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How money works…

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Deposit 300

Principle [300]

Account Payable

Deposit 300

Loan 300

Loan Repayment 550

“For sale: $300!”

Interest [250]

“$300 loan, no fees!”

Let’s repeat the loan…

Loan 300

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Deposit 300

Loan 300

“For sale: $300!”

“$300 loan, no fees!”

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Deposit 300

Loan 300

Bank’s perspective

Our perspective

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Deposit 300

Loan 300

Deposit 300

“Sold! $300!”

(Group 2)

(Group 1)

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Deposit 300

Loan 300

Deposit 300

“I need income!”

Employment needs

Negotiation power

“I can employ you.”

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Deposit 300

Loan 300

Deposit 300

“15/hr?”

“10?”

“Fine, 10.”

Work

Deposit 200

Deposit 100

Deposit 200

Deposit 100

“I can employ you.”

(Group 1)

(Group 2)

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Deposit 200

Deposit 100

Deposit 200

Loan 300

Work

Deposit 200

Deposit 100

Deposit 200

Deposit 100

(Group 1)

(Group 2)

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Loan 300

Work

Deposit 100

Deposit 200

Deposit 100

Deposit 200

Deposit 300

(Group 1)

(Group 2)

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Interest

Deposit 300

Loan 300

No deposits

(Group 2)

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Deposit 150

The bank pays it’s employees…

Work

Deposit 150

Interest

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C.C. Dep. 100

C.C. Dep 100

Purchases

C. Card 100

Interest

The bank issues a credit card...

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C.C. Dep. 100

C.C. Dep 100

C. Card 100

Interest

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C.C. Dep. 100

C.C. Dep 100

C. Card 100

Interest

Work

C.C. Dep. 100

C. Card 100

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Deposit 100

The bank pays it’s employees…

Work

Deposit 100

C. Card 100

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Otherwise, loan repayment requires additional debt.

The bank must spend it’s own interest into existence.

Once all debt is repaid, money no longer exists.

No deposits

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A Financial System

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“House for sale: $600!”

Deposit 600

Loan 600

“$600 loan, no fees!”

Commercial Bank Ledgers (bank deposits)

Central Bank Ledger (reserve deposits)

Account holders

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Deposit 600

Loan 600

Central Bank Ledger (reserve deposits)

“I need real money!”

Reserve Deposit 600

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Deposit 600

Loan 600

Central Bank Ledger (reserve deposits)

“No.”

Inter-bank market for reserve deposits

Reserve Deposit 600

“Can you lend us Central Bank deposits at 2%?”

“5%?”

“We can’t help.”

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Deposit 600

Loan 600

Central Bank Ledger (reserve deposits)

“8%!”

“...”

“10%!”

“...”

“Someone needs reserve deposits!”

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Deposit 600

Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Reserve Loan 600

Central Bank Ledger (reserve deposits)

Accommodative Policy:

“I will loan any amount requested at a rate I specify.”

“Someone needs reserve deposits!”

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Deposit 600

Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Reserve Loan 600

Central Bank Ledger (reserve deposits)

Reserve Deposit 600

(Bank 1)

(Bank 2)

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Deposit 600

Reserve Loan 600

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Deposit 600

Reserve Loan 600

5%

2%

Usable Balance Sheet Space

Loan 600

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Deposit 600

Reserve Loan 600

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Deposit 600

Reserve Loan 600

Deposit 600

Reserve Deposit 600

(Note: US Banks are not subject to “Required Reserves”.)

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Deposit 600

Reserve Loan 600

“I need income!”

“I want to save!”

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Deposit 600

Reserve Loan 600

Want to save

Surplus

(positive money balances)

Deficit

(must borrow deposits)

Savings

Borrowing

Deficit = Insolvency

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Deposit 600

Reserve Loan 600

“I want to save!”

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Deposit 600

Reserve Loan 600

No new bond issuance available

“I’d like to purchase an

interest-earning asset.”

“No auctions or offers available.”

Bond market

“I want to save!”

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Deposit 600

Reserve Loan 600

“Find a borrower for 300 at some rate.”

“Lending 300 at 7%...”

Bond market

“We are not interested in borrowing at this time.”

“...”

(Funds offered!)

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Deposit 600

Reserve Loan 600

“Find a borrower for 300 at some rate.”

“...”

“6%...”

“5%...”

“3%...”

“1%...”

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Deposit 600

Reserve Loan 600

“There are too many deposits in the system!”

“1%...”

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Loan 600

Reserve Deposit 600

Reserve Loan 600

Reserve Deposit 600

Deposit 600

Reserve Loan 600

Coordination Policy:

“Treasury, I need you to borrow deposits.”

“Ok, fine.”

“There are too many deposits in the system!”

“Auction: US Treasurys paying 2% interest!”

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US Treasury 300

Reserve Deposit 300

Reserve Deposit 600

Deposit 600

Deposit 300

Loan 600

Reserve Deposit 600

Reserve Loan 600

Deposit 300

Deposit 600

Reserve Deposit 300

TGA

Reserve Deposit 300

Treasury General Account

US Treasury 300

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Taxation

“Balance the budget!”

“Tax cuts trickle down!”

Deposit 300

US Treasury 300

Reserve Deposit 300

Loan 600

Reserve Loan 600

Deposit 300

Reserve Deposit 300

US Treasury 300

TGA

+550 wages

+250 dividend

+100 sales

(150)

(0)

+300 home sale

+0 home sale

“The gov is like a household!”

“We need to run a surplus!”

“Money doesn’t grow on trees!”

“No tax cuts, unless you donated!”

US Treasury 300

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Deposit 300

US Treasury 300

Reserve Deposit 300

Loan 600

Reserve Loan 600

Deposit 300

Reserve Deposit 300

US Treasury 300

Deposit 150

US Treasury 300

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US Treasury 300

Reserve Deposit 300

Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Rsrv Deposit 150

Loan 600

Deposit 150

Rsrv Deposit 150

Deposit 150

US Treasury 300

Deposit 150

Rsrv Deposit 150

US Treasury 300

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Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Rsrv Deposit 150

Loan 600

Deposit 150

Rsrv Deposit 150

Deposit 150

US Treasury 300

Tax & Loan Account

Deposit 150

Rsrv Deposit 150

US Treasury 300

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Reserve Deposit 600

No

reserve deposits

Reserve Deposit 600

Liquid Payment System

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Reserve Deposit 600

Reserve Deposit 500

Reserve Deposit 400

Reserve Deposit 300

Reserve Deposit 200

Reserve Deposit 100

Reserve Deposit 500

Reserve Deposit 400

Reserve Deposit 300

Reserve Deposit 200

Reserve Deposit 100

Reserve Deposit 600

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Reserve Deposit 600

Reserve Deposit 400

Reserve Deposit 300

Reserve Deposit 500

Reserve Deposit 300

Reserve Deposit 200

Reserve Deposit 600

Reserve Deposit 100

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Taxation

Reserve Deposit 600

Reserve Deposit 300

Rsrv Deposit 150

Reserve Deposit 300

Rsrv Deposit 150

Spending

Reserve Deposit 300

Rsrv Deposit 150

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Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Rsrv Deposit 150

Loan 600

Deposit 150

Rsrv Deposit 150

Deposit 150

US Treasury 300

Deposit 150

“I can’t make my mortgage payment!”

“I saved money!”

“We’re tightening our belts!”

Rsrv Deposit 150

US Treasury 300

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Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Rsrv Deposit 150

Loan 600

Deposit 150

Rsrv Deposit 150

Deposit 150

US Treasury 300

Deposit 150

Rsrv Deposit 150

(1^st missed payment)

“Get this loan off our books!”

Bond market

US Treasury 300

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Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Rsrv Deposit 150

Deposit 150

Rsrv Deposit 150

Deposit 150

US Treasury 300

Deposit 150

Rsrv Deposit 150

Bond market

“Mortgage backed security, 600 at 5%”

Loan 600

“300”

US Treasury 300

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US Treasury 300

Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Rsrv Deposit 150

Deposit 150

Rsrv Deposit 150

Deposit 150

US Treasury 300

Deposit 150

Rsrv Deposit 150

“We are insolvent. We need a bailout.”

Loan 600

Loan 300

(2^nd missed payment)

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US Treasury 300

Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Rsrv Deposit 150

Deposit 150

Rsrv Deposit 150

Deposit 150

US Treasury 300

Deposit 150

Rsrv Deposit 150

Loan 300

Reserve Deposit 600

Loan 600

Reserve Deposit 600

“We are insolvent. We need a bailout.”

Quantitative Easing:

“I’m buying gov & mortgage loans.”

“You are Too-Big-To-Fail.”

0%

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Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Rsrv Deposit 150

Deposit 150

Rsrv Deposit 150

Deposit 150

US Treasury 300

Deposit 150

Rsrv Deposit 150

Reserve Deposit 600

Loan 600

Reserve Deposit 600

Quantitative Easing:

“I’m buying gov & mortgage loans.”

US Treasury 300

Loan 600

Reserve Deposit 300

0%

US Treasury 300

System Open Market Account

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Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Rsrv Deposit 150

Deposit 150

Rsrv Deposit 150

Deposit 150

US Treasury 300

Deposit 150

Rsrv Deposit 150

Reserve Deposit 600

Loan 600

Reserve Deposit 300

0%

US Treasury 300

System Open Market Account

Loan 600

US Treasury 300

(asset purchases & sales)

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Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Rsrv Deposit 150

Deposit 150

Rsrv Deposit 150

Deposit 150

US Treasury 300

Deposit 150

Rsrv Deposit 150

Reserve Deposit 600

US Treasury 300

Loan 600

Reserve Deposit 300

Reserve Deposit 450

Reserve Deposit 750

US Treasury 300

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Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Deposit 150

US Treasury 300

Deposit 150

US Treasury 300

Loan 600

Reserve Deposit 450

Reserve Deposit 750

“Unemployment is too high!”

“I need income!”

“How will we pay for it!”

Deficit Spending

Bill

Spending

US Treasury 300

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Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Loan 600

Reserve Deposit 450

Reserve Deposit 750

Bill

Spending

Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Deposit 150

US Treasury 300

Deposit 150

Reserve Deposit 450

Reserve Deposit 750

“Passed!”

US Treasury is authorized to spend existing 450 from TGA and T&L accounts.

US Treasury is authorized to borrow and spend an additional 2000.

US Treasury 300

Appropriated Spending

2450

US Treasury 2000

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Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Loan 600

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Deposit 150

US Treasury 300

Deposit 150

Reserve Deposit 450

Reserve Deposit 750

US Treasury 2000

Reserve Deposit 450

Reserve Deposit 750

US Treasury 300

Primary Dealer

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US Treasury 300

Reserve Loan 600

Reserve Deposit 300

US Treasury 300

Deposit 150

US Treasury 300

Loan 600

Reserve Deposit 450

Reserve Deposit 750

Reserve Deposit 450

Reserve Deposit 750

Need:

2000 Reserve Deposits

300

600

700

400

US Treasury 1000

400

600

700

300

US Treasury 2000

“Auction: 2000 of US Government Bonds!”

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US Treasury 300

Reserve Loan 600

Reserve Deposit 300

Deposit 150

US Treasury 300

Loan 600

Reserve Deposit 450

Reserve Deposit 750

Reserve Deposit 450

Reserve Deposit 750

Reserve Loan 700

Reserve Loan 400

Reserve Deposit 700

Reserve Deposit 400

Reserve Deposit 700

Reserve Deposit 400

Reserve Loan 700

Reserve Loan 400

Need:

2000 Reserve Deposits

300

600

700

400

US Treasury 1000

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US Treasury 300

Reserve Loan 600

Deposit 150

US Treasury 300

Loan 600

Reserve Deposit 450

Reserve Deposit 750

Reserve Deposit 450

Reserve Deposit 750

Reserve Loan 700

Reserve Loan 400

Reserve Deposit 700

Reserve Deposit 400

Reserve Deposit 700

Reserve Deposit 400

Reserve Loan 700

Reserve Loan 400

US Treasury 1000

Reserve Deposit 1150

Reserve Loan 1000

US Treasury 300

Reserve Loan 700

Loan 600

Reserve Deposit 300

Reserve Loan 1000

Deposit 150

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US Treasury 300

Deposit 150

Reserve Loan 700

US Treasury 1000

Reserve Deposit 1150

Reserve Deposit 300

Reserve Loan 1000

US Treasury 300

Reserve Loan 700

Loan 600

Reserve Deposit 1150

Reserve Loan 1000

Deposit 150

Rsrv Deposit 150

US Treasury 1000

Reserve Deposit 2300

Rsrv Deposit 150

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Rsrv Deposits

2300

US Treasury 300

Deposit 150

Reserve Loan 700

Reserve Loan 1000

US Treasury 300

Reserve Loan 700

Loan 600

Reserve Loan 1000

Deposit 150

Rsrv Deposit 150

US Treasury 1000

Reserve Deposit 2300

Rsrv Deposit 150

UST 300

Dep 150

US Treasury 2000

Loan 600

Deposit 150

US Treasury 300

“We would like to spend our appropriated funds.”

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Rsrv Deposits

2300

US Treasury 300

Deposit 150

Reserve Loan 700

Reserve Loan 1000

US Treasury 300

Reserve Loan 700

Loan 600

Reserve Loan 1000

Deposit 150

Rsrv Deposit 150

US Treasury 1000

Reserve Deposit 2300

Rsrv Deposit 150

UST 300

Dep 150

US Treasury 2000

Loan 600

Deposit 150

US Treasury 300

Reserve Deposit 700

Reserve Deposit 950

UST 1000

Bank Dep 150

Rsrv Deposit 700

Bank Deposit 650

Bank Deposit 450

Bank Deposit 500

UST 300

Spending…

“I can employ you.”

UST 300

Deposit 950

Reserve Loan 700

Deposit 950

“We would like to spend our appropriated funds.”

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“I can employ you.”

Reserve Loan 1000

US Treasury 300

Reserve Loan 700

Loan 600

Reserve Loan 1000

UST 300

US Treasury 2000

Loan 600

Reserve Deposit 700

Reserve Deposit 950

UST 1000

Bank Dep 150

Rsrv Deposit 700

Bank Deposit 650

Bank Deposit 450

Bank Deposit 500

UST 300

Deposit 950

Reserve Loan 700

Deposit 950