Government Debts and Treasury Bonds – Neither Keynesian or Inflationary

Update II: In the post below I had in mind the historical conditions of Central Banks as private banks, then nationalised, which lend to governments and funded this through issuing bills of exchange.  I contrasted this with conventional bond issuance which as a transfer payment does not add to money, whereas a loan from a central bank does.  This essential difference remains.  I made the mistake in the post however of trying to make a distinction between Central Bank issued bonds and treasury issued bonds, this is the wrong way of looking at it it is not the source of bond issuer which matters but the source of debt.   Both Central Bank issued (modern) bonds and treasury bonds are equally deflationary because they both require drawing down of private reserves to pay for the bonds, as Neil Wilson points out.  If however a central bank creates money and then buys treasury bonds, or creates money transfers the money to a treasury and then creates bills of exchange, both are expansionary involving the endogenous creation of money.  I don’t agree with Neil however that one can consolidate the treasury and central bank accounts as this loses the dynamic relationship between creditor and debtor over time.  One can only do this if you ‘close’ both accounts and sweep everything to equity, perfectly acceptable in accounting terms but this conceals the dynamics – a small but important difference I have with MMT.  As Marc Lavoie says ‘Central Banks matter’.  The essential insight of bonds being (net) deflationary remains, as does the insight that Keynes was not talking about such funding in the GT.  This is important because bond finance can only have a velocity/accelerator multiplier effect whereas debt finance can also have a ‘excess reserve’ (Kahn) multiplier effect.  This helps resolve one of the great debates in PK economics over Moores view of the multiplier, ill blog on this shortly – warning wonkish and a lot of maths.

I want to share the essence of a recent correspondence with Professor Steve Keen on the impact of different form of government bonds issues on effective demand.

The background is a recent debate initiated by Frances Coppola on whether QE is deflationary.  Professor Keen has also published a model of QE where it has a neutral effect on demand.  I queried this model on two grounds, firstly it did not model the income stream from Coupon payments that the treasury would otherwise have paid the private sector and now in effect it receives itself via dividends from a Central Bank, secondly we cannot know whether or not this is deflationary or inflationary until we model the ‘policy off’ position of bonds issued and held by the private sector (and the Central Bank through conventional open market operations).

This got me thinking whether the model, implicit or explicit, by those few economists that thinks about financial mechanics is an accurate model of modern government debt management.  For example Professor Keen’s own earlier model of bond issuance (from last years MMT/MCT seminar) assumed a central bank to fund a fiscal deficit would create money endogenously then purchase bonds from a Treasury.  This is certainly how Keynes envisaged government deficits should be financed, but it is not how they are financed today.

Let me explain, the current separation of Central Banks and Treasury is something of an historical accident in most major economies.  Originally most Central Banks were private bodies used by governments for debt issuance and financing.  Gradually these were taken over by states.  Historically central banks issues bonds which it then sold on, it then paying on a dividend to its owner (nowadays the State).

For a number of decades now states have separated out debt management offices from the central banks, these then auction bonds which may or may not be brought by central banks.  Now central banks purchases of bonds have two functions, firstly (in a sovereign currency issuer) acting as a backstop in buying any failed auctions to ensure that the state is guaranteed financing, secondly as a financial policy instrument to control the interest rate through open market operations in bonds.  Under pressure from the IMF (which termed central bank bills financial repression) most of the world has shifted towards debt management office/treasury issuance of bonds rather than central banks.   Indeed as part of the ‘Paris Deal’ writing off  much third world debt  the IMF insisted on this separation in countries receiving relief.

This shift is important and rarely commented on.  This is the difference between ‘central bank bonds and ‘treasury bonds.   This is not to say that Central Banks will not buy bonds and hence create money to do so (hence increasing base money supply) – a bond being effectively a loan to the treasury – rather they now mainly do so through open market operations and QE rather than through issuance of central bank bonds.

This matters because treasury bonds are exactly like corporate bonds, these are in the first instance transfer payments between balance sheets of the existing monetary stock, unlike bank (including central bank) money which involves money creation through crediting of accounts.

This is the key because a ‘Central Bank bond’ adds to monetary base and so the net credit induced demand {change in debt  – change in saving)(this is a simplification as any increase in bank lending may require additional capital which requires saving which must then be leveraged) whereas a treasury bondis simply a transfer payment, there is no net increase in money or effective demand.  There is no net change in the monetary base – the increase in debt is exactly offset by the increase in saving to purchase the bond.

So under central bank bonds there is both a Keynesian multiplier effect and potentially an accelerator effect from the spending.  Under treasury bills however there is no net money creation only a differential accelerator effect from the difference between what the private sector money would have been spent on and what public spending is spent on.  So MMT here is only half right.  It is only correct to say public deficit=private surplus, rather a better accounting identity would be (private spending+public deficit-private saving on purchasing treasury bonds)=private surplus.   The shift towards treasury bonds then may explain the empirical reduction in the Keynsian multiplier from the 1980s onwards.

At least this would be the case in a closed economy where all tax receipts were immediately spent.  But there is always a time lag between money being received by the Treasury and money being spent.  Of course money is being received by the treasury all the time and government departments and agencies spend continuously throughout the year, it is necessary however to maintain a buffer, a kind of monetary inventory, reserves for unexpected spending.  The size of these reserves (which must be proprtional to the overall budget)  causes a slowdown in transactions and is deflationary.  Treasury bond financing therefore is deflationary, and, ironically, the higher the amount of deficit spending relative to GDP the more deflationary it is.  Under normal times this effect is likely to be offset by the expansion in private bank credit, but this becomes exposed when private credit expansion slows down.

Update I:  Thanks to Frances Coppola for stressing that bonds drain bank reserves if seen independently whilst government spending tops them up. If there was no givernment balances (i.e. just in time spending) the two effects would of course cancel out.  I don’t think it is useful to see these in isolation though as the need for financing only comes about because of a shortfall in financing spending, they need to be seen as part of a system.

None of this is to deny that the primary impact of effective demand and hence growth is private debt, and that it is lack of growth which is the primary driver in increase in public debt.  Rather it suggests a secondary channel, that where there is high public debt, and this is financed by treasury bonds, this can act as a deflationary dreg, whilst such bond financing has no Keynesian multiplier effect, in effect such countries, like Japan, can get stuck in a deflationary rut.  The separation of debt management from monetary policy in effect forces the a parallel monetary policy if there is use of fiscal policy.

This is not to suggest that there are no purchases by the Central Bank of bonds, indeed a large proportion are so held, and the endogenous creation of money to purchase them through conventional open market operations (rather than QE) does case a positive change in debt and hence a positive increase in effective demand.  Of course central bank issued bands also need to be paid for through savings, but the effect of the expansion of money is, in that great Keynsian insight,  to create the savings necessary to pay for them, hence they are net expansionary.

Is this contra Keynes to say that deficits paid for by Treasury  bonds are not expansionary.  Does it not undermine MMT and all of Post-Keynsian and Keynsian economics?  Is this not just Hawtry’s discredited Treasury View?

To that I would say no, yes it is Hawtrys’s Treasury view, this view was correct, but Keynes got around this by suggesting a wholly different form of bond financing – bonds bought from bank created money.

This might seem curious, after all the Keynesian view of history, as set down in the 50s, by for example AJ Youngston say the Treasury view as a ‘mystery’ and its omission of the keynsian multiplier a ‘culpable omission’

The treasury view was not a mystery and referred explicitly to cases where there could be no Keynsian Multiplier.  For this was have the benefit of David Glasnet’s recent history of Hawtry’s formulation of the Treasury View.

Hawtrey starts by assuming that the government borrows from private individuals (rather than from the central bank), allowing Hawtrey to take the quantity of money to be constant through the entire exercise, a crucial assumption. The funds that the government borrows therefore come either from that portion of consumer income that would have been saved, in which case they are not available to be spent on whatever private investment projects they would otherwise have financed, or they are taken from idle balances held by the public.

He quotes Hawrtry directly

We assumed that no additional bank credits are created. It follows that there is no increase in the supply of the means of payment.

Hawtry relied on a complex formulation involving cash balances.  With Keynsian identities we need no such complexity, any increase in saving will decrease effective demand.

In these circumstances there is no error in the ‘treasury view’, there can be no multiplier because there is no net increase in effectual demand.

But Hawtry did concede that where government deficits are financed by bank credit not treasury bonds they could be expansionary:

In the simple case where the Government finances its operations by the creation of bank credits, there is no diminution in the consumers’ outlay to set against the new expenditure. It is not necessary for the whole of the expenditure to be so financed. All that is required is a sufficient increase in bank credits to supply balances of cash and credit for those engaged in the new enterprise, without diminishing the balances held by the rest of the community. . . . If the new works are financed by the creation of bank credits, they will give additional employment.

The difference with Keynes was as follows

 expenditure on public works, if accompanied by a creation of credit, will give employment. But then the same reasoning shows that a creation of credit unaccompanied by any expenditure on public works would be equally effective in giving employment.

Of course Keynes argued that at the ‘Zero Lower Bound’ (hicks term monetary policy was ineffective, but Hawtrys own theory of ‘Credit Deadlock’ came to thesame result and in the 1950s Hawtry conceded that in these cases fiscal policy was more appropriate.

Let us now turn to the General Theory and how Keynes argued deficits should be financed.  Ironically there are no no discussions of government deficit financing in the General Theory.  There are many references however to the expansionary natuture of investment funded by bank credit.

In chapter 16 of the GT however Keynes is clear

after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the  sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto. Indeed, owing to the unwillingness of most monetary authorities to deal boldly in debts of long term, there has not been much opportunity for a  test. Moreover, if such a situation were to arise, it would mean that the public authority itself could borrow through the banking system on an unlimited scale at at a nominal rate of interest.

Perhaps this was not noticed because the GT was not altogether clear on the monetary generation process and the relative roles of exogenous and endogenous money.  At times the GT states that the supply of money is fixed or set by the monetary authority./  Elsewhere he talks of the expansion of money through bank credit.  Crucially however on effective demand

There is… just as much reason for adding current consumption to the rate of increase of new bank money in reckoning the flow of cash becoming available to provide new ‘finance’, as there is for adding current saving

Of course after the GT was published Keynes was clearer on the role of endogenous money when talking of the ‘finance motive’.

The overall conclusion here though is that Keynes specifically talked of bank credit finance (which can include Central Bank purchases of bonds) when describing expansion of incomes through investment, not of treasury issued bonds.

This is even clearer when we come to Keynes specific recommendations on financing such as this memo from 1939 on how to pay for the war

modern representative money and a modern banking system, we know that the necessary ‘finance’ can be created by a series of ‘book’ or ‘paper’ transactions. The Treasury can ‘pay’ in effect by ‘book’ entries and the book entries can be transformed into a regular loan at a much later date. (CW XXI, p 540)

From Geoff Tily

A new instrument – the Treasury deposit receipt (TDR) – was devised to support the creation of these book transactions. The instrument brought together debt management policy, that followed from store of value considerations, and an extension to the system to support means of exchange considerations, in this case government expenditure.
Under the TDR system, retail banks were obliged to lend to government, and hence create credit – alternatively: create a “deposit” for the “Treasury”, in exchange for a “receipt” – to finance directly government expenditure. These instruments were added to Treasury bills as part of the floating debt. The new instrument was required because of the traditional role of Treasury bills, which was that they could be discounted at the Bank of England to support an expansion of credit. So an expansion of Treasury bills to support government expenditure could then lead to a further expansion of credit to the private sector. TDRs were therefore not marketable and could not be reserved at the Bank of England against further credit creation.

His systems had addressed concerns about “monetising” government debt, and potentially causing inflation, by breaking the direct link between floating debt and credit creation. Outside banking mechanisms, any substantial increases to the floating debt as a result of accommodating liquidity preference for shorter-term instruments were due to savings not spending considerations and therefore were also not inflationary.

Annex

The balance sheet terms (excluding the none bank sector) of treasury bond funding  looks (broadly) like this

Treasury

Assets +taxes +treasury bond sales +central bank dividends

Liabilities –public expenditure –treasury bonds (coupon +redemption) –central bank bonds (coupon +redemption)

Central Bank

Assets +Treasury Equity (charter Value) -central bank bonds (coupon +redemption)

Liabilities – private bank reserves in central bank –Treasury dividends –Central Bank Bond Sales

Equity -Treasury Equity +Treasury dividends

Private Banks

Assets +Treasury Equity (charter Value) + private bank reserves in central bank +private loans (interest +premium repayment)

Liabilities -Private Reserves –loans granted

Equity –Owners Equity – private bank reserves in central bank

36 thoughts on “Government Debts and Treasury Bonds – Neither Keynesian or Inflationary

  1. “It is only correct to say public deficit=private surplus, rather a better accounting identity would be (private spending+public deficit-private saving on purchasing treasury bonds)=private surplus.”

    Why would it make sense to subtract private saving on purchasing treasury bonds from the private surplus? If the private sector has $100 and buys $50 government bonds, then the government deficit spends $50, the private sector then has $100 + $50 government bonds. Those bonds are a net addition to the financial assets of the private sector and thus a net addition to the private sector surplus, no?

    • no wait,

      Say in period 1 private spending = $100, and there is no government deficit.

      Then in period 2 private spending = $50, the government sells $50 bonds, and deficit spends $50.

      So in period 2, private spending = $50, private saving on purchasing treasury bonds = $50, and the government deficit = $50.

      According to your formulation, the private surplus in period 2 equals:

      private spending ($50) + public deficit ($50) – private saving on purchasing treasury bonds ($50).

      So according to you (apparently) the private surplus = $50 + $50 – $50 = $100

      But $100 is only the total amount of spending in this example, not the total private surplus.

      The private surplus actually equals $100 total spending + $50 accumulation of bonds.

      As I said above, the bonds are a net addition to the private sectors financial assets. The government deficit spending offsets the reduction in private spending exactly. So overall the bonds are a net addition to the private surplus.

      • sorry that should have been $100 + $50 – $50 = $100 obviously.

        The $100 private spending is from period 1.

      • I don’t disagree but you failed to account for the savings that the private sector had to make in the first instance to purchase the bonds, this is net deflationary in the short run because a net increase in bond issuance leads to a net increase in savings, it is net expansionary in the medium term because of the coupon on the bond, the formula as ever is AD=income +delta debt.i – deta savings.i

      • So this is simply an example of consumption smoothing there is no net transfer of wealth to the private sector other than from the coupon on the bond. All such coupons have in themselves to be financed, and again if Bonds are used to finace this this will have the same effect on demand.

  2. but if the Treasury spends as much as it borrows (by selling bonds to the non-government), then there is no overall reduction in non-govt income, only an increase in the net financial wealth of the non-govt. This increase in financial wealth is equal to the quantity of govt bonds sold.

    • You miss the difference between wealth and income and make a stock flow error, if the government spends as much as it borrows and issues bonds to do so there is a net decrease in the income of the private sector to pay for the bonds. The private sector has decreased its income today in return for an increase in income later – consumption smoothing. An financial asset is not money if illiquid it only effects current demand through its present income stream.

      • “You miss the difference between wealth and income”

        I don’t think I did…?

        The Treasury spends the money it borrows back into the non-govt so there is no overall reduction in non-govt income. The bonds are a net addition to non-govt financial assets.

        “The private sector has decreased its income today in return for an increase in income later”

        Do you mean: the private sector spends less today to buy a govt bond, and then the Treasury spends the money over a period of time, so there is a short period in which spending is lower than before? Is that what you mean? Are you talking about the difference in time between when the bond is paid for and when the Treasury spends the money?

        “An financial asset is not money if illiquid”

        Right, but short-term govt bonds, like T-Bills for example, are very liquid and considered to be cash equivalents.

  3. “you failed to account for the savings that the private sector had to make in the first instance to purchase the bonds, this is net deflationary in the short run”

    The Treasury doesn’t have to wait for the non-bank private sector to ‘save up’ money over a period of time before it can sell bonds and deficit spend.

    My understanding of what normally happens is that the Treasury sells bonds in the first instance to primary dealers. These usually get the cash by selling pre-existing bonds to the central bank through repo agreements (in the US). Then the Treasury spends, increasing reserves and bank deposits, and the primary dealers sell the new bonds on into the market.

    If for some strange reason no one in the non-bank private sector wants to buy government bonds, they just end up being held in one way or another by the banking system (or the wider financial system).

    • The sequence is irrelevant – if the holder of the bond has in any way to save to pay for the bond this depresses current demand by simple accounting identities. Your scenario has two issues. Firstly the bond dealers need to see existing bonds, and that is a net transfer of financial assets from the private to the government sector, contradicting your earlier statements. Secondly where on the central banks balance sheets does the money for the purchase of bonds on the secondary market come from? Yes the central bank can use its balance sheets as in effect a bridging loan until the receipts from treasuries are secured, but that doesn’t effect the ultimate source of where the bond financing comes from, from private sector. Also your accounting does not have regard to open economies, not every cent of government expenditure is spent domestically, that that is not will not be additional income to pay for the bonds.

  4. “that doesn’t effect the ultimate source of where the bond financing comes from, from private sector”

    Well ultimately the private sector has to pay for the bonds with central bank money, i.e. money created by the central bank, so in that sense the bond financing *ultimately* comes from the central bank. EIther the CB has to lend the money to the private sector, or buy assets from the private sector, for the private sector to have the money with which it can buy government bonds.

      • Say you buy a government bond directly from the Treasury. First your bank debits your bank account, and then the central bank debits your bank’s reserve account and credits the Treasury’s account at the central bank.

        Your bank might initially credit a Treasury account held at your bank, like a Tax & Loan account for example, before it makes the final payment to Treasury. But at some point your bank has to pay the Treasury with central bank reserves. This happens when the central bank debits your bank’s reserve account and credits the Treasury’s account at the central bank.

        Until your bank’s reserve account has been debited and the Treasury’s account at the central bank has been credited, the payment hasn’t been completed.

        So ultimately government bonds are paid for with reserve balances (central bank money).

        Your bank deposit is simply ‘deleted’ in the process.

      • No as you are transferring money from a deposit account directly to a debt management office (treasury) the banks reserve requirements go DOWN. The bank pays the DMO with its own reserves and these are deposited in the Treasury Central Bank account. Money can only be created from liabilities, never reserves which are always assets. This is an asset swap not money creation. The central banks balance sheet is added to by the treasury deposts and it loses the reduced reserves from the private sector. Try doing some t accounts sowing the chainging tier IO capital and reserve requirements of the banks and you will see what I mean.

  5. Yeah sorry I was using non-accountant terminology, the way that banks talk to their customers: “we have credited your account”, “you have credit in your account” etc.

    “the banks reserve requirements go DOWN”

    Agreed.

    “Money can only be created from liabilities, never reserves which are always assets”

    But reserves are money, and are central bank liabilities…

    “The bank pays the DMO with its own reserves and these are deposited in the Treasury Central Bank account”

    Agreed.

    The bank pays the treasury with reserves, i.e. central bank money. So my point was that the central bank originally had to create that money beforehand for the bank to have it in the first place and be able to buy government bonds with it.

    • I don’t mean that the central bank creates it at the point when the bank pays the tresury. SImply that the money had to have been created by the central bank at some point in time before.

      • bank reserves = central bank deposits + vault cash

        central bank deposits (reserve balances) are basically currency in electronic form. A $10 Federal Reserve Note is central bank money in physical form, and a $10 million Federal Reserve deposit (reserve balance) is central bank money in electronic form.

        Before currency was paper notes + central bank deposits, it was gold and silver coins, etc.

        My point was that ultimately the Treasury only accepts central bank money in payment for its bonds. Yes, it looks like you pay for the bond with your bank deposit, but the reality is that your bank then has to pay the treasury on your behalf with bank reserves.

      • But they are not lreservesl are they but issued currency and all central banks adopt an accommodationist policy to demands for currency by private banks, just look at the Aibuses stuffed with euros at the hright of the Greek Cris if you doubt me. It is impossible to make anyform of clearance payment with money held in a central bank reserve whilst meeting reserve requirements, banks have to transfer additional finds to create excess reserves first.

  6. “banks have to transfer additional finds to create excess reserves first”

    Could you clarify what you mean please?

    “It is impossible to make anyform of clearance payment with money held in a central bank reserve whilst meeting reserve requirements”

    If a bank makes a payment to the Treasury’s account at the central bank (to pay for government bonds for example), and the bank has zero excess reserves at the time, then the central bank will usually lend the money directly to the bank, usually via an automatic overdraft. This is an example of the central bank directly financing the bank’s payment to the Treasury, isn’t it?

    If the bank has excess reserves at the time (as bank do at present due to QE), then the payment would just be made with existing bank reserves.

    In the US, If payments to the Treasury result in a system-wide shortage of reserve balances, thus putting upward pressure on the Fed Funds rate, then the Fed automatically adds reserve balances by purchasing bonds (through repos), so as to maintain its target FF rate.

    • No it’s a very temporary (usually overnight) loan to tackle the temporary liquidity weakness of one park not having funds to clear another banks creation fo money. You neglect interbank lending.

      • I’m not sure I get your argument.

        The treasury’s account is held at the central bank, and payments to that account are made with ‘central bank money’. Central bank money is created by the central bank… so banks originally have to get this money from the central bank, in some way, to be able to make payments to the treasury’s account.

        If there was zero central bank money in existence, for example, the central bank would have to create it before payments could be made to the treasury. So the central bank originally supplies the money with which to bonds can be bought from the treasury.

  7. sorry that should have been: “So the central bank originally supplies the money with which bonds can be bought from the treasury”.

  8. “But treasuries don’t issue bonds anymore, debt management offices do, so your argument doesn’t apply”

    In the UK the Debt Management Office is part of the Treasury.

    “In institutional terms, the DMO is legally and constitutionally part of HM Treasury”

    http://www.dmo.gov.uk/index.aspx?page=About/About_DMO

    When government bonds are sold to the private sector, payment for the bonds is made to the National Loans Fund (an account of HM Treasury held at the Bank of England), via the Debt Management Account (an account of the DMO held at the Bank of England). Payment to these accounts is made with ‘central bank money’, as these are central bank accounts.

    “The DMO was established as an executive agency of the Treasury… Its operations are managed through the Debt Management Account (DMA), which is a bank account at the Bank of England, linked closely with the National Loans Fund as described below. As the Government’s debt manager, the DMO has a key role in the issue of gilt-edged securities on behalf of the Treasury… They are issued from the NLF, sold initially to the DMA and then sold from the DMA by the DMO to the market. In addition, the DMO issues Treasury Bills from the DMA and undertakes other money market operations to meet the Government’s daily cash requirements.”

    http://www.official-documents.gov.uk/document/hc1213/hc04/0447/0447.pdf

    So my argument does still apply.

      • “central banks dont issue treasuries any more DMOs do which is part of the treasury”

        How is that relevant to my point? I said the private sector has to get the money to buy government bonds from the central bank, and you responded by saying “Err no 97% of money is bank created not central bank created”.

        I am aware that government bonds are issued by the Treasury. This doesn’t change the fact that the money to buy the bonds comes from the central bank. You seem to disagree with this but for reasons that aren’t very clear.

      • The fact that the money is held an asset in central bank accounts before buying the bond does not mean that the money has been state created. You seem to assume the money only circulates once. Money can exist on the LHS of a balance sheet from any number of reasons including open market operations that create a profit. The origin of the money is irrelevant.

      • “The fact that the money is held an asset in central bank accounts before buying the bond does not mean that the money has been state created”

        By “money held in central bank accounts” I assume you mean reserve balances, i.e. central bank deposits.

        Reserve balances are created by the central bank.

        The creation of reserve balances by the central bank is in principle no different to the creation of paper currency by the central bank. Reserve balances are just currency in electronic form.

        Saying that reserve balances aren’t created by the central bank is like saying that Bank of England notes aren’t issued by the Bank of England.

        The central bank is part of the state. Hence the money is state created.

        “You seem to assume the money only circulates once”

        I don’t see why you think that. Bank of England notes circulate many times, that doesn’t change the fact that they are created/issued by the Bank of England.

        “The origin of the money is irrelevant”

        How so?

      • You are missing the central point, privately created bank money (inside money) can also circulate many times including through central bank reserves. The current location of an asset says nothing about when and whom created it.

  9. “privately created bank money (inside money) can also circulate many times including through central bank reserves”

    Inside money is a private sector liability, like a bank deposit, right?

    Central bank reserves are liabilities of the central bank, so how can they be inside money?

    Isn’t that like saying that a £5 bank of england note can be ‘inside money’?

    • There is osmosis between the two, financial institutions using the fractional reserve principle can leverage slow moving liabilities onto the asset side of the balance sheet, providing the returns from doing so can satisfy vault cash requirements – see the textbooks by Davidson and Phillips, that’s why I don’t use the terms outside and inside money, they are useless past the point the created money become bank reserves.

      Also central bank reserves never circulate, it is only when they become excess reserves and banks then lend these assets that they do.

      Your framework doesn’t account for equity which creates an asset which is lent out by a bank before it has any liabilities. Please refer to my T accounts on many posts on this site on banking – especially https://andrewlainton.wordpress.com/2013/07/26/a-simple-post-keynesian-alternative-to-is-lm/

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