Understanding how monetary sovereign governments create and spend money means looking at the Treasury department and the central bank or, in the US, the Federal Reserve.

Economist Eric Tymoigne explains two approaches to understanding the relationship: the consolidated and the collaborative, or cooperative, version of the Treasury and the Fed.

The consolidated approach merges the Fed and the Treasury into one entity and analyzes the implications of this merger on public finance. It emphasizes that taxes and government securities don’t fund the government, but rather, the government spends by crediting accounts. (This comes as no surprise to MMTers.)

The consolidated approach also highlights the importance of injecting reserves into the economy before taxes can be collected or government securities can be sold. The coordinated approach recognizes the separate roles of the Treasury and the Fed but emphasizes the extensive coordination between the two entities.

Eric walks us through these operations and touches on the relationship with private banking and the role of reserves on the international stage.

Listening to this episode, you can’t help but conclude that the ways in which the US manages monetary operations are not consistent with budgetary needs. It’s hard to see how it has anything to do with provisioning our society.

Eric Tymoigne is an Associate Professor of Economics at Lewis & Clark College, Portland, Oregon, and Research Associate at the Levy Economics Institute of Bard College.

@tymoignee on Twitter