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Introduction: What Does “Debt Monetisation” Actually Mean? Debt monetisation is generally described as the government financing its deficit by selling government securities directly to the central bank. Market financing, by contrast, is described as the government selling those securities to the market. The two are therefore presented as fundamentally different ways of financing government spending. But are they? To answer that question, we need to follow the monetary operation all the way through - not merely look at who initially buys the government securities. There is one principle we need to establish before we begin. The Central Bank's Policy-Rate Mandate A central bank that sets a target policy rate must conduct its reserve operations consistently with that target rate. As long as the central bank has a mandate to maintain a target policy rate, the quantity of reserves in the banking system is not something it can freely choose independently of that rate. If the banking sys...

Why Government Accounting No Longer Reflects the Operational Reality of the Monetary System - and Why That Matters to Everyone Introduction: The Monetary System Has Moved, But the Accounting Has Not In our previous article, Inside the Banking System , we followed money behind the walls of banking. We saw the difference between a bank deposit and central-bank reserves. We saw how commercial banks create deposits when they lend. We saw how payments between banks are settled through the central-bank reserve system. And we saw something particularly important about government spending: Government payment → bank receives reserves → recipient receives a bank deposit. If you have not read that article, it provides the plumbing behind what follows. But there is another question. If this is what happens monetarily, why does government accounting present government spending, taxation and borrowing in such a different way? This is not a minor technical question. Government account...

The VIP Backroom of Money Introduction Let’s play a quick game of mental architecture. Pull up your banking app on your phone. Look at that number staring back at you in your savings or current account. Now, let me ruin the magic trick: That number is not central-bank money. It is a liability of your commercial bank - a promise by your bank to pay you. If you take that phone into a high-security vault at the Reserve Bank of India (RBI), point to your screen and say, “Can I have my money, please?”, the security guards will politely escort you to the exit. Not because you are broke. Because your bank account balance and the RBI's money are two different layers of the monetary system. To understand how the banking system actually works under normal, day-to-day conditions, we have to look past the money we use to buy groceries or pay rent. We need to look at wholesale money  - otherwise known as central-bank reserves . Reserves are the exclusive money of the banking system . ...

Institutions matter. Technology matters. But what happens when a society already has the people, skills and productive capacity needed to prosper - and leaves much of that human and productive capacity unused? The world is debating Daron Acemoglu again. A recent Economist article asks why one of the world's most influential economists is "oddly unconvincing." Whatever one's assessment of his conclusions, Acemoglu's influence on modern economics is undeniable. He is a Nobel laureate whose work has profoundly influenced how economists think about institutions, prosperity, technology and inequality. The question is whether his framework tells us enough. I think there is a question beneath the institutional question that deserves much greater attention: What happens when a society has the resources to provide a much better life for its people, but fails to use them? That is a different question. And it may be one of the most important economic questions of...

If Tamil Nadu has people ready to work, materials, skills and productive capacity, why should the lack of money in the Treasury stop the State from using them? There is a question that deserves a much more honest answer than it usually receives: When a government wants to improve the lives of its people, what does it actually need? Does it need money? Or does it need people, materials, skills, land, technology, infrastructure and the capacity to organise them ? Think about what a government actually does. It wants: teachers in schools, doctors and nurses in hospitals, engineers and workers building roads, people producing food, equipment for public services, housing, clean water, electricity, public transport, environmental restoration, care for children and the elderly. Take a simple example: improving the school lunch so that it is on par with the best school lunch anywhere. What does it need? Money? Or more cereals, vegetables, fruits and other ingredients to ...