@Gerard Borg Let’s see where we agree or disagree… Model 1, Treasury can spend by issuing new Liabilities to pay their bills, but that creates negative Equity, agreed? Or Model 1, the BoE can just pay Treasury’s bills, creating new Liabilities, but that creates negative BoE Equity, agreed? Midel 2, We have to separate Treasury spending v BoE Ressrves creation. Model 2, the BoE creates new reserves via BS expansion, new Ressrves are used to buy new assets +A - (+L) = 0. Model 2, Treasury receives reserves from banks via tax payments or bond sales, the BoE transfers via Liability Swap, -L +L = 0. Model 2, Treasury pays banks Ressrves, BoE facilitates via Liability Swap -L +L = 0. I am not asking you which model we use, I am just making sure we are clear on how each model works, b/c I explained Treasury as issuer if Treasury Coin I think that’s most likely, but BoE could be model 1 as well, or model 2. This is the entirety of the universe of what we are discussing. Model 1 Treasury issuing to spend, model 1 BoE issuing to spend, model 2 BoE issuing and Treasury taxing or borrowing to spend. “>>Under model 2 when Treasury spends we will see no net increase in total issuer/BoE liabilities because new issuer/BoE Liabilities +L (+Reserves) are offset by a reduction in issuer/BoE Liabilities -L (-Reserves) to Treasury. Treasury itself sees this as a reduction in Assets -A ( -Reserves) and a reduction in Equity (-E). This us an asset payment for Treasury (-A = -E) but a Liability Swap for the BoE (-L+L = 0).<< “You are now saying that Model 2 shows a Treasury spending money into existence by decreasing its assets. No. Remember, Treasury cannot create assets, right? Your Model 2 is exactly Figure 7 of K-K. In other words it is MMT. Again, no, not sure how my words are not reaching you. 1. Treasury can only spend assets or Ressrves it has on deposit. It cannot create new asssts to spend. No exceptions. Understood? 2. If Treasury has Assets, only then can it spends its assets -A = -E. 3. If Treasury has no Assets, it is not possible to spend Assets unless it borrows assets. 4. When Treasury borrows, it expands its balance sheet, which causes no change in Equity. 5. When treasury borrows from the BoE, they both expand their BS, Equity neutral for both, BUT, BoE does create new Ressrves which Treasury borrows and spends. This is still model 2 b/c the issuer BoE uses new money to acquire new Assets, Treasury loan, which prevents a loss of issuer Equity., 6. The Treasury could issue their own Liabilities like Treasury coin, which creates negative Equity.

@Gerard Borg Q1 “>>Model 1, Treasury can spend by issuing new Liabilities to pay their bills, but that creates negative Equity, agreed?” Yes, but whether Treasury spends their assets (reserves they received from banks), or issues new Liabilities, Treasury spending creates negative Equity. 0 = A - L - E L= A - E Therefore: +L = *A OR -E +L = +A OR +L = - E Model 1: +L = -E Model 2 +L = +A None of that should be controversial, it’s simple accounting. There can be no other models if money is issued as a Liability, which modern money is under DEBK. Note: for Asset money like Gold or Treasury reserve account credits at the CB: -A = -E Treasury Spending reduces Equity whether the currency is an existing asset (issued by CB) or if it is a new Treasury Liability. Q2: “Or Model 1, the BoE can just pay Treasury’s bills, creating new Liabilities, but that creates negative BoE Equity, agreed?<< It depends. +L to spend = -E +L to acquire Assets does not change BoE Equity: +L = +A Therefore, when Treasury spends, it always creates negative Equity, but what the data will show helps us understand if we are in Model 1 or model 2. If Treasury spending causes an increase in Ressrves and creates negative BoE Equity, model 1. If Treasury spending causes no increase in Ressrves and no negative Equity, but instead shows an increase in Assets, model 2. There are no other models under DEBK as currency is issued as a new liability, so + L MUST RESULT IN EITHER +A or -E. The data will show you which. It’s pretty simple really, when the Treasury spends, either Treasury Assets and Equity decrease -A = -E. Or when Treasury spends are they issuing new currency +L = -E? Do BoE reserve account Liabilities increase (+Reserves)? And if they do, (+L) do BoE Assets increase (+A)? Conversely, for Treasury receiving tax payments; Model 1: -Liabilities = +Equity Model 2: +Assets = + Equity Receiving taxes increases Treasury Assets in both models.

@Richard Corin “Obviously we have a fundamental disagreement about what constitutes fiat money.” I think we are in intellectually trying to better understand each other,m, and work through any differences that be bridged… “We agree about the mechanics of government payments. The government credits the payee's bank's reserve account and the bank obeys the instruction to credit the payee's deposit account.” Fantastic! Payment complete! We agree! What more is there to say understand? “Then everything dissolves into nonsense, because I say the fiat money is in the payee's bank account, “ Ahh…yes. This is vexing…but you do agree the public does not hold ressve account credits ur Ressrves in their deposit account, right? And you do agree that the bank receives assets from other banks for payment, not public or bank liabilities, not deposits, agreed? And then creates the new deposit or new bank liability, a new bank IOU to their customer? And the deposit is an IOU from the bank? So is our disagreement the ressrves received by the bank is legally the asset of the public? Or where do we go wrong? “but you say the fiat money is in the bank's reserve account at the CB.” Where else can it be? It’s a bookkeeping entry, nothing more, a digital credit on the central bank’s servers, which is a bank asset but a central bank liability. “We see the pea go under different shells.” There is no pea! That’s the fundamental problem, ressrves are settlement balances that live their r tire existence in the central bank’s ledger. They are created when banks swap their assets for Reserves account credits, and if the CB sell their assets there are no more reserves. In fact, the Fed has $3T in reserve account liabilities and $3T in Treasury bonds. If treasury simply pays off those bonds at maturity, the Fed de-issues those reserve liabilities and Ressrves are no more. “To my way of thinking, your definition is equivalent to saying bank credit money does not exist in deposit accounts either, “

@Richard Corin “Settlement accounts do not hold money! You cannot buy dinner with reserves! Reserves are a behind the scenes accounting mechanism and cannot be part of the money supply.” Agree! But those are reserves,, reserve account credits, and Ressrves are nothing more than this. “The money, whether it be government originated fiat money” Reserves + bills that are purchased by banks from the CB by swapping for Reserves, which banks purchased swapping their assets with the CB. All fist is Central bank Ledger credits, nothing more. “ultimately backed by treasury liabilities, “ No! Reserves are not necessarily backed by Treasury bonds, but they can be. The CB only accepts High Quality Liquid Assets HQLA to swap for reserves. “or bank credit money ultimately backed by private liabilities, “ Backed by bank Assets. Deposits are bank liabilities, ledger credits fir customers, backed by the bank’s asset portfolio. “it is only money if it can be used for transactions in the real economy, as opposed to moving assets around the back office accounting mechanism.” If you want to say only bank liabilities are money, fine, they are 97% of the public money supply, with paper bills making up the rest. Therefore, when a government taxes, money is destroyed, -deposits, reserve account credits are moved from one account to another, not de-issued and not destroyed. The only way they can be destroyed is if they are used to pay an CB. and when a government spends, money is created. The money they received from banks, reserve account credits, are spent, meaning returned to banks. The banks then create new IOUs for their customers, new deposits, which they owe but the gov does not. It is wrong to say, "no new money is created", Wrong? Let’s be specific, ‘net’ new money, a net increase in the money supply. Gov spending always results in new deposits, but if those deposits were taxes, then is -Deposits +Deposits = 0 new money? An increase in the money supply?

@Alwyn Lewis well…Based upon Wynne Godley’s sectoral balances equation, negative Gov equity is positive public Equity

@Gerard Borg Did this PDF above help clarify things? What questions are you left with?

@Gerard Borg “"I have read the document thoroughly. There are no errors that I can see.” Excellent! We are making progress! (And FYI, Steve added the tax, not me) “1. Treasury spends their Assets Assets (-Spendg)“ What Assets did they have to spend? If Treasury does not have reserves in deposit, it must borrow from the public, from banks, or from the CB. I have shown here: https://substack.com/@jonunderwood/note/p-207306025?r=emteb&utm_medium=ios&utm_source=notes-share-action “We could equivalently write, 1. Treasury creates a new liability Liabilities (+Spendg) Equity (-Spendg)” This is what an issuer does, pays by issuing new Liabilities which is spending their Equity. +L = -E But the Tressury can only issue Lisbilities on their own ledger, and so this would be True for Treasury Coin. But to spend Ressrves, they have to have them on deposit prior to spending or borrow them prior to spending. The Treasury cannot create reserve account Liabilities in the Fed’s ledger any more than Treasury can create bank deposit Liabilities on a bank’s ledger. What good is DEBK if we throw it out the window when we analyze deficit spending? Treasury borrowing expands their BS: +A (+R) +L (+Bonds) When they spend the Assets they acquired, Treasury incurs negative Equity: -A = -E “We could equivalently write, 1. Treasury creates a new liability Liabilities (+Spendg) Equity (-Spendg)” So hopefully the error here is now clear. Treasury cannot spend Ressrves it does not have, it has to borrow Ressrves, or issue its own currency. “2. Central Bank expands its balance sheet Assets (+Spendg Treasury) Liabilities (+Spendg Reserves Bank)” No, if the Central Bank is facilitating Treasury spending reserves they have on deposits, it’s a Liability Swap for the CB: -L (-R Treasury Account) +L (+R Banks)

Hey @Nadine Gizak Great to hear from you! From what I am hearing, he wants to shrink the size of the Fred’s Balance Sheet, During Covid, Central Banks purchased a lot of bonds on the secondary market, which allowed Treasury to sell new bonds to the private market. The Fed does this through Balance Sheet (BS) expansion via Open Market Operations OMO, or expanding the quantity of the supply of reserve account credits aka ‘reserves’ by buying assets from banks aka QE. Fed BS Expansion: +Assets (+bonds) +Liabilities (+reserves). This allowed the Treasury to expand their BS by selling new bonds to the private market to fund the stimulus. Treasury BS Expansion: +Assets (+reserves) +Liabilities (+bonds) Interestingly, which nobody seems to understand or cover, when these bonds mature, if nothing is done the Treasury pays off Principal and Interest (P&I) to the Fed, which contracts BOTH the Fed BS and Treasury BS, which contracts the supply of reserve account credits aka reserves: Fed BS Contraction -Assets (-bonds) -Liabilities (-reserve account credits or reserves) Treasury BS Contraction: -Assets (-reserve account credits to pay P&I) -Liabilities (-Bonds) The Fed determines optimal supply, which today is thought to be where they are at, around $3T. So if the supply drops below target, the Fed has to either do new OMO, OR, just swap maturing bonds with Treasury for new bonds after the bond market closes and sets the daily price. This is called a paper swap. But, Warsh seems to be signaling that he wants to contract the Fred’s BS, and one easy way to do that is just let Treasury sell new bonds to the public to payoff old bonds held by the Fed, which both reduces the Fed BS AND reduces the supply of reserves. Banks will sat the payment function of the Fed will not function properly if the Fed reduces reserves, but the Fed is paying Interrst On Resetve Balances IORB for banks to park reserves. If they quit doing that, banks will buy more Tressuries, which will drive rates down, which will grow the real economy. Do we want to maximize GDP? Yes!