the government doesn't borrow our savings in order to run a deficit, it runs a deficit so that we can have savings
Surrey, UK
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Robert Pearson retweeted
Just remember:
1. Spending creates income.
2. Loans create deposits.
3. Taxes do not fund spending.
4. Government deficits create non-government financial surpluses.
5. Real resources, not money, constrain sovereign government spending.
Robert Pearson retweeted
If you add a 0 to the end of everyones money (cash/debts), then prices will increase roughly 10x.
If you double everyones money (cash/debt), prices will increase roughly 2x
if you increase everyones cash/debt by 4%, prices will....
Interest rates just change the scale.
Robert Pearson retweeted
It will add a small amount to UK deficit spending/aggregate demand/etc. and push up forward prices a bit as well.
Robert Pearson retweeted
Loved this joke:
Just imagine, Soros, with his relatively modest fortune, somehow controls the entire world, orchestrates revolutions, and is behind every single political event.
Meanwhile, Musk, with his trillion-dollar fortune, couldn’t even get a Republican elected in Texas.
HOW DOES THAT WORK?
Robert Pearson retweeted
My presentation "Chartalism and Money Theory: State and Beyond." Main point: Charta means token not state + old historical roots + has methodological and practical implications for the analysis and set up of monetary systems.
youtube.com/watch?v=9y8r5CIb…
some people dont understand that retirement and pensions are real resources issues. The finances involved with pensions are just a tool to help distribute those real resources from workers to retirees
If we all save more, it doesn't necessarily mean there will be more resources
Pensions are ultimately a real resource problem, not a financial one. The real question is (pun intended): How will fewer productive workers produce enough real goods and services for a growing number of retirees?
To free up real resources for retirees, the working demographic must obviously abstain from spending their entire income. Taxes (PAYG) is one way to achieve this. Forced private savings is another.
But PAYG is vastly more efficient. Growing the FIRE sector to manage forced savings for future pensions actively worsens the real resource shortage by tying up productive capacity and labor.
Ultimately, how much of current production should be redistributed to pensioners should be a democratic decision, and whatever level is decided it is always “financially affordable”.
Robert Pearson retweeted
On TARGET2
The fan club of the ever-hysterical Robin Brooks is coming after me. So let’s use a simple example to explain what TARGET2 actually is and how its balances arise.
Suppose an Italian buyer pays €100 to a German seller. The payment goes through, but the Bank of Italy ends up with a €100 liability to the ECB.
Sounds paradoxical, doesn’t it? But these are two entirely different kinds of obligations.
Let's break it down.
1. An Italian transfers €100 to a German.
€100 is debited from the Italian buyer's bank account.
€100 is credited to the German seller's bank account.
The payment is complete. The Italian buyer owes the German seller nothing.
Before going further, we need to understand something about modern monetary systems.
There are two types of money relevant to this example:
Commercial bank deposits: the money households and businesses use to pay for goods and services.
Central bank reserves: the money commercial banks hold at their central banks and use to settle payments between themselves.
2. What happens at the central bank level?
The Italian commercial bank holds reserves at the Bank of Italy, while the German commercial bank holds reserves at the Bundesbank.
When €100 moves from Italy to Germany, the balance sheets of the two central banks change.
Here's what happens:
BANK OF ITALY 🇮🇹
Reserve liabilities to commercial banks: −€100
TARGET liability to the ECB: +€100
BUNDESBANK 🇩🇪
Reserve liabilities to commercial banks: +€100
TARGET claim on the ECB: +€100
Notice something important.
The Bank of Italy has not increased its total liabilities by €100. It has simply replaced one liability with another.
Before the payment, it owed €100 in reserves to the Italian commercial bank.
After the payment, it owes €100 to the ECB through TARGET.
Meanwhile, the Bundesbank has acquired a new €100 liability to the German commercial bank. To balance its books, it simultaneously acquires a €100 financial asset: a claim on the ECB.
This is precisely how the ECB and the Bundesbank explain the accounting.
3. Why can't we just transfer the money and forget about it?
Because the euro is a single currency, but national central banks maintain separate balance sheets.
If Italy and Germany operated under a single central bank with one consolidated balance sheet, this would simply be a transfer of reserves between two commercial banks.
But since the Bank of Italy and the Bundesbank have separate balance sheets, an additional accounting entry is needed to record the movement of reserves between them.
That's what TARGET does.
4. What if someone in Germany transfers €100 back to Italy tomorrow?
Everything happens in reverse.
The Bank of Italy's TARGET liability decreases by €100, while the Bundesbank's TARGET claim falls by €100.
Assuming no other transactions, both TARGET balances return to their original positions.
Here's the key takeaway:
TARGET records net settlement flows between national central banks within the Eurosystem.
It does not represent unpaid debts of Italian buyers to German sellers, nor does it mean the Italian government has borrowed money from Germany.
And this brings us to a much more interesting question:
If the Bank of Italy can maintain a negative TARGET balance indefinitely while remaining in the Eurosystem, why would it need to repay it at all?
And here's the most fascinating part:
Much of the enormous TARGET imbalances accumulated since 2015 were actually driven by the Eurosystem's own asset purchases under the ECB's quantitative easing programs!
Every time I read Brooks’s tweets, I can’t help but facepalm.
In a debate about Germany potentially leaving the eurozone, TARGET2 liabilities have somehow magically turned into Italian and Spanish government debt owed to Berlin.
But TARGET2 balances are intra-Eurosystem positions between central banks, not loans between governments. Germany leaving the euro would not, in itself, oblige the Italian and Spanish governments to issue sovereign debt to settle those balances.
Robert Pearson retweeted
To be clear, MV=PY is an accounting identity when velocity is defined as nominal GDP divided by the money stock.
It tells us that MV=PY because V=PY/M.
Without additional behavioral assumptions about velocity, real output, and monetary dynamics, the equation has no independent explanatory power regarding the causes of inflation.
Robert Pearson retweeted
Unfortunately Craig confuses bank capital with assets. Bank capital is not an amount of money banks must have in order to lend, as Craig seems to think. It is the equity cushion a bank must have to protect depositors from losses in the event of insolvency.
Banks do not lend out money they already have. They create the money they lend. This increases their leverage, since the money they create is a liability to them, and reduces the equity cushion as a percentage of assets. Bank capital requirements dampen lending by preventing banks running down their equity cushions.
Banks obtain funding to settle deposit withdrawals, including loan drawdowns.
I too spent many years building banking and financial systems. That's how I know banks don't lend out depositors' money or check reserve levels before lending. And why I know the difference between bank capital with assets.
I spent 35 years building banking systems for banks worldwide, including central banks. I know how banks decide where their money goes.
When you build systems, you have to make them work, so you have to know how they work.
The Basel Committee de-industrialised the countries that adopted its rules. It's that simple: I explain the whole complicated mechanism in my essay. They simply regulated it away because that was the most profitable thing to do. It was implemented in such a systemic global way, and nobody seemed to notice
Capital is what a bank must hold before it can lend, the way a manufacturer or miner must hold supplies before it can sell. No miner doubles their costs to serve one group of customers. But that's what the banking system does to miners and manufacturers. Since 1988, the Basel rules have required banks to hold twice the capital against a factory loan as against a home loan, and under Basel III the gap reaches five times. So banks lend less to industry and more against houses. It should be stopped tomorrow.
Manufacturing's share of GDP fell in ten of the eleven countries I examined. In Australia it fell from 13.7% to 5.4%. Every other country that followed fell as well. The only truly crafty ones were the Koreans, who did a good job of offsetting it.
Regulators were warned in writing that the rule would steer credit, and they adopted it anyway. No parliament voted for it, and it's simply too dumb to keep doing, but we do . Not today; there is no justification. Yet from India, across Europe, across the US, including Australia, sanctions against industrial capacity. Financialization has gone too far it needs to be reviewed .
The charge is manslaughter by gross negligence. The mechanism is proven.
Same Rules, Different Ruins:ctindale.substack.com/p/same…
Robert Pearson retweeted
The “national debt” does not have to be paid back. How much is issued as spending and recovered as revenue is entirely up to the govt. Bond holders aren’t creditors. When their bonds mature their treasury debt is just converted into central bank debt.
Robert Pearson retweeted
I don't know which is worse. Is it the idea that you can borrow time, or the idea that the UK government borrows pounds sterling?
Robert Pearson retweeted
I knew him in the 70's when trading GNMA's. He was at 1st Boston, I was at Banker's Trust. He never has understood monetary operations.
"... it means we're going to have structurally higher interest rates for longer." BlackRock CEO Fink in today's Q3 call.
"For the first time in my career, and that's 50 years of a career, I'm seeing genuine shortages of capital. governments are running historically large deficits while at the same time demand for private capital is rising across the economy. Governments need financing for infrastructure. Companies need to fund a generational AI buildout. Individuals need better ways to invest and retire."
"And so the competition for capital is growing between the federal deficits, which are at record levels, and now we're unlocking private capital and demand for capital in the private sector is growing. And all that means is at
this moment, it means we're going to have structurally higher interest rates for longer. And especially out the curve. And I think that's going to be with us."
Thx @business transcripts.
#oott
Robert Pearson retweeted
The only place it CAN come from. The same place every dollar spent comes from: computer keystrokes that credit the bank accounts of those receiving payments. It is all new money creation.
I don't think I've ever seen someone critiquing a subject display such a complete and utter misunderstanding or misinterpretation of the subject they are purporting to critique
We are seeing a total failure of MMT around the globe.
QE and deficit spending (after 2008 and during COVID) was basically an attempt at Modern Monetary Theory (MMT). In a nutshell, MMT says that we can print and deficit spend at will without any fiscal or economic complications.
So, central banks held interest rates at zero, forcing markets to accept absurdly low rates. At the same time, these central banks printed massive amounts of money and absorbed a lot of this new debt themselves.
MMTers said we could do this with no inflation. Clearly they were wrong. Friedman taught us exactly what would happen, and it did. Inflation took off. The result, central banks were forced to raise rates and stop expanding their balance sheets.
So far, governments have resisted fiscal sanity and are still running massive deficits even though central banks stopped funding them.
The result? In the past 3 months, 10-year bond yields are up 50 bps in the UK, 90 bps in France, 72 bps in the US, and more than 40 bps in Germany.
Governments were already too big in 2008, but this crazy experiment over the past 18 years has pushed things toward a breaking point.
France proposes to freeze government pay and pensions, and raise some taxes and we should expect more movement toward austerity in other countries soon.
MMT is basically Keynesianism on steroids. It didn’t work. The fix is a revival of Austrian, supply-side economics. Smaller governments, lower tax rates, tighter money, and less regulation. Some will say this is a pipe dream. But it is the only way out.