve add. So 'willing to lend' is inapplicable.

Comment: So why this hang-up on "spending precedes taxation", as if it is not a simple policy choice but a necessity? It's not fundamental. Can you explain my mistake? (Sorry, book arrived y'day pm, haven't read yet.)

Mosler: So the football stadium has the policy choice of collecting the tickets first and then selling them? As a point of logic, from inception, in Fed speak, you can't do a reserve drain without a prior reserve add/the non counterfeit $ to pay taxes come only from the Gov. or its agents.

Comment: Please rethink the 'repay the outstanding debt' presumption, when it's nothing more than the $ (tax credits) spent by Gov that haven't yet been used to pay taxes=tsy secs=$ balances in securities accounts at the Fed=net financial assets in the economy= the 'net money supply'.

Mosler: That is, the public debt already is 'the money', and what's called 'paying it back' is the Fed, when Treasury securities mature, debiting securities accounts and crediting reserve accounts for the same amount of $. No tax payers or grandchildren are involved....

Comment: Hi @wbmosler, I’m working on a discussion paper on replacing central bank interest rates with a mandatory retirement savings rate mechanism similar to Australia’s superannuation guarantee (but adjustable and run by the CB). Could you DM me your email? Keen for your thoughts.

Mosler: Why not just establish a universal Social Security payment at a living wage for seniors, a permanent 0% policy rate from the CB, and remove all tax advantages for savings plans/unspent income/corporate reserves, etc?

Comment: Sectoral Balances (from UK Office for National Statistics)

Mosler: And let me suggest better understood as the net money supply of the economy: cash + $ balances in reserve accounts at the Fed and securities accounts at the Fed. That is, it 'already' is 'the money' at all times. 'Paying it back' isn't in any way applicable.

Mosler: Reserves don't control credit with floating fx, and IOR determines the cost of funds for banks.

Comment: Advocates of #MMT-style fiscal stimulus point to Japan as one example why the US can sustain far higher debt levels. There's a big difference. Only 13% of Japanese debt is held by foreigners. That number is 40% for the US. We are much more exposed to what foreigners think and do.

Mosler: It's just a reserve drain, get over it... ;)

Comment: Agree that in principle it can be price setter. But this was not your claim, which was that government *is* price setter. I asked how. You answered whenever govt buys something. Evidently, this is not the case.

Mosler: As monop gov sets 2 prices. Let's start with the 'own rate' for the $- the policy interest rate. The Fed sets it (by vote) as monop supplier of reserves currently via int on reserves. With floating fx the idea of markets setting the policy rate is inapplicable. Ok so far?

Comment: I’m talking about the price level, Warren. Not interest rate,

Mosler: And re 2), payment of taxes is via the Fed debiting member bank reserve accounts, where those balances come only from the Fed. So tax liabilities create a need for reserve balances to avoid penalties for non payment. The Fed credits reserves on instruction from Tsy/Congress.

Mosler: Fixed fx gives you that price formation story.

Mosler: That is (from inception, of course) the 'economy' is dependent on Tsy spending to avoid penalty and so the price level is necessarily a function of prices paid by Gov or its agents when it spends. (Gov lending is a form of spending- the purchase of a note, a financial asset etc.)

Comment: Powell's comment on Fed bank accounts didn't get one millionth of the attention it deserved, He effectively said that households could save tens of billions if we let them have accounts at the Fed, but we shouldn't allow it because it would hurt the banks (thread).

Mosler: Commercial banks are functionally Govt. agents- fed chartered, supervised, and fully regulated from the loans they are allowed to make to management which the Feds can remove or replace at will, all as per the Federal Reserve Act of Congress, etc. as is the Federal Reserve Bank.

Comment: Except that the U.S. govt does not set "the" interest rate. The Fed has an interest rate policy rule that influences how the path of a particular short term money market rate will evolve over time (and in response to a variety of contingencies) for the purpose of achieving D.M.

Mosler: Yes, the Fed, as monopoly supplier of reserves, which also happen to have a 0 marginal cost of production, decides to set rates directly or indirectly. (Textbook monopoly dynamics.)

Comment: Does liquidity need to be in deficit if repo is the single policy rate. Else, if liquidity is surplus, does reverse repo need to be added to MPC mandate. (PS: One of my favourite (never ending) debates! Along with the ‘CRR is a monetary or liquidity tool’ debate!).

Mosler: RBI can't just pay interest on reserves to establish a floor? Political restriction?

Comment: Just in the same way, the central bank setting interest rates lower, has the knock on effect of high street banks setting their rates lower.The JG sets labour floor, is roughly equivalent to gilts sales setting interest rates.

Mosler: Or paying interest on reserves... ;)

Comment: You're the only MMT aficionado who refuses to concede that if inflation is on target then ceteris paribus increased government spending means increased taxation. Am I the only MMT aficionado who refuses to concede this?

Mosler: So if you just buy a lot of music from Apple and they just build cash reserves seems no amount of spend per se changes pricing?

Mosler: "Neel Kashkari, president of the Minneapolis Federal Reserve Bank, said the nation needs to control the spread of the virus, which is increasing across much of the country, to get back on a path to economic health."

Comment: Great thread on why #MMT as a framework is the best framework for understanding how the system works/has worked. Saying “MMT is here” doesn’t make much sense, it already was here.

Mosler: As they say in the Fed, you can't do a reserve drain without a prior reserve add. ;)

Comment: You need to consider: who does the fed actually owe the money to? The answer is simple when you realise the fed is a currency issuer. It doesn’t need to go out to the markets to issue money.

Mosler: The (net) money' in the economy is Fed liabilities=client deposits in accounts at the Fed= reserve account balances+securities account balances+cash in circulation=the public debt.

Comment: The Government Can Afford Anything It Wants.

Mosler: He read it, but then takes away that banks lend out reserves... :(

Mosler: While there is no need to earn reserves, the accounting does measure the accruing government liabilities which are useful when estimating future aggregate demand.

Comment: Watching the global not just the U.S. trade data is often useful. European import data for example. Euro area May/June imports from China were about EUR 5b a month above pre-COVID 19 levels.

Mosler: Worth checking to see if China is building euro fx reserves which would indicate targeting the euro zone for exports and sustaining it via euro strength?

Comment: Fed balance sheet recaptures $7tn mark. Total assets rose by $53bn to $7.01tn, equal to 36% of US GDP. Balance sheet expansion driven by MBS ($44bn) & Treasury (25bn) purchases. Central-bank swaps down $4bn, down to $96bn from a peak of $448bn. 81% of remaining swaps used by BoJ.

Mosler: It's just how we account for the mix between cash, reserves, and tsy secs in the economy. The total = the net money supply and that total isn't changed by the Fed's actions.

Comment: No! It’s totally not! What QE does is pay for assets (of varied kinds) with *reserves.* Those same reserves we talked about above. So the Fed receives assets and offers in return “one of the ingredients for money.”

Mosler: Reserves are $ deposits in reserve accounts at the Federal Reserve Bank, which are fully under definitions of 'money'. The Fed receives $ deposits in securities accounts, also on the Fed's books.

Comment: The original intent of reserve requirements is to preserve bank solvency. See Sahil’s thread below for an incredibly well-detailed explanation of how reserves function.

Mosler: With fixed exchange rates, reserves of convertible currency protect bank solvency in the case of depositors' withdrawals/demand for convertible currency. This is inapplicable to today's floating exchange rate policies.

Comment: Well, over a longer time horizon QE is not bad. Banks don’t need to win tomorrow, they need to win over a decade. Expanded reserves help them do this. Remember: the Fed totally controls this one money ingredient. Reserves are literally the “philosopher’s stone” of money.

Mosler: You're again mistaken about reserves in a floating exchange rate context. They are not an 'ingredient of money'.

Comment: Now, astute observer, you might be wondering: why in the hell would a bank take X worth of a single money ingredient in exchange for an asset when they could flat out sell it for X worth of actual money, avoiding the trouble of getting the other ingredients to making money?

Mosler: I read this as asking why a bank would take a balance in its reserve account at the Federal Reserve Bank instead of a deposit at a commercial bank? I owned a bank for over 20 years, and for me, if anything, the deposit at the Fed was of higher credit quality/liquidity?

Comment: In counterparty-style lending (not self-originated debt), reserves can act as a governing force on how much debt is allowed to be created. The only governor on bond-variant debt is the self-originating party’s ability to (legally) sell it to the markets.

Mosler: Bank lending is not reserve constrained. So this is not a distinction.

Comment: In order to create counterparty-style debt, banks typically need to have “reserves” they hold on their books, and can only lend a multiple of reserves. This is how we control debt levels.(yes, I know there are no reserve requirements right now - sit down I’ll get to you)

Mosler: With today's floating exchange rate policy, lending is not reserve constrained. The deposit is created as payment for your signed note, and if a reserve requirement incurred, in the first instance it's functionally an overdraft in the bank's account at the Fed.

Comment: So if we saw someone inventing money out of nothing and paying for real assets (like bonds) with it, we’d know that was monetization. But isn’t that what QE does?

Mosler: Yes, except the asset purchased by the Fed is already 'money' under broader definitions of 'money', so it's just a shift from one form of money- securities account balances at the Fed- to another form of money- reserve account balances at the Fed.

Mosler: When banks buy tsy secs the Fed then debits the bank's reserve account and credits its securities account. When the Fed buys tsy secs it then debits a securities account and credits a bank's reserve account.

Comment: Could you walk through the actual operations of what the banks use to pay for the treasuries and then also the mechanics of immediately selling them to the Fed? I’m missing something in this process and have not found any good sources that explain the exact mechanics of this.

Mosler: When a bank sells anything to the Fed the Fed credits that bank's reserve account.

Comment: Cointelegraph: Thai central bank issues $1.6B in government bonds on IBM blockchain.

Mosler: How about just crediting reserve accounts? ;(

Comment: US Dollars (Central bank credits) are also created by commercial banks extending loans and lines of credit? The credit is created when the borrower promises to pay back the loan. The credit is destroyed when it’s paid back minus the interest...correct?

Mosler: Yes, as agents of Gov via the Federal Reserve Act of Congress.

Comment: Greenspan: Our government can always pay its debts because it just prints money.

Mosler: He never did understand monetary operations, nor as his senior staff would say, 'you can't do a reserve drain without a prior add'- that is, Gov spending precedes tax payment and Treasury security purchases; the $ to pay taxes/buy Tsy securities comes only from Gov and its agents.

Comment: The Treasury market is now so big that the Fed may have to keep buying the debt to keep it functioning properly: Fed's Quarles. "The sheer volume there may have outpaced the ability of the private market infrastructure to support stress of any sort there.”

Mosler: Wrong, it's just a reserve drain/offsetting operating factors and all that. Get over it!

Comment: For those who argue that bonds are not money... Do you regard buying a bond a destruction of money? And if that’s so does any savings constitute a destruction of money?

Mosler: Best to be more specific. For example, bonds are sterling time deposits at the BOE. Reserves are sterling deposits in transactions accounts at the BOE. And so presumably there's a further purpose required to define one as 'money' and the other as something else.

Comment: “A dollar paid to the Treasury in taxes directly reduces the amount of reserves in the banking system by one dollar, while a dollar paid by the Treasury directly increases the amount of reserves in the banking system by one dollar.”

Mosler: Right, Treasury balances at the Fed are not part of 'reserves in the banking system.'

Comment: Thanks for this. I had a good read. I must say, John Law would be impressed. Looking at the detail, the only way the government can 'spend money into existence' is if the Fed creates it for them.

Mosler: The Fed is an agent of Congress via the Federal Reserve Act.

Comment: I'm agreeing with you that money creation happens at the level of the central bank via the creation of reserves / settlement money and at the level of commercial banks via deposits. I do not understand the MMT argument that the government first creates money and then taxes it.

Mosler: The Fed debits reserve accounts when tax payments clear.

Comment: Deposits are an IOU, but reserves are not. I agree that private banks only create deposits; however, the central bank does create base money in exchange for assets, and notes and coins are likewise exactly balanced by assets on the Fed's balance sheet.

Mosler: Reserves are Fed liabilities.

Comment: Issue 1: Debt is a stock (a total you have at one time) and GDP is a flow (the total over a period of time). Better to compare stocks to stocks (or flows to flows). Not hard to pay off $20T of debt when US GDP totals about $4 quadrillion going forward.

Mosler: That debt already is the money- $ in cash+ reserves+ securities accounts, all Fed liabilities (functionally) = net financial assets of the economy= equity that supports the entire private credit structure=net money supply.

Comment: Finally, should we have a fiscal target and if so, what should it be? For this we need a view on g - r. About two thirds of the last 150 years it has been positive, meaning you can run a primary deficit (deficit excluding interest) and still have stable debt.

Mosler: The public debt is just the $ spent by gov that haven't yet been used to pay taxes, resting as cash+reserves+Tsy secs=economy's net financial assets=net money supply. It's an accounting residual. Would you like a briefing?

Comment: Andrew Neil says on Good Morning Britain today that if 25% of UK national debt is owned by the government why are we obsessing about repaying it? Piers Morgan agreed. It's actually 40% @afneil but at last the penny is beginning to drop.

Mosler: The debt already is "the money"- pound balances in securities accounts at the boe. At maturity the BOE shifts those balances back to reserve accounts- no tax payers or grandchildren are involved.

Comment: It is certainly interesting that there are such buyers. Presumably they are expecting minimal inflation and currency loss?

Mosler: It's just what insiders call a 'reserve drain,' and 'offsetting operating factors'- the shifting of pound balances between accounts at the BOE.

Comment: A policy variable means the central bank can set it by market-making. Which points to supply/demand factors in setting yields, not expectations? What am I missing?

Mosler: The Fed is the sole supplier of reserves, therefore 'price setter.' It can set the entire term structure of 'risk free' rates but elects to only set overnight rates and let the term structure reflect anticipated future rate settings and 'technicals' of institutional structure.

Comment: Yes, private banks do create money under license to the government when they make loans. However the deposits they create are lower in the hierarchy of money than the CB reserves that are required in final settlement of payments between banks’ accounts at the CB.

Mosler: The hierarchy thing applied to gold standard risks with gold at the top, then convertible gold certificates below that, and then bank deposits with only fractional reserves for support, etc. For floating fx it's about credit risk with Gov and Gov insured deposits on top, etc.

Comment: The fact that the Fed owns 20% of GDP of US Treasury debt funded by bank deposits is a red flag. 2. But there is a lot of funding that the Fed can continue to tap to buy Treasury debt as long as people believe past returns are a good guide to future performance.

Mosler: The Fed debits securities accounts and credits reserve accounts on its books when it purchases treasury securities. That shifts outstanding $ balances in the non Gov sectors from treasury securities to reserves. Net financial assets are unchanged.

Comment: The current Federal Debt held by public is equivalent to: + 10 years of (non-recession) Federal income tax revenue or + $50,000 per person or + $141,000 per household.

Mosler: Those are the $ spent by gov that haven't yet been used to pay taxes, and remain outstanding as the economy's net financial assets until used to pay taxes= currency in circulation + reserve balances at the Fed + Tsy secs ($ in securities accounts at the Fed).

Comment: As titled, these Tweets are a question not an answer. The history of countries whose central banks buy their debt is very bad. But these numbers are small relative to Japan. Also: future promises like Soc Sec, govt guarantees, refinancing debt, loops w/ real economy, etc.

Mosler: They are promises to credit reserve accounts. Solvency isn't applicable.

Comment: We obviously have enormous GDP losses now that cannot be fixed by deficits, & tremendous need for taxes & transfers to support GDP in future. But after squandering it for years, we may have little fiscal capacity. So we have to be very efficient w/ tax & transfer programs.

Mosler: With floating fx, 'fiscal capacity' is inapplicable. Gov spending is via the crediting of member bank reserve accounts, a process not constrained by revenues.

Comment: Thus, the important point: the Fed currently can borrow reserves at low interest rates that do not price the risk of US government funding crisis. So they can hide this price in the bond market (with help from people buying based on past returns & for regulatory reasons).

Mosler: The Fed doesn't borrow reserves. The Fed pays for purchases by crediting reserve accounts (on its books).

Comment: Can you elaborate, Warren?

Mosler: The public debt is the $ spent by Gov that haven't yet been used to pay taxes, evidencing 'savings desires', and remain outstanding as cash+reserves+tsy sec until used to pay taxes. Regard less of ongoing tax receipts.

Comment: $27.4 trillion in savings! US can always afford compassion.

Mosler: Tax advantaged savings created by Congress-pension income/contributions, corporate reserves, etc.- drive the 'need' for net spending/public sector debt. It starts with the 'we need savings to have money for investment' myth, etc.

Comment: New MMT resource: The Post Keynesian view of fractional reserve banking. Based on my recent interview (plus followups) with @John_T_Harvey (Yes, we have fractional reserve banking [zero percent since 3/2020]. And no, banks are not reserve constrained.) https://citizensmedia.tv/pk-fractional-

Mosler: Fractional is about convertible currency reserves to meet withdrawals. Not applicable with noon convertible currency.

Comment: QE is a tax. It stops interest payments on Treasuries using an asset swap.

Mosler: Instead, the Fed pays interest on the reserves spent via QE.

Comment: What kind of money?

Mosler: Bank liabilities, including the Federal Reserve Bank liabilities- cash, $ in reserve accounts, $ in securities accounts (tsy secs).

Mosler: For the Gov, 'paying off the debt' is like making change. Like to promise to give you five $1 bills for a $5 bill, Gov promises, at maturity, to debit your securities account and credit your reserve account, all at the Fed.

Mosler: The Gov's 'debt' already is 'the money'- $ in 'bank accounts' at the Fed called cash, reserves, and securities.