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If you look at the second "treasury & Federal Reserve" balance sheet, clearing the "debt" ($6500 at the bottom) would mean taking every penny (notes and coins, and every reserve account at every national bank) out of the system. "Debt" is a terrible way to describe the money the US government has spent. Also I'm not the only person getting recommended this video from 9 years ago hah!

Hey @bertiefigueres Thank you for the intelligent comment! Here is my response: *_the Treasury still owes the owners, the Fed in this case_* I mention that the Fed rolls over principle payments from Treasury, which is true, but it is a fair point that probably deserves an entry in the description. Under normal operations, The Fed _does_ roll-over treasury debt automatically, but this is decision of monetary policy; there is no legal requirement that they roll-over principle. Why does the Fed do this? Because a Treasury principle payment to the CB would represent a reserve drain on the system, which is no different from standard monetary policy of buying and selling Treasuries. The Fed rolls over principle, because if they didn't, they just have to purchase the same Treasuries in the secondary market. When would the Fed decide to _not_ roll-over Treasury debt? During a tightening cycle the Fed may decide to allow treasury debt to expire with the explicit purpose of draining reserves from the system. Of course, they could also drain reserves by selling treasury debt to the market, but this is exactly the same result as not rolling over principle. It is six-of-one-half-dozen-of-another. Here is a link describing the roll-over facility at the New York Fed. www.newyorkfed.org/markets/treasury-rollover-faq _* So who foots that bill? Treasury, right?*_ The Fed doesn't always make a profit on its operations, especially during turbulent times (GFC, Covid), but lets examine the data. Does the Fed ever post a loss to Treasury? www.statista.com/statistics/1386557/federal-reserve-earnings-remittances-to-treasury/#:~:text=The%20Federal%20Reserve's%20earnings%20remittances,percent%20lower%20than%20in%202021. Great comment! I'll add your name to the description and post a clarification on roll-over operations. -Wayne

Thanks@@TheBalancedAmerican . The only other note I would make on second viewing your video, at about 1:20, you created money by creating an $100 Asset and a $100 Liability. This type of money is broad money (accounting money). Technically I am referring to broad money less narrow money, so let's just call it Credit for short. I think the US technical for this is M2 less M0, I think. So you created Credit. Credit doesn't increase the bank's Net Assets because the Asset cancels out the Liability. Credit only lives in the accounting system where it is created. If one bank wishes to transfer money to another bank, they need to do it by converting the broad money (Credit in the system) into narrow money (notes, coins and reserves only) and then doing the transfer that way. This automatic transfer from Money to Credit and back again is a very common operation for banks to perform. It's what they do. You are well aware of making a deposit at the bank. You walk in to your branch with $100 note (narrow money), hand it over to the cashier, who Credits your account and then pops the $100 in their cash draw. They have just silently converted your $100 actual money (narrow money), into a $100 Credit in the system. The money itself, the $100 note, now belongs to the bank. The Credit in their accounting system is purely electronic accounting money, not notes and coins you can actually touch (narrow money). They do the automatic swap when you withdraw Credit as well, where they reduce the credit in your account and hand you a $100 note (narrow money) out of their drawer. Now that we understand narrow money and Credit (broad money), I would mention that as I understand it, the QE money created is narrow money. The money you created in your video is broad money (Credit). They are not the same thing. It may be a technicality, but technically a dog is not a cat, and I am sure you would agree the two animals are quite different. MMT, as I understand it, asserts that the government "spends into existence" money. To me, that means narrow money, because broad money is created by creating an Asset and a Liability. The Asset, the money, is linked to a corresponding Liability. So if the government is relying on broad money for the "spend into existence", they are in actual fact just "borrowing to spend" because of the corresponding Liability associated with broad money. By the way, I like the way you presented your T-Accounts in your video. They come out very nice, and it makes it clear to see what you are getting at. If you wish to get back to me on an easier platform for chatting, you can find me on X/Twitter and on Mastodon at @BertieFigueres.

Hi zonnins, thanks for comment. here is my response: *_"The example you have about money printing is wrong."_* The accounting i present in my videos has been peer reviewed multiple times. I make some presentation errors sometimes, but nothing related to what you mention here. If you can point to a specific mistake i've made, i'd be happy to issue a correction and credit you for the finding. *_"The Fed never participates in Treasury auctions"_* The video doesn't show the fed buying directly from Treasury, it shows the fed buying from banks in the secondary market. *_"The Fed purchasing treasuries would never impact the Treasury’s TGA account"_* The Fed does not _'directly'_ impact the Treasury's TGA account (other than remittance), but it certainly affects it indirectly. Surely you recognize that every reserve held in TGA is a liability of The Fed? Moreover, the fed targets an interest rate...if treasury borrowing begins to affect the interbank rate, the Fed will supply whatever quantity of reserves is needed to maintain its target rate. In this context, the Treasury is no different from a Bank, neither is reserve constrained, and monetary policy acts on the margin. I explain this in my Federal Funds video if you're interested. *_"QE creates money because it purchases treasuries through PDs from non-banks."_* QE purchased a lot more than just treasuries, but that fact doesn't change much. QE changed the aggregate saving portfolio of the financial sector by increasing dollar liquidity, and reducing savings assets circulated. How do these actions affect prices? It will have very little affect on broad-based prices because monetary policy targets savers, not consumers. Prices of financial assets are likely to rise as a result of QE (which we saw), whereas prices of real good and services will remain largely unaffected (we saw this too). Monetary policy affects broad-based prices through the investment/borrowing channel.. I.e. companies or consumers need to borrow to purchase real goods and services in order for financial markets to affect the price of real goods and services. So, the Fed lowers rates to make borrowing cheaper...encouraging real investment and consumption. What happens if the rate has been pushed to zero (which QE did), and people still aren't' borrowing? At that stage, the quantity of reserves produced will have no affect real prices. When the target rate reached zero, the Fed began paying interest on reserves to support its target rate. What is the difference between a reserve balance earning 0.25%, and a treasuries balance earning 0.25%? Nothing, they are both highly liquid cash equivalents earning the same rate. So no amount of swapping one for the other (monetary policy) will affect the broader market. This why Keynes called it "pushing on a string". Hope this clarifies some things. Thanks! -Wayne

That is correct, although I’m not sure why that is significant. If employees weren’t paid by the Fed, they’d be paid by Treasury. Paying directly from operations saves a bit of bureaucratic process.

Can someone please answer? Or Wayne please help me bro! I really loved your video ❤

The Fed pushed the federal funds rate to near zero, which did result in lower loans rates from banks. During QE the Fed also targeted the long side of the yield curve (which it never does) in order to try to push mortgage rates lower. But what happens if rates have been pushed as low as possible and people still aren’t borrowing? At that point the quantity of reserves in the system no longer influences the lending rate. So central banks began to try more controversial options. In Europe, they experimented with _negative_ interest rates, with limited results. The incentives for banks and borrowers in a negative interest rate environment never made sense to me, so I can’t explain we’ll what the goal of that policy was. If you’d like to learn more about negative interest rates, I’d suggest reading some articles from Miles Kimball, “Confessions of a supply side liberal” blog. Prof Kimball understands negative rates much better than me. Thanks for the interest! -Wayne

@@TheBalancedAmerican Thanks a lot for your reply, Wayne! Much appreciated and makes sense. I've been going deep into this stuff recently and rewatching your videos in-between reading. They've really been invaluable, thanks :) _psst, release more videos please! haha_

​@TheBalancedAmerican wayne does qe creates our money (deposits) to spend in real economy? And does qt destroying deposit too?

@@TheBalancedAmerican Wayne if you upload more videos please explain money market in it and repo market and how QE influence asset prices most...

@@TheBalancedAmerican in theory wayne QE monetized government debt too...as we saw with fiscal driven inflation.What is difference between 2008 and 2020 QE...in 2008 existing IOUS we're saved...in 2020 government produced debt more IOUS with more money printing...so inflation.Hope you doing good!

These are great questions. _”how is gov deficit debt free money for the private sector?”_ This is related to the concept of “net financial assets.” The only way to achieve a net financial asset is to trade a real good/service for money (whatever form). This is true of foreign trade and domestic trade. When China runs a surplus against USA, they are accumulating “net financial assets” denominated in dollars. When the domestic private sector runs a surplus against gov (shown as gov deficit), the private sector accumulates “net financial assets.” How is this different from private money being created by banks? When a bank creates money it adds a loan asset and some deposits. Both this loan and deposits are owned by the private sector…so if the loan is held to maturity, deposits will decline back to zero as well. This is a net zero affect over the long run. Not true with money created by an external sector (gov in this case). If all private loans were paid off, and all private money were destroyed, what would be left? The “net financial assets” of the private sector, ie the money that is debt-free to the private sector. Your questions are offered in the context of a monetarist view of the system. This is the first view I offered in the Treasury/Fed video. Many economists hold this view, and it may be correct, but I believe it is inconsistent. I subscribe to the endogenous theory of money, which sees these complex interactions a bit differently. Why do I say the monetarists/neoclassical perspective is consistent? Monetarists recognize that private loan creation is related to inflation. This why they try to control inflation by controlling the base interest rate. Yet, at the same time they will say that gov deficits are not inflationary because money is recirculated from an existing stock of money. This is inconsistent because gov deficits grow the total size of economy’s balance sheet the same way that private deficits do. Why are private deficits inflationary, but gov deficits aren’t? Makes no sense to me. This inconsistency in their perspective is one reason they get policy wrong. When most of the mainstream ideas were formed, gov spending was a small part of total GDP. In this world of private sector dominance, adjusting the interest rate can be very effective, since private entities are sensitive to prices. Any actions taken by Treasury will have a small impact, perhaps unnoticeable. The world today is very different. Gov spending has grown to 40% of GDP. Treasury is not sensitive to interest rates, and will continue to spend regardless of financial conditions. This greatly changes the outcomes of interest rate policy. In a world of fiscal dominance, rising interest rates may cause inflation to rise (the exact opposite of what policy makers believe). I basically agree with Warren Moslers neofisherian view, but I believe it follows a bell curve, like most things. In my models, in a world of fiscal dominance, rising interest rates will increase inflation until it causes extreme damage to the private sector. So interest rate policy on the short tail is inflationary, and deflationary in the long tail. It amazes me policy makers consider these relationships linear. What are they thinking?!

@@TheBalancedAmerican And this is interesting to how MMT has convinced us that it is more great to get debt with ourself and pay interest to ourselves instead of saving or god forbid spend.

@@TheBalancedAmerican Hello Wayne can you help in knowing how government created deposited get destroyed when government pays off its debt? Is it possible?

I’ve always found this a rather favorable deal for the bank as well. The argument would be, the bank is responsible for the deposits because it must ultimately fund the deposits with currency. Although considering bank funding is virtually guaranteed by the system, it seems unfair the bank would be able to acquire the property at default with such little risk. At its best, modern banking is a really prudent way to bind money creation to the productive effort of the borrower. At its worst, modern finance can be parasitic and exploitative.

@@TheBalancedAmerican Wayne i really wanna say thanks to you for these videos and even comments under it you have answered (i read them all) it has enchanced my knowledge of monetary and fiscal system greatly.Thanks again!I will say credit creation is dangerous too. Especially from the perspective of derivative trading these days 0DTE options are very popular and if you see twitter many earning good money from 0DTE too from chart trading but then these so called forex trading platform provides already 500x leverage too.Like this credit creation is mostly not going too productive purposes but leverage trading things...so much leveraged is system.

@@TheBalancedAmerican Wayne since you said bank funding is virtually guaranteed by system i wonder what are all ways through which bank funding is virtually guaranteed by system? 1) interbank market ( i.e. money market as much i know) 2) discount window 3) in crisis by federal reserve ( so when in crisis federal reserve give temporary liquidity to system or banks) is it free or banks have to pay it back to fed?

@@TheBalancedAmerican here goes silicon valley bank wayne...banks can actually fail...and fed won't save them.

​@@shubhamsingla9340 Yes! The fed will not lend to an insolvent bank, unless it would be catastrophic to the system. I speak briefly about how banks go down in the Federal Funds Market video. In 2007, Fed allowed Lehman Brothers and Bear Sterns to fail before it start lending to insolvent banks. During that crisis, the Fed ended up buying many of the bad assets on the books of insolvent banks. I believe those bad assets are still on the Fed's balance sheet! (see Maiden Lane Transactions). So what is happening with SVB? Although it is still early, it looks like they are getting the double-whammy...collapsing asset values, and a run on their deposits. Best guess, SVB was over-exposed to bonds issued by Tech companies, which have been going bust left and right lately. Word got out that they had a bunch of non-performing assets, and so investors started moving their uninsured deposits to other banks. How does SVG respond to everyone moving their deposits? It needs to convert one payable ('deposits') to another ('fed funds loan')...only this time, other banks wouldn't lend to them! Their assets are non-performing. Can't sell their assets, can't get a loan, and all the bank's capital is chewed up, its over for them!

You don't know the answer to this wayne? I thought you had good grasp on economics and understand MMT...

Hi Shubham, I think you have enough info to answer this for yourself. If banks have little/no reserves to buy treasury debt, what would happen to the interest rate on Treasury debt? If banks can’t lend to Treasury, they can’t lend to each other. What would happen to the interbank interest rate? How would the central bank respond to these changes in the interest rate? ;) (TLDR, this is why MMTers say gov/cb must spend first before borrowing currency)

@@TheBalancedAmerican i understand cb will defend thier target rate for these changes. But i don't understand one thing you say here if thier is not enough reserves in system banks can't lend reserves to each other but mostly banks enter into private contracts with each other to create money keeping loan contract as collateral.Where reserves here comes into picture when they don't even transfer reserves to each other.Like now in india we have 4 percent liquidity ratio and 19 percent SLR (statutory liquidity ratio ).I really don't understand reserves play in all this.If you could help me with an example how they comes into play into all this will be helpful.Thanks.

@@TheBalancedAmerican i don't understand main part is how thier can be scarcity of reserves when reserves are not even needed for creating money! I am surely missing something sorry for confusion.how reserves even keep rates effected when they don't even need reserves...i have read few white papers on this too but not sure what they mean...they also say same things reserves keep interest rate intact.

Hey Bruno, This is a really good question, and I don’t have a good answer. Here is a series of charts we can use to communicate: fredblog.stlouisfed.org/2021/02/visualizing-the-feds-new-monetary-policy-tools/? You are correct, rather then IOR acting as a floor, the effective federal fund rate fluctuates above and below the IOR rate. In fact the IOR rate acts more like an anchor…representing the center of the Feds target range. But why would the FFR ever go below IOR rate? I don’t know. It could have something to do with the fact not all institutions have access to over night interest on reserves, and must use the reverse repo facility to park their idle reserves. I could have something to do with a much reduced need for Federal Funds Loans. QE flooded the banking system with reserves, which in turn cause a significant decline in the activity in Federal Funds markets. I have not put enough research into this topic to give a smart answer. I’d love to hear your perspective?!

Asynchronous net settlement…this is exactly how it works. Why do you think they call Central Banks “lender of last resort?” It’s because the system works fine so long as banks lend their surplus reserve position to deficit banks. Sorry to burst your bubble :/ In the video I am isolating asynchronous transactions, so viewers can better understand how it works. It is a learning tool. In reality, reserves are needed for synchronous transactions that are not intermediated by a clearing house. Although it varies, upwards of 90% of transactions are settled *async*, so I believe the learning tool is relevant in understanding that context.

@@TheBalancedAmerican asynchronous net settlement, the use of a clearing house, banks lending reserves in the Fed funds market is all fine…what’s totally wrong is how a bank that is OWED reserves can “lend” to the very bank that owes it reserves. Even without the accounting it makes zero sense logically. Btw the interbank market doesn’t deny central bank is LOLR, it just means that yes actually reserve ownership needs to be transferred at the end of the day from bank to bank

If I owe you money, and you otherwise have no spare cash (reserves in BofA’s case) you can’t lend me money you don’t have and balance both of our books. WF’s Fed funds loan would need to come from a bank C like JPM that actually has spare reserves.

@@shourjyaghosh2753 Why is that contract difficult to believe? If you owe me money, and we agree you’ll pay me tomorrow and add on small interest fee. Is money exchanged at the moment of that agreement? No. What if the next day, you still owe me money, and we agree you’ll pay me next day and a small fee. Is money exchanged at the moment of that agreement? No. How many days can we make this agreement, postponing settlement in currency? If ‘I’m earning an income from you in interest payments, I might continue the arrangement forever. What else am I going to do with idle reserves? The system collapses when I decide to break the cycle, I won’t lend to you anymore. Then CBs step in and lend to the deficit bank. See?

@@TheBalancedAmerican if I used credit to buy something off of you, yes you’ve swapped some asset (let’s say you sold me a computer) with my debt instrument on the asset side of your balance sheet. You’re right that this could continue on and on until you lose faith in my ability to repay. The video is very different. In making a loan (and the borrower using it for a transaction), WF has added a liability onto BofA’s balance sheet. The example with me and you is a simple asset swap for you, I didn’t add to your liabilities. BofA is owed money; one and only one thing can settle this as a final transaction, which is reserves “moving” from WF to BofA. Even if BofA had reserves to lend WF, it would be a debt rollover with WF still owing reserves. Nothing in your video can be considered settled or final in any way. That’s all I’m saying.

I am also looking from the same.. if you find any interesting article on this subject please let me know...

Primary dealers buy in the primary market for treasuries…directly from Treasury during auctions. The Fed buys/sells treasuries in the ‘secondary’ market. Anyone can list their treasuries for sale in this market. Could be banks, investment funds, or average citizens.

1) I clearly state that the consolidated gov balance sheets is a theoretical framework. 2) I *do* show TGA drain reserves before spending, exactly as I do in the separated balance sheets. 3) go look at TGA balance history on FRED, it shows the balance doesn’t change much except during crisis. So you can set the TGA balance at any level, including zero, and it will not have meaningful influence on the quantity of reserves in the systems. Typically the Treasury draws down its account throughout the day, and then fills it back up to the level it started with…Ie the net reserve position of treasury is nearly always zero!

@@TheBalancedAmerican but during April tax season TGA do fill up.Draining reserves from banking sector to TGA

@@shubhamsingla9340 taxes are collected on a weekly, monthly, and quarterly basis. April deadlines are for individuals filing their tax documents, and very few owe taxes at that time. You may see a small bump in tax revenue but not likely, since many get tax rebates. Either way it wouldn’t indicate that Treasury is draining reserves in any meaningful way. So long as Treasury is running a deficit, tax revenues are never enough to cause a reserve drain. Treasury would need to run a surplus to have a meaningful impact on the quantity of reserves. But remember, if Treasury drains enough reserves to impact the interbank rate, the CB will just add reserves to offset the drain and defend their target rate.

@@TheBalancedAmerican i still don't understand if thier are abundant reserves why asset prices are going down with QT going on.I see QT as marginal buyer as federal reserve is now selling assets who we're buying once ( during QE) that's why asset prices are going down.

​​​​@@shubhamsingla9340ey thanks for this video and I had a question an MMTer is saying this vid proves their statement that our tax revenues are not carried forward to the treasury and we just delete the tax money and just poof money and print T bills to pay for our govt obligations, is that accurate and this person thinks your agreement in how mmt thinks about the treasury and fed together equalling a balance of zero always is actually how they do things but you are saying that's just your opinion and not actually how it works. Which the facts point to us showing tax revenues going to the treasury but that would mean the treasury and fed wouldn't together equal zero then disproving you saying mmt gets the conceptionalization right. The major reasons why I don't think the mmt claim is accurate that we just delete the tax revenues and just poof money/issue debt to pay for obligations is bec that makes it so confusing as to how do they determine how much debt/how much poofing of the money to do for their day to day obligations for the year when it makes it so much easier to carry the money forward and have that run through and now you take the rest out that you need by issuing debt. And the fact we have articles showing record breaking tax revenues in the treasury disproves that bec if we just deleted the taxes we collect then we wouldn't carry them forward to the treasury to then just delete it so that MMTers don't look incorrect. And is there any way we finance govt obligations (ie military Healthcare govt spending bills) by increasing the money supply or do we just use money already in the system like with tax revenues and issueing T bills? Because I know QE we basically print money that then goes to banks to encourage lending and if it gets loaned out we have increased the money supply. There has to be other ways we increased the money supply before we implemented QE but in what ways do we do it now?

Most primary dealers are banks. Here is a current list. www.newyorkfed.org/markets/primarydealers.html Fed buys treasury debt in secondary markets, not the primary market. Primary dealers are the entities who are responsible for making a market for treasury securities.

@@TheBalancedAmerican wayne what is your opnion about this mosler way how debt is monetised.Here is link to video where he explains. czcams.com/video/480sGei5ZsA/video.html