Issuer-User Paradigm

We've all heard the alarms over our national debt and the need for public spending cuts to avoid a national bankruptcy...but what exactly is the national debt?

Just as every asset has a corresponding liability in accounting, the currency issuer's debt is dollar for dollar equal to the currency users' savings. On the surface this may sound implausible but what exactly is going on?

The currency issuer is the monopoly producer of money and, just as every asset has a liability, also results in government liabilities.The issuer's liabilities, or "debt", is a digital account of the currency supply used by the currency users. To a fiat currency issuer, the currency supply is a digital accounting tool, not an asset in and of itself. The currency supply is simply the bookkeeping records corresponding to all the currency users’ savings in banknotes, deposits, and treasuries.

Looking at it from a sector perspective, the issuer's debt is the "savings" of both the private sector and the foreign sector as a matter of accounting. What exactly is "savings"?

Money functions as both a store of value and a medium of exchange. When users acquire dollars they can either trade them, known as spending, for items in the marketplace or choose to "save" them as banknotes, deposits, and treasuries.

The more users choose to save the more "debt" the issuer takes on. A common misconception is that currency issuers "borrow" money. The issuer does not borrow because it is the monopoly producer of the currency - the money that currency users spend or save. China does not lend to the US government. China saves in the currency the US produces. This is not a theory this is simply double entry accounting.

Savings by currency users, domestic or foreign, is a straightforward concept on an individual level but becomes counter intuitive on a macro level.

In fact, economists have created “laws” based upon the very idea of savings at the macro level. For example, Says Law states, supply creates demand, but this presumes a monopolist currency issuer exists and no monopoly suppliers are involved. Let's say a currency user saves a large amount of money in Say’s system, if the issuer fails to replenish the supply then there are no profits for the Say’s “supplier” to take. In other words, without a currency monopolist to replenish the supply of dollars Say’s Law fails. Keynes’ paradox of thrift provides more insight. The paradox of thrift states that the more people save the less overall demand will result. Keynes system assumes a currency monopolist is not replenishing the supply of dollars. Says’ and Keynes’ oversight is that both their models presume an issuer acting within the system and fail to mention how. The currency issuer as the monopoly producer, lender, and price setter of money is without a doubt the least understood participant within the system.

The digital nature of government debt and the impact of currency users decision to save informs the issuer’s of it’s options. For any given level of output, the currency issuer’s must choose between maintaining equilibrium both in terms of price and output or not. In order to do so, the issuer needs to add to the supply of currency. Likewise, if users collectively choose to save less then the issuer needs to spend less (or tax more) in order to maintain equilibrium. Fiscal policy is the mechanism to add to the currency supply by either increasing public spending and/or adjusting taxes depending on one’s politics.

Optimizing the currency supply at any level of public spending requires offsetting spending with tax revenues while maintaining deficits at a rate corresponding to the users' rate of savings. In order to do so, government must destroy dollars with taxes before it can create the dollars it needs to spend. Recognizing that some users choose not to spend, government deficits must also correlate to the currency users' rate of savings. The challenge of the issuer is to spend enough money to displace the saving rate but not enough to exceed it, doing so creates price instability and inflation.

Managing the currency supply provides price stability for a given output but how can the supply be managed to maximize output within a resource constrained marketplace?

Currency optimization requires managing the supply of currency to operate at full capacity as much of time as possible. Changing conditions cause effective capacity to naturally lower but also enables the policy apparatus to focus on what's adaptive and make adjustments accordingly. Excess currency results in spending that overwhelms constraints, like production capacity, causing inflation and price instability.

Government as the currency issuer can grow the currency supply indefinitely because the supply is generated digitally. Government is fully capable of operating those real constraints at full capacity and chooses not to when constraining it's currency supply.

What are the costs of a suboptimal currency policy?

Failing to manage currency within a constrained marketplace leads to excess capacity, reduced goods and services, and poor labor utilization. If your one to view government spending as inefficient, like i do, I would warn that suboptimal policies also come with opportunity costs. Currency optimization should be used, in my mind, for R&D. (my next post will focus on critical importance of the "invisible" government subsidy to R&D). The cost of suboptimal deficits is the missed opportunity to subsidize research that can create next generation technology for the private sector.

What course of action is recommended?

Managing the currency supply is ultimately a political decision that influences the overall output level of the economy. Fiscal policy of a currency issuer is the a tool used to optimize currency within a resource constrained marketplace. Government as the currency issuer can maintain optimal currency levels indefinitely because government debt is a digital resource, a digital account of currency users savings in banknotes, deposits, and treasuries. Government is fully capable of operating those real constraints at full capacity and chooses not to when constraining the deficit.

The modern free market is an invention of the state. It’s rules are not naturally ordained but simply the outcome of political arrangements. Political arrangements defined by law though property rights, the corporation, and the creation of money. Among other reasons, this is why classical economists never spoke of “economics” but always of the “political economy.” The intended purpose of these political arrangements is to benefit of society by reducing risk and driving economic development.

So where does all this leave us?

The US is the reserve currency of the global economy representing 62% of the worlds currency reserves. In 1971 Nixon closed the gold window and moved the US to non-convertible, floating exchange rate, fiat based currency system. For the last 40 years the entire mainstream economic profession has failed to grasp the fundamental nature of our monetary system. The result has lead mainstream economists to give disastrous advice to our policymakers. Their fear of the federal deficit is a testament to their complete misunderstanding of the accounting relationship between the issuer and user. Well-intended policymakers are only as good as their economic advisors. Mainstream economists are using the wrong models, drawing the wrong conclusions, and giving the wrong advice.

And that leads us to my Kickstarter project. The Kansas City school of economists are doing good work but are marginalized by the mainstream profession and fail to influence policymakers. My goal is to bring attention to their work by using my "issuer-user" paradigm to explain their concepts without all the technical jargon of the economists. The sooner the rest of the economic profession grasps these basic concepts the sooner they can give advice policymakers to remove the yoke suffocating our economy, underutilizing our resources, and reducing our global competitiveness. So please consider supporting my Kickstarter project and together let’s both challenge the group think that has caused so much collateral damage to the US economy and the American public


  1. I think you have a typo on your Issuer-User Accounting slide. The top left green arrow should say "User Assets" no?

  2. Sorry, I should have started by saying this is a fantastic post. You'll make Cullen, Warren, et al, proud.

  3. Good site. How does issuer spending occur and how does the Treasury and the Fed function in issuer spending?

  4. @Somnolento - thanks i've noticed some other typos too as i've reread it.

    @RG I'm still working on a general overview but i plan on eventually tackling the subject. i'm still at the crawling stages of the site.

  5. I'm confused about Paul Krugman. He seems to fall toward the thinking that the "issuer" needs to spend (i.e. create government jobs) than the Chicago people. I just don't see him lumped with the administration at all.

  6. Paul Krugman is a deficit dove, MMT are deficit owls. We recognizing why and how they should be used. paul was my favorite until i discovered MMT

  7. I assume your model can explain various matters. E.g. Why Japan has a debt to GDP ratio of 200% and still survives - thus because Japan people have a tendency of saving, Why the Eurozone has crisis (because PIIGS were saving less as currency users, while their states as collateral currency issuers where spending more as collateral counterparts currency issuers than the North, some issues related to the US economy (e.g. why the debt ballooned the last years - thus because banks have to raise reserves in order to be prepared for housing market collapse, or whatever kind of collapse), even as a bit premature it can explain things.

    So keep up the good work and add a few trims. Generally it looks nice but it needs some feedback models.

  8. @anonymous - great feedback. all of what you mentioned needs to be addressed. i am weighing how deep to get into what versus trying to market the small platform i have. At the moment i am trying to figure out how to position my kickstarter project. do i raise funds to get animations made or.... thats just it i'm trying figure out what to do next.

  9. Craig, you say at the top under the first diagram, "On the surface this may sound plausible but what exactly is going on?" I would suggest changing it to, "On the surface this may sound implausible, so what exactly is going on?" I suspect that most people may not think this is plausible, which is really the point of the page.

  10. Thanks, this helped me.

    "What course of action is recommend?" should read "What course of action is recomended?"

    What about the national debt? Should it be paid off by creating money and no future borrowing occur (money just created, instead)?

  11. In 1792 the US Congress adopted legislation titled "An act establishing a mint, and regulating the Coins of the United States". Section 9 of that act authorized the production of the dollar coin and each to contain 416 grains of standard silver. In July 1944 an agreement was reached at the United Nations Monetary and Financial Conference which pegged the value of gold at US$35 per troy ounce and the whole world looked on US$ as the gold standard in purchases. But in 1971, the US President Nixon took the US$ off the gold standard after his administration realized that the US no longer had enough gold to buy back every dollar that foreign governments were handing in.

    In 1973, the US President Nixon asked King Faisal of Saudi Arabia to accept only the US$ in payment for oil, and to buy US Treasury bonds, notes and bills with their excess profits, so that USA can continue spending money and not pay it back. In return, the USA pledged to protect Saudi Arabian oil fields from seizure by USSR and other nations including Iraq and Iran.

    The 1973 Arab-Israeli War upset this agreement and caused the Great Oil Embargo of 1974. By 1975 the Great Oil Embargo was over and all members of Organisation of Petroleum Exporting Countries (OPEC) accepted to sell their oil only in US$. Every nation was saving their surpluses in US$ since every country needed US$ to buy oil. The OPEC oil sales supported the US$. The petrodollar system was a brilliant political and economic move created a growing international demand for both the US$ and US debt – all at the expense of OPEC.

    Since only the US Federal Reserve can print the US$, the US control the flow of oil. The US essentially owns the world's oil for free because oil is denominated in US$ and the US$ is the only fiat currency for trading in oil.

    So long as almost three quarter of world trade is done in US$, the US$ is the currency which central banks accumulate as reserves. But central banks, whether China or Japan or Brazil or Russia, do not simply stack US$ in their vaults. Currencies have one advantage over gold. A central bank can use it to buy the state bonds of the issuer, the USA. Most countries around the world are forced to control trade deficits or face currency collapse, but not the USA. This is because of the US$'s reserve currency role and the underpinning of the reserve role is the petrodollar. Every nation needs to get US$ to import oil, some more than others. This means their trade targets US$ countries.

    The vast majority of the oil is traded on the New York Mercantile Exchange and the London International Petroleum Exchange and both oil exchanges are owned by the US corporations and transact oil trades in only in US$.

    Because oil is an essential commodity for every nation, the petrodollar system, which exists to the present, demands the buildup of huge trade surpluses in order to accumulate US$ surpluses. This is the case for every country but one — the USA which controls the US$ and prints it at will or fiat. Because today the majority of all international trade is done in US$, countries must go abroad to get the means of payment they cannot themselves issue. The entire global trade structure today works around this dynamic, from Russia to China, from Brazil to South Korea and Japan. Every country aims to maximize US$ surpluses from their export trade. Currently over 13,000 billion of newly printed US$ is flooding into international commodity markets each year.

  12. I have a diagram of money flow in an economy in
    :…orks-a-diagram/ ‎
    You can use it if you like.

  13. Craig,

    I've spent a lot of time at PragCap over the last couple years and literally just finished, maybe an hour ago, writing a post in response to another commenter along the same lines above ( wherein I make the distinction between the paradigm of the currency issuer and the currency user. I've never seen your site or read anyone else use this distinction in explaining MMT, until now. I'm completely floored by the irony here. After I finished writing that post I did a Google search to find some more info on sectoral balances, came across one blog ( which led me here. Amazing when people start coming to the same conclusions entirely independent of each other. I guess the whole Newton/Leibniz feud might've really resulted from a coincidence ;-)

  14. All monetary policy is a reactionary pretence of positive control.

    The majority of currency in use within the economy is asset backed, credit/debt currency created by private banks (book keeping currency).

    Asset values and people's ability to borrow against those assets (to include credit card use) determine the amount of currency in circulation at any given time, not savings or monetary policy.

    It is a common misconception of our currency system that the amount of credit available is determined by the amount of reserves held within the banking system and that the government can influence credit creation by elevating banking reserves, but history has repeatedly demonstrated with every boom/bust cycle that this is not the case.

    Credit is created first and reserved second. The amount of credit currency a bank can create is determined by the value of the assets being "monetized" and the value of assets currently held in excess of the loans made against them by the bank, coupled with a reasonable expectation of an increase in value of those assets over time.

    Reserves are not the source of credit creation, they are the result, they are a fractional portion of the backing for the credit already created with asset values comprising the rest of that backing, this is the same backing used for credited savings accounts.

    As for savings accounts; they only work as a small source for credit creation and only for as long as the economy and asset values remain positive. Once the economy and asset values turn negative, savings accounts become a debt albatross hanging around the neck of the banks because they lack the collateral resources to buy the assets required to purchase the Federal Reserve Notes to cover the deposit accounts (both checking and savings) should the demand arise for those notes.

    That's also why the majority of western banking institutions are insolvent.


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