Gyroscopic Investing

LW,

Did you read anything we posted on the functionality of the fed/treasury?  It answers your question about fed independence.  The fed WILL make sure the treasury auctions work and they therefore can spend what they want.  This means it's NOT a seperate issue... it should be understood by all holders of US debt that they're not holding a pause button on consumption or purchasing power... they're holding another form of money... in a savings account.  You aren't "lending" the treasury anything, as if they really cared they'd "borrow" it from the fed for free.  Interest rates on debt are a monetary tool, not a market-price on "borrowing" the treasury something it didn't need you for anyway.  

A dollar is fiat money.

The bond IS fiat money.

Trading one for the other is not adding anything to the economy it doesn't already have.

Lone Wolf wrote:

moda0306 wrote: A promise to pay a fiat asset is a fiat asset.  These are not "real" assets... they are financial assets backed by the ability of our government to tax us.  You can't think of dollars as confetti but think of treasury bonds, or any other bond for that matter, as being a "real" asset.  It's promising to pay a fiat amount.  

It sounds like our definitions line up reasonably well then.

I imagine we also agree that the homeowner represented by an MBS is "deficit spending".  Likewise, the issuer of a corporate bond can "deficit spend".  And certainly, the issuer of a Treasury bond does loads of deficit spending.

Thus, when the Fed buys any of these assets, it is loaning funds with money printed out of thin air.  Whether the purchased financial asset was created in the "public sector" or the "private sector" makes no difference in terms of how money gets created.  Do you agree?

Yes, in terms of "what will increase M0."  No, in terms of what money TRULY is... basically, both cash and bonds are money.  You're trading one form for another.  This isn't going to affect peoples' purchasing decisions.  Deficit spending will.  That, therefore, is truly what's "printing money," because the bond they "had to issue" for cash to spend was money as well.

Lone Wolf wrote:The Fed has a printing press in that it can purchase assets by creating currency out of thin air.  If the government issues $1 trillion in new helicopter drop bonds on the open market, and I purchase them with counterfeit money, then I am the one with a printing press.

You haven't proven the the Fed creates net financial assets in the private sector. Only the Treasury can do that. This should be obvious by the fact that the sum of private sector's $15 Trillion in risk free savings are far greater than the Fed's balance sheet. You seem to ignore that. And the $15 Trillion in Treasuries certainly wouldn't be very risk free if paying them off depended on bank loans from the private sector.

The Fed is controlled by the Treasury Secretary. We've already proven this by looking at the Federal Reserve Act. The Treasury can force the Fed to do whatever it wants to.

Lone Wolf wrote:

Gumby wrote:Nope. In your model the government starts bankrupt and it's impossible to create any money without the Fed buying stuff and interfering with the free market. But, if that were true, then we'd be on a gold standard (or some other asset-based standard).

I'm just pointing out that the government funds itself by issuing bonds first.  The Fed may or may not create money "out of thin air" in order to purchase those bonds, but Congress can't print money out of thin air on its own.

That doesn't make sense because if the bonds were issued first, the funds to buy the bonds would have to come from the Fed. But if the money to buy the bonds came from the Fed, how does the Fed ever balance its balance sheet? It wouldn't be able to unless it held onto the asset indefinitely — a gold standard approach. For the 15 trillionth time, this discussion is about fiat money... not asset based money. How do you not see the difference?

Lone Wolf wrote:Therefore, the Treasury is issuing an asset (such as a T-bill) that a PP adherent, the Chinese or a pension fund might choose to buy.  The Fed prints money if it wishes to claim this asset.

Now your math is wrong. Where does the Chinese or pension fund get the money to buy the Treasury bond?? In your model, it had to come from either a bank loan or the Fed's gold-standard-era asset-purchasing program. It can't come from a bank loan because that would just bankrupt the private sector. It can't come from your Fed's gold-standard-era asset-purchasing program because that wouldn't be a fiat currency.

The Fed's website already explains where the money to buy Treasuries comes from. The base money already exists in the banking system because the Treasury put it there from government spending. You can choose to ignore this fact that the Fed has explained to us, but it doesn't change the operational fact of what happens. Listen to what the Fed is telling us in that article we had you read. Read the Fed's web page. It's all right there.

Once again... The funds to pay taxes and buy government securities come from government spending.

Lone Wolf wrote:The Fed might help the Treasury deliver on these obligations or it might not.  But the Fed and Treasury are not a single entity.

Nope. It says right there in the Federal Reserve Act, Section 10.6. Read it. The Fed obeys the Treasury's wishes.

Lone Wolf wrote:Corporate bonds and mortgage-backed securities are also promises to pay dollars (and also assets, similar to T-bills.)  They're only as good as the perceived ability to pay (and the perceived ability for the currency to hold its value.)  But they are only a promise.

How does a fiat government not make good on its promise to pay? It's impossible for a fiat government to default. Impossible. Say it with me... A fiat government can never run out of money. The Fed isn't the source of the fiat currency if it needs to absorb assets. That should be easy to understand.

Lone Wolf wrote:

Gumby wrote:Sorry, but that's wrong. The Fed can't print without taking something else away.

Sure.  It can "take away" a mortgage-backed security or it can "take away" a Treasury security.  I understand that your argument is that the government can "deficit spend", but this is not a unique ability.

No. I'm saying there is no deficit in a fiat government. It's just spending and taxing at the proper rate. And since there is always a desire to save, the money is always handed back to the Treasury for safe-keeping. Just like the Fed website tells us. The Treasury spends money into existence first and the Fed helps the Treasury find those reserves in the banking system and uses them to buy the Treasuries that were created to offset that spending in the first place. That's the reality. The Fed tells us this. We know this because there are $15 Trillion in risk-free assets in the private sector and the Fed's balance sheet is nowhere near that size.

Lone Wolf wrote:The homeowners represented by an MBS also "deficit spent".  In either case, the Fed "takes away" the promise to repay later and prints up real currency in its place.

So for our MBS issuer, they bought a house, spending $100,000 in the process.  Then the Fed purchased that security with money printed out of thin air.  That's the creation of new money.

No... For the last time. It's not the creation of a net financial asset in the private sector. The private sector isn't any richer than it was when the MBS was first issued. The Fed just made a swap. It seems you still don't understand what net financial assets are.

I believe back in the 1800's IOU's were traded as money.  These were, effectively, the corporate bonds of today.  Bonds are money.

Lone Wolf wrote: I read the article and I do not follow that line of reasoning.  Operationally, the author didn't seem to present any evidence to support this assertion.

The answer is right on the Fed's web page:

“Staff on the Desk start each workday by gathering information about the market’s activities from a number of sources. The Fed’s traders discuss with the primary dealers how the day might unfold in the securities market and how the dealers’ task of financing their securities positions is progressing. Desk staff also talk with the large banks about their reserve needs and the banks’ plans for meeting them and with fed funds brokers about activities in that market.

Reserve forecasters at the New York Fed and at the Board of Governors in Washington, D.C., compile data on bank reserves for the previous day and make projections of factors that could affect reserves for future days. The staff also receives information from the Treasury about its balance at the Federal Reserve and assists the Treasury in managing this balance and Treasury accounts at commercial banks.

Following the discussion with the Treasury, forecasts of reserves are completed. Then, after reviewing all of the information gathered from the various sources, Desk staff develop a plan of action for the day.”?

Source: http://www.newyorkfed.org/aboutthefed/f ... fed32.html

Please tell me you understand that $15 Trillion in Treasuries were purchased by the private sector somehow. You get that, right? Where did that money come from? It didn't come from the Fed because the Fed's balance sheet isn't big enough. It didn't come from bank loans because the Fed's balance sheet isn't large enough to support that many bank loans and the money supply supply needed to buy the Treasury bonds. This is a mathematical fact. The answer is that the $15 Trillion in bank reserves necessary to buy those bonds had to have come from government spending. There is no other mathematical way for it to happen.

[align=center]The funds to pay taxes and buy government securities come from government spending.[/align]

Why are you fighting something that is so obvious?

The only thing I'm trying to reconcile is how "net financial assets" interact with REAL assets when introduced to a society, in terms of total wealth.

Let's say 3 people are on an island with 1 coconut tree, 1 fishing boat with supplies, and 1 grove of plants with medicinal power.  Each person assumes "ownership" of those assets as he's the one who found them.

To apply a unit of value to these items, let's assume the weekly productive value of those 3 assets is 30 when combined with their skills (coconut breaking, fishing, and medicine making), each worth 10 units of value, and all 10 units are consumed every week.  These are all consumption items, though, so no wealth is created... the only wealth is the existing tree, boat, and grove of plants, let's say each is valued at 1,000 units of value, generating 520 units of value anually.

Enter a fourth guy who comes to the island, and finds some weapons and green paper.  He sees that 1) these people are waiting up late at night thinking the other guys are going to steal their stuff, and 2) they are inefficiently trading with each other.  He proceeds to offer them all protection if all 3 vote to give him some of their production.  They see this guy's services and decide he also has 1,000 units of value in weapons, and will, likewise, produce 520 units of value per year (10 per day).  (How do these stories work out so conveniently?)

So now, without a currency, you've got 4,000 units of net worth and 2,080 units of GDP.  It's all pretty inconveniently traded still, and the 4th guy still has his paper, so he devises an MMT idea.  He goes to the guys and offers them the idea that they each get 1,000 pieces of paper, stipulating that they 1) only trade in that paper, and 2) pay into him 250 pieces per year for his police services.  He would then spend those 250 pieces each on fish, coconuts, and medicine.  Now we start denominating the FMV of this economy in the paper value, not "units."  Since GDP was 2,080 units, and the value of 1/4 of the services has been set at $1,000 per year per , we'll assume that the new GDP is $4,000.  By that measurement, the wealth, denominated in dollars, of the entire economy is $7,692.... $1,923 for each of the tree, boat, grove, and weapons.

But now they have $1,000 each, and they'll make $1,000 per year from selling to each of the other members, and spend $1,000 per year for consumer goods.  The nature of the money (no INCREASE in net savings) matches the nature of the economy around it (no increase in real wealth).  If the police guy tried to take more paper and spend it on more fish & coconuts, those two guys would run into supply contraints and would HAVE to raise prices.  Any attempted increase in savings in the economy, then, would actually just get eaten up in higher prices for everything.  This all makes sense.

We've established, now, that the FMV of the REAL wealth in the economy is $7,692.  The paper just makes things easer.... but now we have $4,000 in "money" to add to their balance sheets.  How did the total wealth of the economy go from $7,692 to $11,692?  Or did it?  Am I missing something here?  

(EDIT: FIXED MY CALCULATIONS)

LW,

When the fed buys a MBS, the person who took out the loan still has to pay it back, destroying money to the fed all along the way.

The person who sold the house still has $100k in cash, and now, instead of having $100k in MBS, the bank holds $100k in cash.

This is trading base money for credit money.  Both are money.  Balance-sheets haven't changed.

Gumby wrote: The Fed is controlled by the Treasury Secretary. We've already proven this by looking at the Federal Reserve Act. The Treasury can force the Fed to do whatever it wants to.

Your interpretation of that section is that "The Treasury can force the Fed to do whatever it wants to"?  That seems like an extremely generous interpretation!  It certainly doesn't follow from a surface reading of the text.

Basically, it just looks like a protection against the Fed going beyond its charter to usurp the Treasury's power.

Gumby wrote:This should be obvious by the fact that the sum of private sector's $15 Trillion in risk free savings are far greater than the Fed's balance sheet. You seem to ignore that.

First, there are only $9 trillion in marketable securities.  Intragovernmental debt isn't "in the private sector".

Second, this is a red herring.  There is no reason that the Fed's balance sheet, M0, M1, M2 or anything else should have to match the Treasury market in size.

To illustrate this point, the total bond market is several times bigger than marketable US debt -- it's $32 trillion.  That easily swamps the much punier $9 trillion of marketable government debt.  These numbers don't match up in any discernible way... nor should they!

Guys, it's been fun, but I'm finished on this discussion.  I'm afraid that's as much MMT as I can stand for now!  I don't buy it but at least it's always fun to talk about money.  Now to just get our hands on some... 

Get your hands on some?  What kind of money.... bonds or cash?

Does it matter if you have either?  Would you spend more with one form of fiat purchasing power vs another?

JK... we'll continue this soon I hope... though I think you have all you need to read from the article about how the fed & treasury work together.

i have been trying to follow all of this in the hope it would end up making some kind of sense to me but so far no luck  ...  has anybody got a description of MMT in a schematic or as a drawing showing where fiat money comes from, goes, gets created, gets destroyed, gets taxed, and why debt doesn't matter?  or otherwise explains MMT.. 

http://pragcap.com/resources/understand ... ary-system

http://www.levyforecast.com/assets/Profits.pdf

http://hir.harvard.edu/debt-deficits-an ... ary-theory

Very solid links on the creation/destruction of money, what gives it value, etc.

The thing about MMT that intrigued me was that it correctly explained...

• Why Treasury Yields would stay low while US debt is downgraded
• Why Treasury auctions are almost always oversubscribed by 3:1 or more
• Why QE wouldn't create any significant inflation
• Why Eurozone countries would see expanded debts from austerity
• Why our currency hasn't hyper-inflated (and has little risk of doing so)

MMT got it all right. Meanwhile the Austrians are still waiting to be proven correct.

It also turns out that LWs model of having the Fed buy gold was incorrect. It turns out the Treasury is the entity that decided how much gold to buy — which totally makes sense, since it's directly controlled by Congress.

When the US government was working under the gold standard the US Treasury would literally print up certificates to purchase gold from the gold mines. These gold bars would be delivered to the government and the Treasury would issue a check to the miner.  This new money would end up at the Federal Reserve Bank in the form of deposits.  This would naturally increase the money supply. An increase in the money supply is scary for obvious reasons.  So, the term debt monetization has its origins in the days of the gold standard, but persists to this day despite the fact that we are no longer on a gold standard.  Not surprisingly, the term is still used today despite the fact that the US government can’t monetize its debt via Fed purchases.
Source: http://pragcap.com/pomo-flip-matter

And actually here's the key point to prove that, that Lone Wolf needed to see... from a speech by Richard Fisher of the Dallas Fed:

“But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place….The Fed does not create government debt; Congress does.”?
Source: http://dallasfed.org/news/speeches/fish ... 110208.cfm

Fisher is not only saying that the Fed doesn't conduct helicopter drops, he's also clearly saying that the government's debt needs to exist before any monetization can be done. In other words, it's impossible for the Fed to monetize the Debt.

Not only is it impossible, but obviously the Treasury must spend money into existence first, before the corresponding bonds are issued.

The Fed doesn't expand our money supply, Congress does. The Fed just manipulates it.

And even when we were on the Gold Standard, it was the Treasury that was buying the Gold from gold miners, not the Fed. I should have realized this earlier, since Fort Knox is controlled by the Treasury Dept.

moda0306 wrote: http://pragcap.com/resources/understand ... ary-system

http://www.levyforecast.com/assets/Profits.pdf

http://hir.harvard.edu/debt-deficits-an ... ary-theory

Very solid links on the creation/destruction of money, what gives it value, etc.

thanks for the links... i think i will try wrapping my brain around it earlier in the day when my thinking is clearer..
(still hoping somebody can just draw me a picture )

l82start wrote:thanks for the links... i think i will try wrapping my brain around it earlier in the day when my thinking is clearer..
(still hoping somebody can just draw me a picture )

Moda's recommendations are excellent and cover everything there is to know. However, if you're looking for a brief audio/visual introduction, my recommendation is to watch the following two videos:

Video: Where does Money Come From
Video: MMT is simple

When you watch the first video, you might shake your head and say that banks create our money supply. But, keep in mind that banks can't create any loans without holding base money. So, the over-simplified example in the video is really talking about base money.

...and then follow it up with:

http://pragcap.com/n-y-fed-explains-gov ... sues-bonds
http://pragcap.com/when-will-the-bond-a ... in-to-fail
http://pragcap.com/who-will-buy-the-bonds

(these are all linked to from the first link Moda provided).

...and finally, there is a short set of overview videos that you can watch:

http://pragcap.com/resources/media-section

Hope that helps if the full resources are a bit too daunting to start with. Much like the PP, understanding MMT takes a few months to fully absorb.

Another way to prove that the Treasury spends first and issues bonds later...

The Fed isn't permitted to buy Treasuries directly from the Treasury. The Fed can only buy Treasuries from the Primary Dealers. And if the Fed can't purchase Treasuries until they are obtained by the Primary Dealers, then the only way the Primary Dealers could possibly have the reserves to buy new Treasury bonds is if they have the reserves in advance. And the only way the Primary Dealers could possibly have the reserves in advance is if those reserves were spent into existence by the Treasury before the bonds were put up for auction.

This is also true of any asset, including MBS. The Primary Dealers must obtain the assets somehow before the Fed can purchase them. Therefore, for the Fed to purchase any asset, the private sector must first obtain the necessary reserves in advance, without the Fed's assistance. This can only happen if the Treasury spends money into existence first — before the Treasury issues any bonds.

The funds to pay taxes and buy government securities come from government spending.

Game, Set, Match!

l82start wrote: i have been trying to follow all of this in the hope it would end up making some kind of sense to me but so far no luck  ...  has anybody got a description of MMT in a schematic or as a drawing showing where fiat money comes from, goes, gets created, gets destroyed, gets taxed, and why debt doesn't matter?  or otherwise explains MMT.. 

I also much prefer schematics to words. The best MMT schematics I know of are:

http://bilbo.economicoutlook.net/blog/?p=11218
http://econviz.org/macroeconomic-balanc ... isualizer/
http://www.thoughtofferings.com/2011/06 ... y-and.html

I think this discussion perhaps isn't giving enough significance to time delay and how important that is for making all of this work. Gumby seems to be saying that new dollars have to already be there to buy any new treasury bond. BUT an existing fixed stock of dollars can just circulate around faster and faster buying bonds and being paid out as bond interest. My example of Lone Wolf writing bonds on a desert Island and Gumby, moda and me buying them using the $100 we washed ashore with illustrates that. In that desert island example perhaps we might imagine that Gumby, moda and me were each hoping to use our stock of bonds as a way to purchase provisions from the others if we ever got sick.

I think it is vital to drill down into what makes government debt "a net financial asset" in MMT terminology whilst private debt is supposidly ephemeral and "all nets to zero" according to MMT. I'm finding it hard to see anything beyond faith that the government will always pay up. With current arrangements that amounts to faith that government debt will always be purchased.
A very interesting case IMO is Goldman Sachs corporate debt. Apparently the price that that trades at is only explicable on the basis that Goldman will always get a government bail out and never be allowed to default on its corporate debt. Does that make Goldman Sachs corporate bonds "net financial assets"? When the UK banks went bust in 2008, none of the bonds lost out. Has the finance system sufficiently captured our governments for us to consider all that corporate debt as "net financial assets" ? I guess I'm having a MMT wobble.

stone wrote:I'm finding it hard to see anything beyond faith that the government will always pay up. With current arrangements that amounts to faith that government debt will always be purchased.

The reason MMTers know that debt will always be purchased is because there is always a desire to save. Reserves always exist if money has been spent into existence. All it takes is a desire to save for government debt to be purchased. The Primary Dealers are contractually obligated to take that savings and invest it in government debt. If the Primary Dealers can't find the savings for some reason, they just delay the auction of government debt. So, I suppose it takes faith in the law of the land for the debt to be purchased. As far as I know, there is no law that Goldman Sachs will always be bailed out

Also, the Central Bank can provide an overnight loan if there's a temporary Primary Dealer liquidity issue, but it requires the Primary Dealer putting up some collateral in exchange for that loan. In any case, it really just comes down to a desire to save. The only reason to have a government bond in a fiat economy is really just a risk-free savings vehicle.

But Gumby, Lone Wolf's whole point (from what I could see) was that it was no different from private sector levering up. In the case of the Goldman debt, with a captive government standing behind them with a bail out at the ready, do you see that as "net financial assets" too?

stone wrote: But Gumby, Lone Wolf's whole point (from what I could see) was that it was no different from private sector levering up. In the case of the Goldman debt, with a captive government standing behind them with a bail out at the ready, do you see that as "net financial assets" too?

I'd have to think about it some more, but I suppose you could say that if a private entity becomes so powerful that it essentially has a gun to the head of the government and its taxpayers, it becomes a country of its own. In other words, now Goldman Sachs essentially has the power to tax the government at its will.

But, you still can't use bonds from Goldman Sachs to purchase government bonds. And then you're getting into shadow banking, which has nothing to do with purchasing government bonds. You can't use money from the shadow banking system to purchase Treasuries from the government. You need cold hard reserves to purchase Treasuries directly from the government.

Private debt and public debt both tend to pull more productivity out of the economy than otherwise would have been via bartaring.  Private debt, though, depends on enough public money in the future to pay it back... Also, the economy depends on enough public/private money in the future to keep people productive and have enough money.

If there's not enough base money, bankruptcy will start to happen, and while this isn't all bad, it can have damaging effects if all of a sudden 5%-15% of the REAL assets in the economy are in limbo because of financial asset/liability bankruptcy proceedings.  Banks aren't in the business of running rentals or businesses, and people would take care of their own home better than one they rent and tend to run their own business better than one owned by the bank... this is worth at least considering when pontificating how useful massive liquidation of our debts would be.  I'm not very concerned about all the financial assets/liabilities as I am the state of real people and real assets.  I shudder to think what all these foreclosures sitting in 55 degrees will look like after 2 years with nobody in them.

stone hit the nail on the head back when he talked about dollars being claims on productive capacity.  As long as there's future productive capacity (and we maintain an IRS with clout) we will maintain our currency's value, AND people will have a will to save in financial assets denominated in the currency, including the currency itself.  If there's no will to save, that means there are much more serious implications about our economy's productive capacity in the future or our govt's ability to tax.

I don't know if this really adds much to either of your points, just thought I'd ramble and see if something took.

moda, I think "classical capitalism" entails a constant exponential growth (due to compound interest) kept from actually happening by constant bankcruptcies and defaults. That treadmill makes stuff; much of which HAS to go to waste because it can not be bought because the money simply isn't there to buy it.

I suppose it is a bit like in nature where every creature tries to increase its offspring exponentially but they are all in a dead locked struggle.

The crazy thing IMO that our masters are trying now is to actually prop up that exponential growth. I just think it means that rather than having a rapid constant succession of minor corrections, you have everything strung along until a huge collapse is inevitable.

Some natural systems involve producing lots of offspring most of whom die. Others such as whales produce fewer and have most of them survive. I guess a very low debt economy would have few bankcruptcies and much less waste. From what I can see, low leverage and equality are the real ways to avoid waste and get things sustainable.

It seems that Lone Wolf's confusion stemmed from how the Bank of Japan and the Fed interact with the private sector.

The government-owned Bank of Japan has the authority to buy government bonds directly from Japan's Treasury (known as the Ministry of Finance). And, of course, any interest payments on the bonds is refunded back to the Treasury. The BOJ holds Japanese government debt equal to 100% of the nation’s GDP. And since the government owns the bank, the loan is always interest-free and can be rolled over indefinitely. An interest-free loan rolled over indefinitely is the equivalent of issuing money. And of course, like the United States, Japan's Treasury is where Japan's spending comes from. Like the Fed, the BOJ issues bank notes by buying Government Bonds from its Primary Dealers. But, of course, the Government Bonds can only be purchased by the Primary Dealers if the Primary Dealer's cash reserves exists before the Bonds are auctioned off. And that can only happen if the Treasury spends before it issues bonds.

The Japanese people own a lot of their national debt as well. But the reason they own so much of the debt has a lot to do with the Post Bank. The Post Bank started in Japan's post offices and offered a very easy way for Japanese citizens to save their money through highly popular savings accounts. The money was obviously invested in Japanese Government Bonds. Today the state-owned bank is currently the world's largest holder of private savings and the world's biggest deposit holder — holding over 1/5th of the entire Japanese national debt and becoming the nation's largest employer. The Post Bank actually became more popular than the post office and had to open up more branches than the post office!

So, you can see where this is going... The Ministry of Finance (the Treasury) can spend and issue as much debt as it wants to, since the BOJ can purchase the interest-free debt directly. And the Ministry of Finance can sell trillions of government bonds to the Post Bank because that's where the Japanese are stashing all of the cash that was spent by the MOF before the bonds are even issued. So, Japan's debt will simply continue to grow and grow, and it won't make a difference. They will have no problem servicing their debt.

The fundamental difference between the Fed and the BOJ is that the Fed can't buy Treasuries directly from the Treasury itself — it can only go through Primary Dealers. And as I explained before, the only way the Primary Dealers would have the cash reserves to purchase Treasuries in the first place is if the reserves existed in advance of the bond auctions. And the only way the cash reserves can exist before the bond auctions is if the Treasury spent its money first, before it issues the corresponding bonds.

What's clear is that the Fed and the BOJ can't just print money into the private sector unless the private sector has purchased some collateral in advance. So, in both cases, all of the net spending all comes from the Treasury. Which makes total sense, since the politicians are deciding what the money should be spent on.

As for corporate debt... Corporations issue Commercial Paper, which fills up Money Market Funds and corporate vaults. That's shadow banking. You can't buy a Treasury Bond from the government with Commercial Paper. The government will only accept real cash reserves. So, Treasury Bonds must always be purchased with money that comes from the Treasury.

The Primary Dealer relationship nullifies any theory of the Fed being able to ever monetize the debt. Any debt monetization would have to come from the Treasury. There can be no other way.

Gumby, the same dollars can just circle round and round. In the desert island example I gave; Lone Wolf could issue $50 worth of bonds; we would buy them; he would buy stuff off us with the $50, then immediately issue another $50 worth of bonds. He could do that every five minutes. After a week, we could have immense amounts of Lone Wolf bonds with only the original $100 of greenbacks ever having been used. Lone Wolf clearly never spent before issuing bonds. He came to the island without a cent.

stone wrote: Gumby, the same dollars can just circle round and round. In the desert island example I gave; Lone Wolf could issue $50 worth of bonds; we would buy them; he would buy stuff off us with the $50, then immediately issue another $50 worth of bonds. He could do that every five minutes. After a week, we could have immense amounts of Lone Wolf bonds with only the original $100 of greenbacks ever having been used. Lone Wolf clearly never spent before issuing bonds. He came to the island without a cent.

Your example ignores where the money came from in the first place. You also don't take taxation and interest into account. You say that those initial dollars washed up on shore. But the fact is that the banknotes came into existence when they started off as electronic deficit dollars issued by the Treasury Department and they were used to purchase new Treasury bonds which were then swapped by the Fed for banknotes. And right away there are interest payments on those handful of Treasuries that will cause a larger deficit and more subsequent tax payments with every interest payment. With every tax payment requires more spending by the Treasury to replace those taxed dollars, but every single Treasury payment is taxed again and causes more interest payments, so that it requires an infinite loop of spending, interest, and taxation.

And every time Lone Wolf pays off the principal of the bonds, we would have to pay taxes on the interest payment. And every time we pay taxes it drains money from our private sector. So, every time the Treasury tries to replace that taxed money, it just causes new taxes to be withdrawn from the private sector. It never ends.

And if money isn't moving around fast enough, it just requires more base money to pay the interest off. You can pretend that we live in a world where there is no taxation and no interest, but it's just not our reality.