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Govt-Distributed Money Accounting


Cullen, I want to recall your statement about giving government the power to create money. Here is the exceprt in ask-cullen.com

If the govt distributed all of the money then you could have one of two systems:

1) You could have the govt operating as the banking system where it distributes the loans AND just prints money (instead of selling bonds). But then of course you’d have the govt issuing loans, which, as you might imagine, could be problematic as there’s no real profit motive to constrain the quality of lending at all.

2) You could have no borrowing and you could just have the govt increasing the money supply by $X every year as they please by spending new money into the economy without selling bonds.

These two options might not look very different from our current arrangement if you just look at the accounting.....

Of the two scenarios above, the accounting will look similar to money created by private banks. For the first, I could understand as the govt just replace private bank's position in creating the loan, thus creating the deposits. However, I don't understand the accounting for the second scenario. If there is no borrowing, who will hold the liability ? What does the accounting entry look like ? As we know, for every financial asset, it is someone else's liability.


The second scenario would be direct issuance of money. For instance, the Fed could have bank accounts linked to individuals and firms and they’d issue deposits directly. It would be exactly like QE without buying an asset. They’d just issue a fresh deposit. So, for instance, the govt wants to spend $1000 in Social Security to Cullen and they do so by crediting Cullen’s Fed account with $1,000. The Fed has a deposit liability and I have a deposit asset.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

If that's the case, what do you think how to maintain the govt's assets ? The govt would just keep expanding its liabilities only.

Any opinion Cullen ?

Your question isn’t clear. Please ask a new one and be clearer.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Sorry for that. I mean with this sort of mechanism in the second scenario, the govt will just keep expanding balance sheet in liabilities only without any corresponding assets. So, how the govt might handle this kind of situation ? The balance sheet can't be kept with outstanding liabilities as its equity would be extremely negative.

You're not explaining your question clearly. Balance sheets balance. Liability issuance requires asset issuance. The govt can't expand liabilities without also expanding assets.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

I thought that when you were saying it's like QE without buying asset, you mean issuing liabilities without correponding asset. Sorry for misunderstanding.

Ok, so what do you think the asset will look like ? This is not loan as these are fresh money for people.

I know this doesn't happen in reality. Just want to hear your opinion.

If the govt deficit spends it creates an asset AND a liability. This will either be a bond (issued by giving the bond buyer a bond and taking their cash and redistributing it) or by spending cash into the economy. In either case a new asset is created with a corresponding liability.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Sorry, I'm still not clear what the whole accounting entries look like. Let say, the govt issues fresh deposits directly into economy. The deposits are govt's liabilities and everyone's assets. The question remained is what are the assets held by govt and liabilities held by everyone ?

I think bonds are not appropriate answer, because in this case the govt is not asking for loan, instead it directly issues money. So, what do you think Cullen ?