Murphy Twin Spin
On Monday I shared my thoughts on grocery stores, and yesterday I discussed Operation Twist. Some excerpts from the latter:
Just the fact that it’s an “operation” is disturbing. Ever since the crisis began, officials have deployed the military metaphor since their only solution to social problems is to start blowing things up. We have a war on poverty, a war on drugs, a war on terrorism, and (since 2008) we’ve had an undeclared war on the recession.
The military metaphor is crystal clear whenever analysts discuss the Fed’s options to “help” the economy, since interest rates are already at zero. Typically these analysts reassure their readers or viewers by declaring, “The Fed still has plenty of ammunition.” Don’t worry kids, we won’t end Operation Enduring Inflation until every last unemployed person is eliminated.
and
So for my non-Austrian economics colleagues, I have to ask, Don’t you think the term spread on interest rates does something? In normal times, if one economy has a spread of 5 percentage points between 1-year and 30-year bonds, while another economy has a spread of 8 points, do you think that difference is meaningless?
If not, then how can you support Operation Twist? Won’t the Fed be screwing up, whatever role you think the term spread serves in a market economy? For example, if you think the term spread relates to people’s “liquidity preference” and their aversion to being stuck with long-term bonds should interest rates move up, then does the Fed’s mere creation of dollars really address that underlying preference?
“It continues to amaze me that Austrian economists are apparently the only ones who think market prices mean something.”
Uh, this is, of course, 100% false (and a little arrogant). The MMT’ers were way ahead of you on this one (again)
“If not, then how can you support Operation Twist? ”
Who are you talking to? Krugman? Not a single MMT’er supports this useless policy.
“If price inflation begins rising and the Fed eventually has no choice but to allow interest rates ”
No, it does not. The Fed can guarantee any rate along the curve it wants, just like they guarantee the overnight rate. It’s all about price, remember? It means something…
“Why are things suddenly different — why is it a “neutral” operation in monetary policy — when the Fed gives an enormous subsidy to the US federal government?”
This is like saying your checking account subsidizes your savings account. There is no Fed subsidy to the US federal government.
“the Fed will take a bigger hit on its portfolio now that it is more heavily skewed to longer-dated bonds”
So what? It’s called buy and hold. Marked to market is meaningless for the central bank.
“is that these actions help the federal government”
How? The treasury could issue as many zero coupon perpetual notes as it likes. The Fed could go away for all the treasury cares.
“For PR reasons, it’s convenient that global markets tanked upon learning the details of Operation Twist”
And have done nothing but rally since. You should pay more attention to the MMT’ers…you may make a better living trading on there views then giving free advice.
http://moslereconomics.com/2011/09/26/update-from-prior-email/
AP Lerner, this sentence alone shows that you don’t agree with me about market prices meaning something:
The Fed can guarantee any rate along the curve it wants, just like they guarantee the overnight rate. It’s all about price, remember? It means something…
> The MMT’ers were way ahead of you on this one (again)
No doubt so far ahead and moving so quickly that even _they_ don’t have time to think it through.
Just so you know Bob, MMTers think government bond rates _are_ “arbitrary.” They think the state can finance whatever it wants with money drops, so the “decision” as to how much to drop and how much to borrow is “political.” Innovative, huh?
I think your point about war terminology is applicable here. If the state wanted to, it could completely eliminate the “capital markets.”
‘Just so you know Bob, MMTers think government bond rates _are_ “arbitrary.” They think the state can finance whatever it wants with money drops, so the “decision” as to how much to drop and how much to borrow is “political.” Innovative, huh?’
Not innovative. Reality
You’re missing a period after Reality. It would be more dramatic with the period.
Since you’re here, maybe you can answer a question. Do you guys have different tiers of operational knowledge?
For example, we know that fiat money drops are *possible.* So maybe that knowledge is Tier 0.
Do we “know” that government debt and fiat money are equivalent? Is that considered a part of “reality”? Lots of MMTers seem to assume that it is.
If so, then what do you do if some crazy Tea Party guys capture Congress and decide to default? Isn’t that also possible? Since it’s possible, does debt-money equivalence get pushed out of “operational reality” entirely? Or does it get relegated to “Tier 1 reality” [very unlikely, but still possible events]?
default = taxation
Seriously, I agree that default and taxation have the same affect on “sector balances.” Especially since no one’s counting the government bucket.
But the point of the question is that in the “real-world” (tier 0), the factors which lead to default and the ones which lead to tax increases are quite different.
Since the “risk” is different, it seems that fiat cash and government debt are NOT “tier 0 equivalent.” And default does not “equal” taxation in tier 0. Bond buyer beware.
woops! this should be posted lower.
Neat trick! Now _that_ is an impressive response.
You know how Keynesians think government should boost fiscal spending and issue bonds in a downturn? The idea is that there’s a dearth of “safe” assets. Since fiat governments can “always” pay back their debts, their bonds are considered really safe, etc.
It seems that we can use MMT to show that this “safety” assumption is invalid [or at least not applicable].
At the very least, it doesn’t seem to be a part of operational knowledge, tier 0. You never know when the bond will go Poof! Those progressives… They’re always looking to raise _someone’s_ taxes!
government bonds are 100% safe in ability to be pay them, never in willingness to pay them.
since default is by and large less likely than a tax hike, you can say government bonds are even safer than cash balances.
> you can say government bonds are even safer than cash balances.
Oh, I dunno. Seems like an ideal alliance between hard-code Republican and MMT Democrat. The former are OK with “default.” And the latter want “tax increases.” If the former convince the latter that the default is an “effective tax increase,” then the default idea may gain some ground.
I totally agree that it is *possible* to pay off government bonds. That’s tier 0 knowledge. Just like it’s *possible* that I will sleep in late tomorrow.
But your likeliness statement indicates you AGREE that government bonds and fiat money are NOT tier 0 equivalent. That is, their “expected” (rather than possible) payoff may be quite different.
Mammoth wrote:
since default is by and large less likely than a tax hike, you can say government bonds are even safer than cash balances.
You could say that, but it would be obviously wrong. Why do people like holding bonds? Why is it considered bad when the government defaults on it? Because then you don’t get the cash.
It’s like saying, “Eggs are sturdier than chicken skulls. So if you want to have a live chicken, it’s safer to have an egg than a live chicken.”
>If so, then what do you do if some crazy Tea Party guys capture Congress and decide to default? Isn’t that also possible? Since it’s possible, does debt-money equivalence get pushed out of “operational reality” entirely? Or does it get relegated to “Tier 1 reality” [very unlikely, but still possible events]?
Within the MMT framework, that would be classified as a political default: an unwillingness to pay, rather than an inability to pay.
Not sure what you mean by the latter? If you could clarify that would be very helpful.
Marris,
>They think the state can finance whatever it wants with money drops, so the “decision” as to how much to drop and how much to borrow is “political.” Innovative, huh?
What MMT is saying is that modern states, who are the monopoly issuer of their currency (liability of the consolidated government sector), and whose currencies are not pegged to a particular asset (i.e. whose liabilities are not explicitly convertible into another asset) do not have a financial constraint in issuing their own currency (liabilities). The only constraints they face are 1. acceptability of the currency (achieved via taxation), 2. real resource constraints (the productive capacity of the economy, i.e. how the supply side of the economy responds to the government spending; and 3. political constraints.
The use of the term ‘finance’ when referring to bonds, is in this framework a misnomer, because the bonds are just one other type of government liability. Why does the government need to ‘finance’ its issuing of its own liabilities (currency) by issuing a liability of a longer maturity (bonds)? In the framework, there is nothing that could possibly ‘finance’ government spending, because in order for the public to purchase the bond, the government needs to first provide, either via central bank loan, or previous spending, the money in the first place.
If this reflects the real world, then the discussion should then turn to the impacts upon the private sector (both real and monetary) of spending with bond issued or spending without bonds being issued).
> What MMT is saying is that modern states, who are the monopoly issuer of their currency (liability of the consolidated government sector), and whose currencies are not pegged to a particular asset (i.e. whose liabilities are not explicitly convertible into another asset) do not have a financial constraint in issuing their own currency (liabilities).
Dude, I _get_ it. Bob Murphy gets it. We now know that Matt Yglesias gets it. The real-world/operational knowledge of this paragraph [and maybe all MMT literature?] can be distilled to “fiat money drops are possible.” Everything else is of the form “well, if we assume this pattern of money drops _actually_ occurs, then…”
> The only constraints they face are 1. acceptability of the currency (achieved via taxation), 2. real resource constraints (the productive capacity of the economy, i.e. how the supply side of the economy responds to the government spending; and 3. political constraints.
I actually think (1) is operationally questionable, but it’s an MMT axiom. Let’s look at the others. We have real resource constraints [goods, services, factors of production, etc] and political constraints [the allocation of resources, possibly influenced by drops and drains].
The problem is that you’ll hit _another_ constraint when you actually try to implement MMT policies. You will hit knowledge constraints. It turns out that it’s _very_ difficult to predict the real-world effects of a money drop. You will see “bad patterns” emerge as money drop recipients strategize against your policy.
> The use of the term ‘finance’ when referring to bonds, is in this framework a misnomer, because the bonds are just one other type of government liability.
The government bonds are “cash equivalent” from a bond buyer’s point of view only so long as he “knows” that they will get paid off. We’ve already discussed one possible default scenario (the “political default” above). If the default happens, it will turn out that “bond” was _not_ a misnomer. It was not cash equivalent after all. You can also apply the reasoning to _non-government_ bonds. That is, political “bailouts” are _also_ possible. “Political constraints” are really just that. _Every_ financial instrument equivalence is now “up for grabs.” It all hinges on whether the political groups currently in power want to maintain the equivalence between X and Y or let them diverge.
> If this reflects the real world, then the discussion should then turn to the impacts upon the private sector (both real and monetary) of spending with bond issued or spending without bonds being issued).
I don’t have a problem with the “operational facts” that modern money “theory” uses. My problem is the bad economics. Mosler’s reliance on the nemployment-inflation tradeoff, a near total ignorance of economic calculation problems, etc. In their race to “solve the unemployment problem” or “realize our economic potential and restore the American dream,” MMTers have decided to pretend that certain real world _economic_ difficulties don’t exist. The problems are dismissed as “political,” rather than economic problems. Well OK, but then the only thing still left “in theory” is “money drops are possible.” And that’s not very useful.
BTW, I also think the large number of “bad patterns” that fiat currency makes possible is a great reason to stop using fiat currency.
Marris,
Thank you for the reply, and sorry for the lateness of mine.
Fair enough, maybe they do get it. The way I think about it is in regards to the Government Budget Constraint identity (hope this works):
G_t+ 〖iB〗_t= T_t+ 〖∆B〗_t+ 〖∆M〗_t
MMT interprets that identity as an ex post identity, whereas everyone else interprets it as an ex ante identity. I have a sneaky suspicion that when most people talk about MMT and understanding MMT, they are 1. assuming that an ex ante interpretation is a shared belief, and 2. thinking that MMT is talking about the possibility of ‘printing money’ (delta M). When in actuality, this is NOT the MMT argument. But perhaps I am mistaken.
>The problem is that you’ll hit _another_ constraint when you actually try to implement MMT policies. You will hit knowledge constraints. It turns out that it’s _very_ difficult to predict the real-world effects of a money drop. You will see “bad patterns” emerge as money drop recipients strategize against your policy.
I assume by ‘knowledge constraints’ you are stating that the government will not know with completely certainty the consequences of its actions (i.e. unintended consequences). In that case I agree, agent expectations may be informed by a particular model which derives outcomes that are the opposite of the model that the government has in mind. leading to the opposite of what is actually going on, furthermore, these expectations can have a self-fulfilling outcome. However, aren’t we then saying that expectations can overcome ‘market’ fundamentals, or even that ‘market’ fundamentals are solely driven by expectations?
Now I know we can get into a whole debate about the ‘market’ being a complex adaptive system, and therefore it’s impossible to predict the process that the market will take, but I think a fundamental point of economics is to uncover persistent regularities. These regularities can be used as the basis for estimating how we believe the economy will react to government policy. For instance, a firm which sees its inventory being drawn down will interpret that as a signal that there is demand for its goods, and will increase its production. If it has excess capacity, it will respond by increasing output, and employing more factors of production.
>The government bonds are “cash equivalent” from a bond buyer’s point of view only so long as he “knows” that they will get paid off. We’ve already discussed one possible default scenario (the “political default” above). If the default happens, it will turn out that “bond” was _not_ a misnomer. t was not cash equivalent after all. You can also apply the reasoning to _non-government_ bonds. That is, political “bailouts” are _also_ possible. “Political constraints” are really just that. _Every_ financial instrument equivalence is now “up for grabs.” It all hinges on whether the political groups currently in power want to maintain the equivalence between X and Y or let them diverge.
Perhaps I wans’t clear enough in my early post, or perhaps I am mistaking what you are currently saying: by misnomer I was referring to the operation of issuing bonds as being a ‘finance’ operation from an MMT perspect.
>I don’t have a problem with the “operational facts” that modern money “theory” uses. My problem is the bad economics. Mosler’s reliance on the nemployment-inflation tradeoff, a near total ignorance of economic calculation problems, etc. n their race to “solve the unemployment problem” or “realize our economic potential and restore the American dream,” MMTers have decided to pretend that certain real world _economic_ difficulties don’t exist. The problems are dismissed as “political,” rather than economic problems.
A lot of the background and economics is based in Post Keynesian analysis. In fact a lot of what you bring up here is what I would refer to as a real constraint: how the economy will react to the government spending. I wouldn’t consider it a political constraint in the same sense that is used by MMT. Obviously the distribution of resources and national income will end up being a political question, and political decisions will inform government policy.
If we accept the proposition that a currency monopoly issuer has no financial constraint on issuing its own currency (liabilities). And if we accept that most modern states take this form (e.g. U.S., Japan, Australia, etc.) then the discussion and debate should be about the desirable role of government in an economy, or whether it has a role, the impact of government spending on the economy, how the economy functions, etc. These would all be under the ‘real constraint’.
The term ‘real’ here is probably not the best phrase to use, as Post Keynesians take a monetary analysis approach to analysing the economy. i.e. the economy is a monetary production economy: money matters (money matters because the future is uncertain), expectations matter, and finance matters (the liability structure of the economy is important –Minsky).
By economic calculation problems I believe you’re referring to Hayek’s information problems, and Mises economic calculation requires property because otherwise you cannot properly caculative profit and loss, etc. Is this correct? If so, can societies without Mises requirements exist?
>Well OK, but then the only thing still left “in theory” is “money drops are possible.” And that’s not very useful.
Well if we accept your argument above, then what is left is an institutional analysis of the banking system, central bank and treasury from which operational realities are derived.
>BTW, I also think the large number of “bad patterns” that fiat currency makes possible is a great reason to stop using fiat currency.
Perhaps you can clarify what ‘bad patterns’ you are referring to.
You missed my point. Or I worded it poorly. Either way, my point is there is no market price for treasury securities. The Fed can determine the price/rate at any point along the curve at anytime. Why do you think I could be so adamant about treasury rates collapsing regardless of what inflation was going to be? I knew what the Fed was going to do and there was zero chance the Fed would allow rates to rise. Easiest trade in history if you understood the monetary system.
The operational reality is the Fed could make the 10 year rate whatever it wants. It can (should) set all rates to zero and pack up shop since the natural rate of interest is determined by the currency, which is zero. The Fed should get out of the rate setting business. so there is absolutely no subsidy from the Fed to the treasury (but there is a subsidy from the treasury/fed to traders, the Street, corporations, etc.), since the treasury can and should spend by issuing zero coupon perpetual securities. Also know as dollars. Or dead presidents. Or mullah….
http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF
(warning, this paper is much more thoughtful and coherent than screaming End the Fed, so it may not be of much interest to arm chair economists who have little interest in understanding the monetary system.)
with rates set at the true risk free rate, zero, then market forces determine a true spread based of off credit, liquidity etc risk for the private sector. private sector rates are clearly distorted by the linkage of credit spreads to treasury rates etc. It should stop. The currency is the risk free rate, not some security created to distribute more currency to a bank for doing nothing.
See, we thoughtful and logical MMT’ers do know something about prices. And can base our argument on facts and reality and not some outdated textbook or fictitious interpretation of the market.
> See, we thoughtful and logical MMT’ers do know something about prices. And can base our argument on facts and reality and not some outdated textbook or fictitious interpretation of the market.
“The term “innocent fraud” was introduced by Professor
John Kenneth Galbraith in his last book… Professor Galbraith
coined the term to describe a variety of incorrect assumptions
embraced by mainstream economists, the media, and most of
all, politicians.
The presumption of innocence, yet another example of Galbraith’s elegant and biting wit, implies those perpetuating the fraud are not only wrong, but also not clever enough to understand what they are actually doing.”
— Warren Mosler
Implying Austrian economics is an innocent fraud?
Come on, you don’t think it’s a little funny?
7DIF could have been published as anti-fiat satire in 1971. The material is terrific!
I’d say it’s solid gold, but then I’d be accused of not understanding money systems or something.
lol these MMT’ers are out of control
After holding out for months, both AP “Hut Tax” Lerner and Mammouth have stipulated that government debt will be satisfied only in “nominal” terms, which is what the Austrians have been saying.
Once the evil gvernment performs its money drop, then Austrian analysis kicks in. MMTers are oblivious about Austrian analysis, including Cantillon Effects, at such point in the drama. AP “Hut Tax” Lerner insists that catallactics, the study of human exchange, no longer matters after 1971. Amazing.