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We are often told that the Fed prints money, while the Treasury can only borrow. Yet, this statement is inaccurate.
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This story began in earnest back in the early 1990’s when Italian government bonds denominated in lira yielded about 2% more than the cost of borrowing the lira from the banks. One could buy Italian securities at about 14%, and borrow the lira to pay for them at about 12% for the term of the securities. This was a free lunch of 2% apart from one thing- the perceived risk of default by the Italian government. Professor Rudi Dornbusch, an influential academic economist, was insisting Italy was on the verge of default because of their debt to GDP ratio exceeded 110% and the lira interest rate was higher than the Italian growth rate. This situation caught my attention as there was easy money to be made if one knew for sure the Italian government wouldn’t default.
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Explanation why: The reserves of the banking system exist in only one single form: deposits at the Fed. Banks ‘own money’ when they own a deposit at the Fed. Banks make payments by transferring their credits. Read the rest of this entry »

Explanation why: When a bank agrees in making a new loan, it credits the agreed amount on a bank account. The only constraint for the bank is when the borrower spends the loaned amount; it will have to clear the payments using reserves at the Fed. Read the rest of this entry »

Explanation why: The government spends by writing checks on the US Treasury General Account at the Fed. When the check is deposited by the private recipient, the check is cleared directly with the Fed that debits the account of the US Treasury and credits the reserves of the bank that has cleared the check. Read the rest of this entry »

Explanation why:  Taxes are liabilities that the state has the authority to impose on private sector’s balance sheets.  It is a unilateral transaction driven by a hierarchy relation (not by contractual arrangements).  At the moment a new tax is approved (and before it is paid), the net worth of the private sector is reduced.
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By: Warren Mosler

Aiming at public purpose while reducing government discretionary power, increasing spending power, fixing the banking system, restoring states’ budgets, keeping inflation in check, achieving full employment, easing tensions in the mortgage market, and ensuring sufficient liquidity at all times.

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By: Andrea Terzi

The total amount of bank deposits has nothing to do with the saving attitude, or with the spending decisions, of bank accounts’ holders. A new bank deposit can only be created through two main channels. In one, deposits are born twins with bank loans to the non-bank private sector (households or firms). In the other, deposits are born twins with bank reserves as a result of payments made by the public sector (Treasury or Central bank) to the non-bank private sector. A third process, yet smaller in importance, is when the banking sector makes net payments to the non-bank private sector.

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