More MMT Wisdom on How Debt Works
Somebody in the comments a while back sent me this Mike Norman piece, in which he argues that the federal government paid off the national debt 4 times already…this year!
The phony debt crisis facing the United States is kept alive by this one, stupid, soundbite: “How are we gonna pay it back?”
The subtext, of course, is that the U.S. is deeply in debt to the tune of $14.5 trillion and there is no way we can ever pay it back. Indeed, even some great “minds” (NOT) like Jim Rogers have publicly said that the U.S. will never be able to pay back its debts.
Well guess what…not only can we “pay it back,” but we’ve already paid it back four times over–THIS YEAR!!
That’s right…the total amount of redemptions (public debt paid back) so far this fiscal year amounts to $58.8 TRILLION! That’s trillion with a “T.”
I am not making this up. Please see for yourself that number right off the Treasury’s Daily Statement.
[Norman links to a Treasury document.–RPM]
So we “paid back” nearly $59 trillion in the past 11 months without a hitch. The yield on 10-year Treasuries is below 2%. How did that happen? Simple…the Fed debits securities accounts and credits reserve accounts by whatever number it needs to. It’s paid back by mere accounting entries. That’s it. End of story. No digging up gold out of the ground, no mortgaging our future and best of all, no grandchildren involved. Please send to your Congressional representative.
If I had more time, I would call up the Treasury to verify this for sure. Barring that, let me say I am 99% confident that Norman here is making a ridiculous error. I think the Treasury document–which claims that there have been some $58.8 trillion in “total redemptions” in debt this fiscal year so far–is referring to the fact that the debt rolls over.
The fact that you can roll over maturing debt doesn’t prove that you never have to pay it off. Firms in the private sector roll over debt too–they “pay back” lots of their debt in a given year, even if their total indebtedness increases over the course of the year.
……these guys are awesome! Austrians just don’t get it, the ability to print one’s own currency abolishes trivial things such as scarcity and debt. All that’s needed is angelic politicians and Central Bank heads to determine the correct amount of inflation, taxation, and money printing for country composed of hundreds of millions of individuals!
Burn your copies if “The Use of Knowledge in Society” people, it’s irrelevant now.
The one thing that makes me reserve the 1% of doubt, is that the number $58 trillion is a lot higher than I would have guessed. I mean, it’s not like 95% of the total federal debt consists in one-month T-bills. So something else might be going on here.
Here’s the graphic Norman refers to:
http://3.bp.blogspot.com/-Rrke7r8pRN8/TmZZZJsW_hI/AAAAAAAAAbU/GlLam3w8-sI/s1600/total%2Bredemptions.JPG
“I mean, it’s not like 95% of the total federal debt consists in one-month T-bills”
Yes, the $58T is total debt rolled over year to date. Bonds issued 30, 10, 5 years ago matured this year, and got rolled over. It’s not all 1 month bills getting repeatedly rolled. So the point is the US government has managed to roll over $58T in debt, year to date, and rates kept falling AND bid to covers remained at all time highs This should raise a red flag to anyone that thinks the US government ‘funds’ itself out of private sector savings.
Also, when you say ‘The fact that you can roll over maturing debt doesn’t prove that you never have to pay it off’ it means certainly means you never pay it off, hence the fact you can roll it over, indefinitely.
“Firms in the private sector roll over debt too–they “pay back” lots of their debt in a given year”
Yes, this is true, except no firm has ever done this for 200+ years. The comparison between a firm and government that is the monopoly supplier of an unlimited amount of currency is not remotely close to being accurate. It’s old gold standard logic. Firms are always revenue constrained (well, except maybe Apple); the US government is not. Never.
It all come backs to the fact that the US government spends FIRST, then ‘borrows’ SECOND. By definition, it must. I feel like you’re getting close to this operational reality Mr. Murphy.
There very fact that you can’t understand Murphy’s questioning of the statistic, and then cite 30/10/5 year bonds being redeemed this year as the explanation suggests that you shouldn’t actually be listened to at all. I leave it to you to figure out why.
EB offers the most likely source of all the additional rollovers.
“and then cite 30/10/5 year bonds being redeemed this year as the explanation”
I don’t understand what you are saying. Bonds of many maturities rolled over this year. They would all be part of the $58 trillion statistic. What is wrong with what he said?
They are being redeemed, Gene, but only a fraction of those outstanding every year. Even if, for example, all the publicly held debt was of the shortest of those maturities, 5Y, only about 2 trillion would be rolled over in a given year. He was suggesting that a majority of that large number could be explained by redemption of those bonds. It was a stupid explanation since it can’t even come close to accounting for size. Murphy was right to question the validity of that value, even if it can be explained. AP didn’t offer an explanation, but instead tried to mock Murphy with one that can’t actually succeed.
So much wrong here it’s like peeing into the pacific to know where to begin.
Yes, the $58T is total debt rolled over year to date. Bonds issued 30, 10, 5 years ago matured this year, and got rolled over. It’s not all 1 month bills getting repeatedly rolled. So the point is the US government has managed to roll over $58T in debt, year to date, and rates kept falling AND bid to covers remained at all time highs This should raise a red flag to anyone that thinks the US government ‘funds’ itself out of private sector savings.
The fact that rates have remained “low” and that bid to covers remained “high” does not mean that the government does not ultimately fund itself out of the private sector.
The principle that unearned money (unearned meaning not earned through production of goods and services), once spent, must come at the expense of those who do earn money through production, is not avoided just because the spender of unearned money created it out of thin air through an enforced monopoly of fiat money production.
Whatever consumption of resources the government brings about by inflation, must be produced in the private sector which produced but did not consume those resources. To the extent that that this consumption of resources leads to a decrease in saving in the private sector that would have been higher had there been a sufficient quantity of consumption vis a vis production to enable/invoke/allow people to choose to save, means that the inflation is attacking saving and capital formation, and thus attacking the citizenry’s general standard of living. This, again, is true despite interest rates being “low” and bid to covers being “high.”
Also, when you say ‘The fact that you can roll over maturing debt doesn’t prove that you never have to pay it off’ it means certainly means you never pay it off, hence the fact you can roll it over, indefinitely.
There is no such thing as “indefinitely” anything in human affairs, other than what is logically necessary in human action. While it is true that rolling over debt can be maintained for a period time in principle, it is not certain that it can be maintained “indefinitely.” Certain conditions have to hold before it can be indefinitely sustained, and those conditions are by no means certain themselves.
Yes, this is true, except no firm has ever done this for 200+ years. The comparison between a firm and government that is the monopoly supplier of an unlimited amount of currency is not remotely close to being accurate. It’s old gold standard logic. Firms are always revenue constrained (well, except maybe Apple); the US government is not. Never.
It all come backs to the fact that the US government spends FIRST, then ‘borrows’ SECOND. By definition, it must.
That is incorrect. You are incorrectly presuming that a government that took over a previously non-monopolized monetary system, allegedly always had the monopoly such that it originally established a monetary system through fiat and has all along spent only what it created through inflation.
You are taking what is superficially the case after some time passes after monopolization of a monetary system, and ignoring the cause and effect order.
Yes, in our monetary system, right now, after some time has already passed, the only way that the government can tax MORE is if it first creates and spends MORE. But that doesn’t mean that the government must first spend money period before it can tax money period. The cause and effect order has not changed.
Imagine a syphoning hose and a gasoline tank. What you are saying is equivalent to saying that gasoline must first flow out of the tube before more gas can go in to the hose. Sure, that’s true, but that’s true only AFTER the person already started the syphoning by making the gas flow in first before it started to flow out second. Syphoning hoses don’t come prepackaged with flowing gasoline already in them. Once the person takes control of the syphoning hose and gasoline, and starts the flow, and the flow continues on for some time, then it appears as though for more gas to flow in to the hose, more gas as to flow out first. But the cause and effect has not changed. The original set up of gasoline in before gasoline out is still the root cause.
In order for individuals to even form governments, they have to first acquire resources (money or goods) from the non-government individuals who produce those resources first. If the government then takes monopoly control over money production, or potato production, or whatever, then that does not mean that the relationship is “government must first produce and sell money or potatoes and then tax the people in money or potatoes after.”
It’s still the other way around, because every day that passes with government enforcing its monopoly, these days represent new initiations of force in order to maintain a historical monopoly up to that point. It’s not the case that once the government takes monopoly control over money production, that the force somehow ceases to exist, that the order between cause and effect reverses, and that the state of affairs becomes a sort of physical law that can be taken as a “given” despite any further human input.
Wow! Your garden hose example is great! Hopefully, MMT people will stop repeating things like “the government spends first and borrows second” now…
Yes, that number seems awfully high. As of August this year, there were only 1.5 trillion in T-Bills (maturing in less than 1 year). Even if all of it was in 1 month bills, it would amount to only 18 trillion in rollovers cumulatively.
So, you seem to be making the very error that Lerner is correcting. Why in the world should this statistic count only T-Bills? Why isn’t a 30-year treasury paid off this year validly counted as part of the $58 trillion? (I am not coming down on other side of whether “roll it over eternally” is a sound strategy — I’m just trying to sort out the $58 trillion stat.)
As I note above, only a fraction of such bonds get redeemed. Of the non-bill debt, the total publicly held is only about another 8 trillion. Only a fraction of that will be redeemed/rolled over in any given year. If I have to explain this further, then I think it hopeless to make you understand this.
The government never has to pay off its debt, nor does it need to tax all the dollars from the private sector for any reason.
And the government could redeem the entire debt any time with a few keystrokes if it wasn’t for its own self-imposed constraints.
Time to rid yourself of gold-standard thinking.
And the government could redeem the entire debt any time with a few keystrokes if it wasn’t for its own self-imposed constraints.
Self-imposed constraints? What about the exploitation of others who have to use depreciated money? Just an inconsequential nuisance, huh?
“And the government could…..”
Oh yeah!!! Government ” could”. We all know that. What you seem to (consistently) fail to understand is that the issue being discussed is not whether it “could” or “couldn’t” but whether it should. There is a teeny weeny bit of economics in discussing that issue and (somehow) I don’t see you addressing it. Silly issues like diminishing marginal utility of money as the stock of money increases……
Put another way, you seem to be stuck (irretrievably) in the ‘is’ and just do not seem to be interested in the ‘ought’. Quite interesting.
Well, actually I never said it should for the very reason that it doesn’t matter.
And how do you say that it doesn’t matter? By saying that there are no economic consequences of such increases in money supply? Could you lay out the arguments for any such claim please?
Money supply? Does anybody know what it is?
Nice tactic of sidestepping the question. However, I don’t think I am naive enough to me misled by that. My question was simple – Are you saying that there are no economic consequences of such increase in money supply? And if you are saying so, could you please lay out the arguments for such a claim?
Just in case you do not understand what I mean by money supply, I suspect it means the number of units of the money (commodity) in circulation as “money”.
What’s the difference between government bonds (which are an interest rate maintenance account) and excess reserves earning interest?
It looks like you think that I am very naive and will get diverted into and stuck in irrelevant side discussions. Unfortunately, I still think I am not that naive. Therefore, your further attempt at sidestepping the question and deflecting the discussion into useless trivia is not a bait I am going to bite.
Let me repeat. My question was simple – Are you saying that there are no economic consequences of such increase in money supply? And if you are saying so, could you please lay out the arguments for such a claim?
To this, let me add another question – Do you intend to and wish to answer this question or do you plan to continue evading answering what was as direct a question as can be posed?
My question was pretty simple, yours was not because it refers to the money supply, which nobody knows what it really is.
So if the question is what are the economic effects of replacing interest bearing tsy bonds in an account at the Fed with interest bearing excess reserves at another account at the Fed, I would say none.
So if the question is what are the economic effects of replacing interest bearing tsy bonds in an account at the Fed with interest bearing excess reserves at another account at the Fed…
…well, that wasn’t the question.
The question is if there is any economic consequence in increasing the money supply.
I think he’s still waiting for your answer, at least I am.
You are really persistently evasive. It is clear that you have no intent to answer my question but still want to be able to say that
1. You have answered it and
2. I have not answered your question and thus
3. I am the one evading
What a fantastic trick!!! I wonder how and where you picked up such tricks of argumentation.
“My question was pretty simple, yours was not because it refers to the money supply, which nobody knows what it really is.”
What goop! If (and note the if) money were pieces of gold, the total number of such pieces of gold circulating would be the money supply. It is a ‘countable’ quantity and hence the money supply is measurable. That nobody ‘knows’ at a point in time is a rather infantile answer simply because that is not the issue at hand. If you had an increase in the number of such pieces of gold circulating, that would be an increase in the money supply.
If money were, on the other hand and as it is today, green pieces of paper or their electronic equivalents of various kinds, that too is countable. Hence, even in this case, money supply is measurable and we can talk intelligently about an ‘increase’ in the money supply. We may not agree on which M is the correct measure of the money supply, but one can indeed talk of increases and decreases.
And if one can indeed talk of increases and decreases, one can also talk of the economic effects of such increases and decreases in the money supply. So, my question is far from vague and very specific. You have just demonstrated that you have no answer and in fact, do not wish to answer my question. Why you do not wish to answer is something you alone can explain and I can only speculate on.
However, it is interesting to note that you (now) and AP (earlier on k-i-w) have an identical reaction to this question – refusing to answer and diverting the discussion into useless trivia. Makes for an interesting observation.
Bala, you just don’t realize that MamMoTh did answer your question because you don’t realize your question is kinda the wrong one to ask. To realize that you need to understand that there is precious little difference between bonds and interest paying reserves, that bonds don’t prevent consumption etc. You can start here:
http://neweconomicperspectives.blogspot.com/2009/11/what-if-government-just-prints-money.html
Also, head over to PragCap and see how MMT framework actually succeeds in explaining why increase in reserves due to QEII had so little effect while in your framework it was supposed to cause high inflation or hyperinflation.
http://pragcap.com/the-exploding-u-s-money-supply-myth
Peter D,
Thanks for the laughs. That’s ‘point 1’ that I made. Secondly, you haven’t read (I repeat ‘read’) a word of what I have said in my latest post – that saying ‘who knows what the money supply is’ in response to my question is rather infantile.
“because you don’t realize your question is kinda the wrong one to ask.”
This is downright hilarious. So are you saying that the question ‘What, if any, are the economic effects of an increase in the money supply?’ is kinda the wrong question to ask? Could you please explain why?
Bala, you need to define exactly what you mean by money supply.
MMT tends to look more at non-government sector’s Net Financial Assets (NFAs). These comprise high powered money + bonds. This is also sometimes refered to as “vertical money”. There is little difference between the two, because operationally these are both accounts at the Fed (except for cash) , with reserves being akin to checking account and bonds to savings accounts. If you know anybody for whom having money in savings account prevented spending this money, please let me know.
The only source of NFAs for the non-govt sector is the government, by accounting tautology. Too much govt deficit in excess of productive capacity oft he economy would cause inflation. Inflation can also be caused by “horizontal money” – bank loans. In fact, most inflation in recent times has been caused either by horizontal expansion or supply shocks.
If you really want to understand MMT position, you’d have to spend time with sources. I cannot convey it all in a post.
Peter D,
Did you read this thing I wrote?
http://consultingbyrpm.com/blog/2011/09/more-mmt-wisdom-on-how-debt-works.html#comment-24514
Out there, I did define what I mean by money supply. It is a different matter that you may disagree with me on this ‘definition’, but I did define it. So could we please stop the evasion and have an MMT guy (you, MamMoTh or AP) answer my question?
What1? “Just in case you do not understand what I mean by money supply, I suspect it means the number of units of the money (commodity) in circulation as “money”.” is not a definition. It is a jumble of words.
Just in case you actually want to ponder the possibility that “money” and “money supply” are not trivially defined terms, here is a pointer for you:
http://www.levyinstitute.org/pubs/wp_656.pdf
> Bala, you need to define exactly what you mean by money supply.
I think Bala’s point is that the definition is not really that important. If you are in a world where no one holds cash balances at the bank and everyone holds it in dollar bills AND the government “creates money” by printing a lot of bills, then you’re going to see inflation. [there some missing details here on expectations, but at a high level, this is the argument]. Bala is saying the government SHOULD NOT do this because it should not create inflation.
If you are in a world where money IS held at banks and in financial assets, and the government decides to create lots of financial assets, then you will ALSO see lots of inflation. [I think there may be a difference here in the expectations treatment of bonds vs reserves, but I need to think about it a bit].
So redirecting the argument to “well, we don’t know what the ‘best’ measure is for money supply because there are lots of interesting choices” does not really address the point.
It is really painful to read this narrow text. If anyone wants to responds, can they create a new comment below and maybe put a pointer to it here?
@marris,
Thank you. You pretty much summed up an important part of what I am trying ti get at. However, my point goes beyond inflation. I am trying to get these MMTers to commit to a position on the economic consequences of an increase in money supply. It looks like they do not wish to do that and instead only desire to divert the discussion into what the proper measure of money supply is or, even worse, to try to say that it is futile to discuss the economic consequences of money supply increases because the very concept of money supply is fuzzy.
You’re right that it is painful to read on such a narrow thread. I’ll try to move this discussion down below.
Add in all the very short term cash management bills, and $58T is entirely plausible.
Ok, I overlooked the CMBs. That might do it.
Given the PDs must pick up the slack at any Tsy auction, and the Fed can TOMO them unlimited amounts of liquidity, I suppose you could make the argument that the ability to rollover in perpetuity is baked into the system, even if it’s concurrent with increasing interest rates. I still don’t think this addresses extreme fat tail risk.
So here’s a question for the MMTers: why aren’t the PDs considered part of the “government”, the way the Fed and Treasury are in your definitions? Or are they?
OK guys, some quick thoughts:
(1) Mike Norman is making it sound like he’s discussing something special for the USG, with its sovereign ability to issue currency. No he’s not; this is a reflection of an indebted agency rolling over its debt. If your wife says, “You put $5000 on the AmEx bill for your new TV?! Are you nuts?! How are we going to pay that??” you would get smacked if you said, “Honey calm down, we never have to pay that back. In fact I paid it off already–I got a balance transfer offer from Chase. Problem solved.”
(2) If 100% of the debt consisted in one-month T-bills, then it would roll over 12x per year, even if the government ran a balanced budget. So that’s why I’m saying the 4x figure surprised me, since I thought the average duration was higher than that. Yes, a maturing 30-year T bond counts, but we’d only expect 1/30th of the 30-year T-bonds to mature in a given year. So I am surprised that the total figure is $58 trillion, when the outstanding debt is only $14 trillion.
Oh point (3): Far from reassuring me, this $58 trillion makes me poop my pants. It shows that if and when interest rates spike, we are more screwed than I realized.
” In fact I paid it off already–I got a balance transfer offer from Chase. Problem solved”
More gold standard logic. like the US government, are you no longer revenue constrained? Interesting…I didn’t realize free advice paid so well (that was sarcasm!)
AP, do you agree that the mere fact of the USG rolling over its debt, doesn’t prove what Norman thinks it proves? You seem to agree with me that a private person can “pay off” his AmEx bill by a balance transfer, and you agree that the private person would still be in trouble.
So it’s as if Norman wrote a blog post saying, “Pizza tastes good, therefore we don’t need to worry about the debt.”
You might still think Norman is right, but surely you agree his argument is invalid.
“do you agree that the mere fact of the USG rolling over its debt, doesn’t prove what Norman thinks it proves?”
He is trying to prove the government is never revenue constrained and does not represent a solvency risk. He does this by saying ‘see, the government can regularly roll over debt that is 4x income and rates still fall, could you as an individual do that? Of course not, so maybe the government that issues a currency is different than an individual’
Was it a good way of proving this point? Probably not. Still doesn’t change the operational facts of the US monetary system.
“You seem to agree with me that a private person can “pay off” his AmEx bill by a balance transfer, and you agree that the private person would still be in trouble.”
I agree. I would disagree if, as a private person, I could create an unlimited amount of whatever was needed to settle that balance. If all my debts were denominated in pizza, and I had a magic pizza making that created an unlimited amount of pizzas at no charge, would you have any problem loaning me pizza? If AmEx only accepted pizza for payment, would they have any issue extending me more pizza credit?
AP,
While everything you say about the operational reality of the US monetary system is true, are you saying that your producing pizzas as and when you need to settle debts in pizzas has no economic consequence? In other words, is government’s addition to the money supply expanding machine without economic consequence?
This is the question that you evaded answering on k-i-w and which MamMoTh and Peter D are busy evading out here.
Will you please answer it for me, at least now?
Why do you compare an individual to the US govt? Do you believe they operate the same way?
“It shows that if and when interest rates spike, we are more screwed than I realized.”
Take back what I said…you still think we are on the gold standard. I’m going go out on a limb and say you’re statement above will never happen. I’m sure 5, 10, XX years from now you’ll still be data mining for reasons why ‘it’s coming’, and of course you’ll still be wrong. Time will be show who is right; operational reality is on my side.
EB pointed out cash management bills. These can have maturities under 21 days. I have no clue where to find these transactions in the Treasury website, but if, for example, such debt transactions are rolled/paid off from longer term debt issuance over every couple of days, it wouldn’t necessarily take a large value continuously rolling over/paid off to add up to multi-trillions cumulatively every year.
It’s now been 13 months that I have been waiting for AP “Hut Tax” Lerner to explain where all the goods and services are going to come from to satisfy the debt with real world stuff as opposed to being paid with unconstrained funny money.
As Taylor Conant pointed out last year, the MMTers have no economic theory other than allegedly discerning technical rules explaining the precise detailed operative manner of government theft as it moves around various government funny money accounts and instruments.
Austrian Economics can then explain the disaster that follows.
Bob Wenzel thinks we may have hyperinflation due to the increasing popularity of the MMTers.
http://www.economicpolicyjournal.com/2011/09/putting-hyper-inflation-cart-before.html
The debt is not paid with real stuff. It is just an interest bearing savings account at the Fed, and at maturity the nominal amount of principal plus interests gets shifted to a normal account at the Fed.
That’s all there is to it, really. It’s so simple an average simpleton like you should get it.
The debt is not paid with real stuff.
Duh. As I have been saying for four decades, it’s a massive fraud. It’s good that you guys have stopped being so coy. Keep blabbing.
There is no fraud. The debt is repaid as it should be repaid, and as people who store their savings in government debt expect it to be repaid or they wouldn’t have voluntarily saved in government bonds.
You are the fraud. Keep babbling.
The debt is not paid with real stuff… There is no fraud… The debt is not paid with real stuff… There is no fraud… The debt is not paid with real stuff… There is no fraud…
How can you say this without setting off a little cognitive dissonance alarm in your head?
Because I know what the debt is, and what constitutes fraud.
And I don’t care about your and Roddis’ cognitive dissonance really.
Our 41.6T of debt (actually, much less than that, because about 4.6T of this is intragovernmental debt – the “debt” the left hand owes to the right, so to speak: http://www.treasurydirect.gov/govt/reports/pd/mspd/2011/opds082011.pdf) is all nominal – you can redeem it only in green pieces of paper or, rather, in electronic numbers shifting between accounts. It is not in real stuff. The US govt never promisses to pay you in bridges or oil or gold or whatever, only in $US. On the other hand, MMTers are the first to point out that real stuff is the constraint on the economy, not nominal quantities. For example, here is Mosler on Social Security:
Let’s look at it this way: 50 years from now when there
is one person left working and 300 million retired people (I
exaggerate to make the point), that guy is going to be pretty
busy since he’ll have to grow all the food, build and maintain
all the buildings, do the laundry, take care of all medical needs,
produce the TV shows, etc. etc. etc. What we need to do is
make sure that those 300 million retired people have the funds
to pay him??? I don’t think so! This problem obviously isn’t
about money.
Oops, meant to say our 14.6T of debt…
“AP “Hut Tax” Lerner to explain where all the goods and services are going to come from to satisfy the debt ”
There is no debt. All that matters is the productive capacity of the economy. The ‘debt’ you speak of is unnecessarily issued, and serves as a corporate hand out.
“As Taylor Conant pointed out last year, the MMTers have no economic theory ”
He’s correct. MMT is not a theory. It’s 100% observable fact. Operating realities. The great thing about observable facts is there is no debating them,
unlike theories.
“Bob Wenzel thinks we may have hyperinflation due to the increasing popularity of the MMTers.”
Haha…there will be a direct correlation between prosperity and the popularity of MMT…
Ok, so I responded to you (again). You claim I never have, but I have (again). Now, do me a solid and please stop stalking on the internet…as you said, it’s been 13 months. It’s getting a little creepy.
FIne. You have no economic theory and the creditors never get paid. What was so hard about that?
Abba Lerner’s book is RED and is called “The Economics of Control”.
http://www.flickr.com/photos/bob_roddis/5560086472/in/set-72157626353319778/
And Mickey Mouse has grown up a cow.
MMT is indeed going mainstream. Goldman has had a financial balances model based on MMT for three months now: http://www.zerohedge.com/news/goldman-fires-another-warning-shot-across-bernankes-bow#comment-1691064
Didn’t mean to link to my own comment, but the post is the main point.
Fantastic!
The technical answer, or close enough, is in the comments:
http://mikenormaneconomics.blogspot.com/2011/09/howre-we-gonna-pay-it-back.html?showComment=1315361715945#c50261307765138164
http://mikenormaneconomics.blogspot.com/2011/09/howre-we-gonna-pay-it-back.html?showComment=1315364510835#c2262554980620541814
The govt “debt” is a promise to exchange dollars and bonds for … other dollars and bonds. Hence, the govt can always make good on this (and it did 58 trillion times this year). End of story.
If someone thinks that more debt means inflation they should think again: the correlation between govt deficits and inflation is… negative. That’s right. NEGATIVE.
How do you explain that?
MamMoTh is pretty well right. Turning $Xbn of Treasuries that pay Y% interest into $Xbn of monetary base that pays Y% interest can be done with keystokes, and it’s of no economic significance.
But it’s a slight cheat to call that “reducing the debt” because debt is something you normally pay interest on, and in the above example the interest bill has not changed. So on one definition of the word debt, the amount of debt has not changed.
So could $Xbn of Treasuries to turned into $Xbn of zero interest paying monetary base? The answer is yes – easily. My guess is there would be a slight stimulatory or inflationary effect beause former debt holders would spend a portion of their newly acquired cash on other assets. But any stimulatory effect is easily countered by raising taxes (and using some of the money raised to buy back more debt). Those taxes would NOT mean any “austerity” or reduced living standards because if the above “debt buy back” wheeze is done properly, the stimulatory / inflationary effect of the “print money and buy back debt” element is exactly countered by the deflationary effect of the tax increase.
There are one or two other little technicalities to bear in mind when going for “rapid debt reduction with keystrokes”. But basically a rapid debt reduction is a doddle. It’s easy, as I’ve been trying to point out for the last year – e.g. see here:
http://www.positivemoney.org.uk/2011/05/let%E2%80%99s-print-money-and-buy-back-national-debts/
and here: http://www.thejeffersontree.com/the-debt-and-deficit/
So…I wonder..if the nominated USG debt in one side of the trick and his money printer the “FED” on the other side of the aisle can monetize all its debt by dividing in two accounts (that we can name as entry and other as exit…simple ..efficient and not theoretical..only a matter of pure and genuine “operational reality”….hahahahahahhahhahah…..) why does USG not assume all the private debt (let’s say at least the Morgatge garbagge )and monetize it?like all the buyers of USG debt in Bonds terms…would be USTAXPAYERS BONDS…finito…hahahahhaha…and all your babbling and still the same trick DID NOT WORK IN THE 30’s…..explain that!!!!!!!!!!!…by the way your “operational reality” only works because you took from the market (and i mean market all the human and nature interactions) the competition of others medium of exchanges meaning MONEY ….well money are everything and nothing…butif you have ever read Heraclitus you would have the prfect definition for oney..I am going to wait yours …then I will “school” you really bad in that….hahhaha…but ..BECAUSE your USG rippoff all the possible competition DOES NOT MEAN it will not get fucked….at all..or ad infinitum..hahahhahahahha…so the Romans are ruling ad infinitum ham…hahhahah
marris,
I understand, but without clear definitions there can be no discussion. Austrians even have their own way of defining inflation (and inflation is a very poorly understood phenomenon as it is) so, when they talk with the rest of the world and use their own definition there can be no real understanding.
Here is the view on what does and does not cause inflation:
http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
http://www.forbes.com/sites/johntharvey/2011/05/30/what-actually-causes-inflation/
Peter D,
First, thanks for moving the discussion out here. Second, the Austrian explanation of the consequences of increase in the money supply has nothing to do with the Friedman Helicopter Model that you have cited. Since you suggested readings, let me give you suggestions of my own. Try
http://mises.org/books/mysteryofbanking.pdf
Read just chapters 1 to 4 for an elaborate explanation. Those chapters will also tell you that the demand for money always equals the supply of money because all money is in the cash balance of someone or the other and it is these balances that, put together, constitute the money supply as well. To accuse Austrians of speaking otherwise would, IMHO, be incorrect.
However, what you are still failing (or should I say refusing) to address is the economic consequences of increases in the money supply. If you understood the Austrian position, you may realise that it is not just about inflation. A full reading of the book I have cites will tell you what I am talking of.
Evading a discussion citing difficulties in defining the proper measure of money supply is not, IMHO, intellectually encouraging. Further, you have thrown a charge of ‘being trivial’ at my definition of money supply, a charge that I feel is unjustified given that my definition would just include every dollar existing, circulating and performing the role of the medium of exchange (which is what money essentially is). It is as broad as broad can be. Please do tell me why my definition is “trivial”.
Bala, I sdid not claim your definition was “trivial”. I claimed tyhat you gave no understandable definition at all. “every dollar existing, circulating and performing the role of the medium of exchange” is also not a definition. Because “dollar” is a unit of account, a numeraire, while what performs the role of the medium of exchange is a “money-thing” denominated in the unit of account. I don’t want to commit to discussion with vaguely or badly defined terms because this is not a discussion at all.
For example, do you consider QE2 “an increase in money supply”? If yes, why? If no, why? If yes, then you’d expect inflation out of QE2 and yet except for some short-lived asset price inflation there is none. Why? MMT has a position on that. I’ve seen some nice explanations from other places as well.
Oops. I made an error. I should not have said ‘every dollar’. I should have said ‘every unit of the money commodity’. Correct that and then your criticism would be pretty much off base.
“Because “dollar” is a unit of account”
False right away because it is a unit of account BECAUSE it is the generally accepted medium of exchange. You are reversing the concept of cause and effect between being a generally accepted medium of exchange and being a unit of account.
“what performs the role of the medium of exchange is a “money-thing” denominated in the unit of account”
False again because it is the pieces of paper/electronic signals that perform the role of the medium of exchange. Even under a gold standard with FRB, it is the combination of actual gold coins in circulation, pieces of paper representing promises to deliver gold on demand and electronic signals promising to deliver gold on demand that constitutes the medium of exchange.
“I don’t want to commit to discussion with vaguely or badly defined terms because this is not a discussion at all.”
Neither do I. But it would be flat out incorrect to say that money supply defined as “the sum total of the total value of paper dollars in circulation and the total value of electronic dollars in deposits convertible into paper dollars on demand” is a vague or badly defined term. Each of these is a precise number at any point in time and their sum is also a precise number at any point in time. So, not committing to a discussion on the grounds that this definition is vague is unjustified avoidance of an important discussion. Therefore, you should stop evading the discussion and answer my questions.
“For example, do you consider QE2 “an increase in money supply”? If yes, why? If no, why?”
QE2 did NOT increase the money supply. What it did is to greatly expand the monetary BASE. Money supply would increase WHEN and ONLY WHEN banks pyramid many more loans and create many more demand deposits that get credited with newly created money created on top of this expanded monetary base.
” If yes, then you’d expect inflation out of QE2 and yet except for some short-lived asset price inflation there is none. Why?”
That’s because banks have not been able to convert the expanded monetary base into an expanded money supply and expand massive amounts of credit.
“MMT has a position on that. I’ve seen some nice explanations from other places as well.”
So do Austrians. And their explanation makes economic sense as well (unlike the MMT explanation). I would be greatly obligated if some fellow Austrians would tell me if my explanation is correct.
Hence (and finally), will you please answer my question on whether there are any economic consequences of an increase in the money supply.
Bala, MaMoTh said “And the government could redeem the entire debt any time with a few keystrokes if it wasn’t for its own self-imposed constraints. “ to which you replied “And how do you say that it doesn’t matter? By saying that there are no economic consequences of such increases in money supply?” Now you’re saying “Money supply would increase WHEN and ONLY WHEN banks pyramid many more loans and create many more demand deposits that get credited with newly created money created on top of this expanded monetary base.” See what I mean about badly defined terms? Is it govt? Or is it the banks? Your last statement is inconsistent with your first.
What MamMoTh was trying to say is that QE2 on an even larger scale – that is the govt redeeming all its debt and swapping it with reserves in the banking system is possible and does not have to create inflation. In practice it would have to be done gradually, because people might just freak out, but basically the govt can pay off its debt because the money that was used to buy this debt in the first place came from govt spending. You can buy bonds only with HPM and all HPM is created by the govt.
Now, yes, there are always consequences to actions. If the govt spends in excess of potential capacity, floods the non-govt sector with NFAs, like in Zimbabwe, then you’ll get high inflation or hyperinflation sooner or later. But people that save in US bonds are savers first. They bought the bonds with HPM which ultimate source is the govt itself. If there were no govt debt available for them to park their savings in, they’d look for alternative savings vehicles – munis, commodities, real estate etc. They won’t be spending it on consumption, not on a large scale. So, you’ll get some asset price increases, some relative price adjustments, some one time leakage from asset prices into consumer prices and that’s it. If done gradually, the whole thing would be hardly noticeable. The govt could just stop issuing debt. Not that issuing debt anyhow makes it harder for the govt to service it, but it is a transfer of NFAs to those parts of the non-govt sector that need it the least. The rich people mostly. Too bad.
I’ve replied down below to keep the thread readable. Thanks.
> without clear definitions there can be no discussion
Money in this context means a “generally accepted medium of exchange.” It’s basically whatever the actors think has this property. For now, the dollar (USD) [and maybe very short dated government bonds?] are the most common money in the US.
We can talk about inflation in terms of prices [and avoid the classical definition of inflation as an increase in the qty of money or whatever]. The Austrian argument is simply that if you increase the qty of USD, you will tend to see an increase in the prices of goods and services in terms of USD over what they _would have been_.
I think the Austrian argument is closest to the “demand pull” and “asset market boom” [probably commodity boom] causes in the link above.
“The Austrian argument is simply that if you increase the qty of USD, you will tend to see an increase in the prices of goods and services in terms of USD over what they _would have been_.”
That would be true only if rest of the terms in MV=-PQ remained unchanged or were adversely impacted. Think Zimbabwe, where the govt was just giving money away to its cronies and the military while its agriculture infrastructure was being destroyed. Ont he other hand, with huge output gaps, factories idling and 20% un- and underemployed, the businesses wait for a sign of picked demand to put the idle capacity to work. If you can stimulate demand with increase in money supply (I am using the vague term here for your benefit) then there would be increase in goods and services and no demand-pull inflation.
Yes, you can get fat if you eat. You can also not dies of hunger if you eat. See what I mean?
“That would be true only if rest of the terms in MV=-PQ remained unchanged or were adversely impacted.”
And Austrians would say MV=PQ makes no sense. I suggest you read the book I referred you to. It explains what I understand as the Austrian position.
MV=PQ is a tautology. It cannot “make no sense” because it is an accounting identity. I think you might not understand what it means.
Do you have anything shorter than a book?
P in PQ is a meaningless quantity. Hence, MV = PQ is meaningless.
> That would be true only if rest of the terms in MV=-PQ remained unchanged or were adversely impacted.
I think you’re addressing a slightly different point. You’re saying that GIVEN an increase in M, it does not follow that P increases. Over that period, V could fall, in which case P may not rise. Or V could stay the same and/or increase, in which case P WILL rise.
I’m saying that V is very much determined by what people expect M to be in the future. If they expect the government to increase the quantity of money [the quantity of the general medium of exchange], then they will bid up the prices of goods in anticipation of the new money. The fact that people are bidding UP the prices means that they are higher than what they would be if the people did not expect new money.
marris, people don’t move consumption forward in anticipation of inflation or increase in govt spending. This just doesn’t happen. What could happen is some asset price inflation leaking into consumption price inflation. Even that is very limited, as the recent experience with QE shows. The monetary base exploded and there is no inflation. So, the idea that people expecting increase in money supply and hence inflation will turn into a self-fulfilling prophecy is not credible. Under some circumstances, maybe. Not here.
> marris, people don’t move consumption forward in anticipation of inflation or increase in govt spending. This just doesn’t happen.
What do you mean? Good sellers are raising their prices so they can stay ahead of the price index. The race raises the index. Are you saying this has not empirically happened? Based on what?
> as the recent experience with QE shows. The monetary base exploded and there is no inflation. So, the idea that people expecting increase in money supply and hence inflation will turn into a self-fulfilling prophecy is not credible.
I think it’s clear that V fell, right? There a few reasons for this. First, you had an initial collapse in available credit [supply of funds]. Then you had people cutting back on their purchases [paying down debt, holding cash, etc]. You also had [still have] a lot of uncertainty about exactly how much money the government will create. If everyone believed that the government was going to print our way out, you would see something very different. For one, people would NOT be paying off their fixed-rated debts. Why bother? Why not grab buy things which will be hit by the new money, hang onto it until the prices rise, sell it, and pay off the debt then?
marris,
first, good that you acknowledge that increase in “money supply” does not need to result in price inflation, as the usual story goes, because other things may change. So, Rothbard’s Archangel Gabriel story is basically wrong or at least not universally applicable. Most Austrians I met on the internet were screaming bloody inflation then they heard of QE@ (despite what Bala claims). Peter Schiff was screaming hyperinflation. They were wrong.
Now, goods sellers don’t just raise prices in a competitive economy, because they risk losing market share. They raise prices as a result of supply shocks or workers successfully managing to negotiate wage increases. Supply shocks such as the Oil Embargo int he 70’s are outside of control of either fiscal or monetary policy, so,. let’s not bother with those. Substantial wage increases are usually negotiated when unemployment gaps is very small or zero, not huge as it is now.
People won’t just buy things and sell them later in anticipation of inflation, because most stuff is not durable. Do you think you’ll go out and buy more food or a TV if you expect high inflation? I don’t think so. You might buy other financial assets or durables – yes. Hence I said asset price inflation is possible. There was a good thread on this here:http://www.winterspeak.com/2010/12/why-inflations-expectation-model-is.html
Ont he other hand, expectations are a very fuzzy thing, as you seem to acknowledge. A business owner that sees an uptick in demand in a competitive environment would hire a worker before he raises prices if he can.
Finally, as I mentioned before, inflation does not have to come from increased govt spending and indeed in the recent cycles it did not. Banks create loans out of thin air. Govt surpluses can actually create a situation that spurs credit expansion, because govt surpluses by definition remove NFAs from non-govt sector. People then try to maintain their standard of living and take out bank loans. This can, under some painfully familiar circumstances, turn into an unsustainable credit bubble.
> So, Rothbard’s Archangel Gabriel story is basically wrong or at least not universally applicable. Most Austrians I met on the internet were screaming bloody inflation then they heard of QE@ (despite what Bala claims).
I think you’re jumbling a few things together. The Angel Gabriel model is basically an “even” increase in the supply of money with the additional assumption that there is no increase in the demand for money. It will ALWAYS lead to increased prices. Imagine if Fed replaced every existing dollar with 2 “new dollars.” You can expect every seller [who previously posted a price of X units] will now post a price of 2X units.
QE is not the Angel Gabriel model. It’s the addition of money at the bank reserve level over a period where banks are afraid to lend and people don’t really want to lever up.
> Now, goods sellers don’t just raise prices in a competitive economy, because they risk losing market share.
New money that “enters” the system [enters trade] will bid up prices. That’s the only way for the “new money holder” to buy stuff with it. He has to bid them away from other people. If a seller expects new money holders to show up this week to buy blueberries, he will increase the posted price of blueberries. He does this for two reasons.
First, he wants to ensure that he does not RUN OUT of blueberries during the week. He does not want some customer to show up, willing to pay a slightly higher price, and not have any blueberries left over to sell him.
He ALSO raises prices because he wants to get enough money from the sales to buy OTHER stuff. And they know other [non-blueberry] sellers are thinking the same thing. There may be some initial competitive loss incurred by being the first person to raise his prices… HOWEVER, there is also a disadvantage to being the LAST person to raise prices. The “price index” will have outpaced you. The argument that “competition will keep prices down” assumes the first disadvantage and ignores the second.
> Supply shocks such as the Oil Embargo int he 70′s are outside of control of either fiscal or monetary policy, so,. let’s not bother with those.
OK, this is tricky. If you’re in an environment where people expect the price level to rise, they will raise their prices to try and keep up. How you GOT to that initial expectation can vary. It could be caused by a supply shock. Or it could be a smooth ramp up. If everyone expects the government to increase the money supply by 3 percent, then they will try to raise their prices by at least 3 percent because they want to stay ahead of the index.
> A business owner that sees an uptick in demand in a competitive environment would hire a worker before he raises prices if he can.
What is this coming from? The US went through a period of stagflation in the 70s.
marris, short reply, I really don’t have time to go thru a detailed one, sorry!
Re: “> A business owner that sees an uptick in demand in a competitive environment would hire a worker before he raises prices if he can.
What is this coming from? The US went through a period of stagflation in the 70s.”
you see, I am trying to word my comments carefully. I said “if he can” precisely because of that. And during the 70s you had a cost push both from the higher prices of oil and from the many salaries contracts being indexed, which created a positive feedback (inflation feeding on itself). So, the goods producers could not not raise prices.
WIll come back if I have a chance.
As a pointer to MMT, if you’re interested at all, start at Warren Mosler’s mandatory readings, one by one, especially the first one “7 DIF”:
http://moslereconomics.com/mandatory-readings/
MMTers understand and can easily control inflation, right?
In 1980, two years before he died, Abba Ptachya Lerner (1903-1982) was dabbling in the following ghastly Rube Goldberg style price control system according to this article by David Colander, a co-author of a 1980 book with Lerner:
Lerner found the implications of sellers’ inflation so important that, beginning in the 1960s, he changed his research program to center on finding cures for sellers’ inflation. Initially he toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based[??!!!] incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market [???!!!!] anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change [@page 12]
http://tinyurl.com/4rfk3jk
Read it and weep. There’s a reason Lerner’s book is RED.
Peter D,
The more you post, the more errors in understanding you reveal.
“Is it govt? Or is it the banks? Your last statement is inconsistent with your first.”
Why and how do you bring in an ‘or’? It is ‘and’. That’s the point. The increase in money supply works through the system of banking. Government, the Central Bank and the banking system together create the increase in money supply. Government provides a small increase in money supply when it issues new debt. More importantly, this also adds to the monetary base of the banking system. Central banks add more to this addition to the monetary base. Banks expand credit on this doubly enhanced base and pump new money into supply. Ignore any of these and you do not understand how money supply increases.
“What MamMoTh was trying to say is that QE2 on an even larger scale – that is the govt redeeming all its debt and swapping it with reserves in the banking system is possible and does not have to create inflation.”
If this is what MamMoTh meant, then neither of you understood my question. My question was not whether there will be inflation but whether there will be economic consequences. Given my previous paragraph, my question is to be read as “Given that QE2 has added to the monetary base of the banking system and that it has added greatly to the potential of the banking system to inflate money supply as and when they are in a position to expand credit, are you saying that there are no economic consequences?”.
When I say ‘economic consequences’, do not mean just inflation. It basically means one of 2 things
1. Does it have the potential to trigger the next boom phase of the business cycle (meaning even more massive malinvestment on top of the already existing and uncleansed malinvestment) which will eventually lead to the next (and necessarily bigger) bust phase of the business cycle
2. A crack-up boom (as explained by Mises), either now or after 1, 2 or x more boom phases trigger so much malinvestment that the economy just collapses.
Further, in your responses to me and to marris, you demonstrate that you completely fail to understand what we Austrians mean when we say ‘price inflation’. It is important that you understand that when Austrians say ‘price inflation’, they do not always mean a rise in prices. They mean that prices would be higher than what they would have been in the absence of the monetary inflation. This means that
1. if prices would have been the same without monetary inflation, prices after monetary inflation would be higher (i.e., rise)
2. if prices would have risen without monetary inflation, prices after monetary inflation would be even higher (i.e., rise more)
3. If prices would have fallen without monetary inflation, prices after monetary inflation could rise (moderately or greatly), remain the same or fall, but less than what they would have fallen without the monetary inflation.
Your reference to the Archangel Gabriel problem also reveals the extent and depth of your misunderstandings. Rothbard uses it to demonstrate the effects of a uniform increase in money supply across all holders of money would end up not achieving the good angel’s ‘noble’ intentions. In fact, even in that basic circumstance, Rothbard demonstrates that prices will not double uniformly. Some people will be quick to spend and some wouldn’t. Whichever goods the former group spends on will face the first bout of price rises while the goods the latter group spends on will see price rises later. If the goods are the same, spenders are benefited at the expense of savers because they get to buy at today’s prices leaving the savers to pay the inflated prices, thus frustrating the good Archangel even more.
However, you are also failing rather badly at using the Archangel Gabriel construct to address the point I am raising. Imagine if the good archangel Gabriel did not uniformly increase money available but increased the quantity in the hands of particular people. Clearly, this would not lead to a uniform increase but to an increase in the prices (once again, relative to what they would have been in the absence of the monetary inflation) of the particular goods that these people spend their new found money on. It is only as the money ripples through the economy that prices of other goods are affected. The impact is not on a mythical ‘price level’ but on relative prices.
If this favoured group were a bunch of producers, you would see a rise in the prices (once again, relative to what they would have been in the absence of the monetary inflation) of producers’ goods demanded by these producers and at a later stage, you would see a rise in the prices of various consumers’ goods (once again, relative to what they would have been in the absence of the monetary inflation).
And if you want to scoff at the concept of talking of prices rising relative to what they would have been in the absence of the monetary inflation because it is all hypothetical, I will just remind you of Bastiat’s concept of the seen versus the unseen.
Bala, first, you need to learn that banks don’t lend reserves and that money multiplier concept is a myth, however common.
Here is why:
http://moslereconomics.com/mandatory-readings/soft-currency-economics/
Banks don’t need an increase in the monetary base to lend. They lend first and acquire reserves later. And to ensure a smooth payment system and to target the FFR the Fed would accommodate the bank lending if the existing reserves are insufficient. All of the mainstream – and your – ideas about increase in monetary base and money supply are wrong (but mainstream is catching up, with recent papers from BIS saying the same, will dig out the link, if you want). Which is why I also referred you to this:
http://neweconomicperspectives.blogspot.com/2009/11/what-if-government-just-prints-money.html
So, there is no increased “potential of the banking system to inflate money supply” so your concern is inapplicable.
Regarding price inflation, I think I understand very well what Rothbard was saying. But first, again, increase in monetary base – basically for most parts reserves sitting in banks does not automatically lead to increase in money supply – that could come only with increase in demand for money (banks cannot force loans on people) and second it still ignores the fact that with idle capacity there is going to be a stimulative effect that nullifies and reverses some of the inflation. It also ignores demand for money. If ALL the people wanted to hold twice the money nothing would happen at all. Of course, this is not to show that no inflation would occur.
I’ll need to probably stop here, it’s taking too much of my time.
Nice talking to you.
Peter D,
I don’t know if you are reading this, but I hope you are.
“first, you need to learn that banks don’t lend reserves and that money multiplier concept is a myth, however common.”
I never said that banks lend reserves. That is a misinterpretation of what I said.
“Banks don’t need an increase in the monetary base to lend.”
I never said this either. Putting words into my mouth is not an argument. I said “Now that the banks have more reserves, you can expect it to translate into more credit expansion and accompanying monetary inflation”. By no stretch of imagination does this imply that I believe that banks need an increase in the monetary base to lend.
“They lend first and acquire reserves later.”
Fine, but what happens AFTER a bank comes into a huge pile of reserves that are way above what they need to have given their obligations to deposit holders?
“And to ensure a smooth payment system and to target the FFR the Fed would accommodate the bank lending if the existing reserves are insufficient.”
This is therefore irrelevant to the point I raised.
“So, there is no increased “potential of the banking system to inflate money supply” so your concern is inapplicable.”
Your statement and the article you have linked to do not come anywhere close to addressing the point I am making. Yes. I agree that the banking system is not lending out of reserves. My point is with reserves being above the statutory requirements, the bank CAN expand credit and add to money supply. Whether it will or not depends on WHETHER IT CAN expand credit. That condition is not dependent on the bank alone but on producers seeking loans for projects. So, while it is possible that the additions to reserves do not increase money supply right now, they do indeed have the potential to add to money supply as and when people are ready to borrow for investments (or in fact even for consumption expenditure). By potential, I mean that they can if they could.
“Regarding price inflation, I think I understand very well what Rothbard was saying.”
For all your claims, I don’t think you do. For if you do, you would not keep referring to rising prices as the consequence of increases in the money supply (as per the Austrians). You would not cite CPI statistics to demonstrate that the Austrian position on price inflation is not playing out.
“But first, again, increase in monetary base – basically for most parts reserves sitting in banks does not automatically lead to increase in money supply”
I agree. That’s what I have been saying all along.
” – that could come only with increase in demand for money (banks cannot force loans on people)”
This is where you are going wrong. Money supply increases when the banks’ potential to create new money through credit expansion becomes reality. It has nothing to do with demand for money. The producers to whom credit is expanded are suppliers of future money in exchange for present money. You are confusing an exchange happening on the time-market for a demand for money. If (as you claim) you understand Rothbard, ‘demand for money’ is ‘demand for cash balances’.
“and second it still ignores the fact that with idle capacity there is going to be a stimulative effect that nullifies and reverses some of the inflation.”
And you are ignoring the point that the entire notion of idle resources is a myth.
“It also ignores demand for money. If ALL the people wanted to hold twice the money nothing would happen at all.”
False. First, you are mixing up transactions on the time market with demand for cash balances. Second, if demand for money (read demand for cash balances) were to rise with the stock of money remaining the same, prices in general would fall.
So, my point about the potential for increase in money supply is valid and you (that goes for MamMoTh and AP as well) still need to address my point about the economic consequences of such money supply increases, which, incidentally, is not just about inflation but about fueling the next (certain to be even bigger) boom-bust cycle.
“Nice talking to you.”
The feeling is mutual.
Banks will restart lending at some point, but that decision is independent of their reserve position.
The main economic consequence will be that the economy will begin to grow and unemployment will fall.
The money supply is basically determined endogenously by the demand for credit money of the private sector.
The only myth is saying idle resources are being saved. They are not.
First, thank you for finally responding. Second, let me respond to your “points”.
“Banks will restart lending at some point, but that decision is independent of their reserve position.”
Yeah! So?? Why do you think restating what I have said is a good argument?
“The main economic consequence will be that the economy will begin to grow and unemployment will fall.”
How did you come to the conclusion that these will be the “main” consequences? Have you refuted Austrian Business Cycle Theory? Or is it that MMT blinds you to the unseen, unintended consequences of your actions? Are all MMTers incapable of seeing the world beyond their own noses?
Frankly, this is all I wanted out of this thread – to get you to confess how intellectually shallow and bankrupt MMT is. I always knew that it would take only 1 response to do that and you have just shown that I was right to think so. Just because you understand how the monetary system works, you think you understand economics. It just can’t get more ridiculous than that.
“The money supply is basically determined endogenously by the demand for credit money of the private sector.”
If you intend this as a description of the way things work now, this is fine. If you intend this as a general principle, then you have exposed MMT for the shallow, infantile nonsense that it is.
Bala
“Fine, but what happens AFTER a bank comes into a huge pile of reserves that are way above what they need to have given their obligations to deposit holders? “
If a banking system as a whole has excess reserves, the Fed Funds Rate fall to potentially zero (or whatever support rate the Fed decides upon.) And if it falls to 0, no problem, the banks will just sit on reserves. If the economy picks up some of the reserves would be lent to customers, but again, this happens as a function of such customers existing and deemed creditworthy, not as a consequence of the reserves existing in the first place! The pre-existing excess reserve in no way facilitate credit expansion. If there are no pre-existing excess reserves they would be provided by the Fed. Demand for money is endogenous.
I was led to this page from somewhere in the money/investment arena, and I have to say: What in the hell are you guys talking about? If this is indicative of state of the art economic thinking, you MMT guys are certifiably nuts. And I’m speaking diagnostically, not derisively.
Look, if all this brilliance being displayed here cannot come up with a simple economic rationale that is decently understandable by an average intelligence on the street, then you all must admit that whatever you come up with will not work in practice. Economics is wholesale sophistry, by and large, and has zero relevance to virtually anyone. Who grows up wanting to be an economist? Or an accountant? Or a tax attorney? Useless careers all.
The whole field of monetary systems, their machinations, and economics should all be, en toto, readable in 5 minutes and understandable by anyone. If allowed to become more complex than this, it will always be manipulated and bastardized by a few at the horrendous expense of the many.
Human intelligence can do better than this.
Bala:
“This is where you are going wrong. Money supply increases when the banks’ potential to create new money through credit expansion becomes reality”
But this reality has nothing to do with excess reserves created in the system by either swapping bonds for reserves (QE2) or by increased govt spending (to the extent that it creates excess reserves which are not drained by taxation or bond issuance). You keep saying you know that banks don’t lend reserves, but then you revert to pronouncements that show that you don’t really internalize this knowledge. Basically, if there were no excess reserves in the system, the banks would still lend whenever a willing and creditworthy customer asks for a loan. And then the bank would acquire the needed reserves either from the fed funds market or, if in our example there are no excess reserves int he banking system in aggregate, then from the Fed, which has to accommodate. So, credit expansion cannot be “forced” from the govt sector (Fed+Treasury), at least not from creating excess reserves per se. It can only happen when enough customers deemed creditworthy come to the banks seeking loans.
That was quick, I am off again.
Peter D,
I’ll be even quicker. Just tell me 1 thing. What would have happened (to the banks) if the Fed hadn’t stepped in, taken the crap assets in the hands and given them the cash that they are sitting on? Would they still be around now? If they would not still be around now, would they be able to engage in credit expansion?
The potential for credit expansion comes not from the reserves but from the very continued existence of banks that should have failed but were saved by the very actions of the Fed that we are discussing have left them with ‘huge’ excess reserves (which are irrelevant in any case). The simple point is that by saving the banks, the Fed has prevented the market from cleansing itself. If the Fed hadn’t saved these rotten banks that had made bad lending decisions, we wouldn’t be facing the threat of massive credit expansion through equally massive monetary inflation. We would therefore not be in a position where all we can look forward to is either ruinous price inflation and economic collapse or the next and sure to be much bigger boom-bust cycle and eventual economic collapse.
Banks fail not when they are short on reserves but then they are short on capital. Reserve shortage affects the fed funds rate to the point where the payment system breaks. If there is a shortage of reserves then even good solvent banks might not meet their payments and this leads to the breakage of the whole banking system. Which is why the Fed accommodates with whatever amount of reserves necessary either thru repos or thru the discount window.
Credit expansion cannot be prevented by denying the banks the reserves, because stability of the payment system requires the Fed to provide the needed reserves first of all. The discipline for credit expansion must come from other places, such as capital requirements (but these are “un-American, according to some 🙂 ) and, yes, letting banks fail.
QE1 was about swapping banks junk ABS assets with “cash” (reserves) because these assets were expected to default and hit the banks’ capital. Note that these are not even the same banks that lent the mortgages in the first place! These banks just bought junk securities. So, credit expansion and not letting banks fail in this particular case are not immediately connected (but of course there is a second order connection.) QE2 on the other had was swapping Tsys with reserves – a different mater. But both won’t cause or facilitate credit expansion.
Peter D,
You have just given a classic demonstration of shooting yourself in the foot.
“Reserve shortage affects the fed funds rate to the point where the payment system breaks. If there is a shortage of reserves then even good solvent banks might not meet their payments and this leads to the breakage of the whole banking system. Which is why the Fed accommodates with whatever amount of reserves necessary either thru repos or thru the discount window.”
This is interesting. Banks are not dependent on reserves for lending, but the banking system can break down if banks do not have ‘sufficient’ reserves. This tells me many things. First, there is some thing as ‘sufficient’ reserves. Second, what is more interesting is that if the banking system can break down without those ‘sufficient’ reserves, they actually become ‘necessary’ reserves. Third, and this is very important, if a bank has come into a huge pile of reserves that is way in excess of what is ‘necessary’ given the amount of money they hold on deposits, it means that the bank can happily create new money in deposits till reaches the point where the reserves they have in hand match the ‘necessary’ reserves. That, to me, only means that the reserves have the potential to aid money supply increase.
“Credit expansion cannot be prevented by denying the banks the reserves, because stability of the payment system requires the Fed to provide the needed reserves first of all.”
A classic example of question-begging when the issue at dispute is whether the Fed should be providing reserves at all.
“Banks fail not when they are short on reserves but then they are short on capital”
This assumes that the Central Bank exists and is ready to and capable of extending reserves to banks. No Fed => No desperately needed reserves => Bank collapse => No credit and money supply expanding machine.
“The discipline for credit expansion must come from other places, such as capital requirements (but these are “un-American, according to some ) and, yes, letting banks fail.”
Banks can fail even if they do not have sufficient reserves, which is why they borrow reserves in the first place. However, even under the current system, I see you agreeing with me right away…
“QE1 was about swapping banks junk ABS assets with “cash” (reserves) because these assets were expected to default and hit the banks’ capital.”
So, if the Fed hadn’t engaged in QE1, banks would have failed and we wouldn’t have a banking system as capable of engaging in credit expansion and monetary inflation, would we?
“Note that these are not even the same banks that lent the mortgages in the first place! These banks just bought junk securities.”
A distinction without a difference. And yes!!! That these banks were (wisely, in the first place) buying these junk securities had no effect on the other banks’ ability to expand more credit and add more to the money supply. Interesting proposition.
“But both won’t cause or facilitate credit expansion.”
This brings us back to the points about ‘sufficient’ and ‘necessary’ reserves.
Thus, you have only succeeded in confirming my basic point that while the addition of money to reserves (QE1 or QE2) may not have given reserves that were necessary for the banking system to expand credit and multiply the money supply, it enabled the banking system to remain alive so that they may continue to expand credit and increase money supply as and when they could.
Bala, if you want to do away with the banking system altogether that’s a different story. Given the existing “fractional reserve” system, the reserves are required to maintain the system regardless of whether the credit expansion is healthy or not.
And so far there is no place on earth without some sort of credit system in place. Next time you want to buy a car or a house think about that.
“if a bank has come into a huge pile of reserves that is way in excess of what is ‘necessary’ given the amount of money they hold on deposits, it means that the bank can happily create new money in deposits till reaches the point where the reserves they have in hand match the ‘necessary’ reserves.”
Not the way it works. for the 100th time, the banks never look at their reserve positions when extending credit. Ask anybody working at a bank. They extend credit based on the availability of willing customers. If they extend bad credit, regardless of whether they have reserves backing the credit or not, when the borrowers default, the banks will suffer loss of capital. In Canada and some other countries there aren’t even reserve requirements. The discipline should come from the fact that bank still suffer losses of capital when extending bad credit. Maintaining sufficient reserves to enable the payment system has nothing to do with that. It is like blood in your body. The volume of blood will accommodate whatever size your body grows to. But if you eat unhealthy you’ll get obese. The solution to obesity is not to deny the body the blood.