Wednesday, June 19, 2013

Money Labels

This post attempts to depict the various labels used to describe US money in a Venn diagram and an accompanying table. I've simplified the world into just four entities: The Treasury (Tsy), the Fed, the banks and the private sector non-banks. You can think of Tsy as a stand-in for the all the (largely non-private) non-bank Fed deposit holders (such as Treasury, the IMF, foreign central banks, and government sponsored enterprises (GSEs)), except for in the "Created/Destroyed by" column in the table where only the US Treasury is really meant. "Non-banks" means private sector non-banks in the table. JP Koning has a lot of good information on "moneyness" related issues. So does Cullen Roche.





Update #1: Sept. 28, 2013: By "Face Value" in the table I simply mean the dollar value written on the paper note or the coin, to distinguish it from the production cost of the note or coin. The "face value" of deposits are simply the value of the deposits. Also, by "paper notes" I'm really referring to Federal Reserve Notes (reserve notes). There's also such a thing as United States Notes (US notes) which are also paper bills, but they are very rare and have not really been produced since 1971 (I did not include a row for these in the above table). Unlike reserve notes, US notes are not "face value" liabilities of the Fed, but instead are direct liabilities of the Tsy (after they were printed and sold by the Tsy) although they don't contribute to the statutory debt limit (search for "United States Notes" in this document). Reserve notes are much more common than US notes (I don't believe I've ever seen a US note!).

Coins are not liabilities of any entity officially (they don't appear on any balance sheets as liabilities) however they are described by the Fed and Tsy as being "obligations" of the Tsy. This most likely refers to the fact that coins are accepted as face value legal tender by the Fed and Tsy and that the US Mint (a branch of Tsy) will purchase back damaged coins for their face value. JKH has described coins as "contingent liabilities" of Tsy.

By "Created/Destroyed By" in the table, I mean literally the physical creation and destruction of the physical money in terms of notes and coins. In terms of electronic deposits I mean the crediting (creation) and debiting (destruction) of deposit accounts, which corresponds to the increase and decrease of the balance in these accounts respectively.

Reserve notes are created and destroyed by the Bureau of Engraving and Printing (BEP) which is a branch of the US Treasury (Tsy). Coins are likewise physically created and destroyed by the United States Mint, which is also a branch of the US Tsy. In the case of reserve notes, however, the face value can be thought of to be created and destroyed by the Fed which sells and buys them from banks. While at the Fed, reserve notes are not entered on the balance sheet of any entity. The Fed purchases the notes from the BEP for their production cost, however, once they sell them to banks for their face value, they are entered onto the Fed's balance sheet as a face value liability of the Fed and a face value asset of the banks which purchase them... until the banks in turn sell them as an asset to other non-Fed entities. It's not until they are sold back to the Fed that they again are removed from all balance sheets, and they remain off balance sheet at the Fed until they are resold. If they are not resold they will eventually be destroyed. In this sense the Fed can be thought of as creating and destroying the face value of reserve notes. Coins are different in that they are face value assets from they day they are minted by the Mint and remain so until they are destroyed by the Mint. Similar to notes, however, the face value of coins is not the same as their production costs. Any profit made in the sale of coins is called seigniorage. As can be seen from the table at the bottom of this page, the Mint does not currently make positive seigniorage on pennies and nickles. Does that means it "makes" negative seigniorage on pennies and nickles? I don't know how to refer to that situation! ... if you do, let me know in the comments.

The concept of "inside" and "outside" money is normally defined with respect to the view from the private sector (which includes both banks and non-bank entities). All this means is that "inside money" is a liability of an entity inside the private sector (in this case banks). Outside money is NOT a liability of any entities within the private sector. This is the usual way of defining inside and outside money, however they are more generally relative terms. For example from the point of view of the Fed, reserve notes and Fed deposits are "inside money" even though they are both strictly liabilities of the Fed. In a similar manner, if a non-bank private entity were able to issue IOUs that were used as a form of money, those would also be "inside money" in the typical sense (i.e. w.r.t. the private sector). From the point of view of the non-bank private sector, bank deposits could be considered to be "outside money." However, I will almost always stick to the typical definitions of inside and outside money (as depicted in the above table) in this blog: i.e. w.r.t. the private sector.

72 comments:

  1. Nice diagram.

    Notes can be an asset of the treasury, too. Whilst the treasury physically creates them, it's the Fed that issues them as a liability. And it is possible to pay taxes, for example, in cash. The treasury can also hold TTL bank deposits as an asset, though these are different to normal demand/time deposits and I think they're also not counted as part of the broad money supply.

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    1. Hi phil, thanks for the feedback. I was planning to redo the diagram and table anyway so perhaps I can fix it then. Regarding the Tsy holding notes as assets, I was thinking along the lines of freshly printed/minted notes, which are sold at production cost to the Fed. Perhaps I can break out the "US Mint" as a separate entity to make that distinction, or simply correct the table with the current categories and add a footnote.

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    2. Regarding the TTL accounts: yes I knew I was glossing over that. Perhaps another footnote is in order for that. Tsy doesn't spend from TTL accounts, correct? Actually my purpose was in part answering someone's question on pragcap, when I thought it might be useful to make a post on it. I didn't want it to get too complicated, but I do want it to be correct. Thanks again!

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    3. phil, a couple of question for you:

      1. Is it Treasury's responsibility to actually destroy old notes and coins?

      2. How would you classify freshly minted/printed (what's the proper term?) notes either at the Mint or having just been purchased at production cost by the Fed, but not yet sold to banks? Are those notes even money yet? I was thinking of placing outside and inside money as subsets of the more general "money" ... but also having an extension of the "notes" set protruding outside of "money" to cover these uncirculated notes.

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    4. I don't think it's worth putting the mint as a separate entity as it's part of the treasury.

      For your table probably just put federal reserve notes as being created by the fed. It's only when the board issues them that they become money. Coins become money when they leave the mint.

      I think the mint destroys old coins. The bureau of engraving and printing prints paper currency and shreds old notes. You can buy shredded money from them:

      http://moneyfactory.gov/shreddedcurrency.html

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    5. So, likewise, when notes come back to the Fed and when the Fed retires old notes and sends them off to The Bureau of Engraving and Printing to be shredded (yet before they are actually shredded) they are not longer money, correct?

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    6. Regarding notes as an asset of Tsy: if you pay your taxes in cash, what does Tsy do with the cash? How do you do that, BTW? Do you mail them cash? Do you deliver the cash by hand to the Treasury or a field office of the Treasury?

      What does Treasury do with this cash? Do they maintain a vault? Or do they immediately send it back to the Fed to exchange for electronic Fed deposits.

      Do people actually pay that way? I wonder if they even have a system in place to deal with it.

      The reason I'm asking all this is I'm wondering if Treasury truly keeps much cash as an asset. If it's truly a tiny amount, I'm not sure how I should deal with it. For example, perhaps at the Fed itself they have a "petty cash" drawer to buy incidental items. If such a drawer exists I'm not sure I want to say that paper cash can thus be kept as an asset of the Fed. That seems like a minor exception.

      Also, I'm currently glossing over another exception to my table on the inside money side: correspondence banks. I understand that banks will sometimes maintain deposits at other banks from which they may spend on office supplies, or other operating expenses. Banks don't always do this, but it's a possibility. I prefer not to get into that here because it kind of obscures the picture I'm trying to paint rather than helps clarify things.

      I guess I'm more interested in the broad picture.

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    7. ... of course I should have said "field office of the IRS" ... which is part of Treasury. We've got one in my city: I used to go to pick up my forms in person.... way back when.

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    8. When the Fed gets its notes back and sends them off to the BEP to be shredded, no one counts them as money - they're just paper.

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    9. 1. No one actually pays their taxes in cash. At least not in any amount that would be considered relevant. Phil and the other MMTers use this example in order to validate the MMT "shredder" analogy, which is misleading, and quite frankly, stupid.

      2. Even if you did pay your taxes in cash the Tsy would still mark it as a credit to its account. There is a specific flow of funds which MMT very sloppily ignores in all of this.

      3. The concept of taxes "destroying" money is redundant and useless as our system is designed. Money is created primarily by banks as deposits via loans and is only destroyed when the loan is repaid. There is no destruction and then creation every time money is transformed from inside money to outside money because it must always necessarily be transformed back into its original inside money form in order to maintain a stable banking system.

      4. The way MMT views the system gets the emphasis precisely backwards by focusing on the state when the banks are really the center of the system. The govt, by necessity, subsidizes private banks in numerous ways. MMTers don't tend to support nationalization, but they always complain about private banks. Well, news flash - private banks are inherently unstable because they're private competitive entities and the only way the system won't periodically experience typical business cycle downturns is if the govt is there constantly supporting it. So, MMTers, implicitly support the govt subsidizing banks and bankers which means they implicitly support the 1% and the financialization of our economy because banks don't use their business model purely for public purpose.

      So many contradictions there it's hard to see how Phil still has the energy to troll all the websites he does....

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    10. I didn't say many people pay their taxes in cash, I said it's possible.

      Obviously you don't understand the shredder analogy.

      I said that notes can be an asset to the Treasury. Maybe you should read what I wrote.

      You say 'flow of funds' a lot, but I've yet to see you demonstrate any actual understanding of the flow of funds.

      Money is not only destroyed when loans are repaid.

      "There is no destruction and then creation every time money is transformed from inside money to outside money because it must always necessarily be transformed back into its original inside money form in order to maintain a stable banking system".

      That is a complete non-sequitur, as well as being false. You seem to have no understanding of how to construct logical arguments.

      'Private banks are inherently unstable therefore MMT supports the financialization of the economy' is another complete non-sequitur, and a completely nonsensical argument.

      The only contradiction here is between what you say and reality.

      And again, because people don't agree with every bit of nonsense that comes out of your mouth, that doesn't make them a troll.

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  2. A note on 'outside money':

    "Outside money is a term that refers to money that is not a liability for anyone "inside" the economy. It is held in an economy in net positive amounts. Examples are gold or assets denominated in foreign currency or otherwise backed up by foreign debt, like foreign cash, stocks or bonds. Typically, the private economy is considered as the "inside", so government-issued money is also "outside money." [1]

    http://en.wikipedia.org/wiki/Outside_money

    Also, if term deposits/savings deposits held at banks are counted as 'inside money' - even though they generally can't be used directly as money (in the narrow sense of a medium of exchange), and are basically bank bonds - then it seems logical that treasury bonds and term deposits held at the Fed should also be counted as 'outside money'.

    Would you say the quantity of inside money stays the same or decreases when a demand deposit is converted into a savings deposit?

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    1. "Would you say the quantity of inside money stays the same or decreases when a demand deposit is converted into a savings deposit?"

      Good question. I guess I wasn't thinking of that. Perhaps that's why I left "Bank Deposit" as vague (subconsciously!).

      But now that you mention it, I think that it stays the same. But I don't know if I'm technically correct or not.

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    2. But you can't spend a savings deposit in a shop, for example. You have to convert it into a demand deposit first, so in that sense it's no different to a treasury. According to the definition of money you were using previously, that means savings deposits aren't money. So when a demand deposit is converted into a savings deposit, inside money is 'destroyed' and replaced with a different type of (non-money) financial asset.

      Also, given that savings accounts don't have minimum reserve requirements attached to them, converting a demand deposit into a savings deposit creates excess reserves, all else being equal.

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    3. Yes, I see your point. So perhaps I should clarify and state "bank demand deposits."

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    4. Like I say, I'm going to redo the whole thing. I've had other feedback on it from someone at pragcap, plus I wasn't quite satisfied with it myself. Just wanted to get it up fast to help answer a question about "what are reserves exactly" which lead me down another tangent.

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    5. There's a bit of problem there however, as savings deposits and similar assets are actually considered by standard definitions to be part of the money supply:

      M1: "A category of the money supply that includes all physical money such as coins and currency; it also includes demand deposits, which are checking accounts, and Negotiable Order of Withdrawal (NOW) Accounts".

      http://www.investopedia.com/terms/m/m1.asp

      M2: "A category within the money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds".

      http://www.investopedia.com/terms/m/m2.asp

      M3: "The category of the money supply that includes M2 as well as all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets".

      http://www.investopedia.com/terms/m/m3.asp

      "money market funds" include T-Bills and other treasury securities.

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    6. Wikipedia agrees:

      M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).

      http://en.wikipedia.org/wiki/Money_supply

      so maybe I'll just leave it a bit vague as "bank deposits."

      I guess my goal here is to try and clear up some confusion. It seems I've attempted to answer a number of questions recently that I was confused by (i.e. I had a hard time understanding the question): the only thing that made sense was that the questioners were somehow imagining that bank deposits could be assets of banks, or that Fed deposits or cash could be assets of the Fed. Of course the *coins* part of cash CAN be an asset of the Fed... an unfortunate fact for someone trying to offer a quick explanation.... thus this chart. :^)

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    7. Well that's the problem with the recent descriptions offered up by Cullen. They're completely nonsensical and don't explain the logical structure of the system. No wonder people get confused. You seem to understand it so I don't know why you don't challenge his nonsensical descriptions.

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    8. Ha! .. phil, I think this problem is more fundamental than your disagreements with Cullen. I don't think Cullen would challenge what I wrote here. I'm used to thinking of paper money and deposits as being liabilities to the Fed and banks resp. now. But I need to step back a year or so ... when I first starting learning about this stuff and I can see where I may have had similar confusions at that time.

      I think people are used to seeing all money as coins: assets to everyone all the time (as long as they have them in their possession). The idea that money can be an asset to one entity but ONLY a liability to the creating entity is perhaps non-intuitive.

      BTW, on the subject of coins, that's another question for you: Are coins money the moment they're minted or only after the Fed purchases them at face value? They certainly seem like they're an ASSET the moment they're minted, since they can be sold at face value.... but perhaps they're not technically "money" at that time.

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    9. Seriously, the stuff he writes these days isn't just factually wrong, it's complete nonsense. It's literally gibberish.

      How can you expect people to understand how money works if you tell them that:

      "the government obtains inside money either taxing your inside money account and redistributing it to someone else OR they sell a bond, obtain inside money and spend it into someone else’s account".

      ??

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    10. Philip Diehl said at one point that coins become money once they leave the mint loading bay in the back of a truck.

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    11. re: "gibberish".... well, you're going to hate my Example #8 then!

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    12. Your #8 example simply shows that the treasury sells bonds to the private sector and the private sector borrows funds from the fed to buy the bonds.

      Given that the fed is part of the government, it just shows that, putting it simply, the government lends the money to the private sector which the private sector then uses to buy government bonds.

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    13. So you're OK with it then?

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    14. The process you describe, in which the bank creates a deposit which y uses to buy a house from x, and then x decides to save by buying a treasury, isn't relevant to the transaction between the treasury and private sector. In your example, the private sector pays for the treasury bond by borrowing funds from the Fed.

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    15. I agree the buying-a-house step wasn't relevant... that's step 1. I only included that because (as you know) right or wrong, I like to start from empty or nearly empty balance sheets. It's a mental help to me (but perhaps nobody else!). Plus I wanted a "mortgage backed security" in there for collateral.

      I really only claim steps 2. through 5. describe the deficit spending process (which I define as the bond purchase all the way through spending of the proceeds... and to which I add a loan re-payment to the CB at the end for clarity).

      So in other words, I'm going to take your response as a "yes" then (willfully ignoring your objection to y's initiation of the process by use of Treasury Direct as "irrelevant"). ;^)

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    16. ... I guess I should have said the transition from 1 to 2 isn't relevant (that's when x borrows money to buy y's house). Then BS sets 2 through 4 show the deficit spending process (as I've defined it), and BS set 5 just does a little clean-up (re-payment of CB loan). Same goes for BS set 6 (it's just more clean-up).

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    17. Shoot! let me try again: ... more accurate to say the transition from 2 to 3 (Tsy raising money through bond sale) and the transition from 3 to 4 (Tsy spending the proceeds) covers "deficit spending" as I've defined it.

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    18. whatever happens with bank deposits, x buying a house from y, etc, isn't relevant to the bond purchase from the Treasury. In your example the treasury bond is bought with funds borrowed from the federal reserve, i.e. with outside money. whatever goes on in the 'inside money' world is a separate affair.

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    19. "y's initiation of the process by use of Treasury Direct"

      There's no such thing as people initiating the process by deciding to buy a bond through Treasury Direct. Treasury Direct buyers are hangers-on in bond auctions, which happen with or without them.

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    20. Non-government agents don't initiate the bond-buying process. The treasury holds auctions at set dates and people buy the bonds. The treasury doesn't sit around waiting for the bond auction to settle so that it has enough funds to spend - the process is a constant churning of money - with trillions of dollars of tax receipts and bond auction receipts and expenditures flowing through the TGA every year.

      No one is sitting in the Treasury waiting for the next dollar to land in the TGA before they spend. What they try to do is try to balance the outflows and inflows by various means - selling bonds, calling in TTL deposits, depositing receipts in TTL accounts, coordinating actions with the Fed, etc. It's an ongoing and constant process.

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    21. "...x buying a house from y, etc, isn't relevant..."

      -- agree: not relevant, as I stated above.

      However, IMO, y's decision to trade his bank account for Tsy debt (which he ends up owning at the end of this process) most definitely IS

      "relevant to the bond purchase from the Treasury."

      However, the scope of what we disagree on here is relatively small in my opinion. I completely understand what you are saying. I don't agree with what you think is relevant to the bond purchase, but I think I know why you're saying it and we agree on all the low level details (as usual). So from my perspective we'll just have to agree to disagree on that score.

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    22. BTW, in case anybody is following this wondering "What is Treasury Direct?" ... here's their website:

      http://www.treasurydirect.gov/tdhome.htm

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    23. "However, IMO, y's decision to trade his bank account for Tsy debt (which he ends up owning at the end of this process) most definitely IS [relevant]"

      Ok, so why?

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    24. The government's planned expenditure would happen in any case, regardless of y's decision to save.

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    25. So why? Prior to QE, most Tsy debt was held by private non-banks. So I'm demonstrating (in Example #8) what has been the most typical case. If the goal is to demonstrate how deficit spending works, why not show how it typically works? Some class of entities ends up owning the debt that's auctioned, which is a key part of the process. (Granted I'm trying to do that in a super simplified cartoon fashion).

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    26. "Prior to QE, most Tsy debt was held by private non-banks"

      Actually I think more was held by the US government and foreign governments than by the private sector (domestic and foreign).

      http://www.optimist123.com/optimist/2007/03/updated_pie_cha.html

      http://www.fas.org/sgp/crs/misc/RS22331.pdf

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    27. Thanks for the links phil. Perhaps I was thinking of the debt which excluded the intragovernmental part. I knew the intragovernmental part was large, but I wasn't sure how large. I agree it's important to consider that.

      Do you happen to know what percentage of the pie represents commercial banks, both foreign and domestic? Pre-QE vs post-QE? Any significant difference?

      Also, it would be interesting to see a breakdown in terms of "Fed deposit holders" vs "non-Fed deposit holders." Do you suppose most of the "US government ("intragovernmental debt")" have Fed deposits? I guess the Fed itself wouldn't really count, since it creates Fed deposits, but probably everybody else in that slice has one, don't you imagine? (I'm assuming the Fed is in that slice)

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    28. Here's a more recent pie chart:

      http://www.optimist123.com/optimist/2011/08/pie-chart-of-who-owns-the-national-debt-mid-2011.html

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    29. "If the goal is to demonstrate how deficit spending works, why not show how it typically works?"

      Your example doesn't demonstrate how it typically works, it demonstrates how you think it typically works. How it actually typically works is that the Treasury auctions bonds mainly to primary dealers and other banks, central banks and other financial institutions, and the Fed ensures there are sufficient reserve balances circulating to settle the bond auction by engaging in repos with primary dealers and other banks. (Of course as a result of QE the banking system has huge excess reserves so these sorts of repos are not currently necessary).

      Treasury direct account holders can not bid at auction, they only specify the quantity they want to buy and accept the price set at the auction. The amount sold to Treasury direct account holders is a tiny fraction of the total amount sold at auction.

      http://newyorkfed.org/research/current_issues/ci13-1/ci13-1.html

      The discount window usually only serves as a last resort for the banking system, and discount window loans are normally only a very small percentage of the total reserve credit provided by the Fed.

      http://www.frbdiscountwindow.org/discountwindowbook.cfm?hdrID=14&dtlID=43

      http://www.federalreserve.gov/monetarypolicy/bst_openmarketops.htm

      http://www.federalreserve.gov/releases/h41/20060223/

      The collateral demanded by the Fed for repos is always treasuries, or federal agency MBS.

      http://www.newyorkfed.org/markets/omo_transaction_data.html

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    30. According to http://newyorkfed.org/research/current_issues/ci13-1/ci13-1.html

      "primary dealers alone account for 70.9 percent of Treasury securities sold to the public, on average"

      also:

      "the Fed bought an average of 19.1 percent of all 904 Treasury securities auctioned between July 30, 2001, and December 28, 2005"

      This might seem strange as the Fed is supposedly not allowed to buy directly from the Treasury. In actual fact the Fed does sometimes buy directly at auction. I think this is normally to replace the stock of bonds it holds in the SOMA (system open market account), when these reach maturity.

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    31. Regarding Treasury Direct, here are the results of a recent auction of 10-year Notes:

      http://www.treasurydirect.gov/instit/annceresult/press/preanre/2013/R_20130508_1.pdf

      source: http://www.treasurydirect.gov/instit/annceresult/press/preanre/2013/2013_10year.htm

      Treasury Direct buyers bought $8,926,800 of the total $24,000,037,200 sold. (see footnote 5). That's 0.037% of the total sold.

      In contrast primary dealers bought 49% of the total sold (for their own house accounts - see footnote 6), and tendered 72% of the total tendered.

      At the other end of the scale, here are the results of a recent auction of 4-week Bills:

      http://www.treasurydirect.gov/instit/annceresult/press/preanre/2013/R_20130618_1.pdf

      source: http://www.treasurydirect.gov/instit/annceresult/press/preanre/2013/2013_4week.htm

      Treasury Direct buyers bought 0.55% of the total sold (see footnote 6). In contrast primary dealers bought 71.9% of the total sold (for their own house accounts), and tendered 85% of the total tendered.

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    32. So phil, if we were going to make a pie chart showing who owns Tsy debt in three categories:

      1. Fed deposit holders (these hold Fed deposits as assets)
      2. The Fed
      3. Everybody/everything else

      What do you think the breakdown would be?

      Regarding Tsy direct, I didn't intent to imply that Tsy Direct was a typical means by which the non-bank, non-Fed sector obtains Tsy debt. I'm sure there are more typical methods by which this sector obtains Tsy debt. Tsy direct is an easy one to conceive of though. What's actually important to me is the slice of the pie accounted for by my number 3 above. Do you know what that is?

      I'd then be further interested to break item 1 down into US Federal government agencies & GSEs vs all other Fed deposit holders.


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    33. My amateur estimate, from looking at the Flow of Funds (p.93): http://www.federalreserve.gov/releases/z1/Current/z1.pdf

      and this: http://www.fas.org/sgp/crs/misc/RS22331.pdf

      Is that 'foreign official' (mainly central banks I think) currently hold about 25% of the total $16+ trillion US national debt.

      Domestic 'depository institutions' and GSEs hold about 3%

      The Fed holds about 10%

      I don't know about the rest.

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    34. My estimate might be wrong, of course. Brett Fiebiger included a table of "Bank holdings of US Treasury debt" in his critique of MMT. For 2011 he puts depository institutions as holding 2.9% and Federal Reserve Banks as holding 16.7%.

      http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP279.pdf (p.9)

      What do you reckon?

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    35. Btw my reasoning for the '25% owned by foreign central banks' figure is as follows:

      1.The Flow of Funds lists 'Rest of the world' as owning $5,701.4 billion (line 12).

      2. p.3 of the 2012 CRS document ( http://www.fas.org/sgp/crs/misc/RS22331.pdf ) states that foreign governments own 72.4% of US govt debt held by foreigners. I assume that means foreign central banks, which have accounts at the Fed.

      3. Total US govt debt is approx $16,738 billion. The FoF lists 'total liabilities' as $11,905.5 billion, but this figure leaves out intragovernmental holdings.

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    36. "Is that 'foreign official' (mainly central banks I think) currently hold about 25% of the total $16+ trillion US national debt."

      If those really are central banks, then I suppose they are Fed deposit holders. Is it possible that a significant share of this 25% is held by non-Fed-deposit holders though?

      "Domestic 'depository institutions' and GSEs hold about 3%"

      Intra-governmental debt looked like a large share (between the pie chart I posted and the one you posted). That includes the Social Security Administration for example (I believe). The amount is between a quarter and a third of the full amount of Tsy debt. So this 3% you've listed here is something else, correct? Obviously "depository institutions" are commercial banks, but the GSE part does not include SS, etc. Is it true that GSEs, and SS, etc all have Fed deposits?

      "What do you reckon?" ... I have almost no idea. I've looked at some data, but have been too impatient to make a good attempt at understanding it. As I recall some of the categories seemed to vary wildly from data set to data set making me think there was a lot of noise on the data and that it needed to be smoothed in some fashion. I'll try to find the links to what I was looking at... I think I recorded them somewhere. Regarding the Fed's fraction, that pie chart I posted (same source as your chart) assigned 7% to the Fed back in 2011. At least 10% and 17% are the same order of magnitude.

      Your 1. 2. 3. reasoning: Sounds reasonable...

      Thanks for taking the time to look.

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    37. "If those really are central banks"

      To my knowledge government Treasuries don't go out and buy foreign government bonds. I might be wrong, but I think they leave that to the central bank. It could be that the government entity which ends up holding the foreign govt debt is not the central bank itself, but to my knowledge it's the central bank which buys it in the first place.

      If you look at http://newyorkfed.org/research/current_issues/ci13-1/ci13-1.html you'll see that it talks about foreign central banks buying at auction but makes no mention of any other foreign government entities doing so.

      "So this 3% you've listed here is something else, correct?"

      It's just banks and GSEs, nothing to do with SS.

      "Is it true that GSEs, and SS, etc all have Fed deposits?"

      GSEs do. SS is different: http://en.wikipedia.org/wiki/Social_Security_Trust_Fund


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    38. A savings account is essentially a security issued by a bank. It must be closed and transferred back into a deposit in order to be used for purchases. Still, it would be considered a form of inside money in that it comes from inside the private sector. Securities, however, always have a lower level of moneyness than a bank deposit since they are claims on money.

      Govt bonds, for instance, are claims on money since they must be transformed into deposits in order to be used as a means of final payment. The govt issues bonds for the same reason that a corporation does - it wants inside money as a means of final payment.

      This is the point you don't get Phil. The whole system is designed around obtaining inside money. Not outside money.

      The only thing that's "non-sensical" in all of this is your belief that the govt spends its own money....That's ludicrous.

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    39. "your belief that the govt spends its own money....That's ludicrous".

      Do you even know what the word 'liability' means?

      A bank deposit - i.e. "inside money" - is a bank liability.

      Could you please explain to me why it is a bank liability, and what you think that means?

      Once you do that you should begin to understand that your pronouncements are literally gibberish.

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  3. "I think people are used to seeing all money as coins: assets to everyone"

    That's precisely the problem with Cullen's nonsensical descriptions. They don't describe the logical structure of assets and liabilities, they describe some parallel universe of his own imagining in which bank deposits are like coins that banks mint and then give to the treasury when people pay taxes. That's nonsense. Surely you can see that.

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    1. I have to disagree with you there phil... like I said, I don't have any problem seeing it from Cullen's point of view or from your ever so slightly different point of view. What amazes me is the that you (and he) see a giant chasm between your two views: that doesn't make any sense to me.

      What I will grant you is that terse word descriptions sometimes leave me flat (see my Mission Statement), which is why Fullwiler's "Krugman's Flashing..." article was such an eye opener to me and why I started this blog. I don't think Cullen sees this blog as a challenge to his description but rather as a compliment to it. It's designed to help people like me... who want to see the balance sheets! Granted it has a decidedly MR slant, but I hope to put something together here that's useful for anybody, including post-Keynesians in general, and even some neo-classicals (Sumner himself doesn't have a problem with some of these posts... on more than one occasion he's answered comments on his site that I already answered with a simple "Tom's right."... I've also posted links on Rowe's and Glasner's sites... not to get in their faces about MMism... but to clarify and help people understand some basic ideas: in return I want to try to understand MM, so I ask a ton of questions too). Maybe I'll get interested in MMT again and come to you asking a bunch more questions. I'm very much interested in trying to see how all these different views fit together, if they can. From what I've seen so far the MMT/MR disparity is an easy one! Try squaring the MM view of the long vs short term endogeneity of inside money with either!

      And when I think Cullen gets it wrong, or what he says just doesn't make sense, I do tell him. For example, he used to write "Banks can't take their reserves and buy stuff from Wal-Mart." ... so I pestered everyone I could think of (including Cullen) asking "Well then how do banks buy things from Wal-mart then??" ... finally "Joe in Accounting" (who's a bank auditor by profession) gave a great answer... which I simplified to "they buy it with reserves... if Wal-mart banks at a different bank." (that's my example #5)

      I think Cullen tries to simplify it for people with his word descriptions. It's no fun drawing out balance sheets every two seconds... at least not for normal people, but for me I'm OK with it! ;^)

      Plus, you have to admit even though I've stated that I don't want to get too far into the minutia here (e.g. taking into consideration the Fed's "petty cash" drawer -- if it exists), but I'm still getting into some minutia in a relative sense! Does it really matter that coins are treated differently than paper cash? Well... I'm interested in that, but I think Cullen would consider that to mostly be a distraction from the more important bigger picture, and rightly so! (although he has touched on it before in passing).

      So, I'm happy you come here to keep me honest. I really appreciate the feedback. I still don't see any fundamental problems however with the MR world view, and I think it's a useful way to view the system we have. I agree that we need to be accurate however... so I'm open to your corrections/suggestions.

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    2. Tom, I'd like to ask you a simple question.

      Let's say that Bob has a $10 note, and he owes you $10.

      You then need to pay me $10, for what ever reason.

      So you ask Bob to pay me the $10 on your behalf.

      Bob then gives me the $10 note. As such he no longer owes you $10. His debt to you no longer exists.

      Here's the question:

      Have I obtained Bob's debt to you, or have I obtained the $10 note?

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    3. Phil, I see where you're going with that example. Clever, but misleading, as usual.

      Loans/deposits are assets/liabilities of the PRIVATE BANKING SYSTEM, not the govt. The fact that the govt obtains its own liability through the reserve settlement process is missing the point! The banking system doesn't obtain the deposit liability if the govt doesn't spend it back into the system after it taxes! The govt is a necessary redistributor of inside money....It is a self determined user of private bank money.

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    4. your sentences are just random accumulations of words which contain no logical sequence or meaning.

      btw I didn't say anywhere that bank deposits are liabilities of the government. However many bank deposits are insured by the FDIC, but that's a separate issue.

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  4. Tom, I was hoping you might answer my question... No rush though :)

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  5. No response as yet so I guess I’ll have to answer my own question.

    “Have I obtained Bob's debt to you, or have I obtained the $10 note?”

    The answer, obviously, is that I have obtained the $10 note.

    It should be obvious that I haven’t obtained Bob’s debt to you. This is just very simple, very basic logic.


    Now on to the next question.

    Let’s say I spend the $10 note, and buy some goods from Pete.

    Has my spending been funded by Bob’s debt to you?

    Again, the answer should be obvious.

    It would be nonsensical, illogical, and incorrect, to say that my spending has been funded by Bob’s debt to you.

    Again, this is very simple, very basic logic.

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    1. Your example doesn't apply just as MMT doesn't apply to the US system. The banks don't issue the US govt's liabilities on behalf of the US govt. The US govt is not legally responsible for all liabilities issued by the banking system. The banks issue private liabilities that can only be extinguished when you repay your loan. The fact that they're denominated in USD's doesn't mean they're the liabilities of the US govt. That's very simple, very basic logic.

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    2. Your comment isn't remotely relevant to my questions or answers. At no point did I suggest that commercial banks issue US government liabilities, or that the govt is responsible for all commercial bank liabilities.

      There's no reason why I would even suggest that in the first place as it has nothing to do with my example whatsoever. Your comment is so irrelevant it seems almost entirely random.

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    3. Of course you don't get it. Your model doesn't even focus on the primary money at the point of sale. Your model focuses on reserves which are secondary to the point of sale. So of course you think everything I say is irrelevant. You've created your own little version of the money multiplier. It's a reserve centric version with the focus on a consolidated govt as opposed to the central bank as the neoclassicals generally do. You've moved the goal posts, but suffer from the same error. It's almost comical how much time you waste trolling other people's websites without realizing this.

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    4. MMT doesn't 'focus on reserves', it describes how the monetary system works. MMT hasn't created 'it's own little version of the money multiplier', nor does it have 'a reserve centric vision', it just describes how the monetary system works. People who disagree with you are not automatically trolls.

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  6. What I get is that you apparently have no comprehension of my very simple questions and answers.

    Nothing you have said in either of your comments above has anything to do with my examples.

    It's like someone tries to explain to you that 1+1=2 and you reply by saying "no but three is the magic number and monkeys hang around in groups of four so you are wrong!!!"

    You're apparently incapable of understanding simple logic or of even sticking to the subject.

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    1. Sigh. You're a professional antagonist. Bravo. I tip my cap to you. Good day, sir.

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  7. Ok, so moving on.

    The first question was whether I obtained Bob's debt to you, or whether I obtained the $10 note.

    The answer was, obviously, that I obtained the $10 note. We saw that Bob's debt to you ceased to exist when he paid me the $10 note on your behalf.

    The second question was whether my subsequent spending of the $10 note (to buy goods from Pete) was funded by Bob's debt to you.

    The answer was, obviously, that no it didn't. The fund spent by me was the $10 note that Bob paid to me on your behalf.

    Now for the next question.

    Pete currently has the $10 note. Let's say that Pete decides to lend the money to Joe. Now Joe has the $10 note and he owes $10 to Pete.

    Have I redistributed Bob's debt to you, to Pete?

    Once again, the answer should be obvious.

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    1. You're wasting your time. Tom and I both understand that the govt, in theory, doesn't have to obtain money to spend more money.

      You're better off spending all this time on the Mises.org site teaching people the basics of endogenous money and other post-keynesian basics.

      I have no idea what prompts you to waste such an extraordinary amount of time on MRists....

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    2. No I don't think you do understand Cullen. I'm not talking about whether the government, in theory, has to "obtain money". I'm talking about the nonsense you write, such as,

      "the government obtains inside money either taxing your inside money account and redistributing it to someone else OR they sell a bond, obtain inside money and spend it into someone else’s account".

      I have no idea why you feel the need to write things which are simply illogical.

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    3. Okay, Phil. I just can't understand MMT and everything I say is nonsense. So maybe now you can stop stalking me on my various websites.

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    4. I don't stalk you, idiot. If you don't want people correcting you on your sites then maybe you should just censor them. Oh wait, you already do that.

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    5. Yes, I moderate people who leave THOUSANDS of comments on my sites as they obsess over my work, harass me daily and call me "idiot" on a daily basis. Just like ant sane person would.

      You need to get over it Phil. I'm not a threat to the MMT religion so stop worrying so much about it. You guys have bigger fish to fry.

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    6. I don't leave thousands of comments on your sites, obsess over your work, harass you daily or call you an idiot on a daily basis.

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  8. Phil,

    I am not your enemy. MMT and MR have a lot more in common than these back and forths imply. I think maybe we should spend less time focusing on where they disagree and spend more time on the ample overlap. You guys have much bigger fish to fry than MR.

    Truce?

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