The Flow of Funds

I’ve made an diagram of how money flows around in the modern monetary system, and added some MMT propaganda around it for effect. I plan to make reference to it an upcoming post, but for now it’s just a pretty picture for you to look at.

7 comments to The Flow of Funds

  • Larry Staton Jr.

    I get a 403 error when I try to access your pretty picture so I can’t see it. i just see a small question mark.

  • askod

    Very good tool.

    A nitpick: The Government to Commercial banks and Commercial banks to Government arrows are somewhat hard to connect to the right labels. Is the red Loans (text above Central bank) or Excess reserves? Does Interest payments refer to the blue Government to Commercial banks or to the yellow Central bank to Government arrow?

    To be clear: I did figure it out, but first I cold not find the label for Government to Commercial banks. So moving the labels for greater clarity would be good. Perhaps outside the arrows instead of inside?

  • David Chester

    The diagram does not represent all of the working parts of a macroeconomy in a country. it omits the production side and this using Adam Smith’s description of the production process should include landlords, workers and capitalists.

    Without including all of the social system there is no certaincy that the use of this model will give the true results or effects, after the introduction of new policy changes. The full model which should be used here is available in Google Images:
    DiagFuncMacroSyst.pdf

    where all of the Smithian effects are included with some more necessary terms too. It should be noted that it is not necessary to make the model more complicated than this but it is also important not to over-simplify it. This model that I use has the absolute minimal number of entities and money flows to fully describe or cover our social systems. Consequently I find that any result comming from the simpler model illustrated in the blog, is likely to be incorrect.

  • […] Found this visual model of MMT from this webpage […]

  • John Bloomfield

    In reference to:
    “..When the Government wants to spend, it issues bonds – basically IOU notes with interest, paid to the holder of the note – and lists them for sale to commercial banks on the open market..”;
    and
    “…the bonds that the government listed for sale to borrow the money to spend in the first place. ”

    I suggest that the above statements imply that before a fiat currency issuing govt. can spend, it must first call in (borrow) money from commercial banks.
    That is clearly not a requirement – a sovereign nation can issue new money at any time it so decides.

    While the govt, may well choose to issue new bonds of a similar value to the new money they have ‘spent’ into the economy it is not a prerequisite to issuing new money.
    Currency on issue is already a government debt – to issue an interest bearing IOU to a bank in exchange for return of its own IOU token (currency) achieves little other than to covert one form of debt (currency) to another form of debt (bond).
    From the banks point of view, a similar transaction occurs when an individual transfers private ‘money’ from a non interest bearing cheque account to an interest bearing savings account.
    The transaction is a swap in the form of an existing liability; a currency debt exchanged for a freshly issued bond debt.

    The separate bond issuance decision should be made with the specific intent to influence/control the prevailing inter-bank interest rate.
    What if the prevailing interest rate was 0%, and the intent was to maintain it at 0%?
    If the sole desire is to remove an equivalent amount of currency from active circulation in the economy there are other means available to achieve that purpose – such as a tax or a levy.

    While a subsequent sentence “..It doesn’t matter which order it happens in – the end result is the same:..” provides a get out clause of sorts, I consider an incorrect message is likely conveyed.

    While most functional aspects of MMT economics are more or less (indirectly) interconnected, and since we explicitly state that new spending is not constrained by taxation receipts, and banks do not spend from their reserves, we should equally take care not to suggest that new spending is directly dependent on bond issuance.

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