by Warren Mosler
With fixed fx/convertible currency ‘base money’ doesn’t include government securities. In fixed money systems those obligations are claims on government reserves (gold, fx, etc.), which are part of ‘national savings’ by definition.
However, with today’s floating fx/non-convertible currency treasury securities (held outside of government) are logically additions to ‘base money’. The notion of a reduction of government reserves (again, gold, fx, etc) is inapplicable to non-convertible currency.
Thus, with today’s floating fx, I define base money as currency in circulation + $ balances in Fed accounts. And $ balances in Fed accounts include both member bank ‘reserve accounts’ and ‘securities accounts’ (treasury securities). In addition, to me, it’s logical to include any other government guaranteed debt as well, including agency paper, etc.
Therefore, with floating fx, ‘base money’ can logically be defined as the total net financial assets of the non-government sectors.
Note: For example, that this means QE does not alter base money as thus defined, which further fits the observation that QE in today’s context is nothing more than a tax that removes interest income from the economy.
In addition, deficit reduction is the reduction in the addition of base money to the economy, with the predictable slowing effects as observed.
The point of this post is to ‘reframe’ government deficit spending away from ‘going into debt’ as it would be with fixed fx. Instead it is ‘adding to base money’. With floating fx net government spending increases the economy’s holdings of government liabilities, aka ‘tax credits’, and is therefore an asset for the non-government sectors.
1. This structural definition of base money is consistent with the tracking of money supply by the Federal Reserve. The Fed has stopped tracking and reporting broader measures of monetary aggregates as of 23 March 2006. No longer followed are measures of things such as CDs above $100,000, U.S. deposits of foreign currencies,repos, commercial paper, T-bills and Bankers' Acceptance. These changes would be logical for the acceptance of a broader definition of base money such as the author presents here. Of course, an explicit statement like Mosler's proposal has not been inferred by the Fed in any direct way. But Econintersect can see an implicit relationship.
2. The definition by the author is consistent with the lack of impact on economic growth of the Fed QE actions. Slower growth can be in part attributed to the withdrawal of $166 billion from the real economy in 2011 and 2012. This amount was returned to the Treasury by the Fed for interest earned on government securities. That by itself reduced GDP by 1% over the two years - and possibly more if there were a multiplier greater than 1. By this logic QE is contractionary and has been inhibiting the very recovery that was supposedly intended. Of course, there was one beneficiary and that was the financial sector which had enhanced liquidity for its activities which had little benefit for Main Street.
An added note: In a private discussion with Econintersect Warren Mosler has contended there was no real added liquidity for the financial sector and does not agree with the final statement about liquidity above.
John Lounsbury edited this article.