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Sunday, 12 July 2015

Confusion - Govt debits reserve accounts of banks when it taxes

Anyone can create IOUs in govt currency. I can create a Random IOU for £2, but the govt don't accept it as tax payment!
This is the difference between 'inside' and 'outside' money. The government is the only entity that can issue inside money e.g. US federal government issues dollars, Treasury pounds in UK (BoE is a subsidiary as seen in the consolidated accounts released by the government - see HERE.)
An excellent comment at Mosler Economics:
"When a bank creates a deposit balance for someone, they have thereby created a liability for themselves. And that liability is a liability for the state’s money. If you pay your taxes by drawing on that deposit balance, then the clearing of the payment results in a transfer from the bank’s reserve account to a treasury account. The government doesn’t simply accept the bank liability itself as payment, but requires payment in the form of the government’s own liability – that which the bank liability is a liabilityfor."