Sometime in the next 24 hours we will be switching European Tribune over to a new layout. This will involve a little downtime and no doubt some teething troubles. Do not adjust your set. - Colman

In my analysis there is no such thing as 'high powered money'.

It's a canard.

Central Banks issue fiat currency as a tax credit in their capacity as fiscal agents of the Treasury and they spend this by crediting the memorandum accounts of clearing banks. The Treasury then issues dated interest-bearing Debt which is purchased by private banks.

Private banks also create - as sub fiscal agents of the Treasury - what are 'look-alike' tax credits and these  are indistinguishable from central bank money. This virtual cash is then either spent - by crediting Central Bank memorandum accounts - on purchasing goods, services or assets (particularly treasury debt) or lent by entering into a sale and repurchase agreement of the cash asset.

The misunderstanding which permeates Economics is to regard the relationship between Treasury and Central Bank as a counter-party relationship when it's an agency relationship.

Likewise, central banks do not 'owe' cash reserves to private banks: private banks 'own' cash deposits.

Two different 'liabilities': the undated creditary/ownership liability of cash reserves; and the dated liabilities of loans and term deposits have been wrongly conflated.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Jan 6th, 2013 at 07:08:23 PM EST
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