The following is via economist Warren Mosler of Illinois Income Investors Offshore Advisors.

Mosler is a a believer in MOSLER’S LAW, which states: There is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it.

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The media is screaming that deficit spending simply takes money from borrowers and gives it to someone else, so it doesn’t work.

This is NOT the case. In fact, deficit spending ADDS to our total savings of financial assets.

Operationally, this is how $100 billion of deficit spending ‘works’ to ADD to nominal savings of financial assets:

  1. The Treasury sells $100 billion of treasury securities.
  2. Paying for the new securities reduces member bank balances held at the Fed by $100 billion.
  3. And our holdings of treasury securities increase by $100 billion.
  4. Quick recap-

    We buy treasury securities from the government which means we have $100 billion more treasury securities.

    We pay for them which means we have $100 billion less in our bank accounts.

    So far all we have done is exchange bank balances at the Fed for treasury securities, which also held at the Fed.

    So far nothing of economic consequence has changed, apart from now we could be earning more interest on our treasury securities than we had been earning on our Fed balances.

  5. The Treasury spends the $100 billion it got from selling us the $100 billion of new treasury securities.
  6. This increases member bank balances at the Fed by $100 billion.

Final recap:

  • Bank balances are back where they started from.
  • Our holdings of treasury securities, which are financial assets and saving, have increased by $100 billion.

Conclusion and proof:

Government deficit spending of $100 billion necessarily increases savings of financial assets by $100 billion.

Category: Bailouts, BP Cafe, Financial Press, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Deficit Spending for Dummies”

  1. TrickStyle says:

    So, I had $100M in cash. And then I bought $100M of notes from the USG. Yay! I’m earning interest. Who is making the interest payment? The USG. Where do they get money to make that payment? They tax me and my business.

    When they spend the $100M on infrastructure programs, where do they the money to return my principal. They tax me and my business.

    And what does this lack of “economic consequence” (except for the interest payment) do to the longer-term prospects for the currency in which all of this is taking place? On top of that, let’s suppose that it weren’t 100M but 2 trillion. Should we be satisfied to know that we just created 2 trillion of increased savings of financial assets?

    I guess I need the “Deficit Spending for Really Big Dummies” to understand why “Mosler’s Law” is worth a lick.

  2. dreimer says:

    Only problem with the current financial system is that some of that $100B will not end up back in fed coffers because some of it will be shipped overseas to buy the goods that the government bought with the $100B.

  3. Simon says:

    I wish I clearly understood this process. I guess the end result of increased savings is what the Chinese have been doing to help us out.

    Also what I’d like to know is the deviation from this process that the FED could take that would result in real printing, not just credit expansion.

  4. Porsche87 says:

    I think a thesis could be written on if 5 is a logical progression from 4. It seems far too simplistic a statement to make without a long list of caveats.

  5. wswainwright says:

    Just to pick nits… the Fed does not pay interest on member bank reserves on deposit with the central bank, even if the reserves exceed the minimum required reserve amount.

    Otherwise, this analysis is generally correct and is referred to as the “money mutiplier effect.”

  6. maxpower says:

    Quad erat demonstrandum. Congratulations, you’ve just halucinated $100B out of thin air by devaluation of currency, the unmentioned variable. In which vaccuum does Mosler exist? One devoid of assets backing the currency or one devoid of air for the brain?

  7. Mike M says:

    This is good because deficits don’t matter.

  8. if this “for dummies”, and I don’t get it–thanks Venn, then I guess I’m excluded, like my, above, cohort, from that Group..

    this Tripe only reinforces my belief, that anything entitled “…for Dummies” is, safely judging a book by its cover, a total waste of Time, and then some..

  9. David Merkel says:

    Mosler is patting himself on the back before external validation arrives. If we take the case where the Fed buys the debt, well, that’s monetizing the debt, with more inflation than we would have had.

    Regardless of who buys the debt, there is an eventual payback, default, or inflation that must occur. There is no free lunch.

  10. KidDynamite says:

    this is also known as the Ponzi Scheme of the U.S. Treasury. it works until it doesn’t…