Notes on MMT

In regards to running a surplus and clearing out the national deficit, Clinton’s team suggested that:

What worried policy makers the most was the prospect of depriving the Federal Reserve of the key instrument it relied on to conduct monetary policy - government debt. At the time, the Fed was relying on government bonds to manage the short-term interest rate. When the Fed wanted to raise interest rates, it sold some of its Treasuries. Buyers paid for those bonds using a portion of their bank reserves. By removing enough reserves, the Fed could move the interest rate up. To cut rates, the Fed would do the opposite, buying Treasuries and paying for them with newly created reserves. Without Treasuries, the Fed would need to find some other way to set interest rates.

Remember, the crux of the Fed’s ability to set monetary policy is by controlling how much money circulates through the economy. They do this through the banks by loaning it out when interest rates are low or by encouraging saving when they are high.

Simply let the central bank buy up government bonds in exchange for bank reserves. A pain frere transaction that turns yellow dollars back into green dollars… Instead of selling bonds to drain off the reserve balances that result from deficit spending, we could just leave the reserve in the system.

Government prints out money, taxes some back out, and is left with a negative balance - which they borrow. What is this “reserve balance”?

Rather than buying and selling Treasuries to add and subtract reserves, he Fed switched to a “more direct and more efficient method of interest rate support.” It simply started paying interest on reserve balances. Today, the Fed can adjust the short-term interest rate any time it chooses, simply by announcing that it will pay a new rate.

Aka instead of using cash in their checking account to buy Treasuries, converting it to a savings account, and thus pushing the interest rate up they are now directly setting the interest rate on Treasuries.

Question: Who is benefiting from he Fed’s interest rates? Are people buying Treasuries from them instead of through the UST?

If I had to guess, the “reserves” in this case mean the money sitting in the regional banks accounts that they get from the Fed selling securities. Thus when they want banks to lend it out, they will lower interest rates and vise versa increase them when banks should reign in spending.