The US Government is NOT like a Household

The US Government (and it’s budget) is NOT like a household or a corporation.  Anybody who uses this time-worn analogy is simply not telling the truth and is likely either ignorant or is trying to pull the wool over your eyes.  Randy Wray explains the many reasons.  You (your household) must finance your spending (either use your income, sell your assets, or borrow).  A corporation must do the same.  A state government must do the same.  The US Government (or any other sovereign national government with a non-convertible currency) does not.  Modern banking and money simply don’t work that way.  When sovereign governments DO try to balance their budgets but acting as if they have to finance spending, bad things happen. For the full impact, read past the “more”.

L. Randall Wray takes the fear and loathing out of understanding federal budget deficits.

Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household’s budget: “No household can continually spend more than its income, and neither can the federal government”. On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household. Let us enumerate some relevant differences. Continue reading

More on Modern Banking – end of fractional reserves

More on MMT & end of fractional reserve banking:  From Naked Capitalism and Washington’s Blog. There’s more in the entire post to see, but this is a critical part (bold is mine):


From Fractional to Fictional Reserves

But whatever you think about fractional reserve banking, whether or not you agree with its critics, the truth is that we no longer have it.

As the above-linked NY Fed article notes:

In practice, the connection between reserve requirements and money creation is not nearly as strong as the exercise above would suggest. Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money. Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits, have no reserve requirements and therefore can expand without regard to reserve levels.

And as Steve Keen notes – citing Table 10 in Yueh-Yun C. OBrien, 2007. “Reserve Requirement Systems in OECD Countries”, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, 2007-54, Washington, D.C:

The US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals; banks have no reserve requirement at all for deposits by companies.

So huge swaths of loans deposits are not subject to any reserve requirements.

With the repeal of Glass-Steagall, deposits have been used to speculate in every type of investment under the sun, using insane amounts of leverage. Instead of the traditional 10-to-1 ratio…