27 karma · joined August 28, 2017
Most money is created by commercial banks. As the demand for credit expands the money supply expands, and as credit is repaid, the money supply decreases. This is going on all the time.
The point of saying that the Treasury bond accounts aren't counted as part of the monetary base while the reserve accounts are is that it doesn't really matter which account your money is in at the Fed. My original comment was pointing out that QE just moves reserves from one account to the other and that this has little effect on overall economic activity because lending by private banks isn't reserve constrained (MMT people do a good job explaining this as well).
But if there's a fall in aggregate demand at a given price level, there are _fewer_ dollars chasing the same number of goods for a period of time. So if government spending is greater than taxation for that given period, it doesn't necessarily cause inflation.
> the bank exchanges an asset (like a treasury) in exchange for reserves (base money)
The "monetary base" increases because of the way they define the monetary base. In the old days, the money in reserve accounts was convertible into gold, and the money in the Treasury bond accounts wasn't, so they count the money in the reserve accounts as part of the "monetary base" but not the money in the Treasury bond accounts.
A good aspect of MMT is that it explains how the Treasury spending more than it takes in in taxes means more money is created into the economy than is deleted out of the economy. This is the more important thing to focus on.
Some of the MMT professors also do a good job explaining how QE (quantitative easing) doesn't create new net financial assets into the system, it just shifts around assets in accounts at the Fed.
All this focus on the Fed seems counterproductive.
Let's say Bank A loans $1000 to a customer. It creates a $1000 bank deposit in that customer's account. On the balance sheet it looks like this:
Bank A:
(Asset) Loan to customer of $1000
(Liability) Bank deposit in account of customer $1000
Bank A created the $1000 at will out of thin air. This is how it happens most of the time.
When a business receives a loan it shows up as an asset to them in the form of a bank deposit. The business then usually uses that demand deposit to purchase goods and services, so people who don't owe debt to the bank get those deposits in their accounts, and spend the deposits, etc., etc. So effectively, private banks create money.
I wouldn't want to read it on a non E-ink screen, or have to scroll within a single page though.
That's exactly what I was saying: the goods and services are priced in USD because the legal structures require USD. I just used taxes as the most simple example.
But the whole point of the legal structures requiring USD is to get people to offer goods and services for sale in exchange for it. That way the government can purchase goods and services from the private sector to use as public goods, without having to first "get the money" from somewhere else.
Yes it does. You have to pay your taxes in U.S. dollars, so people have to use it. That's one of the purposes of taxes: so that the government-issued currency is used.