I woke up to a not so lovely email this morning:
“There has been a large withdrawal from your bank account”.
I won’t joke around about what “large” is in my world because it’s probably “small” in many other people’s worlds, but that’s beside the point. The point is, that withdrawal was part of a very necessary flow of funds that precedes government spending. After all, it was the US Treasury debiting my bank account. Those of you who understand Monetary Realism know how important it is to understand the flow of funds in the economy. The flow is the lifeblood. It keeps revenues going, incomes going, spending going, etc. No flow, no economy. It’s that simple.
The interesting part of the withdrawal I noticed this morning is that the government doesn’t really need to withdraw money in order to be able to spend. After all, it has deemed the US dollar as the unit of account in the USA and can create currency at will. In theory, our government could just print dollar bills right into our bank accounts. This was the true message of the Trillion Dollar Coin discussions. Unfortunately, most commentators didn’t even understand that. Our government, if it wanted to, could just start crediting bank accounts without procuring the funds first.
But what really happens is due to specific bank centric design. Our government has essentially outsourced the money supply to private banks. So money creation starts when a bank makes a loan and money destruction occurs when a bank loan is repaid. Between this start and finish are nothing more than a sequence of flows.
So, when the government taxes Peter they debit Peter’s bank money (what Monteary Realism calls “inside money” because it comes from inside the private banking system), resulting in a credit to the government bank account so they can then debit the account and credit someone’s account with inside money via government spending. If they don’t procure enough inside money they will sell bonds and again use the inside money system as an intermediary. That is, if Peter buys a t-bond the government debits his inside money account, credits their account, credits Peter’s account with a t-bond, and will eventually debit their account so they can credit someone else’s account via government spending (notice the government doesn’t “print money” when it taxes or sells bonds!).
As you can see, there’s a specific flow of inside money that occurs. Why? Because the whole system is built around the stability of the inside money system. It’s all a flow of funds occurring in inside money and understanding that flow is crucial to understanding the modern monetary system.
* To learn more please see the following:
1. Understanding The Modern Monetary System
2. Understanding Inside & Outside Money
4. The Disaggregation of Credit
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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