Ron Paul’s Idea to Repudiate the Fed’s Debt Holdings
It’s nowhere near the demand for me to comment on Bitcoin–that article is still forthcoming; it has turned into my Apocalypse Now–but a lot of people were asking what I thought about Ron Paul’s proposal for the Treasury to cancel the debt held by the Fed. So here ya go. An excerpt that I want to emphasize on reserve requirements:
In other words, rather than eliminating the excess reserves by having the Fed sell assets, [Dean] Baker is proposing that the Fed simply mandate that banks keep a larger amount of cash in the vault (or electronic reserves on deposit with the Fed) in order to “back up” the checking-account balances of the banks’ customers. In this way, the banks won’t be able to pile a massive amount of new loans on top of the existing reserves.
This may or may not be a good solution in the grand scheme of things, but I do want to point out that it’s equivalent to stealing that money from the banks. Consider the following analogy: Suppose the government passed a new law requiring all bank customers to keep a checking account balance of at least $1,000. No matter the emergency, people wouldn’t be allowed to let their checking accounts fall below $1,000 at any time, under threat of a ten-year prison term and huge fine.
But as far as Karl Denninger–who had flipped out over the “raw printing of money” that Paul’s proposal would entail–here’s an observation:
[H]aving the dollar backed up by gold is qualitatively different from having it “backed up” by IOUs issued by the federal government. For one thing, Federal Reserve notes (and banks’ electronic deposits with the Fed) are legal tender, and we truly have a fiat currency. If you turn in a $20 bill to the Treasury or the Fed, they will give you two $10s or four $5s, but they don’t owe you anything besides the US dollar itself.
Furthermore, reflect for a moment on the absurdity of claiming that Treasury debt “backs up” the dollar reserves in the financial system. Suppose someone is holding a $100 bill, but he’s not sure if he trusts it as an asset. Would it reassure him to know that somewhere in the vaults of the Federal Reserve there is a piece of paper issued by the US Treasury promising to pay a $100 bill in the future?
It’s comical that Austrian ‘economists’ and Ron Paul consider canceling the bonds held by the Fed as radical since MMT’ers have been saying for decades that government bonds fund exactly nothing. Essentially what Ron Paul is doing is supporting/proving point the made by MMT’ers all along, and that the issuance of government bonds is nothing more than a reserve drain and funds exactly zero spending. Now, if Ron Paul and Austrian ‘economists’ actually understood the banking system, they would also recognize all those reserves built up in the banking system are completely meaningless, since the banking system is never constrained by reserves.
I’ve asked this question before. Please show one example of a banks loan department that checks it’s reserve position before making what it deems to be a profitable loan. Please show one example of a bank that consistently meets its reserve requirement prior to making a loan. Please explain why banking systems that do not have reserve requirements are not in a constant state of inflation.
So what would happen if this ‘radical’ Ron Paul proposal occurred? Absolutely nothing. The market would yawn. And inflation would remain low.
A truly ‘radical’ solution would be for the Treasury to use it’s legal authority to mint coins and mint a $2T or $4T or whatever size coin and place it in it’s account at the Fed. Debt ceiling problem solved. And that solution, Mr. Murphy, is called adding new financial assets to the private sector. Or, to use scary terms, money printing.
Please explain why banking systems that do not have reserve requirements are not in a constant state of inflation.
Please explain why, if credit expansion is not inflationary, the dollar has lost over 95% of its value since the beginning of the Fed.
Please explain why, if credit expansion is not inflationary, the dollar has lost over 95% of its value since the beginning of the Fed.
Who cares? Most if not all manufactured products or skills from 1911 have lost 100% of their value, so the dollar has done pretty well since then.
US Indian Head Half Eagle manufactured in 1911.
1911: $5
2011: $720
http://www.montanararities.com/1911s-us-gold-indian-5.html
Most if not all.
Clearly there are a few useless objects that didn’t lose their value.
Money does not have to lose its value over time. We would be a lot better off if the dollar hadn’t of lost 95% of its value. Our standards of living would be much higher right now. During the 100 years prior to the Fed existing, the dollar gained in value as prices fell across the board while real wages increased which lifted millions out of poverty.
This happened because the increased productivity that capital accumulation provides. The economy can grow and prosper while a currency gains in value. The extent to which we have prospered since the Fed came into existence has happened in spite of the dollar losing its value not because of it.
Good thing there was no MMT or Keynesian stimulus back then to ruin it.
Who cares?
The people ascertaining the truth of the claim that credit expansion is not inflationary, a claim that your reply sheds no light on.
I don’t even think he realizes that wages for most people didn’t increase at the rate of the dollar’s decline. He doesn’t see the loss in purchasing power or he is perfectly fine with the transfer of wealth from those who got the money first to those that got it last or not at all.
Given that, it’s not surprising he would respond with something that doesn’t even touch on what you asked.
I don’t even think he realizes that wages for most people didn’t increase at the rate of the dollar’s decline.
Really? What do you think real GDP growth is?
That’s what I thought. You don’t understand the transfer of purchasing power from those who get the money last (retired people, middle class, and poor) to those who get the money first (banks, governments, and politically connected groups).
it’a basically growth in nominal GDP adjusted for government’s bogus deflator.
Hold on, I’m not saying that you should look at minimum wage to see if ALL wages have kept up with Inflation. I’m saying that poor people are one of the groups hurt most by inflation so we should look at that subset of people rather than looking at the entire population. The statistics show that someone on minimum wage had more purchasing power in 1971 than someone on minimum wage today. So inflation has hurt that segment of society. It has also hurt retired people on a fixed income. I haven’t been arguing that ALL wages have been behind inflation. That argument wouldn’t show that people on the bottom have seen purchasing power transferred to people who got the money first.
Dan,
Here’s the problem. On the one hand, you are treating the minimum wage as a good measure of how the poor are doing, while on the other hand you maintain that the minimum wage is harmful to the poor and ought to be abolished. That does not compute.
If Congress wanted, it could raise the minimum wage tomorrow to $15 an hour. If it did so, then the purchasing power of someone making the minimum wage would be a lot higher than the purchasing power of someone making the minimum wage right now. Does that mean the poor would be better off? No.
Alternatively, Congress could decide tomorrow to lower the minimum wage to $1.00 an hour. In that case someone making the minimum wage would have much less purchasing power than someone making the minimum wage now. Does that mean that poor would be worse off? Again, no.
Your mistake is that you are looking at a law to tell you about the real economy. That would be like if we had price controls and you tried to see how much inflation there was by looking at official prices.
Yea it does compute as long as you know why I oppose the minimum wage law. I oppose it because it creates a barrier for people who produce at less than $7.25 an hour. I don’t oppose it because it is too low. So that doesn’t change my argument that a fry cook making minimum wage in 1971 has less purchasing power than a person making minimum wage today. In fact, it bolsters my argument because all the people who produce below mw and are out of work have been hurt more than the fry cook by inflation.
Correction: should have read, “that doesn’t change my argument that a fry cook making minimum wage in 1971 has more purchasing power than a fry cook making minimum wage today.”
all the people who produce below mw and are out of work have been hurt more than the fry cook by inflation.
Exactly. The lower the real value of the minimum wage, the fewer people there will be who are out of work because they their marginal product is below the minimum. Therefore, it is a good thing if the minimum wage increases less than inflation. So you can’t point to the fact that minimum wage increases haven’t kept up with inflation as proof that the poor are worse off, since by your own argument a lower minimum wage is better for the poor.
BA,
These are two separate arguments and I’m not sure why you can’t see that. I completely agree with you about minimum wage. This does not change the fact that a fry cook making minimum wage in 1971 had more purchasing power than a fry cook making minimum wage today. Now someone who produced at just below minimum wage in 1971 might be able to get a job today because the real value of the minimum wage has been decreased by inflation but that doesn’t follow that the fry cook who already produced at the minimum wage rate in 1971 has benefitted from inflation.
My main argument has been that some people lose their purchasing power to those that get the new money first. So unless you are going to argue that the fry cook making minimum wage in 1971 is worse off in terms of purchasing power than his counterpart today then my main point stands. I could also bring in retired people on fixed incomes but I wanted to just focus on one group to make my point.
Turning this into a debate about minimum wage, which we agree on, does not address the transfer of wealth problem that I am talking about.
If you are saying that I should be fine with the loss in purchasing power because more people can get over the minimum wage hurdle then I would refer you to ABCT to see why we disagree with inflation as a solution to lowering real wages. You would also be conceding that inflation does lower real wages for some people if that is your point.
Dan,
Suppose I tell you that a guy making $20 an hour today has more purchasing power than a guy making $2 an hour in 1971. That’s a true statement. But does it tell you anything meaningful about the economy? Not really. Why not? Because the guy making $20 an hour today and the guy making $2 an hour in 1971 aren’t really comparable. I just arbitrarily picked a number for 1971 and another one for 2010.
The fact that it is Congress arbitrarily picking numbers rather than me doesn’t make the comparison any more meaningful.
Take your fry cook making $1.60 in 1971. Who is he comparable to in today’s economy? Well, presumably the fry cook is worth $1.60 an hour to his employer, otherwise he would not have a job. That means that, in today’s dollars, he was providing approximately $8.52 an hour worth of value to his employer. So we would expect him to be making $8.52 an hour today, i.e. more than the minimum wage.
Now take the guy making minimum wage today. He is providing $7.25 an hour in value to his employer, or $1.36 an hour in 1971 dollars. The comparable person to someone worth $1.36 an hour to his employer in 1971 is not someone making $1.60 an hour. It’s someone who is unemployed.
BA,
Let’s assume that everybody in the country who earns a wage has outperformed inflation since 1971. I don’t agree with that but let’s assume it is true. How have people who are retired and on a fixed income benefitted from inflation? Are you seriously arguing that there has been no transfer of wealth from inflation? I’m not even sure why you are pursuing this line of argument since I could go back to previous debates we’ve had where you admit that inflation causes transfers of wealth. What caused you to change that opinion?
Dan,
When did I say anything about people benefiting from inflation?
You said that “wages for most people didn’t increase at the rate of the dollar’s decline.” When I pointed out that this isn’t actually true you tried to argue that it was by invoking the minimum wage, which is just an arbitrary number set by Congress. How do you conclude from this that I’m arguing inflation is beneficial?
Btw, with regard to inflation effectively causing transfers of wealth, yes this does happen. But if inflation is low and stable the effect is fairly minimal.
BA,
Now I will grant you that I was sloppy when I said “most” but I did follow up with saying that the transfer occurs from people who get the new money last or not at all to those who get it first.
Would you agree with that statement if I removed the word “most” and just stuck to the transfer from people who get it last to those who get it first?
Also, the reason I’m assuming you were arguing that nobody lost purchasing power is because you said,
“Inflation may outpace wages for a period of time. However, if we are talking about over the course of a person’s working life, then wages will outpace inflation considerably.”
That doesn’t leave a lot of room to assume you were not talking about all wages.
So if you can agree with the above statements then we are both on the same page as far as that goes. The only difference would be I believe ABCT is correct and low and stable inflation is still a problem but that’s a different debate.
Dan,
Saying
“if we are talking about over the course of a person’s working life, then wages will outpace inflation considerably.”
is not the same as saying
“people who are retired and on a fixed income benefitted from inflation.”
In fact they aren’t even close.
As wealth transfers, imagine that we are in a society where gold is used as money. In that case, when someone digs gold out of the ground and spends it, there will be a transfer of purchasing power to the people who get the new gold first from those who get it last or not at all. Likewise, in a fiat money system you will have a similar effect around new money creation. The question isn’t whether this effect exists; the question is whether it is significant. When it comes to digging gold out of the ground, Austrians do not seem to think this effect is significant. I would say that when you have low and stable inflation, the effect is likewise minimal.
BA,
Sorry, so you are saying that everyone in this country who earns a wage or earned a wage has never lost purchasing power to inflation. It is only the retired who get hurt. Good to know.
As for the low and stable inflation causing minimal problems, I would direct you again to ABCT for my response and have you look at the tech and housing busts. I know you have a different view of those instances but I believe ABCT is correct. I don’t see the value in debating the entire theory on a few posts.
Dan,
You made a false claim about whether wages kept up with inflation and then backed it up with an invalid argument. In order to understand my criticisms of that claim and that argument, it is not necessary for me to state my views on who is hurt by inflation. They are irrelevant to the issue. I could be a completely orthodox Rothbardian, and still agree that:
1) wages tend to grow more than inflation over the medium to long term; and
2) looking at the minimum wage will not tell you whether wages (or wages of the poor) have grown more than inflation.
Furthermore, if I say that wages tend to grow more than inflation, this does not imply that “everyone in this country who earns a wage or earned a wage has never lost purchasing power to inflation.”
For example, it could be that inflation eats away some but not all of the increase in wages, so that people have less purchasing power than they would have had without inflation, even though their real wages continue to increase.
Or it could be the case that there are ways for people to cancel the otherwise negative effects of inflation if it is low and stable, but that these mechanisms don’t work so well if inflation becomes high and/or volatile (for example, if everyone expects 3% inflation year after year, then this will get built into wage demands, negotiations for long term contracts, interest rates, etc., but if inflation is unexpected, or happens too rapidly, then these correctives will break down).
And it could be the case that in a nation of 300 million people there is some fool somewhere who chooses to keep all his money under his mattress, and thus sees his purchasing power reduced even though he could have avoided this reduction in purchasing power by investing his money or keeping it in a bank.
That’s not an exhaustive list, of course, but (hopefully) you get the point.
Finally, as should be blindingly obvious, the fact that wages tend to rise faster than prices does not imply anything one way or the other about how inflation affects people who are retired (and, hence, do not receive wages at all).
If I didn’t spell all this out, it was because 1) I thought it was pretty obvious, and 2) I don’t have time to write Major-Freedom-Length comments explaining what should not be difficult points to grasp (I am doing so here simply so that you don’t think I am refusing to answer your questions).
Now, even though it’s irrelevant to the original issue we were discussing, since you asked, my own view is that if inflation is low and stable people can take steps to roughly cancel out its negative effects. It won’t cancel them 100%, and it won’t cancel them for every last person in society, but it will reduce them to the point that they are not a major concern.
My argument is not invalid in regards to how I used the minimum wage. I understand your arguments about the minimum wage and agree with them but they have nothing to do with what I brought up. If a someone went to go get a job at Mcdonalds in 1971 they got paid minimum wage just like they do today. So it is valid to use the minimum wage data from 1971 and today vs. inflation to show that people working these jobs have lost purchasing power because of inflation.
Maybe you do not believe that there are jobs that paid minimum wage in 1971 and still pay minimum wage today.
I don’t even think he realizes that wages for most people didn’t increase at the rate of the dollar’s decline.
Are you under the impression that real wages today are lower than they were in 1911?
Of course they are much higher.
But the important point is that if someone had been cryogenized in 1911 with his dollars he would be destitute if he woke up in 2011.
He would be pretty useless too.
I can see why you might think that is my argument from my response but, no that is not what I think. I’m talking about how looking at wages in 1911 vs today doesn’t even take into account the transfer of wealth problem associated with inflation. For example, people who are retired don’t exactly benefit from inflation even if wages climbed at a 1 to 1 rate with inflation. Also since wages and inflation don’t move at a 1 to 1 rate, the people who get the new money last or not at all also lose purchasing power. Inflation, according to the CPI, has gone up 3.6% over the last 12 months from May but people working for minimum wage are still making the same wage per hour so they are losing purchasing power. Very few jobs have seen wages increase 3.6% over the last 12 months from May and have thus lost purchasing power. Looking at static numbers from 1911 and today misses all the nuanced problems inflation creates.
Dan,
Inflation may outpace wages for a period of time. However, if we are talking about over the course of a person’s working life, then wages will outpace inflation considerably.
In addition, when you have a situation where there is high unemployment the standard Austrian response is that wages need to fall so the market can clear. So it’s not clear why an Austrian should object to wages growing more slowly than prices in that circumstance.
BA,
“Inflation may outpace wages for a period of time. However, if we are talking about over the course of a person’s working life, then wages will outpace inflation considerably.”
I would like to see some data that backs up that assertion. I just googled the CPI since 1971 and also minimum wage since then because, in my opinion, the poor suffer the most from inflation. minimum wages have risen from $1.60 to $7.25 which is about 353% increase. The CPI rose more than 450%. That doesn’t really support your claim of wages considerably outpacing inflation, at least for poor people.
Also this doesn’t take into account that gas prices rose over 800% and food and beverages by 450% (same as the whole CPI). Poor people spend more of their income on food and energy and so if those prices are rising faster than the CPI as a whole it will mean the impact of inflation is not captured fully by looking just at the whole CPI number.
Here is the CPI number and the others can be found on the St. Louis FRED Graphs and by googling minimum wage rates.
http://research.stlouisfed.org/fred2/graph/?id=CPIFABSL,#
“In addition, when you have a situation where there is high unemployment the standard Austrian response is that wages need to fall so the market can clear. So it’s not clear why an Austrian should object to wages growing more slowly than prices in that circumstance.”
See, ABCT
Actually gas prices are up over 900%. In 1971 $0.36/per gallon to $ 3.65 now.
Dan, my comment was an answer to Silas’ original point about the dollar losing value since the creation of the Fed.
But yes, inflation has distributional effects, and so does deflation.
We could certainly agree that the minimum wage is way too low if that is what you are trying to say.
Mammoth,
“Dan, my comment was an answer to Silas’ original point about the dollar losing value since the creation of the Fed.
But yes, inflation has distributional effects, and so does deflation.
We could certainly agree that the minimum wage is way too low if that is what you are trying to say.”
You also said,
“Who cares? Most if not all manufactured products or skills from 1911 have lost 100% of their value, so the dollar has done pretty well since then.”
First, that doesn’t explain how credit expansion is not inflationary with the dollar losing 95% of its value since 1913 as Silas asked.
Also, if you agree that the dollar losing value has redistributive effects then your comment asking who cares doesn’t make any since. People who are retired, middle class, or poor care about the dollar losing value because of the distributive effects that you agree occur. That’s who cares.
As far as the minimum wage, I don’t believe in it at all. I don’t think it is too low. I think it should not exist. I am an anarcholibertarian and almost puked in my mouth thinking someone would think I’m in favor of raising it.
I used minimum wage data to show that the poor have suffered greatly from the devaluation of the dollar, not to argue for a higher minimum wage. The minimum wage is one area virtually all economist agree on.
Dan,
The minimum wage is a legal artifact, so it’s not a good gauge of what’s happening in the real economy. Here is an old post I did looking at real income growth since the 1970s.
Dan, the lower real incomes have stalled since the 70s, so it has nothing to do with the creation of the Fed, but rather with deregulation, immigration, or globalization.
BA,
A person in 1971 making minimum wage had more purchasing power than someone making minimum wage today. I’m not arguing that everyone in society has lost purchasing power. I am saying that there is a transfer from the poor, retired, etc. to the people who get the new money first.
Mammoth,
Regardless of why people at the bottom rung have stagnated, the Fed devaluing the dollar has hurt them. If the dollar had not fallen at all and the poor wages had stagnated they would not have lost purchasing power. In fact, as long as the production was driving prices down there stagnated wages would buy more. I don’t need to argue that the Fed caused the poor’s wages to stagnate to show that inflation was bad for them.
Dan,
The argument you are making here is inconsistent with opposition to the minimum wage. If you think the minimum wage ought to be abolished then you ought likewise to support lowering the minimum wage. But this is precisely what happens when increases in the minimum wage don’t keep up with inflation.
Remember, the minimum wage is not a market wage rate. It is set by Congress. Congress could decide tomorrow to raise the minimum wage to $15 an hour. That wouldn’t mean that the poor were suddenly better off. It could decide to lower the minimum wage back to $1.50. That wouldn’t mean that the poor were suddenly worse off.
I don’t think that follows at all, Blackadder. E.g. elsewhere I’ve written that the Fed should reinstate a gold price of $2000/oz. So does that mean I should support QE3, since that might very well push up the gold price in the direction I apparently want?
There was inflation from 1913 to the 70s as well, but real wages of low income earners grew to match overall productivity growth, something that didn’t happen since the 70s. So inflation is not the reason why real minimum wage has stagnated.
Inflation has distributional issues for sure. So has deflation.
It has nothing to do with who gets new money first, otherwise those living on government welfare would have done better than the rest.
Bob,
Dan is saying that you should look at the minimum wage to see whether wages have kept up with inflation. Do you not see the problem with doing that?
Oh then maybe I am mixed up. I haven’t followed you guys closely on this, but I thought you were saying, “Hang on, Austrians want the minimum wage to be set to zero. So why should those same Austrians be worried if prices are rising faster than wages? Isn’t that what they recommend to fix the labor market?”
No, I’m arguing that a fry cook making minimum wage on 1971 had more purchasing power than a fry cook making minimum wage today. I believe that inflation transfers wealth from those who get the new money last or not at all to those who get the new money first. It wouldn’t make sense if I thought ALL wages have been behind inflation.
It sheds a light. Most objects and skills from 1911 are worth 0, so the dollar has infinitely appreciated since then.
Of course there are a few exceptions, mostly useless objects that fetishists love (paintings, gold and other collector items that serve no purpose).
“Of course there are a few exceptions, mostly useless objects that fetishists love (paintings, gold and other collector items that serve no purpose).”
I think you mean they serve you no purpose because they blow up your argument that the dollar has actually increased in value.
Whatever value the dollar has ‘gained’ thanks to improved techniques, skills, and quality of goods has been in spite of its relatively costless production, not because of it.
You’re still changing the topic. You claimed that expanding credit issuance does not decreas the value of dollars-in-general. It simply doesn’t matter what has or hasn’t physically happened to objects in 1913.
If you were correct about the non-inflationary nature of expanded credit, the dollar (not a specific piece of paper, but *the dollar*) would not have expereienced a huge printing-money-induced decline in its value. But it has. Therefore, you are wrong. Please stop the smoke and mirrors act.
Whenever AP Lerner ever shows up to lecture us on our economic ignorance, keep in mind that he claims (without argument) that catallactic exchange became irrelevant under our “pure” fiat money system in 1971. When I directed him to Mises’ evisceration of MMT hero Knapp and his wacky state theory of money a century ago (now an appendix to “Theory of Money and Credit”) AP Lerner responded last August:
That essay is irrelevant since it was written in a period of time when the current monetary system did not exist. The rules changed in 70’s. The US left the gold standard.
http://tinyurl.com/4rf8pg9
I’m still waiting for an explanation as to how that is possible.
Also, I’m still waiting for an explanation from him as to where all of the stuff is going to come from to satisfy the government’s unpayable debt.
This has now been going on for almost a year. I suppose ignoring those essential issues is “comical” but it’s more like tragic and creepy.
Also, I’m still waiting for an explanation from him as to where all of the stuff is going to come from to satisfy the government’s unpayable debt.
Not from people who are squandering stolen gas on public roads when they are not reading blogs, or other attorneys, that’s for sure.
Government debt is always payable by the way.
I guess as long as you can print money literally or electronically. It doesn’t follow though that the money will retain its purchasing power over time and that people will continue to use it as a medium of exchange.
Man, I wish I could inflate my debt away with a printing press.
Good thing the U.S can do that, right?
So you think it would be good for the economy to go back to horse and buggies?
Just wondering, did you not understand the question or the answer? It was pretty basic stuff.
Well Mammoth, you keep bringing up that people are squandering gas on public roads so I wanted to see how far you were willing to take that conclusion to. I was making a joke about your constant squandering gas claims.
So you change the topic with other people, too? Good to know.
When the topic is where all the stuff is going to come from, pointing out where it is not going to come from is not changing the topic.
You only mean this reserve requirement thing in a strict mechanical way, right? As if banks couldn’t borrow from the FED when ever they need money for lending, right?
But finally higher reserve requirements constrain lending, because banks lend on the spread between their costs, and earnings. And their costs will increase with higher reserve requirements and/or higher interest rates set by the FED, hence less lending. So if this is right, you cannot fault someone for saying: Reserve requirements constrain bank lending.
Please correct me if I am wrong.
I’m sorry I didn’t post this before; hope you guys see it under Bob’s new posts.
I’ve asked this question before. Please show one example of a banks loan department that checks it’s reserve position before making what it deems to be a profitable loan.
Easy: me. I’m a bank. I loaned a friend $X000 (true story, thousands digit obscured, it’s not zero). I deemed him a good credit risk, and he offered a good interest rate. I would have loaned more, but I didn’t have enough of a cash cushion to sit on. I also couldn’t get any other bank to loan me additional money because they didn’t have the private information I had about this borrower.
Checkmate.
This only shows you are not a bank.
“No true Scotsman”, eh?
Please, tell us your definition of a “bank”, such that when you meet it, you magically lose all concern with cash reserves? I’d love to learn how this mechanism is woven into the universe’s very ontology.
Excellent article. I would’ve described your last point a bit differently (it’s a strange sort of stealing where the thief doesn’t get the money), but you’re right that if reserves can never be used for anything then they might as well not exist.
One other thought: if raising reserves requirements is equivalent to stealing from banks, then when (some) Austrians advocate a 100% reserve requirement are they not advocating grand scale thievery? Discuss.
Murphy is wrong, raising reserve requirements is not stealing from banks. It could increase the cost of money, unless the Fed pays interest on excess reserves, but nothing else.
Murphy’s analogy about someone being forced to keep a $1000 in his savings account just shows how little he understands of the monetary system.
Banks use their reserves all the time to settle payments. If reserves do not earn any interest then holding excess reserves represents an opportunity cost to the bank. If reserves earn interest then there are functionally equivalent to a Treasury security.
Mam-mouth is confusing the MMTer concepts of “specific” constraints and “general” constraints. MMTers differentiate between government being potentially unconstrained as opposed to purposefully self constrained. Here is a quote from “Modern Monetary Theory—A Primer on the Operational Realities of the Monetary System” by Scott Fullwiler, Associate Professor of Economics at Wartburg College and MMT guru:
Having said that, MMT’ers are keenly aware that governments can and do write laws that their treasuries’ operations be legally bound in certain ways. For instance, the Fed is constrained by law to only purchase Treasury securities in the “open market,” is thereby forbidden from directly lending or providing overdrafts to the Treasury. In other words, “specific” cases can and do differ from the “general” case MMT’ers describe for a sovereign currency issuer under flexible exchange rates in the sense that self-imposed constraints specify particular operations.
http://tinyurl.com/3tdadas
Thus, a wacky insane criminally corrupt fiat banking system may be subject to legal constraints in the form of enforceable reserve requirements.
I am not confusing anything.
Murphy is confusing reserve requirement with stealing. Banks still own their reserves and use them to settle payments.
Raising reserve requirement might increase costs for banks though, unless the Fed pays interest on reserves as it currently does since 2008.
It’s just nonsense, but clearly the kind of nonsense Austrians love.
Mam-mouth gets another “cement-head of the month” award.
Ron Paul is as sly as a fox. His proposal puts into play discussions of whether the Fed is part of the government or not. If it is part of the government, then the government can’t steal from itself. If it isn’t, then average folks need to understand this and understand that there is no moral reason to pay the Fed back for securities it bought with diluted funny money. A teaching moment.
Then there is the issue of higher reserve requirements which, as Bob Murphy explained, are “like” stealing money from the bank. However, as Bob Murphy also pointed out, this interpretation is dependent upon what you think about how the banks acquired those reserves. Another teaching moment.
“Comical” doesn’t begin to describe the tone-deafness and ignorance of MMTers regarding the political realities and economic realities (Cantillon Effects, theft of purchasing power, ABCT, distortion of economic calculation etc…) implicit in their beloved policies.
Well I didn’t say that Murphy was the only one making the mistake about increasing reserves. Clearly Roddis the Clown doesn’t either. and always needs to change the subject. What a waste of space.
I think you’re conflating two different scenarios. To refute Murphy’s point, it seems, you state that banks use their reserves all the time to settle payments. The banks are engaging here in voluntary transactions to settle accounts. Murphy is describing an involuntary ‘transaction’ where banks (and there customers) cannot hold the reserves they want to based on a government edict. How are these two ‘transactions’ the same?
And, I think this goes to answer Blackadder’s question. I don’t think its accurate to say that 100% ‘reservers’ claim that banks have to hold a certain amount of reserves. They do claim that banks have to hold 100% of deposits made for redemption on demand. It is conceivable that in a 100% ‘reserve’ banking society that banks may not be holding any ‘reserves.’ Here, customers would have loaned all their money to banks for repayment at some point in the future, rather than for redemption on demand. They may be holding ‘cash’ on the person, or within their household, etc.
*sorry: ‘their customers’, not ‘there customers’.
If you believe the 1.6 trillion of excess reserves is here to stay. What do you see the M2 level at in a few years?
Bob, you said there would be massive inflation in this video http://www.youtube.com/watch?v=dZf3Qye0BtQ, and that was with excess reserves at ~800 billion. Why wouldn’t 1.6 trillion be twice as bad?
He is not claiming that excess reserves cause inflation. He is saying that when the banks loan out the excess reserves into the economy that it will be inflationary. So if the amount of excess reserves increases then the potential inflationary impact will be higher.
I misread that. I thought you asked why would 1.6 trillion be twice as bad?
Luke, I don’t want to make predictions about M2 because I obviously was way too early in warning that there would be large-scale price inflation by now (by which I meant CPI). Yes, if $800 billion is bad, then $1.6 trillion is worse.
It’s amazing how annoying the MMT commentators are. MMT is just Keynes on Krack. They’ve got a couple accounting tautologies and somehow conclude from them that government is some all-powerful force for human welfare. I really can’t see any common ground between the Austrians, who think about economic problems like adults, and the various brands of monetary cranks and socialists, with MMTers as the nuttiest of the nuts.
Funny that only Austrians consider themselves adults when thinking about economic problems.
Anyway I was only pointing out Murphy’s big mistake when discussing the effects of raising reserve requirements which is quite worrisome coming from someone with a PhD in economics, unlike Roddis whose nonsense can be just laughed at.
Austrians are the only ones who recognize the importance of saving and the fact that spending or money printing doesn’t restore economic health.
Murphy didn’t make a mistake about reserve requirements. He just pointed out a different way of looking at the problem; and his way of looking at the issue runs counter to MMT’s philosophy.
No, since what he said about the effects of raising reserve requirements being a seizure of those reserves is wrong, he made a mistake.
The appropriate analogy would be if you had 1300$ in your savings account earning interest but your bank moved 1000$ to your checking account earning no interest but that you can still use to make all your payments.
You might not like it but you can hardly accuse them of seizing or stealing your money.
MamMoTh, I generally think we agree on how central banks with fiat money operate, and we just disagree on whether it will lead to rising price inflation / low unemployment in various circumstances. But in this thread it sounds to me like you just don’t know how the banking system works. (Ironic, I know.)
If a bank has $1 billion in reserves, and $1 billion in required reserves, then they can’t legally spend those reserves on anything, unless they also do something to lower their required reserves (like contract the amount of credit available to their customers). So no, you are simply wrong when you say that raising reserve requirements would be like shifting a person’s savings balance into his non-interest-bearing checking account.
When you (and AP Lerner) constantly claim that banks are not reserve-constrained, I have to ask what you mean. Are you saying that when banks butt up against the binding reserve requirement, then that pushes up the fed funds rate and then the Fed injects more reserves into the system, to keep the market rate near the Fed’s target? If so, fine, but I acknowledged that months ago when I was trying to extend an olive branch to you guys. Even in that scenario, banks are still “constrained by the reserve requirement,” it’s just that the Fed might take steps to make it easy to get over the bar.
But at other times it sounds like you and AP Lerner think that the commercial banks themselves somehow have it within their power to make as many loans as they want, and they don’t need no stinking reserves. If so, how does that actually work? Are the banks all breaking the law, but nobody cares? Is it like the speeding limit on the interstate? (I’m not being sarcastic, I’m trying to understand what you guys mean.)
For example: Why doesn’t the graph for “excess reserves” ever go negative? If we take you and AP Lerner literally, then the banks often should have less in total reserves than the paper-tiger “reserve requirement” would indicate. So the formula for excess reserves should be yielding a negative number in that case. And yet the graph is usually close to zero, but positive, throughout the Fed’s history–just as the standard textbook account of this stuff would lead us to believe. So how do you explain that? Again, I’m not saying, “Aha! My victory is complete!” I’m trying to understand exactly how you think the banks evade what appears to be a legal constraint on their behavior.
Nice takedown Bob. It shows incredible patience to go in depth against those insipid and tedious MMT arguments.
Query: Is there really anything more to this than failing to understand Scott Fullwiler’s distinction between “specific” cases and “general” cases in MMT mythology? See my comment above.
Bob, honestly I am not sure what you are trying to get at with your latest comment.
Clearly the current situation is one where the banking system has enough excess reserves, so raising reserve requirement will be of no other consequence than rising the cost of holding reserves for banks if no interest is paid on them.
Your example where the Fed were to raise reserve requirements when there are no excess reserves in the banking system, without providing those extra reserves to solvent banks, means that the Fed
(i) is willing to lose control of interest rates
(ii) is willing to risk a collapse of the payment system, trigger bank runs and let banks go bankrupt
This is against the Fed’s mandate.
So I still think it’s a mistake that you call raising reserve requirement stealing and that your analogy is wrong.
It is rather imposing an extra tax on banks, or better decreasing the subsidies for running a bank.
Reserve requirements are related to the level of deposits at the bank.
Every time a depositor of bank A pays 100$ to a depositor of bank B, reserves of bank A are debited by 100$ which is credited to the reserves of bank B.
Depending on the initial level of reserves bank A might find itself short of $100 which it could then borrow from bank B (or from the Fed, or getting new deposits) increasing its cost of funds.
So reserves are not idle regardless of the reserve requirements. They are definitely not stolen from the bank, they are always used to clear payments.
But raising the reserve requirements can increase the cost of funds. You can see it as a tax (or a smaller subsidy) for operating a bank.
OK suppose there are $1 trillion in total reserves, and $10 trillion in total customer deposits at commercial banks. There is a 10% reserve requirement, so there are $0 excess reserves. You’re right, when people write checks to each other, the reserves and required reserves just get shuffled around the system from commercial bank to commercial bank.
Now the Fed raises the reserve requirement to 20%. Instantly, the system as a whole is short $1 trillion in required reserves. The commercial banks can try borrowing reserves from each other, but the banks can’t create reserves. If the system is short, they can’t fix that.
They go to the discount window to borrow, and the Fed says no.
The fed funds target rate zooms up from 3% to 15%, as the commercial banks scramble for reserves to meet their legal requirements. The Fed lets that happen, and doesn’t engage in any open market purchases to bring the fed funds rate back down.
The only thing the commercial banks can do is to call in their loans. When people pay off debts, the banks don’t roll them over to new borrowers. Total deposits in the banking system have to shrink to $5 trillion because of the Fed’s new policy stance.
Do you agree with all of this MamMoth? If so, then you should have no problem with my article, and you shouldn’t be saying I made a mistake.
The silence is deafening.
http://consultingbyrpm.com/blog/2011/07/ron-pauls-idea-to-repudiate-the-feds-debt-holdings.html#comment-20215
My mistake, I didn’t realize you gave a nonrespose to his question.
the question about the Fed trying to bring down the banking system?
yes I did answer it. Murphy is still wrong.
And his silence defeaning
Mammoth,
Are you serious? The only thing you said about his scenario was,
“Bob, honestly I am not sure what you are trying to get at with your latest comment”
and then you went and said the Fed would never do it anyways. That is a dodge not an answer to his hypothetical. I would think even you would be honest enough to admit that.
Of course I am serious.
Can’t you see that in order to defend his original claim he came up with a scenario that is the opposite of his original claim?
Now the banking system is short of reserves and the Fed violates its mandate!
Still, if they don’t go bankrupt, banks will keep using their reserves whilst trying to get back their loans. No one stole those reserves from them.
So Murphy is wrong.
Mammoth, are banks not reserve constrained only in liquidity traps where there a ton of excess reserves, or always including in normal times?
Lets say we go back to normal times with little excess reserves. If the fed never does a single open market operation again, can the banks continue to get reserves as need when they want to make a loan? Can the money supply (m1 or m2) continue to grow at around the same trend it has in the past 20 years? since getting off the gold standard, has the fed had any control over the money supply? (AP Lerner once told me they didn’t) Is the money supply determined by deficits?
can the banks continue to get reserves as needed**
DJ, the MMT view is that banks are never reserve constrained but always capital constrained.
Solvent banks can always extend loans, which create deposits, and look for reserves later as needed, borrowing them from the Fed if necessary and the Fed will accommodate to guarantee the functioning of the payment system and sustain its interest rate target.
The monetary base (cash, reserves, Treasury bonds) is determined by deficit spending. The monetary supply by bank leverage of the monetary base.
If the Fed has an interest rate target then it cannot control the monetary supply which is endogenously determined by credit creation.