Dinero, having pointed out quite correctly that "There is no objective reason to give a special status to the government. That is political view not an accounting view" then went a step too far:
Governments don't issue currency. It's a myth.
No, they do and it's not a myth.
Currency is mainly deposits that are created by the credit system and governments borrow deposits that allready exist i.e. the Bond market.
Private sector borrowing comes first in the process creating deposits then the government taxes or borrows those deposits.
Again, nope.
The general rule that "loans create deposits" applies to the government just as much as it does to banks or anybody else.
Borrowing money, taking out a mortgage, printing notes, minting coins, running up credit, issuing currency or signing IOUs, leaving bills unpaid etc. are all shades of the same thing and there are the same two sides to each of them - the issuer/borrower has a financial LIABILITY and the holder of the mortgage, bank notes, bank deposit, IOU etc. has a financial ASSET. It always nets off to precisely zero.
So the government can pay people with coins and notes, bank deposits, new bonds, or simply pay a supplier over an extended credit period. It is all shades of the same thing. It does not need to borrow a penny beforehand. It is the expenditure which creates the liability and asset, collectively referred to as "money".
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As a quite separate matter, having printed or issued currency, the government also claws back or unprints money by collecting taxes (to prevent price inflation and to regulate/meddle with the economy).
Consider - the government could collect taxes in cash and then distribute the same very same physical cash to its employees, suppliers and pensioners. Or it could pay out with freshly printed and minted cash, then collect taxes in physical cash and throw the bank notes in a furnace and melt down the coins.
It makes absolutely no difference. Indeed, the government could do one without the other, or more of one that the other.
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Dinero adds: "Government borrowing does not create money."
No it doesn't, but I never said it did. Read the post.
What I said was that government SPENDING creates money, in the same way as government TAXATION destroys money.
Game Over
2 hours ago
25 comments:
Government borrowing does not create money.
You have a lot of theoretical notions there but the functional reality of the monetary system is that the governments borrows deposits that allready exist by using the bond market.
The general rule that "loans create deposits" does not apply to to the government just as much as it does to banks or anybody else. Because government borrowing does not create money, apart from the miniscule amount of deposits created by local govenment overdrafts or government functions such as health authority overdrafts.
You did say government borrowing creates money. You said that the general rule that loans create deposits applys to the government.
And as I wrote - that is not the case as the government borrows deposits from bond market participants.
You go on to say that government spending creates money and taxation destroys it.
That is not the case.
The Treasury collects taxes and accumulates them in The Consolidated Fund of The Unighted Kingdom bank account held at the Bank of England.
From there it pays out payments to recipients of governmnet spending.
If there is a shortfall during the year to which bond selling has not yet attended to , then the shortfall is was up, untill around 2000, by advances from the overdraft facility - The Way and Means overdraft facility at the Bank of England. Now after 2000 that overdraft facility has been superseded by the Debt management office using market instruments.
You often say you personally deal in facts, these are the facts outlined here
Debt and reserves
management report
2008-09
http://www.dmo.gov.uk/documentview.aspx?docname=remit/drmr0809.pdf&page=Remit/full_details
the document in general and paricular box 4.1 .
Din, in bookkeeping terms they are quite correct, they try to match up income and expenses. In economic or fiscal terms it is complete and utter horseshit.
Please read my actual post:
"… the government could collect taxes in cash and then distribute the same very same physical cash to its employees, suppliers and pensioners.
Or it could pay out with freshly printed and minted cash, then collect taxes in physical cash and throw the bank notes in a furnace and melt down the coins.
It makes absolutely no difference."
Why replace actual facts with stories.It doesn't help with understanding.
To understand the monetary system it is required to have knowledge of and keep to the operational realities of the actual process. You keep aking me to read your post and I have read it.
The scenario of the government burning bank notes and issuing new ones at its own behest does in fact make a huge difference, as it has no prudential, political and above all accounting restraints on the governments spending power.
The two scenarios you ouline are fundamentally completely different processes. If , however, you mean a government agency burnt and issued notes at a one for one basis then yes that would be true that is makes no difference, but it would also be a trivial statement inconsequential in economic terms. Inconsequential to this discussion. The BoE does do this with old notes.
The point is the government doesn't issue currency . It is a myth. In normal operations currency is created by the private sector and government actions of borrowing an taxation and spending move it around.
It works the opposite way around than is often portraid when
" a special status is given to the government"
in discusions about money. Which is where we started off. When people do that they reach incorrect conclusions , which they think are self evident. But that comes from the fact that they have an incorrect model of the money system.
I
Contrary to your imaginary scenario , here is a real life scenario.
You or I can instigate the printing of some five pound notes.
Step 1. Go to bank , get mortgage.
Step 2. Give notice to the bank that you will withdraw the funds in cash . At this point the bank will request the BoE to convert some funds in its reserve account to notes , or more pertinant to the discussion, it could aquire new reserves against your mortgage, and ask for Boe bank note delivery. The BoE will then instruct the mint to print the notes and a secure courier to deliver them to your bank, and you will have them in your hand. Entirely on the back of your own loan contract new BoE reserves and consequentially new BoE notes were created.
Thats how it actually works in reality.
To clarify and put this discussion in context -
The UK government did issue some currency in 1914 to 1928.
They were called Treasury Notes and were inscribed with the Signature of John Bradbury and the words "One pound Currency notes are legal tender for the payment of any amount"
That stopped in 1928.
There are photographs of them on the BoE website.
"You or I can instigate the printing of some five pound notes."
You can't add NET FINANCIAL ASSETS without net govt spending.
Also, gilts are a red herring. The govt can QE or just abolish the rules that it issues £-£ deficit with borrowing.
Dinero, the consolidated accounts are helpful to understand- in the article there is a link:
http://www.3spoken.co.uk/2014/03/uk-whole-of-government-accounts-some.html?m=0
Din, most govt spending nowadays works electronically by crediting bank accounts.
I think you are getting confused by the actual printing of the currency.
Din, you are starting to annoy me now.
"The scenario of the government burning bank notes and issuing new ones at its own behest does in fact make a huge difference, as it has no prudential, political and above all accounting restraints on the governments spending power."
Nonsense, nonsense, nonsense. It doesn't make any difference!!
A sensible govt would try and make sure that it burns roughly as many notes as it prints i.e. dose not run a deficit.
Our pathetic government would print far more than it burned (run a deficit).
Or a government could burn more than it printed (run a surplus).
Exactly the same principles apply whether it is electronic money or physical cash, there is no difference at all. If you understand cash, you understand electronic money.
> Mark
You say that the assertion that collecting and burning and printing has no prudential restraints is non sense, and then 18 words later you type "
Our pathetic government would print far more than it burned (run a deficit)."
You are arguing with your own assertions
But anyway the government doesn't run a deficit by printing money - it runs a deficit by borrowing deposits.
> Random
Intersting thay way they treat Gilts held at the BoE in that particular report, that is actually pretty much not abiding with the Lisbon treaty. In the lisbon treaty it says that CB purchases of Gilts must only be indirect funding of borrowing not direct. So QE is OK but to then not treat Gilts at the BoE as a liabilaty for loan accounting pretty much not OK.
You certainly can add to financial assets, without government spending, you must have read that you cant somewhere misinformed as it doesn't make sense.
Mortgages are financial assets. Read through my example again.
Most Government spending is electronic. Yes it is. The government collects the taxes in and arrgregates them in the Consolidated Fund of the UK bank account, held at the BoE , from where it makes electronic payments.
http://www.dmo.gov.uk/documentview.aspx?docname=remit/drmr0809.pdf&page=Remit/full_details
Din, I give in, I surrender.
"Mortgages are financial assets. Read through my example again."
Yes but i already explained that in the original post.
There are two sides to a mortgage, the financial asset (owned by the bank) and the financial liability (owed by the borrower).
"the government doesn't run a deficit by printing money - it runs a deficit by borrowing deposits."
Well exactly not.
It can if it wants, and to some extent it does, but to some extent it just issues new bonds with nothing to back them up except future tax receipts.
> Random
the statement the gov could just QE or change the rules is not a real scenario it is an imagined scenario.
For example , generally speaking, Governemt deficit spending is supposed to not impact on the monetary conditions of the economy. Thats the purview of the BoE.
>Random
Government spending doesn't create net financial assets.
It either moves deposits around by taxation and spending or it moves them around by selling bonds and spending. In the rare occasion that it sells a bond to a bank , or the BoE obtains one by QE, or a government departmental overdraft with a commercial bank that is the same asset and liabilaty pair as a mortgage. I covered that in an earlier comment. There are no Net financial asets as they are debt contracts. A "Net asset" would be picking up a raw diamond if you were lucky enough to find one.
Clearly the credit creation process of banks creates new deposits. Loans create deposits. But nothing net is created. That is the crucial difference between the Government creating new net financial assets by crediting private bank accounts (that is, deficit spending) and the banks creating deposits (which are always offset by a matching liability.)
That is a huge difference and should be incorporated at the outset in any analysis of the monetary system.
"There are no Net financial asets as they are debt contracts."
Please read the document in the link above.
The title of the post is "Economic Myths: Governments don't issue currency"
We have discussed it and and can conclude that it is true governments do not issue currency. If we agree the most abundant form of currency is deposits and bank notes. Governments do not issue deposits and bank notes are issued at the behest of bank customers. Neither way that a person obtains some currency entails the government issuing it. Different processes have been used in the past such as the Soviet Union prior to 1989 and the Uk 1914 to 1928. But that is how it is.
Din, as I said, I give in, I can't be bothered restating the bleeding obvious any more.
> Mark
the statement you made and restated was not pertinant to the subject anyway . It was off on a tangent about taxation.
Currency is bank deposits , and the government doesn't issue those deposits, and that's that.
D, as I explained in the post, just about anybody can "issue currency", the government is just one of many actors who can do this. Once issued, it is largely indistinguishable and all goes in the mix.
The relevance of taxation is that this is (partly) what gives currency its value.
It's like rationing vouchers - they have value because the government demands that you give them back if you want to buy food.
So if you want to earn money, you need to get your hands on some "currency" to pay your tax bill.
Or, again as I said in the post, the government prints money by spending and destroys money by taxing, which is what the MMTers say, but you flatly deny this which is why I have thrown in the towel.
D, most government spending actually works by crediting bank accounts!
R, yes of course, that is the modern equivalent of printing bank notes. The same general principles apply.
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