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Bank-created 
money, 
Monetary 
Sovereignty, 
and the 
Federal Deficit 
Toward a New Paradigm in 
the Government-Spending ...
This is what Fiscal Panic looks 
like. 
 Debt-ceiling crises 
 Credit Downgrade 
 Simpson-Bowles Commission 
 Sequeste...
THE NATIONAL COMMISSION 
ON FISCAL RESPONSIBILITY AND 
REFORM 
 “America cannot be great if we go broke” 
 “We have a pa...
People believe this and are 
scared
61% worry a “great deal”
But, as a matter of Constitutional 
law, Congress can “print” its way 
out of debt. 
 The Congress shall have power to la...
Julian v. Greenwald (1884) 
“[C]ongress has the power to issue the 
obligations of the United States in such form, 
and to...
Congress has done this before
Running the Machine
Congress is printing money to 
pay (some of) its bills now 
 Sacajawea Dollar 
 Fed doesn’t like this
But, but, but: inflation! 
 Maybe, but Inflation is not necessarily a 
bad thing. 
 The current inflation rate (1.6%) is...
Moreover… 
 Inflation depends on how the created 
money is spent 
 MV=QP (Quantity Theory of Money)
And, other entities are 
creating money now 
 Federal Reserve 
 Private commercial banks
Congress has delegated its 
sovereign power to print 
money to the Federal Reserve 
 1913 – Federal Reserve Act 
 Sectio...
Quantitative Easing 
 More than $3 trillion so far 
 $85 billion per month since December 
2012 – December 2013 
 “The ...
The Fed’s “expanding 
balance sheet” 
$4,500,000.00 
$4,000,000.00 
$3,500,000.00 
$3,000,000.00 
$2,500,000.00 
$2,000,00...
Why is Fed Allowed to print 
money? 
 Originally: to prevent bank runs by 
functioning as lender of last resort 
 Now: “...
Private banks also create 
money with blessing of Federal 
Reserve
Fractional-reserve banking
Current Reserve Rates 
 0% for banks with “net transaction 
accounts” of less than $13.3 million, 
 3% for banks with up...
How much money are private 
banks creating through this 
process? 
 Private banks create over 80% of money 
supply ($11.1...
By comparison, the Fiscal 
Numbers are: 
 Federal Deficit: $1.086 trillion (fiscal year 
2012) 
 Total receipts: $2.450 ...
So what? 
 Simpson-Bowles is wrong: America 
cannot “go broke” 
We need a new paradigm that 
recognizes the relationship...
Bank Created Money, Monetary Sovereignty, and the Federal Deficit
Bank Created Money, Monetary Sovereignty, and the Federal Deficit
Bank Created Money, Monetary Sovereignty, and the Federal Deficit
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Bank Created Money, Monetary Sovereignty, and the Federal Deficit

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MMT, Functional Finance and ELR session at 12th International Conference

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Bank Created Money, Monetary Sovereignty, and the Federal Deficit

  1. 1. Bank-created money, Monetary Sovereignty, and the Federal Deficit Toward a New Paradigm in the Government-Spending Debate Ashton S. Phillips, JD
  2. 2. This is what Fiscal Panic looks like.  Debt-ceiling crises  Credit Downgrade  Simpson-Bowles Commission  Sequester (Budget Control Act of 2011)  Recovery Act expiring (including cuts to Food Stamps)  Government Shutdown  New Budget Talks
  3. 3. THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM  “America cannot be great if we go broke”  “We have a patriotic duty to keep the promise of America to give our children and grandchildren a better life.”  “Ever since the economic downturn, families across the country have huddled around kitchen tables, making tough choices about what they hold most dear and what they can learn to live without. They expect and deserve their leaders to do the same. The American people are counting on us to put politics aside, pull together not pull apart, and agree on a plan to live within our means and make America strong for the long haul.”  “the most significant threat to our national security is our debt.”  Proposes: capping revenue at 21% of GDP by 2022 (within 10 years) and capping spending at 21% of GDP (“eventually”) http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/doc uments/TheMomentofTruth12_1_2010.pdf ;
  4. 4. People believe this and are scared
  5. 5. 61% worry a “great deal”
  6. 6. But, as a matter of Constitutional law, Congress can “print” its way out of debt.  The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;  To borrow money on the credit of the United States;  To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;  To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof.
  7. 7. Julian v. Greenwald (1884) “[C]ongress has the power to issue the obligations of the United States in such form, and to impress upon them such qualities as currency for the purchase of merchandise and the payment of debts, as accord with the usage of sovereign governments. The Legal Tender Cases, 110 U.S. 421, 447- 48, 4 S. Ct. 122, 129-30, 28 L. Ed. 204 (1884)
  8. 8. Congress has done this before
  9. 9. Running the Machine
  10. 10. Congress is printing money to pay (some of) its bills now  Sacajawea Dollar  Fed doesn’t like this
  11. 11. But, but, but: inflation!  Maybe, but Inflation is not necessarily a bad thing.  The current inflation rate (1.6%) is well below targets
  12. 12. Moreover…  Inflation depends on how the created money is spent  MV=QP (Quantity Theory of Money)
  13. 13. And, other entities are creating money now  Federal Reserve  Private commercial banks
  14. 14. Congress has delegated its sovereign power to print money to the Federal Reserve  1913 – Federal Reserve Act  Section 16:“Federal Reserve notes, to be issued at the discretion of the Federal Reserve Board for the purpose of making advances to Federal Reserve Banks through the Federal Reserve Agents as hereinafter set forth and for no other purposes, are hereby authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and for all taxes, customs, and other public dues.”  FOMC  Courts won’t touch this (exercise “equitable discretion” to decline to hear case, even when Court finds standing and actual controversy)
  15. 15. Quantitative Easing  More than $3 trillion so far  $85 billion per month since December 2012 – December 2013  “The one certain outcome of QE is that those with assets benefit relative to those without,”  John Kay, Quantitative easing and the curious case of the leaky bucket, The Financial Times, July 9, 2013.
  16. 16. The Fed’s “expanding balance sheet” $4,500,000.00 $4,000,000.00 $3,500,000.00 $3,000,000.00 $2,500,000.00 $2,000,000.00 $1,500,000.00 $1,000,000.00 $500,000.00 $0.00 Total Assets
  17. 17. Why is Fed Allowed to print money?  Originally: to prevent bank runs by functioning as lender of last resort  Now: “to maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”  12 U.S.C. § 225a
  18. 18. Private banks also create money with blessing of Federal Reserve
  19. 19. Fractional-reserve banking
  20. 20. Current Reserve Rates  0% for banks with “net transaction accounts” of less than $13.3 million,  3% for banks with up to $89 million, and  10% for banks with net transaction accounts in excess of $89 million.
  21. 21. How much money are private banks creating through this process?  Private banks create over 80% of money supply ($11.103 trillion out of $14.831 trillion)  Monetary Base($3.728 trillion)  M2 ($11.103 trillion)
  22. 22. By comparison, the Fiscal Numbers are:  Federal Deficit: $1.086 trillion (fiscal year 2012)  Total receipts: $2.450 trillion  Total outlays: $3.537 trillion  Total 2012 expenditures on food and nutrition assistance programs (including SNAP and WIC): $ 0.106 trillion www.omb.gov (historical tables)
  23. 23. So what?  Simpson-Bowles is wrong: America cannot “go broke” We need a new paradigm that recognizes the relationship between fiscal and monetary policy.  Congress should evaluate the policy value and inflationary effect of all money creation as weighed against policy cost of status quo.

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