Quick Question for the MMTers
For those of you intrepid (foolish?) enough to wade through the comments on this blog, you will note that–contrary to perhaps your initial perception–the Modern Monetary Theory (MMT) proponents do not actually say that the issuer of a fiat currency can’t become insolvent. Rather, they qualify it in the following way: To qualify for the vaunted invulnerability status, we need a central bank having “all liabilities denominated in a free floating, non convertible currency which they are a monopoly issuer of.” So that’s why Iceland, Greece, and Spain are all in trouble, even though the gold standard ended in 1971.
I have an observation and then a question.
OBSERVATION: If this is the MMT position, fair enough, but then to be consistent they should stop saying, “You Austrians have to drop your gold standard thinking. That ended in 1971.” No, it is still very much relevant, as the collapse in Iceland and the current trouble in Europe demonstrate. I could understand you making such a claim during the US debt ceiling debate, because there you were arguing that the politicians were foolishly imposing artificial constraints on the US gov’t/Fed apparatus. But there is nothing artificial about the crisis that hit Iceland, or that is currently hitting Greece. So if the MMTers agree with Krugman (he’s not an MMTer, by the way) when he says that we are seeing the problems of a “nouveau gold standard regime” in Europe right now, then they at least should have the decency to stop ridiculing Austrians (and others) for clinging to “gold standard analysis.” They themselves are admitting it is still necessary to understand–dare I say it?–modern monetary institutions.
QUESTION: The European Central Bank itself currently has dollar-denominated liabilities, on account of its swap lines (and probably a bunch of other stuff too). I can’t get an exact number, but I am sure the Fed in its humongous balance sheet somewhere owes somebody on planet Earth a debt denominated in a currency other than dollars. So, what is the cutoff for MMT to become applicable? (In other words, the Fed presumably counts right now under the umbrella of MMT, so you must think that it’s OK to have a piddling amount of liabilities denominated in foreign currencies.) Does MMT currently apply to just the Fed, or to the ECB too? If the former, should you maybe stop calling it “Modern Monetary Theory” and instead call it “Future Monetary Theory,” for a time when its results are applicable to more than one central bank on earth?
This is awesome stuff.
I look forward to the answers.
Really? I just ordered some of those see-through shields that riot police use. Hunker down, MF, this isn’t going to be pretty.
I’ll just bring a paper plate as my shield. I mean, how much damage can flying feces really do?
Hi Robert,
It appears we are getting somewhere now. A few points in response . . .
1. The “Austrians cling to gold standard analysis” criticism relates to currency issuers under flexible exchange rates. We would not criticize Austrians for applying that sort of analysis to non-currency issuers like the eurozone, nations operating under fixed exchange rate regimes, currency boards, and so forth. (There is a separate issue with the “gold standard” criticism relating to how Austrians analyze the banking system that is still a valid criticism from our point of view at least for the eurozone and fixed exchange rate regimes, but would again not be made by MMT’ers in the case of a currency board-type regime that does function very much like a gold standard.)
2. If the Fed or the Tsy does in fact have debts denominated in foreign currencies, these are most definitely cases in which default is possible and the “currency issuer under flexible exchange rates” standard of MMT does not apply for those specific debts. This is why we were very much against the Fed lending $ to the ECB (which obviously does not print $), particularly in such large amounts–in the case of an ECB default the euros used to collateralize the loan would lose value and the net effect would be that the federal govt would be the one taking the loss even though the federal govt never signed off on these swaps. Similarly, loans to the Fed or the US govt in payable in a currency other than the $ could be defaulted upon involuntarily, while debts in $ terms can only be defaulted upon by choice (as in not raising the debt ceiling) or by inflating the debt away. So, in short, as we have always said, MMT applies to a nation under flexible exchange rates issuing debt in its own currency–those parts of the debt, if they exist (and if so, it would be surprising if they were economically significant in size) that are not denominated in $ would not be part of the MMT description of the current US monetary system. This is no secret; we’ve always stated it this way.
Hope that helps.
Best,
Scott Fullwiler
Future Monetary Theory sounds good to me. Much better than the Primitive Monetary Theory that gold fetishists love.
Mammoth, instead of “Primitive Monetary Theory” you mean “Monetary Theory for yesterday and today.” It’s like the light rock radio station I sometimes listen to.
Except MMTers took that Dire Straits song too literally.
Alas… Chicks are never really for free.
Not in the dark alleys that MMTers hang out.
You can’t pay your taxes in coconuts.
Actually, this “money has value because of taxes” is yet _another_ MMT confusion [wow! there are so many!].
Now it’s difficult to show that this is “the reason” that money has value. I think the best way to think about this is to visualize what would happen if current government actors demanded that taxes be paid in special Obama/Boehner-dollars [which they will sell you for USD] There would of course be some rush to buy these things in time for next tax season. Long-term however, the nuts who floated this idea would probably be thrown out of office. This is more likely than OB dollars being picked up as the “new money.” Of course, there are historical episodes where the nuts have not been thrown out. But historically, this is somewhat rare.
I think the basic confusion here is from survival bias. Basically, the loony schemes that succeeded are the ones we see today.
>Actually, this “money has value because of taxes” is yet _another_ MMT confusion [wow! there are so many!].
Well you only have to read Graeber and other anthropologists to find examples of the tax drives money view. Not to mention that Smith and Tobin both make similar arguments.
I’m not saying that “things that tax collectors want” won’t affect individual valuation. I’m saying that “what the taxpayer wants” is usually what’s money in the society anyway. For example, they start collect taxes in gold because the _gold_ is valued by members of the society. Even if they change the laws to only accept stamped coins, they will won’t necessarily replace the money with the new coin. Unstamped gold could still circulate as the most marketable medium of exchange.
Basically, I’m saying that the MMT “hierarchy of money” is economically very useful. In contrast, the “money as marketability commodity” theory _is_ useful because it is applicable in stateless societies, between states, across the transition from one money system to the next, etc.
It’s funny how you label a violence backed system as “modern” and a voluntary system as “primitive.” It’s almost like you actually believe violence is less primitive that voluntarism.
I label the gold fetishism as primitive, and the purely voluntary system as utopian.
Peace will always seem Utopian to violence welcomers.
Expecting fiat money to result in anything but either socialism or hyperinflation in the long term is Utopian.
Whether on a gold standard or the use of a sovereign fiat, both involve the use of coercion that you have to use these things as a unit of account (i.e. money).
The idea of any society without coercion (freedom as you’re defining it) is ridiculous.
You could use barter, but the double coincident of wants is quite problematic.
Austrians like Ron Paul advocate competing currencies. If people were free to use whatever they want as currency then there would be no coercion. This isn’t rocket science.
There are already plenty of competing currencies. Who needs more?
The more currencies we have, the harder the economic calculation becomes.
There are already plenty of competing currencies. Who needs more?
There is no competition WITHIN currency regimes. Paul is talking about currency competition in US borders, which means no taxing of gold earnings as if they are US dollars, for example.
The more currencies we have, the harder the economic calculation becomes
It’s not hard. It’s no more difficult than converting a price in British Pounds to a price in US dollars based on the market exchange rate. Adding one more line to one’s spreadsheet takes 2 seconds.
What makes economic calculation more difficult is in monetary regimes that are further away from the market process, meaning the further we are away from a free market in money production.
Well that convinces me Mammoth. I hadn’t even thought of the “who needs more” argument.
Well that convinces me Mammoth. I hadn’t even thought of the “who needs more” argument.
All violence based arguments like the one Mammouth is peddling ultimately boil down to “because I say so.”
Competition in currencies and a gold standard are functionally equivalent.
Peace is not ridiculous.
If you’re talking about how the money system can develop without an “official definition,” then you can use a regression theorem analysis.
The durable-ish, divisible-ish, homogeneous barter goods will become involved in more and more indirect trades.(I trade you fish for salt not to consume the salt, but because I know there are others who would like to consume it).
This practice will become more popular (and the indirect goods will become more marketable) as more people realize these indirect trades are being done. The goods will start competing for the role of new money (the good that is seen as the most marketable, and involved in most trades).
I agree. It’s a matter of what level of coercion we want.
Democratically elected governments are much like gigantic, diffuse corporations we choose to work through our choice of where we live.
It’s not perfect, but the alternatives are far worse. You can’t choose to live without coercion. Even living free forces you to arm yourself and make yourself into something way harder than I’d freely choose.
Quick question? Hardly!
“we need a central bank having “all liabilities denominated in a free floating, non convertible currency which they are a monopoly issuer of.”
Might be a minor quibble (but probably not the more I think about it), but why did you say central bank in this statement? The point of being a monetarily sovereign nation (like the US) is you do not borrow in say, Euro, to pay someone to build a bridge in Texas. You do agree that when the government spends, like to invade Uganda, the spending comes from the Treasury, right? Would you also agree there is no operational or financial constrain to the treasury spending if we ended the Fed tomorrow? If you agree, then why not combine them?
““You Austrians have to drop your gold standard thinking. That ended in 1971.” No, it is still very much relevant, as the collapse in Iceland and the current trouble in Europe demonstrate.”
Agreed, very relevant. But concepts like crowding out and the money multiplier are no longer relevant for monetary sovereign nations. Those myths need to shelved and stored next to the gold standard when discussing US monetary operations.
So my question is, if you recognize a fixed currency contributes to Europe’s troubles, then why do you advocate for the return to the gold standard in the US?
“I could understand you making such a claim during the US debt ceiling debate, because there you were arguing that the politicians were foolishly imposing artificial constraints on the US gov’t/Fed apparatus.”
Agreed!
“then they at least should have the decency to stop ridiculing Austrians (and others) for clinging to “gold standard analysis.”
Will do.
“The European Central Bank itself currently has dollar-denominated liabilities, on account of its swap lines”
How does this create a USD denominated liability for the ECB? The ECB sells Euro’s, and then buys USD, right?
“I am sure the Fed in its humongous balance sheet somewhere owes somebody on planet Earth a debt denominated in a currency other than dollars”
Has the Fed issued bonds that I am not aware of? Did they borrow Euro or Yen at some point? Don’t think so. If you are referring to the swap lines, then, again, the swaps just create an FX denominated asset on the Fed’s balance sheet? From this link:
http://www.federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm
“The foreign currency that the Federal Reserve acquires is an asset on the Federal Reserve’s balance sheet. Because the swap is unwound at the same exchange rate that is used in the initial draw, the dollar value of the asset is not affected by changes in the market exchange rate. The dollar funds deposited in the accounts that foreign central banks maintains at the Federal Reserve Bank of New York are a Federal Reserve liability. “
Where is the non USD liability? Is there risk this asset is worthless (well actually, it kind of is, but that’s a different topic…)? Sure. But that has nothing to do with a non USD liability at the Fed. I might be misinterpreting, but it appears you may not understand the mechanics of an FX swap…
“So, what is the cutoff for MMT to become applicable?”
I’m not sure how to answer this or even what it means. But the difference is this: Iceland, unfortunately gave up its monetary sovereignty when it borrowed in a currency it did not have the ability to issue to fund government spending.
Germany gave up monetary sovereignty when it pegged the DM to the Euro.
Neither Germany, nor Iceland, can just credit private sector accounts to spend.
The US, despite claims the Fed has non USD liabilities (which I don’t think is accurate…) has not borrowed a nickel in non USD to fund government spending, thus maintaining monetary sovereignty. The treasury can credit as much currency as it likes to credit private sector bank accounts as it like, it will always be able to meet all obligations which are denominated in USD.
“Or to the ECB too?”
In theory, the ECB could be the consolidated fiscal and monetary agent in Europe. There are some legal/operational constrains to this, but they are self-imposed.
Putting on my riot gear………NOW!
But concepts like crowding out and the money multiplier are no longer relevant for monetary sovereign nations.
Crowding out still happens in real terms, which is what really matters for productivity and standard of living.
Crowding out in gold standard thinking is ultimately derived from crowding out in real terms. This doesn’t change when governments impose a fiat system.
Crowding might happen in real terms but not necessarily, specially when there is so much spare capacity already in place.
Still, financial crowding out is not relevant any more, but still taught in economics 101.
I think the issue may be I view crowding out strictly from the financial perspective (nonsense loanable funds gibberish).
The ‘real’ crowding being referred to above I see more as a misallocation of resources. I agree this can/does occur. Terminology confusion, potentially?
Spare capacity cannot be solely targeted by government spending. Every industry, every factory, is a piece of the economic puzzle that is affected by and affects other factories and industries.
Government printing and spending ALWAYS affects resources and labor already in use and redirects them away from where the market process would have allocated them.
The existence of idle resources does not overturn the economic law behind crowding out.
There is more that 10 million people that need to be crowed out now.
The government is printing, borrowing and taxing, and then spending money on food stamps and welfare, which crowds out real resources that could be used by productive laborers (including those currently unemployed).
Those 10 million people are being sustained in real terms somehow. If instead they ceased living on the dole, and offered their labor at a lower price to the market, and the government didn’t make it illegal to do so, then no crowding out in real terms would be necessary.
Those are policy choices.
With real economic effects such as crowding out in real terms.
Every decision has economic effects.
Most of the unemployed will not mind being crowed out of a private sector that does not want to hire them.
Every decision has economic effects.
And in the case of government spending “targeting” unemployment and “idle resources”, the effects spill over into already employed and already utilized resources.
Most of the unemployed will not mind being crowed out of a private sector that does not want to hire them.
The private sector would want to hire them, if the government just stopped making it so that it doesn’t hire them.
Widespread unemployment in peacetime, and in the absence of plagues and natural disasters, is the fault of government. The problem cannot possibly be the solution.
Downwards price adjustments will not suffice to achieve market clearing in the presence of nominally fixed liabilities.
A loan that is repaid is not immediately reissued to another borrower, which is the assumption underlying the loanable funds fallacy. This being the case, there will be periods during which the amount of borrowing exceeds the amount of repayment – during which credit is a net contributor to aggregate demand. And there will be periods where repayment exceeds borrowing, so that borrowing is a net drain on aggregate demand. During the former, the excess nominal demand will have to be taxed away, in order to avoid placing greater real demands on the productive capacity of the country than it can sustainably serve. During the latter, the government will have to spend in order to prevent a deflationary depression.
Private sector price adjustments alone will not prevent clearing failure in the product and labour markets when savings exceed investment, because private sector price adjustments alone will not prevent clearing failure in the credit market, and clearing failure in one of the three implies clearing failure in at least one of the other two (Walras’ postulate).
Interest rate adjustments by the private sector will not generally suffice to achieve clearing, because pre-existing nominal liabilities will, in a deflationary environment, cause increasing risk premia which will prevent interest rates from dropping to the level required for clearing between savings and investment.
Interest rate policy cannot generally affect clearing either, because of the zero lower bound on nominal interest rates.
What can affect clearing is that the sovereign enforces clearing of the goods and labour markets – which it can always do, since it is definitionally solvent. Having enforced full employment and capacity utilisation, the credit market must clear (Walras’ postulate, again).
The failure of Austrian mythology is that it has only the most rudimentary conception of the mechanics of clearing failure in private markets. Clearing failure is not a sideshow – absent active sovereign intervention to enforce labour and goods market clearing, they are the main show in any economy where private debt obligations are enforceable and most production is not for the personal consumption of the producer.
– Jake
> What can affect clearing is that the sovereign enforces clearing of the goods and labour markets – which it can always do, since it is definitionally solvent.
I’m not sure what you’re saying here. If the seller is trying to sell a unit of good X and can’t find a bid, then the market will not clear.
Are you saying that the sovereign could just buy the thing and give it to the seller? How does that fix the problem? Won’t the seller try to sell it again?
Or are you saying that the sovereign can sieze the good and take it away? Hard to see how the seller is better off from this.
Or are you saying that the sovereign can buy the good and give is away? How is this “clearing” good? Why wouldn’t this just lead to the production of more goods that the _sovereign_ is willing to take [rather than what market actors want]?
So my question is, if you recognize a fixed currency contributes to Europe’s troubles, then why do you advocate for the return to the gold standard in the US?
European countries are not in trouble because they can’t print their own money. They are in trouble because they borrow and spend more than they can pay back through taxation.
If the solution to country governments being in financial trouble is for them to be able to print their own money, then by that logic, every state, and every city, and every individual ought to be able to print their own money too. Of course when that happens, nobody will accept printed money anymore.
Major, with all due respect, I think you need to do a little research on trade accounting. Not every country can run a trade surplus. It’s mathematically not possible. So someone has to run a trade deficit and that deficit must be financed. Simplistically, those deficits are kept in check by floating currencies, but when you no longer have a floating currency, it gets really, really, really, really, really hard to adjust the external balance when capital leaves the (a la Spain).
So when you say ‘They are in trouble because they borrow and spend more than they can pay back through taxation’ you really, really, really are missing many pieces of the puzzle.
Not every country can run a trade surplus. It’s mathematically not possible.
I didn’t say that everyone had to run a trade surplus at the same time. I said if every individual simply tried to print and spend their own money, then nobody would accept paper money anymore.
You need to stop imagining real life people to be the same worn out and constantly beaten straw man that MMTers have in mind when “defending” their worldview.
Yes, the only way that monopoly counterfeiting would work would be if the counterfeiter printed and spent money (deficit) on others. My argument is that if it is true that “monetary sovereignty” was the proper solution for countries in fiscal trouble, then surely that same logic would hold true for all levels. If it can’t hold for all levels, then obviously there is something wrong with the logic in your claim that the solution is monetary sovereignty.
So someone has to run a trade deficit and that deficit must be financed.
To say that the monopoly counterfeiter needs to run a deficit with others is just saying that exploiters need exploitees if exploitation is to “work.”
Simplistically, those deficits are kept in check by floating currencies, but when you no longer have a floating currency, it gets really, really, really, really, really hard to adjust the external balance when capital leaves the (a la Spain).
So let’s call for floating currencies down to the individual level. That will keep every individual in check by every other individual.
So when you say ‘They are in trouble because they borrow and spend more than they can pay back through taxation’ you really, really, really are missing many pieces of the puzzle.
Like what? There are only three ways governments can acquire money. Taxation, borrowing, or if they are a sovereign currency issuer, inflation. In Greece’s case, they can’t print money, so they can only tax and borrow. Since Greece cannot pay back its debts, it necessarily means that they borrowed and spent too much relative to their taxation. There is no other possibility.
I think your problem is that you’re too busy attackign straw men and repeating the same MMT mantras over and over, rather than actually considering what is being said.
“So let’s call for floating currencies down to the individual level. That will keep every individual in check by every other individual.”
You are kinda right! As Hyman Minsky quipped, ““Anyone can create money — the problem is getting it accepted”. Yyou can get your liability accepted if you can credibly promise to deliver on it in the future – ultimately, in real terms. Which is why there do exist “money things” issued by big retail chains, for example. Or IOUs of rich people. These are all “money things”, differing only by the level of their liquidity (acceptance.)
See this:
http://www.levyinstitute.org/pubs/wp_656.pdf
http://www.youtube.com/watch?v=7GSXbgfKFWg
Might wanna hang on to that one.
I didn’t say that everyone had to run a trade surplus at the same time.
What you said was that the problem in the Eurozone is that some countries spend more than they earn.
A country spending more than it earns is running a current accounts deficit. Note, by the way, that the sovereign deficit is neither here nor there – when the country as a whole runs a CA deficit, it does not matter whether the government runs a surplus or a deficit, because government is only one sector in the economy. The private sector is perfectly capable of wrecking the foreign balance on its own, even against substantial government surpluses (see, e.g. Spain, Ireland and Iceland).
If the solution to that problem is for every country to spend less than it earns, then every country must run a current accounts surplus. That is of course mathematically impossible, and therefore not a solution.
Thus, the solution must be that every country runs precisely balanced current accounts (since CA deficits are unsustainable and universal CA surpluses impossible).
There are three ways to enforce balanced foreign accounts: One is to forcibly redistribute current accounts surpluses back into to the polities running CA deficits. This is how municipal current accounts are balanced (and why we do not bother tracking them) in countries where the state functions as market maker, lender, investor and employer of last resort.
The other is for the surplus polities to voluntarily recycle their surpluses into deficit polities through foreign direct investment. That is how the foreign accounts were balanced under the Bretton Woods system, where the US, as the largest CA surplus country, took upon itself the role of investor of last resort on a global scale. The Bretton Woods system collapsed because the US went from being a CA surplus to a CA deficit country, and the new CA surplus countries did not take on the role of investor of last resort. At which point the whole edifice became unstable.
The third possibility is for each polity which is able and willing to forcibly redistribute internal CA surpluses to have floating exchange rates with each other polity similarly able and willing to secure internal balance. Floating exchange rates enforce balanced current accounts through ordinary market clearing, except in the face of sufficiently large supply-side shocks that no power short of supranational intervention can enforce clearing.
The European problem is that the Eurozone countries have signed away their right to float their exchange rates without obtaining a guarantee that the federal level will force the internal CA surplus countries to either eliminate their surpluses or recycle them as foreign direct investment.
Fiscal policy has nothing to do with it, except insofar as the prohibition against unconstrained fiscal intervention to secure full employment is deepening the crisis.
– Jake
European countries are not in trouble because they can’t print their own money. They are in trouble because they borrow and spend more than they can pay back through taxation.
European countries are in trouble because they have committed themselves to a currency system where there is no investor, employer, market maker and lender of last resort.
All economies substantially removed from primitive barter need all those things in order to balance savings and investment on an ongoing basis, because the possibility of hoarding credit instruments instead of productive capital means that these do not balance of their own accord.
If the solution to country governments being in financial trouble is for them to be able to print their own money, then by that logic, every state, and every city, and every individual ought to be able to print their own money too.
But it isn’t. The solution is to have an investor, employer, market maker and lender of last resort. You only need one of those. And since the federal government does not want to be the entity that does it, the state governments have to be able to. Which means that they have to be able to print their own money. But there is nothing magical about the state governments in this respect – the state government can be taken in by the “sound money” fallacy just as much as the federal level, at which point the function would have to – of necessity – devolve to the local or municipal level if you were to avoid a crisis.
There incidentally is a precedent for this last step happening. Look up the Wörgl experiment sometime. (Which also, not coincidentally, demonstrates that freely competing currencies within the same jurisdiction does not lead to the emergence of a gold standard regime – quite the contrary: The gold standard is a highly anomaleous coincidence of the circumstances of the early colonial period and highly unlikely to evolve in any other environment, absent active coercion by creditor interests concerned with promoting the sound money fallacy.)
– Jake
Iceland, unfortunately gave up its monetary sovereignty when it borrowed in a currency it did not have the ability to issue to fund government spending.
Understood. But how much did they have to borrow to lose their their monetary sovereignty? Or was is a gradual transition?
It’s neither. The debt issued in your own currency under flexible fx is that debt for which you are monetarily sovereign. The debt issued in any other currency is the debt for which you are not monetarily sovereign. So, issuing 1 currency unit of debt in another currency removes your sovereignty for that debt. There is an issue with regard to the economic significance, which would be a spectrum or gradual, which would seem to be obvious.
Scott Fullwiler wrote:
So, issuing 1 currency unit of debt in another currency removes your sovereignty for that debt. There is an issue with regard to the economic significance, which would be a spectrum or gradual, which would seem to be obvious.
Scott (if I may) let me clarify where I’m coming from. A while ago Krugman wrote a mild critique of MMT, and James Galbraith responded saying something like, “Paul, please explain to me how the sovereign issuer of a currency can ever be in a position to not pay off its debts.”
So at the time, I filed that away as JG saying modern issuers of fiat money are never debt constrained.
But of course, the more nuanced position is to say that it’s not enough to issue fiat currency, you also have to make sure your liabilities are only denominated in that same currency.
This didn’t apply to Iceland. So if an Icelandic Krugman had warned about debt issues in 2004, and an Icelandic Galbraithian had pooh poohed those concerns, then the Krugmanite would have been right.
So, if MMTers think Galbraith was right when talking about the US, then it must be because the Fed has relatively few liabilities denominated in other currencies. I’m asking what the cutoff is. For example, does the ECB (which now has USD liabilities) count?
“an Icelandic Galbraithian had pooh poohed those concerns”
This doesn’t sound like an Icelandic Galbraith
“I’m asking what the cutoff is”
This cutoff question is really odd to me…
“For example, does the ECB (which now has USD liabilities) count?”
I’m curiuos, do you currently consider the ECB the fiscal agent in the EU?
Bob,
I just explained that the concept of a “cutoff’ makes little sense except in terms of economic significance. That is, would defaulting on the portion of the outstanding debt that is not issued in the currency you issue have significant repercussions? It seems rather clear that this is an empirical, rather than a theoretical, point. I can’t imagine that any debt the US govt or the Fed might be holding (if any) is economically significant in the sens of mattering for the overall economy if it were defaulted upon.
Another point is that even before you get to default, there’s the problem of the bond mkt vigilantes, at least when it’s in a currency you don’t issue at flexible fx. Greece hasn’t defaulted yet (to my knowledge), but their debt in a currency they don’t issue already matters as there is a vicious cycle of rising rates on businesses and consumers, and increased debt service costs to the govt that just trigger more cuts in the credit rating and higher debt service.
But, again, for a nation with both types of debt, the “cutoff” is an empirical issue that depends on the economic effects of defaulting on that debt or mkts rejecting that debt even before default.
Again, we’ve always explained there’s no hard and fast theoretical “trigger,”, which is why we’ve always said it is best not to issue debt in another currency ever in the first place if you have the choice.
Best,
Scott
Good point. These phenomena are never linear. I guess trouble starts when interests on foreign debt keep growing as a percentage of GDP and devaluing the currency only aggravates thing.
The market figures it out eventually. How long did it take Argentina? Russia? I’m not saying a country that issues in non local currency will always go bust. I’m just they are at much higher risk of it happening.
AP Lerner wrote:
How does this create a USD denominated liability for the ECB? The ECB sells Euro’s, and then buys USD, right?
Right, but the price might be prohibitive. Originally the ECB gives euros to the Fed as collateral for a loan of USD. Then the ECB lends the USD to European financial institutions, which might default on the loans. Then the ECB has to go into the market to get more USD to pay back the Fed. If the euro happens to have crashed against the dollar in the meantime, then the ECB will be like Icelandic banks.
I can’t believe I am able to truthfully say: “AP, please see Scott Fullwiler’s comment above; he agrees with me on this point.” !!
“Right, and then the ECB lends the USD to European financial institutions”
Right. Agreed. I thought you were saying that the ‘ European Central Bank itself currently has dollar-denominated liabilities, on account of its swap lines’ you were saying the actual swap itself created the liability.
But yes, I agree, when the “ECB lends the USD to European financial institutions” this creates credit risk on the ECB’s balance sheet. Agreed.
I’m sure I misinterpreted you along the way. Apologies.
I thought you were saying the swap with the Fed created the liability, in case that was not clear….
AP Lerner wrote:
I thought you were saying the swap with the Fed created the liability, in case that was not clear….
Right, it does. The ECB and the Fed swap dollars for euros, and then they have to give them back in 3 months (or whatever). So the swap itself creates the liabilities. Technically the Fed has a liability too, of owing a certain number of euros to the ECB when the swap contract expires.
But the reason the ECB is more vulnerable, is that the whole point of getting the swap was to then lend out the USD to other institutions, which might not give the USD back. I don’t know what the Fed did with the euros it got, but in principle they could have stored them in a piggy bank.
No Mr. Murphy, you’re not correct on this one, I am certain. My original suspicion was correct..I’m not sure you fully understand the mechanics of an FX swap.
‘The ECB and the Fed swap dollars for Euros and then they have to give them back in 3 months (or whatever).’
So think about this for a moment. Are you saying when the ECB creates Euro’s and buys Italian bonds, it assumes Italy’s obligations? Of course not. It marks the newly created Euros as a liability, and the Italian bond as an ASSET. Same thing for an FX swap. The ECB creates Euros. This is a liability on the ECB’s balance sheet. The ECB then buys USD, marked as an asset. Here is the accounting for the ECB: liability side higher by the Euro’s created. Assets higher with USD just purchased. No non Euro liabilities created thus far on the ECB’s balance sheet. The fact they are going to unwind this 3 months later is irrelevant at this point, even if the Euro collapses since the ECB is giving back the same exact dollars (at this point, we assume they have not been leant out), and the ECB could care less the Euro just collapsed since they can create an unlimited amount of them.
Thus far, no USD has been leant to financial institutions. At which point during this process did the ECB create a non Euro denominated liability?
‘Technically the Fed has a liability too’
Yes, it’s liability is USD. The Fed creates USD, then buys Euro’s. When the Fed buys treasuries, do the treasuries end up on the liability side of the balance sheet? Of course not. They are assets. Is the Fed exposed to a Euro denominated asset depreciating? Sure (this is why MMT’ers disagree with the swaps, as Mr. Fullwiler points out). Just like it is exposed to treasuries or any of the other crap assets it holds depreciating, but this is very, very, very different from saying the Fed has a non USD denominated liability. It does not.
See here: http://www.federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm
From that link: ‘The foreign currency that the Federal Reserve acquires is an asset on the Federal Reserves balance sheet’
The Fed’s risk is a depreciating asset, NOT meeting a liability in a currency it cannot create.
Even if you do not want to believe my example above, this is pretty clear. Unless you are saying to believe the Fed, and the rest of the financial world, are guilty of fraudulent accounting out in the open for the world to see.
‘that the whole point of getting the swap was to lend out the USD to other institutions, which might not give the USD back’
Correct. NOW the ECB is exposed to not only credit risk, but currency risk as well. But not until this very moment; the transaction w/ the Fed did NOT create a dollar denominated liability like you said above. It’s the transaction with the financial institution that creates the USD liability, NOT the transaction with the Fed.
Again: The Fed’s risk is a depreciating asset, NOT meeting a liability in a currency it cannot create.
Hope that was more clear. Admittedly, this may not be a fair debate since I’ve traded swaps for entirely too long.
AP, I can’t tell if you and I are having a disagreement over semantics or something more serious. Yes or no: Because the ECB enters into a swap agreement with the Fed, the ECB is contractually obligated at the termination of the swap to give a certain number of USD to the Fed. If you agree, then I am calling that a liability denominated in USD. In particular, if the day of the expiration the ECB doesn’t have those dollars, then it is in trouble.
The reason the lending of the USDs to European commercial banks is relevant, is that this explains why the ECB might not have the dollars anymore (i.e. those banks default). I have the opposite interpretation from you: The ECB loans to the European banks represent dollar-denominated assets to the ECB, not liabilities. I.e. somebody owes them dollars. But if the private banks default, then the ECB’s dollar-denominated assets disappear, leaving them exposed with their dollar-denominated liability to the Fed.
It’s more serious!
You do agree assets = liabilities + capital, right? And this must always hold, right? If you disagree, then I guess we have nothing further to discuss!
Let’s look at the impact on the ECB’s and the Feds balance sheet, line by line: :
1) initial swap. So ECB creates Euro, buys USD. Liabilities marked up with Euro reserves, assets marked up with USD by the same value. Ok?
From the Fed’s perspective, create USD, buy Euro. Liabilities are marked up the creation of new USD reserves, and assets marked up by the new Euros.
If you disagree with this, then please explain how the creation of new Euros and the purchase of new USD creates just liabilities and no other accounts on the balance sheet are impacted? Are you saying the capital account needs to be adjusted as well?
2) ECB buys asset from financial institution. Buy USD asset (loan) from financial institution, sell USD from balance sheet. So the asset side is marked down by the amount of the asset value, and the asset side is then marked up by the loan made to the financial institution. To adjustments to the asset side, ok? Assets still equal liabilities + capital, right? Do liabilities or capital need adjusting? I don’t think so. No adjustment to the Feds balance sheet from this, right?
3) Financial institution defaults. The ECB then writes down the loan to the financial institution, for simplicity, to zero. And capital is reduced by the same amount, ok? Our accounting is in still in balance, right?
4) The swap matures. The ECB has zero USD to sell back to the Fed. So the Fed marks down the Euro asset to zero, and marks down capital accordingly. Right? No adjustment to any other accounts, right?
This is accounting 101 and generally agreed upon by most. If my accounting is wrong, please correct where.
“leaving them exposed with their dollar-denominated liability to the Fed.”
No. leaving the Fed with an impaired Euro denominated asset.
AP wrote:
Murphy said: “leaving them exposed with their dollar-denominated liability to the Fed.”
No. leaving the Fed with an impaired Euro denominated asset.
AP, this is crazy. I can’t believe we are disagreeing over this.
You agree with me that on (say) December 1, 2011, the ECB could be contractually obligated (because of a swap contract it entered into 3 months earlier) to hand the Fed $100,000, and the Fed could be obligated to hand the ECB (say) 80,000 euros. But the ECB says, “Oops sorry, we don’t have any USD.”
I want to say the ECB just defaulted on its dollar-liability to the Fed. It was supposed to give the Fed 100,000 dollars, and now isn’t.
You are going to instead classify that situation by saying the Fed’s euro-denominated asset went to zero?
Accountemterics??? Where does, oh say, valuation come into play?
AP,
OK let’s defuse this argument (I hope). I think I have put my finger on exactly what you are doing wrong (in my opinion).
From the Fed link you provided it says:
At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first.
Nowhere in the analysis have you accounted for this binding agreement. In “step one,” you treat the creation of assets and liabilities in the exact same way you would, if the Fed and ECB were just buying outright some of each other’s currency, without having a binding contract to unwind. (Right? That’s important, so think through what I just said.) So you are acting as if the presence of the binding contract makes no difference in the nature of the relationship, when clearly that can’t be the case.
So yes, I agree with all the points you outline on the initial transaction, except I want you to add some more: When the Fed enters the swap, I agree with you that it gains euro assets and USD liabilities. But, it also gains a dollar-denominated asset (the ECB’s promise to pay it dollars in 3 months) and a euro-denominated liability (the Fed’s obligation to pay the ECB euros in 3 months).
I don’t know how the central banks actually do the accounting on these things. Maybe you are right, but that would just tell me they are doing it wrong. (After all, the Fed doesn’t value gold at market prices, and they are willing to put in “negative liabilities” in their account with the Treasury.) The Fed site you link doesn’t explicitly say “liability,” but it does say this:
The foreign central bank remains obligated to return the dollars to the Federal Reserve under the terms of the agreement…
So what can it mean to say the ECB “remains obligated to return the dollars to the Fed” besides saying the ECB has a dollar-denominated liability?
Last point, just to show you I am reasonable: I re-read Scott Fullwiler’s post, and I now agree with you that he is taking your interpretation. I.e. I withdraw my claim that on this narrow dispute we are having, Scott is on my side. I agree he is on your side. So, now I disagree with both of you. 🙂
You are both missing some context to this argument. Which is that the reason the European banks in question need dollars – and the reason the Fed cares – is that they lend to American firms.
Over the past thirty years, Wall Street has increasingly been moving away from lending to actual productive investment, in favour of daytrading and Ponzi scams. In other words, European banks are doing the job American banks should be doing, and the Fed therefore wants to provide them with the liquidity they need to continue doing it.
Is this a sensible scheme? No. Certainly not. But while there is plenty of blame to go around, the Fed swaps are actually quite sensible, in the context of thirty years of right-wing mismanagement of the global and national macroeconomy.
What the Fed should have done (assuming that it did not wish to forcibly relocate a great many Wall Street banks to Las Vegas, where they more properly belong) was to demand that the European banks in question create US-based subsidiaries, which should be independently capitalised and subject to US regulations. The Fed could then have provided liquidity for them without using the ECBuBa as a go-between. But that would have required intrusive and heavy-handed regulation of domestic US banking operations, which the Fed – gripped as it was by a cultish deregulation mania – did not want.
What the ECBuBa should have done, given that the Fed and SEC were not doing their jobs, was to sell €-Mark and buy US$ in the open market, in order to have sufficient hard currency reserves that it could function as lender of last resort in a situation such as this. But that would have caused the €-Mark to (temporarily) depreciate against the US$, and the ECBuBa – gripped as it was by a cultish “sound money” mania – did not want that.
And now it’s ten years too late to do either of those things, so the Fed has to launder liquidity provision to American companies through the Eurosystem, at least until the immediate panic subsides.
– Jake
Just for my own piece of mind, do you disagree w/ assets=liabilities + capital, or how i accounted for the transaction? If you disagree w/ A=L+C thats fine (and wrong) but if you disagree w/ how the transaction is accounted for, correct me. Saying “I don’t know why you’re wrong I just know you are” does not seem like a great response.
By your logic, since the market is not obligated to pay you back cost or better for an asset, then you account for the mark to market loss as a liability. It’s not. It’s an impaired asset.
“Last point, just to show you I am reasonable: I re-read Scott Fullwiler’s post, and I now agree with you that he is taking your interpretation. I.e. I withdraw my claim that on this narrow dispute we are having, Scott is on my side. I agree he is on your side.! So, now I disagree with both of you.”
You disagree w/ me, Scott, and the laws of accounting.
AP Lerner wrote:
Just for my own piece of mind, do you disagree w/ assets=liabilities + capital, or how i accounted for the transaction?
AP, I know we trade witty barbs on this blog, but let’s be serious for a minute. Notwithstanding David S.’s suggestions, I actually do have a PhD in economics. I’m not challenging the laws of accounting.
I specifically said that I disagree with you how are handling the transaction. I said (a) I agree with your treatment of the initial purchase of the currencies by each party but (b) I asked you where you are handling the “binding obligation” that the swap contract puts on both parties, even at the initial stage. You haven’t accounted for that in the first stage.
AP Lerner, I have to admit I am with Mr. Murphy here. I cannot see a material difference between the Fed having to write down its USD-denominated asset due to ECB not being able to meet the payment and saying that ECB default on the payment. And vice versa with Euro-denominated asset and the Fed defaulting on its obligation to pay ECB. These might have different names but the underlying process that occurs is the same, no?
” I actually do have a PhD in economics. ”
You really playing that card? Well, Krugman has a Nobel….he wins. Keynsians rule 🙂
“the “binding obligation” that the swap contract puts on both parties,”
And as I illustrated, it’s captured as an asset impairment. What is really baffling to me about this thread is you are so insistent your conclusion is correct, even though you openly admit ‘I don’t know how the central banks actually do the accounting on these things”
Aren’t you suppose to look at evidence/ facts before drawing conclusions, not the other way around? I guess the conclusion ‘the US really does have non USD liabilities’ fits the Murphy Twin Spin of higher rates and the US going bankrupt….
“And as I illustrated, it’s captured as an asset impairment. “
AP, I asked above already but I’ll ask again – how is that materially different from default? You could also say that when a sovereign defaults on its debt, the holders of debt just “write down” their assets (the bonds). No?
(And I don’t think Mr. Murphy was playing the credentials card, just saying that he has enough qualifications to understand the accounting you were describing.)
@ AP
To move the discussion to the new thread (the other one is already quite hard to follow anyway):
So a country is financially sovereign if it issues the world’s reserve currency and like you mentioned in case of Japan if they have big enough trade surpluses with the US so they don’t need to borrow foreign currency to maintain foreign trade.
That still doesn’t answer what the other countries are supposed to do? You are for sure not recommending they should all strive to have big trade surpluses with the US, or are you? Should they go for barter contracts with other countries? Also that would mean countries are forced to never turn around their trade surplus into a lasting significant trade deficit with the US.
And do you really think the privilege the US enjoys is granted for all times? More specifically do you think if the US government follows MMT conform policies there never would be an incentive/opportunity for other countries to drop the USD and switch to something else?
“So a country is financially sovereign if it issues the world’s reserve currency”
Not limited to reserve currency. Any issuer with a floating currency and all liabilities in that currency. This also includes UK, Australia, etc.
“Japan if they have big enough trade surpluses with the US so they don’t need to borrow foreign currency to maintain foreign trade”
Japan never needs to borrow USD to maintain any size trade deficit/surplus. Just like the UK, Australia, etc. Many countries run trade deficits with the US and still maintain monetary sovereignty.
“You are for sure not recommending they should all strive to have big trade surpluses with the US”
No.
“And do you really think the privilege the US enjoys is granted for all times?”
What privilege? Reserve currency status is not a privilege. More of a curse given the complete misunderstanding of monetary operations by our thoughtless and leaders and the economists they rely on for advice.
“More specifically do you think if the US government follows MMT conform policies”
They already do, just don’t know it. MMT is a description, not a policy.
“there never would be an incentive/opportunity for other countries to drop the USD and switch to something else?”
So what? Australia’s doing just fine. As is Canada.
I guess I’ll need to do some research on that topic. Thanks for the answer.
Check out the mandatory readings here:
http://moslereconomics.com/
Cheers!
> But concepts like crowding out and the money multiplier are no longer relevant for monetary sovereign nations. Those myths need to shelved and stored next to the gold standard when discussing US monetary operations.
Isn’t crowding in nominal terms still possible when the government issues bonds? [not talking about cash drops] If I’m looking for return and the two options are (1) a government bond which pays 10 percent or (2) a corporate bond which pays 10 percent, and I choose to buy the government bond, then why did the government bond not “crowd out” the corporate?
I think the Keynesian “crowding out does not happen” only applies to what they call “liquidity traps.” The analysis _starts_ with the premise that I’m trying to stay away from corporate bonds [want liquidity]. I will be happy to hold cash or government bonds. The government bonds I buy did not crowd out corporates because I would not have bought the corporates anyway.
I think money multipliers are also relevant for some monetary sovereign nations [not US]. In the US, banks have ducked out of reserve requirements by using sweep accounts. However, this is a fairly recent development. These were not used in 1971 [also not sure if the Fed set _any_ short term rates back then. Didn’t they attempt quantity control for a while?]. China is one example of a monetary sovereign nation which enforces reserve requirements. They have been raising these requirements in an attempt to control rising prices. In a country like that, we can expect an increase in bank reserves to have a multiplied impact on the money supply.
When MMTers say financial crowding out does not take place because of government deficits they mean the money used to buy government bonds comes from the deficit spending, so it can’t really raise interest rates. And if the government didn’t offset its deficit selling bonds, then the funds rate would drop to 0, so government borrowing prevents the rate from falling instead of raising it.
The money multiplier does not apply even with reserve requirements which are just a tax on banks, they raise the price of funds but does not limit the quantity of loans a bank can issue.
I think the money used to buy government bonds comes from either private accounts [when private individuals buy] or out of thin air [when the Fed buys].
The claim that money used to buy a bond “comes from” deficit spending is just MMT confusion. It stems from not understanding private cash balances and a lumping together of both Fed and Treasury operations [an arrangement which MMTers would *like to* institutionalize] as “government operations.”
If you trace through the actual _economic_ analysis, you would see that the relation here is not between what actors call themselves [“government vs private”] or what we would like to call them. It’s between what debts the Fed will buy and the issuer of that debt. For example, if the Fed bought GM bonds as part of its open market operations, then you could extend this confusion to also include GM. You would think of private money used to buy GM bonds as “coming from” GM spending.
Why are reserve requirements merely a “tax”? Are you sure you’re thinking about it correctly? You need to see the geometric series to get the multiplier idea.
The money to buy government bonds is in the hands of the private sector, but comes from deficit spending.
So the money left after selling of government bonds to buy anything else, is the same as if there was no deficit and no government bonds were sold.
As long as the CB accommodates the needs for reserves of the banking system, banks are constrained by capital and not by reserves. Reserve requirements are part of the cost of funds for banks.
> As long as the CB accommodates the needs for reserves of the banking system, banks are constrained by capital and not by reserves. Reserve requirements are part of the cost of funds for banks.
I’m not sure I understand. Are you saying that in a system with reserve requirements, in addition to the money multiplier, there is new money added whenever the CB bails out a bank?
When they do this to bail out depositors [something the FDIC does in the US], they’re just topping off people’s accounts. They do not add more than the multiplier implied amounts.
A system where they “accommodate” the need for reserves is not a reserve requirement system. The only “accommodation” is bank deposit backing during runs.
No, accommodating is providing reserves automatically as needed at some price (above the overnight rate) be it a loan, a repo or an overdraft.
This is a joke, right?
Please re-read my post. It simply says that what you describe is not a _reserve requirement system_.
I’m not saying that what you describe does not happen in the US.
I’m saying that what you describe is not X and X may be what happens in China. [Not sure about this. They recently increased reserve ratios recently in an attempt to stem rising prices.]
Firstly, the post keynesian view is that the money supply is endogenous and the central bank has no choice but to accommodate the demand for reserves (i.e. it cannot target a quantity). I mentioned this in another thread, not sure if you responded.
Accommodating simply refers to the central banks behaviour of supply the necessary amount of reserves demanded by the system in order to maintain the central bank’s target rate. Numerous central banks will describe their behaviour as such, a good example is the Reserve Bank of Australia.
This accommodating behaviour occurs on a daily basis. Again, the RBA provides a number of example examples of this in practice.
>A system where they “accommodate” the need for reserves is not a reserve requirement system.
Well perhaps you should look at how the FED actually operates. The reserve requirements as accounted for on a lagged basis, where a specific number of bank liabilities are measured in a two week period, and the average of that amount is required to be held as reserves (some ratio of the average) in the next period. The FED will provide the necessary amount of reserves.
> I mentioned this in another thread, not sure if you responded.
I did not respond to one because Bob locked the post. Not sure if this is the one you mean.
Yes, when the Fed buys govt bonds MMT treats it for all intents and purposes an intergovernmental transaction. It is like a husband owing money to his wife.
When the private sector purchases bonds, they can do so only with either cash or reserves, both of which come from the consolidated govt sector. there is no “MMT confusion” about that.
I should add that additional source of funds for purchase of govt bonds is lending by the CB (in which case the non-govt sector buys bonds with money it borrows from the govt sector).
> When the private sector purchases bonds, they can do so only with either cash or reserves, both of which come from the consolidated govt sector. there is no “MMT confusion” about that.
Sorry, by confusion, I mean the claim that the money to buy government bonds “comes from” the government spending. IMHO, that’s a misunderstanding of what’s actually going on.
Secret Agent had a great comment a while back in which he described the analysis in terms of water in a hose. The claim that “the money to buy a marginal bond unit comes from the spending done with that unit” is like saying the water that leaves the hose this period leaves because of the new water that is added.
This is simply not true. The hose can drain on its own, without water being added. Further, the mechanics of the hose don’t change just because someone “promises” to put a drop into the hose for every drop that comes out.
But it is exactly right that the water cannot be drained unless it is first put in. I’ve used the same analogy many times myself. Ultimately, every drop of water drained from the imagined tub must be first added to the tub (not necessarily in the same period, but over the lifetime, yes). Without govt spending/CB loans to the non-govt sector there’d be no money to pay taxes/buy bonds with.
> But it is exactly right that the water cannot be drained unless it is first put in… Without govt spending/CB loans to the non-govt sector there’d be no money to pay taxes/buy bonds with.
The initial money/water was not added by “govt spending” or CB loans. The initial money in the US was added in phases.
First, we went through a period where people bought CB notes voluntarily. They bought it with gold. They did so because (1) notes were easier to carry around, and (2) they had a reasonable belief that they could get their gold back. Another major phase occurred when FDR issued an executive order to turn in gold in exchange for a fixed ratio of CB notes.
Neither of these are “govt spending”or “CB loans.” They are asset exchanges. It’s the sort of thing that happens when the government sells a post office building. They give up ownership of the physical building. The private buyers lose ownership over the sale money.
I guess to map this to the hose, you need to imagine that the hose was filled with something else [assets] before the spending happened. The first asset exchanges involved “old filling draining out” and “water being added.”
We’re referring to financial assets here. So by definition there needs to be a matching liability.
Well, I’m saying that the notes these guys got when they made their sales are assets on their balance sheet. And they are liabilities on their balance sheet [as equity].
It is obvious that if the govt accepts only coins, notes and reserves in payment of taxes and bonds and those coins, notes and reserves can only be issued by the govt, then those coins, notes and reserves first need to be made available to the non-govt sector by the govt. When govt buys your gold it spends money on your gold just as it spend money on your labor if you’re a govt employee. Further, it does not promise to give you back your gold for the same amount of money or even give you your gold at all – the only thing it promises is to accept its own scrip as a payment of your taxes.
“The initial money in the US was added in phases. “
Need to be careful with the term “money” (I know I myself slip a lot in that.) That which pays taxes can only come from the govt itself in the current system. “Money things” denominated in the “money unit of account” can come from anybody and differ only in their liquidity.
If the govt promised to accept a fixed ratio of gold for your payment of taxes, then you’d have a point that that which pays taxes doesn’t have to come from the govt. But this is not the case in our current system.
> When govt buys your gold it spends money on your gold just as it spend money on your labor if you’re a govt employee….Further, it does not promise to give you back your gold for the same amount of money or even give you your gold at all – the only thing it promises is to accept its own scrip as a payment of your taxes.
i think you are confused here. This is not how US notes replaced gold [this is a matter of historical fact, right? Not whether we can squeeze reality into the MMT model].
I think the reason it is difficult to squeeze this into MMT terms is that it involves the transition from one money system to the next. This “government buying gold and promising not to return it,” is not what actually happened, but it’s the only explanation which “fits” the model.
“I think the reason it is difficult to squeeze this into MMT terms is that it involves the transition from one money system to the next”
Here you acknowledged that there happened a switch of the monetary system. I don’t see what I am supposedly “confused” about. Can you elaborate?
Sorry, I was contesting the explanation that USD notes first entered the system because the government “bought everyone’s gold.”
And the claim that people who turned in their gold “knew” that they would not get their gold back.
And the claim that “tax requirements” can be used to establish new money systems.
And the claim that the current money order was created [water was first added to the hose] due to government purchases or CB loans.
Woops! This should be
And the claim that “tax requirements” _were_ used to establish _the current_ money system.
marris, I replied below for readability
>The claim that money used to buy a bond “comes from” deficit spending is just MMT confusion. It stems from not understanding private cash balances and a lumping together of both Fed and Treasury operations [an arrangement which MMTers would *like to* institutionalize] as “government operations.”
A more nuanced statement is that the money used to buy government bonds is a liability of the consolidated governments balance sheet. The source for the private sector is either from treasury spending or a central bank loan. I don’t see what the issue is.
I find your claim that MMT doesn’t understand the balance sheet operations between various sectors of the economy to be baseless. A key methodology of Post Keynesians is the principle of double-entry book keeping and the need to ground analysis in a double book keeping framework. This is the basis for the stock-flow models. If you look through the literature (Lavoie, Fullwiler, Wray, Kelton (formerly Bell), etc.) you will find numerous examples of analysis of the various financial flows between various sectors.
I also fail to see how your example illustrates anything or has any relevance to what MMTers are saying. In your example, GM issues a bond and it is purchased by the FED. The FED credits the GM’s bank account. The banks liabilities increase by the amount of the deposit and its assets increase by the increase in its reserve account. So no, the private money used to buy GM bonds did not come from GM spending.
Reserve requirements reduce the profitability of the a bank, because the bank is required to hold an amount of its asset in the form of reserves. with little to no return (depending on institutional arrangements). There’s an obvious opportunity cost associated with this.
Man you’re a speed reader.
“Crowding out still happens in real terms”
This assumes banks are constrained by reserves, which they are not. Banks are constrained by capital, not reserves. I’m even close to having Mr. Murphy recognizing this (he’s almost there..I can feel it). I’ll outsource this one to the most under read economist alive today, since I’ve had this debate 1,000 times, and I’m tired.
http://bilbo.economicoutlook.net/blog/?p=9075
Man you’re a speed reader.
“Crowding out still happens in real terms”
This assumes banks are constrained by reserves, which they are not.
No, that argument does not assume banks are constrained by reserves. It assumes that real resources are scarce. It assumes that if ANYONE spends money on real goods, even if they printed it, that “crowds out” real resources away from those who are net productive agents as opposed to unproductive net consuming agents.
This is the case even if there is unemployment and idle resources.
Banks are constrained by capital, not reserves. I’m even close to having Mr. Murphy recognizing this (he’s almost there..I can feel it). I’ll outsource this one to the most under read economist alive today, since I’ve had this debate 1,000 times, and I’m tired.
Operationally, banks are capital constrained yes. They don’t have to worry about reserves because historically and intentional wise, the Fed always “tops up” the overnight market with fresh new reserves. So banks lend first, then the Fed ensures there are enough reserves.
But this does not mean that banks aren’t ULTIMATELY constrained by reserves. If the Fed stopped increasing reserves tomorrow, then at some point, as the banking system keeps expanding credit ex nihilo, individual banks will start to realize that even though the market values of their capitals are rising, the quantity of cash each of them has on hand is decreasing RELATIVE to withdrawals and transfer requests, which keep growing and growing as banks keep creating new deposits.
All this means that banks are ultimately constrained by reserves, despite the fact that banks managers never even consider their reserves because the Fed makes it so they don’t have to worry about them, which leads to banks setting constraints to lending on capital instead.
Banks are also ULTIMATELY constrained by oxygen too. If they run out of Oxygen, they won’t be able to lend. Of course, bank managers don’t worry about oxygen (or reserves) when they lend. They do worry about excess capital though.
Yes, banks are ultimately oxygen constrained (interesting analogy, it’s like you equate less inflation with choking to death), but nobody is denying that they are, the way AP Lerner is denying that banks are reserve constrained.
Banks will only ever be liquidity-constrained if the Fed stops defending the Fed funds rate while still enforcing liquidity requirements. And it won’t, so they aren’t.
I suppose that “banks are not liquidity constrained unless the Earth blows up, their central bank stops defending an interest rate target while still enforcing liquidity requirements, the government decides to shut them down, the little green men from Mars invade, or some other ten-sigma event happens that fundamentally alters institutional and operational reality in our economy” would be more correct than saying “banks are not liquidity constrained.”
But brevity has a virtue of its own.
– Jake
If the Fed stopped increasing reserves tomorrow, it would break the payment system and the whole thing would come crashing down. Reserves in modern banking system are like blood in your body – the volume of blood must expand to accommodate any growth – whether healthy or not. It does not make sense to treat obesity, for example, by denying blood to the body.
It was a thought experiment Peter D, to show how banks are ultimately reserve constrained. It wasn’t an advocacy.
If the Fed stopped increasing reserves tomorrow, it would break the payment system and the whole thing would come crashing down.
Can you be more specific?
How exactly will stopping an increase in reserves “break the payment system”?
Reserves in modern banking system are like blood in your body – the volume of blood must expand to accommodate any growth – whether healthy or not.
This is a commonly used, but fallacious, analogy to money.
The supply of money certainly does not need to expand to “accommodate” growth. A fixed supply of money can “accommodate” practically infinite growth. As more is produced, and as more people enter the workforce, wage rates and prices fall. This does not collapse profitability because selling, say, twice the goods for half the price, doesn’t decrease revenues.
It does not make sense to treat obesity, for example, by denying blood to the body.
Even using your analogy, the last time I checked, my body has a more or less constant supply of blood, and yet my body is able to do more and more over time as I gain physical and mental strength. The same principle is true for the supply of money vis a vis real supply.
“How exactly will stopping an increase in reserves “break the payment system”?”
What I mean is that if there are insufficient reserves in the system to meet the interbank settlement requirements, then even banks that expanded credit to truly creditworthy customers might not be able to meet their payment obligations. Since banks acquire reserves after the fact – they first lend and then seek reserves – if the Fed ultimately does not accommodate the system with enough reserves then it could break.
“The supply of money certainly does not need to expand to “accommodate” growth.”
I did not mean economic growth, I meant credit expansion. Or contraction (in which case the reserves int he system could shrink.)
Yes, with deflation a fixed money supply can accommodate any economic growth. But it seems like in the real world for whatever reasons – and Austrians have a whole list of those – either prices and wages are too sticky or deflation where occurs is usually too recessionary. Anyway, that was beside the point I was trying to make about the volume of reserves in the system accommodating rather than causing credit expasions.
What I mean is that if there are insufficient reserves in the system to meet the interbank settlement requirements, then even banks that expanded credit to truly creditworthy customers might not be able to meet their payment obligations.
And that means banks would have to reduce further credit expansion, correct?
When you say “even if borrowers are truly credit worthy” as if the mere ability to pay back a loan automatically entitles one to a loan. Yes, I know it’s easy to think that when credit is given out like candy these days, but it doesn’t make people more prosperous.
Since banks acquire reserves after the fact – they first lend and then seek reserves – if the Fed ultimately does not accommodate the system with enough reserves then it could break.
Banks can foresee this as they notice that the overnight market rate is increasing over time.
I did not mean economic growth, I meant credit expansion. Or contraction (in which case the reserves int he system could shrink.)
Oh, my mistake. Sorry.
So it looks as though you agree that without increasing reserves, banks will eventually no longer be able to expand credit any more. That’s really been my only point this whole time.
Yes, we agree. But we probably disagree about the consequences of controlling credit expansions with reserve requirements. In the current system, not in an anarcho-capitalist paradise, that is…
Anarcho-capitalist paradise?
It more or less existed for a generation prior to 1913.
It did exist in 17th century Holland.
I bet if we were speaking in the 1600s, you’d tell me that slave emancipation is “anarcho-capitalist paradise.”
Humans can choose change. We are not condemned to the status quo.
“Humans can choose change. We are not condemned to the status quo.”
Of course, and I was not commenting on desirability of such system. I am sure you might have your own good reasons as to why such systems did not survive and I might have mine. This is a little beyond the point. A move to anarcho-capitalist society would entail changes larger than imposing 100% reserves rule.
When you say “even if borrowers are truly credit worthy” as if the mere ability to pay back a loan automatically entitles one to a loan. Yes, I know it’s easy to think that when credit is given out like candy these days, but it doesn’t make people more prosperous.
The ability to pay back a loan means that it either goes towards an investment which has a positive risk-free rate of return after all expenses – which does, in fact, make people richer. Or it means that people wish to borrow in order to even out their lifetime consumption, which, given declining marginal utility of consumption, also makes people better off (albeit in a less tangible fashion).
– Jake
It more or less existed for a generation prior to 1913.
That is a severely revisionist version of history, unless you believe that having a major money market panic every twenty years is merely good fun for the whole family.
– Jake
An economy that does not grow in nominal terms is unstable to stochastic noise in its internal cash flows.
Bluntly put, deflation kills economies, and must be avoided at virtually any cost.
– Jake
Nominal money can stop bank runs, but it can also paper over structural problems in the economy [like the fact that we have too many resources going to a politically favored industry].
Now, if you’re political theory does not include economics, then you’re going the say that too many resources _can’t_ be going into favored industries. It was, after all, the outcome of the “political process.”
I think this is a bizarre view. Most people don’t vote so they can support one industry over another [the workers in the industries may, but this is usually a small part of the overall population]. In a fiat system, you will see more industries which can profit from future drops, hold a “disproportionate” share of political power. Patterns will emerge in which these groups “channel” drops toward themselves and use some of the dropped money to channel future drops.
Nominal money can stop bank runs, but it can also paper over structural problems in the economy
Lack of nominal money virtually ensures that the economy develops structural problems, because it favours unproductive banking over productive industry.
Now, if you’re political theory does not include economics, then you’re going the say that too many resources _can’t_ be going into favored industries. It was, after all, the outcome of the “political process.”
Economic considerations do not trump the democratic process, yes. That should hopefully not be controversial. The economy exists to provide for the wishes and needs of the people, not the other way around.
In a fiat system, you will see more industries which can profit from future drops, hold a “disproportionate” share of political power.
Different industries always hold different degrees of power.
Yes, I am unashamedly in favour of moderate (5-6 % pro annum) inflation, because it shifts power away from the banks and towards capital-intensive heavy and manufacturing industry. That is a policy preference. You may prefer favouring banksters over industrialists, but if you do so, you should come right out and say so. Not seek refuge in the special pleading that bankster-favouring policies are a state of nature.
Patterns will emerge in which these groups “channel” drops toward themselves and use some of the dropped money to channel future drops.
This is no different from a deflation-biased policy, except in the nature of the recipients. Deflation also creates “money drops,” it just drops the money on the people who have hoarded money instead of making productive investments that would contribute to society.
– Jake
I think the claim that if one payment did not flow, the whole system would break down is not true. Similarly for all the flows out of one institution. It would be painful to sort out, but not impossible.
Further, pretending that every flow will be guaranteed just increases the complexity and risk taking in the system. See Taleb on this. He analyzes it in probability terms.
marris, it is about the banking system being short of reserves in aggregate. This could have various consequences, but first, the Fed loses control over the Fed Funds Rate and it is bid up. Some banks will probably fail due to payment system failure, some banks then will reduce lending because their cost of fund would be too high – but this would be the wrong credit contraction, because to stay in business those banks would lend only to the more speculative enterprises that are willing to pay the higher interest rate that results from the banks’ cost of funds going up. Good productive lending would suffer first.
There is a good deal of discussion about these matters int he link that AP Lerner quotes above:
http://bilbo.economicoutlook.net/blog/?p=9075
> This could have various consequences, but first, the Fed loses control over the Fed Funds Rate and it is bid up. Some banks will probably fail due to payment system failure, some banks then will reduce lending because their cost of fund would be too high…
The more levered banks would certainly wipe out quickly. That is how risk gets removed from the system. I don’t think there would be a run on every bank, or even most banks. The idea that the whole system would collapse is just wishful thinking.
> this would be the wrong credit contraction, because to stay in business those banks would lend only to the more speculative enterprises that are willing to pay the higher interest rate that results from the banks’ cost of funds going up. Good productive lending would suffer first.
Why should this happen? When you feel cash flow strains, do you increase your lottery ticket purchases? Clearly banks would reduce lending until they can figure out what’s happening. But I don’t think they would respond this way.
I did not mean the system will collapse, I said it would break. Then enough banks don’t manage to make payments because they cannot acquire reserves I consider it a breakage. Depending on the number of banks this could create a total collapse, I guess. But integrity of system would be compromised.
“When you feel cash flow strains, do you increase your lottery ticket purchases?”
Well, it is all speculative and I cannot be sure I know what the banks will do to go around the lack of reserves. But they’d need to stay in business. And they’d need to continue to lend. And it is not unheard of banks going into more risky assets you squeeze them on the liability side.
Why should this happen? When you feel cash flow strains, do you increase your lottery ticket purchases?
You can only go bankrupt once – there is no such thing as “doubleplus insolvent.”
So when you are insolvent, it makes sense – from the perspective of maximising shareholder value (and your own annual performance bonus) to buy lottery tickets. Heads you win, tails you’re already insolvent.
See, e.g. the collapse of the S&Ls in the aftermath of the Reagan-Volker depression.
More fundamentally, however, the true cost of extending credit to a solvent borrower is zero. Any risk-free rate of return in excess of zero justifies credit expansion, so the risk-free nominal interest rate should be zero. Forcing the risk-free rate to go higher by holding a gun to the banks’ heads and demanding that they hoard US$, and then telling them that you won’t lend them US$ will force the risk-free interest rate above its natural rate of zero.
– Jake
Transfers between banks are irrelevant for the banking system.
As long as the CB accommodates the need for reserves of any bank that fulfils capital requirements, banks are ultimately constrained by capital, not by reserves.
Transfers between banks are irrelevant for the banking system.
As long as the CB accommodates the need for reserves of any bank that fulfils capital requirements, banks are ultimately constrained by capital, not by reserves.
Hahaha, you’re saying that as long as more reserves are introduced to back more credit expansion, banks are not reserve constrained.
That’s funny.
No, I am saying that under the current operational arrangement quantity of reserves are never a constraint.
Only because the Fed keeps increasing reserves, thus preventing the constraint from becoming visible.
Similar to how a prisoner is ultimately constrained by the guards’ guns, despite the fact that the prisoner is operationally constrained by the cell he is in and he doesn’t try to escape.
In other words, “under current arrangements” means “reserves keep increasing,” so you don’t see the reserve constraint visibly manifested.
There is no constraint, that’s why it’s not visible.
There is a constraint, which is why it does become visible when the reserves are actually constrained.
In other words under current arrangements, quantity of reserves is not a constraint.
In other words, “under current arrangements” means “reserves keep increasing,” so you don’t see the reserve constraint visibly manifested.
I bet you’ll tell me next that humans are not food and water constrained, as long as there is enough food and water consumption.
>If the Fed stopped increasing reserves tomorrow, then at some point, as the banking system keeps expanding credit ex nihilo, individual banks will start to realize that even though the market values of their capitals are rising, the quantity of cash each of them has on hand is decreasing RELATIVE to withdrawals and transfer requests, which keep growing and growing as banks keep creating new deposits.
If the FED stops increasing reserves, then the reserve balance of the private sector will vary based upon flows to and from the treasury. Furthermore, if the banking system finds itself with deficient reserves, furthermore because banks are interest rate inelastic, then the overnight rate will continue to be bid up, which will have a flow on to other rates and a crisis in the payment system.
So the actual process would be FED stops accommodating reserves, so it is targeting a quantity, the overnight rate is then the adjustment mechanism. The overnight rate becomes extremely volatile with implications for the rest of the economy. Of course, during the process banks will find ways to innovate and reduce 1. their reserve requirements 2. the need for reserves. On the latter we could imagine that deposit rates will continue to increase, and banks will provide various financial instruments to attract reserves. Other non-bank institutions will also arise providing credit.
anyway, the Post Keynesian view is that bank credit is endogenous regardless of the institutional arrangements.
You guys are making the same mistake Mr. Muphy does, and forgeting loans create additional deposits, not the other way around, andconfusing reserves and capital. Huge differance; not remotely the same!
Post keynesians(MMT being an offshoot) assume abundance and not scarcity, hence your premise of a crowding out of sorts is of course not accepted.
🙂 🙂 🙂
“Post keynesians(MMT being an offshoot) assume abundance and not scarcity, hence your premise of a crowding out of sorts is of course not accepted.”
This is not accurate. No MMT’er assumes abundance for scarce resources. None. Never. Crowding out in the loanable funds sense is non existent under monetarily sovereign nations, but misallocation of resources can and does occur. This is why most MMT’ers will tell you increasing the deficit via elimination of the dreadfully regressive, horrific FICA tax would be beneficial. However, for MMT’ers, it’s not about taxes or spending, it’s about a larger deficit which adds directly, dollar for dollar, to private sector savings. Allocation of the deficit is a policy decision…and the only policy I would advocate for is elimination of FICA
MMTers differentiate between self inflicted constraints by the government on itself (such as a legal reserve requirement) and the unconstrained wonder of an unconstrained government. To explain their basic concepts,
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:
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.
Similarly, the government has foolishly imposed a “special” restriction on my ability to issue my own unbacked currency thereby constraining my ability to purchase $10 million mansions.
You can issue your own currency. Several towns in the US already do. But you can’t pay your taxes to the federal govt with your currency. So, whether you are allowed to issue currency or not isn’t the point–the point is being in a position to impose a tax liability on others and thus being able to name the thing that will settle this liability.
So, whether you are allowed to issue currency or not isn’t the point–the point is being in a position to impose a tax liability on others and thus being able to name the thing that will settle this liability.
Isn’t it the case that the government will enforce private contracts ultimately in US dollars only as well, even if the contract is a trade of gold for a computer, and one party reneges?
Depends on if plaintiff seek damages or specific performance.
Ordinarily, a breach of contract is remedied by the payment of money damages equal to the expected value of the contract. However for unique contracts (typically, tor land sales but a gold for computer barter contract certainly qualifies as unique), the judge can order the defendant to perform his end of the bargain.
This is similar to other countries, in Australia for instance the RBA notes that:
“It is the Reserve Bank of Australia’s understanding that, although Australian currency has legal tender status, it does not necessarily have to be used in transactions and that refusal to accept payment in legal tender banknotes and coins is not unlawful. This is the case even where an existing debt is involved. However, a refusal to accept legal tender in payment of an existing debt, where no other means of payment/settlement has been specified in advance, conceivably could have consequences in legal proceedings, i.e. the creditor may be unable to enforce payment in any other form.”
Source: http://www.rba.gov.au/banknotes/legal-framework/
Bob, if you can find people to accept your IOU, then you can purchase $10 million mansions, sure. Who’s stopping you?
Bob doesn’t have enough guns.
You don’t need guns to make people accept your IOUs. Airlines don’t have guns but you accept their frequent miles programs. Bob made it sound as he could issue $10 million of IOUs if only the govt wouldn’t prevent him. What prevents him is that his IOUs are not as desirable.
“What prevents him is that his IOUs are not as desirable.”
Correct. What makes USD’s desireable is we all have the same liability denominated in USD: taxes.
Peter D,
I am confused. To refute Daniel’s point, you say people do find IOUS’s like airline miles desirable, and not because airlines put a gun to their head. Likewise, then, anyone (Roddis) can sell IOUs for mansions if people find their IOU’s desirable.
But, MMTers, (like AP Lerner above) say that FRNs (IOUs) are valuable because governments put a gun to people’s head; people have to have them to pay taxes. In fact, based on what I have read, MMTers maintain that is the only way money (IOU’s) can be made valuable.
But, if airlines and Roddises can make their ‘IOU’s’ desirable without putting a gun to anyone else’s head, why do governments have to?
And, if you show that we do need the government putting a gun to someone’s head to make FRN’s valuable, then how can you say the Roddises, like airlines, are free to compete with them, they just don’t need guns to do so?
Because governments have to be able to pursue unconstrained fiscal intervention in order to ensure clearing in the private markets.
Airlines cannot issue unlimited volumes of frequent flier miles, and therefore cannot decisively check clearing failures in the money markets. Governments can, because governments are solvent by fiat rather than by balance sheet.
– Jake
> Because governments have to be able to pursue unconstrained fiscal intervention in order to ensure clearing in the private markets.
Oh. Kind of a “beatings will continue until moral improves” thing?
BTW, I am offering to sell a pen for one million dollars. Please clear my market first.
You seem to be working from a dictionary that is highly divergent from the one commonly encountered when using the English language.
In the rest of the world, “clearing” means that all who are willing to sell at the prevailing price are able to sell. That you cannot sell a pen for one million dollars is not a clearing failure. If you cannot sell a pen at any price, no matter how low, then you have a clearing failure. These are frequent events, unless the sovereign acts as investor, employer, lender and market maker of last resort.
– Jake
Do you know how an actual market works? When has “unable to sell something for any price” ever arisen for goods? This happens in scenarios like garbage [you need to pay someone to take it away]. Or maybe if _the thing_ has a property tax burden. But you’re basically trying to sell a thing that the state has made into a “bad” [a thing that no one wants to own].
And now we “need” the state to fix this problem which it created?
And, if you show that we do need the government putting a gun to someone’s head to make FRN’s valuable, then how can you say the Roddises, like airlines, are free to compete with them, they just don’t need guns to do so?
I guess the problem is the level of competition. The govt want to ensure that any competition to its fiat is very weak, with no consequences to govt’s ability to spend. That doesn’t mean that Roddis cannot make his IOUs desirable, but just not so desirable as to impede on govt’s ability to spend. Because if tomorrow everybody would switch to Roddis IOUs, the govt would come and say: “please, pay us tax worth $X $USD” and as such ensure that people would still need to get those govt-issues $USD somewhere. That would ensure a floor on the $USD value and the continued ability of the govt to spend those $USD.
The MMT position is that money is a financial asset and liability. Anyone can create money (issue a liability upon themselves) the key is getting it accepted. The acceptability of the liability is dependent on how marketable it is. Some institutions create acceptance by specifying that their liabilities are convertible into a particular asset. Others, such as the state do so via coercion, declaring that their liabilities are required in order to pay taxes.
The MMT describes a hierarchy of credit which exists within society, with state money at the top, and bank credit below it, and non-bank credit below that.
> The MMT describes a hierarchy of credit which exists within society, with state money at the top, and bank credit below it, and non-bank credit below that.
But what is the _metric_ used to create this hierarchy? Austrians rank money and quasi-money by their marketability because we use this concept in our economic analysis. Further, this analysis is useful even in situations without token money.
What is the use of the MMT hierarchy? Is there something akin to marketability which increases as you move up the hierarchy?
In my humble opinion, the word “money” really causes great confusion. Similar to Keynesians being blinded by their use of highly aggregated data, so too are people blinded by using the word “money” in describing what really are two distinct purposes for which the “money-item” can be used: 1) means of payment; and 2) storing purchasing power. Instead, I would propose we use words like, “tender” in describing what a buyer (potentially debtor) offers as payment to settle their account with a seller (potentially creditor). Why “potentially” you ask? Because the purchaser may have paid with equity (real tangible value/savings), in which case they would truly be considered a “buyer” -or- the purchaser previously paid by issuing debt (PRN – purchaser reserve note) to the seller, in which case the purchaser would be considered a debtor and the seller, a creditor. So when we are talking about “money as a means of payment” what we really are talking about is a contract between buyers and sellers. This is why Keynesians believe fiat credit “money” is magical – because in their view, fiat credit “money” is just one legal way to settle you accounts… the more the merrier to them.
Now only consider the “store of purchasing power” function of “money” and you get a very different view. Because the “money-item” is being used as a vehicle to store purchasing power, the item, if an intangible like a PRN, depends on its issuer’s ability to maintain “good credit” in society in order to effectively store purchasing power. If the item is a tangible like gold or silver, there is no dependence on an issuer to ensure the gold or silver effectively stores purchasing power, what matters in whether gold or silver can effectively store purchasing power is society’s want/need/desire/demand of the tangible.
In sum, we can tender our own debt issues or we can tender our equity (real tangible value/savings) to pay. When we tender with our own individual debt, we are asking the seller to provide us equity (real tangible value) based on are credit-standing with them and defer final settlement. When we tender with equity we are also settling the account which means we will have no outstanding debt with the seller. We can also store purchasing power in equity (real tangible value) or we can store purchasing power in the debt (intangible promise) of another. There are trade-offs associated with how one decides to pay or store purchasing power, it is all an individual choice. However, the government forcibly transacts with you providing services you did not necessarily want and then proceeds to collect payment from you, forcing you to redeem its zero-interest debt issues that it used to purchase resources from the private sector. Until the government-private sector transaction becomes voluntary, government is nothing but a plunderer of wealth from the private sector.
“Until the government-private sector transaction becomes voluntary, government is nothing but a plunderer of wealth from the private sector.”
I think this cannot happen if you have governments.
And the current setup is both voluntary and involuntary. Sure, if you ask almost any taxpayer whether they’d prefer to pay less taxes they’d say yes. In that sense taxes are involuntary. But if the choice the taxpayer faces is between living in a modern society and paying taxes or moving to some other society which doesn’t pay taxes, then I think most taxpayers would look around, note that countries that don’t pay taxes usually look like Somalia and say, “no, thank you”. In that sense taxes are no more involuntary than your payment for channels you never watch in your cable TV package is involuntary – it is part of the bundle.
Your response presumes that “external government” is to be attributed to the development of so called, “modern society.” This is a value judgement that is inherent in the thinking of pupils with a pretense of knowledge about what is the “correct” or “optimal” arrangement for humanity. That is, the “correct” or “optimal” arrangement for humanity somehow can not exist outside the status quo.
Lest you accept being labeled a “societal luddite,” you must agree there is a better arrangement for humanity than the status quo.
My response did not presume that. I don’t deny that better arrangements might exist. I have a lot of sympathy for libertarian utopias. I just think you’d have hard time convincing many people that anything close to a truly libertarian society is currently achievable. And there are none to choose from.
I am not saying that humanity might not progress and in X years actually move to libertarian societies.
There is, in fact, a question of time scales here as well. Money should store purchasing power through an ordinary inventory turnover period – somewhere on the order of months. Because dollarizing is a massive PITA for everyone involved.
But money should not be a viable store of purchasing power over a person’s lifetime – on the order of years and decades. If you want to save up for your pension, buy a machine or a silo full of grain. The government should not subsidise your private pension scheme by guaranteeing it a risk-free positive real return, because that will crowd out productive investment.
Until the government-private sector transaction becomes voluntary
It’s called “democracy.” If you do not like it, you are free to emigrate. There is no Berlin Wall keeping you from doing so.
– Jake
> It’s called “democracy.” If you do not like it, you are free to emigrate. There is no Berlin Wall keeping you from doing so.
Doesn’t this presume that property rights _are_ whatever the state says they are? Someone who does not share this view would think that your response here is incoherent.
From a purely academic-free-market advocate point of view, it is non-sensical to store more purchasing power in Federal Reserve Notes than what your forced “tax liability” is/will be. Using FRN’s to store more purchasing power than that represented by your forced tax bill provides the system with more staying power. Start tendering and accepting other things as payment, and storing purchasing power in things other than FRN’s.
Reply to marris from http://consultingbyrpm.com/blog/2011/10/quick-question-for-the-mmters.html#comment-26973
“Sorry, I was contesting the explanation that USD notes first entered the system because the government “bought everyone’s gold.””
No, I wasn’t contesting it. To make clear what I was saying is that when the official convertibility to gold was abandoned, the underlying system characteristics changed. If before you could treat coins, notes and reserves in circulation as coming basically from the “deficit spending” by the Mother Earth’s gold mines (because of the official convertibility), as soon as the convertibility got severed, those coins, notes and reserves became a result of the govt deficit spending. By definition. I don’t know whether it was recorded as such at the time – even today when the govt mints coins these are not recorded as “deficit spending” but as pure seignorage income (which is why MMTers proposed to circumvent the stupid debt ceiling by minting a trillion-dollar platinum coin), but for all intents and purposes the effect is the same: the non-govt sector get its hands on the liability of the govt – liability in the sense that the govt promises to extinguish tax liabilities with it. In MMT argo this is called “vertical money creation”.
So, while before you could discover a gold mine and the govt promised to extinguish your tax liability with that gold at a fixed conversion rate, now if you, say, sold this gold to the govt and then paid your taxes in the acquired dollars, what actually happened is that the govt spent dollars on purchasing your gold first. And for most people who never discovered their gold mines – they’d either have to sell their services and output to the govt and acquire dollars to pay their tax liabilities, or they’d sell their services and output to another person and if you follow this chain you’d find at the end a person who got his or her dollars from govt spending. And of course about $10T in debt (=accumulated deficit) since then is all possible not because there were $10T coins, notes and reserves in the system to buy this debt, but only because the govt spent this money first (and before you ask, it is $10T and not $15T because $5T is intragovernmental debt – the debt that the govt sector owns to itself.)
”And the claim that people who turned in their gold “knew” that they would not get their gold back.”
If for whatever reason the govt sector would buy your gold, you cannot force it to sell this gold back to you. This is what I meant. The only thing you can force the govt sector to do with your dollars is to accept them in payment of your taxes.
”And the claim that “tax requirements” can be used to establish new money systems.”
Not only can, they historically did.
”And the claim that the current money order was created [water was first added to the hose] due to government purchases or CB loans.”
See above.
> the non-govt sector get its hands on the liability of the govt – liability in the sense that the govt promises to extinguish tax liabilities with it.
Well, this is what is being disputed. In this historical scenario, this is not why the actors accepted the notes. I’m sure that most people would have been happy to pay their taxes in gold and if the government did not want it, screw it. Are they going to arrest _everyone_? No [there are some gruesome historical examples where this kind of thing has been tried, but it _usually_ fails].
You could _pretend_ that the government is “buying” your gold in exchange for notes that could be used to pay taxes. But this is not what happened. It is historically more common that the government builds demand for the notes in _other ways_ [as is the case in the US].
Now what are the pitfalls of _pretending_ that this is what happened?
(1) First, it downplays the difficulty of bootstrapping a money system with only tax requirements. [BTW, you’re link above is broken]. Bootstrapping a money system with the “government offering tax notes for gold” does not happen very often. This is not how most states have developed. I think attempts to create states this way would have a fairly low success rate [not impossible].
(2) It prevents a proper analysis of “who is funding whom” in a government bond cycle, because it changes the phase of [shifts] the cycle.
If the government dropped notes on everyone and _then_ sold bonds for these notes, then it would look like (a) their initial drop “funded” the first bond issue, and (b) I would not have been able to buy the bonds unless they had given me the money first.
If the government slipped in more surreptitiously, for example, by first offering notes for assets which the claim holder can redeem at any time, and then cutting the link, then (a) the original property holders funded the first bond issue [imagine the government selling bonds for assets like gold. this is basically what it means to accept notes for bonds AND making notes immediately redeemable for gold], and (b) when they pay me back and I buy bonds again, I am starting another “funding” cycle.
[I know that the Treasury dept could just adjust the numbers if they wanted, so they would probably still “spend.” But that would be a net money drop. The type of thing that the Fed normally does].
“Bootstrapping a modern industrial society into existence is difficult.”
What an astonishingly astute insight.
You are committing the fallacy of raising an early colonial period evolutionary happenstance (the gold standard) up to be the “natural” institutional arrangement, from which all further development is “deviation.”
That is nonsense, in the same way that calling a Neanderthal “the natural human” and H.S. Sapiens a “deviation” from this “state of nature.”
In actual fact, the evolution of the institutions went more or less as follows: Chieftans and proto-kings collected tribute in food and other goods, and issue receipts for this payment. Proto-kings realised that they could raise bigger armies (and other public works) during time of need by paying people with receipts for taxes they haven’t paid yet. People realise that being able to trade these receipts directly is convenient.
You now have an early fiat currency (note that the chief was not obligated to give you grain in exchange for your receipt, only that you were not obligated to give the chief grain if you could instead present a receipt).
Counterfeiting quickly becomes a problem. Precious metals are then used to make these receipts because those are more difficult to counterfeit than clay tablets.
Fast forward a couple of thousand years to the Marian Reforms, which shift military forces from citizen-militias to professional mercenaries. These soldiers now expect to be paid in precious metals (and arable land), because precious metals is what they have always been paid in. Your economy is now operating on a (mixed) silver (and farmland) standard.
Fast forward another couple of thousand years, to the early colonial period, where the Iberian empires loot the gold and silver from South America in order to buy into the Far East carry trade. Gold/silver arbitrage against China and India drains silver from Europe, forcing European merchants and sovereigns to shift from the silver to the gold standard. (Europe is a third-world backwater at this point – the centre of global economic activity is in the Orient, so Europe runs out of silver before China runs out of gold and commodities).
Fast forward another two or three centuries to the Industrial Revolution, and Europe secures global hegemony. Having operated under a gold standard for some centuries, and having a reasonably sophisticated banking system, there is no particularly compelling reason to switch back to the silver standard.
Fast forward another two hundred years, and the gold peg becomes untenable in the face of the move away from a primarily barter-based economy to a primarily credit-based economy (for reasons discussed elsewhere in this thread). The gold standard collapses, there is a brief flirtation with the Bretton Woods quasi gold standard, but that collapses as well. There is a brief flirtation with the €-Mark pseudo gold standard, which is collapsing as we speak.
Why, precisely, is it only the second-to-last step in this long evolution of different sorts of monetary instruments that is The Culmination of All Evolutionary Progression, from which all future developments must necessarily be unhealthy deviations? I could equally well point to the pre-Marian grain-based fiat system, the pre-Sumerian barter economy or the Medieval silver standard as “natural points of departure.”
It is certainly not because life is, for the vast majority of people, worse than it was under the gold standard. Quite the contrary, in fact, as anyone with even passing familiarity with the “utopia” of the late 19th century will know.
– Jake
I’m not sure what questions your post is trying to address.
I certainly did not say “money should be gold.” I am also not sure from where you copied the above bootstrapping “quote.” I never talked about bootstrapping an industrial society. You can have fiat currency in a pre-industrial society as well.
[Actually, I think “bootstrapping an industrial system” is a technology problem, not an economic one, and as far as I know, no one ever “solved” it. The industrial civilization of the 19th century did not arise because people in the 18th century walked around trying to think of ways to change _their_ state of affairs into the _19th century_ state of affairs. They were trying to achieve their ends with the available means. I recommend Hayek’s Use of Knowledge in Society http://www.princetonphilosophy.com/background/Hayek.pdf. After reading it, you will hopefully be able to avoid interpreting historical events as “attempts to reach the current state.”]
I also think it’s a mistake to begin economic history with “Chieftans and proto-kings collected tribute in food and other goods, and issue receipts for this payment.” A bit like saying “On the first day, God created taxes. And then He created man to pay those taxes.”
Are you getting this from Graeber? His facts may be OK, but I would stay away from his analysis. It’s a bit nutty.
Now I think there are “problems” with fiat systems. The central bank is a single point of failure. Any gang who gets control of the money drop apparatus can totally screw up the (real) economic system for everyone else. I think this is less of a danger in non-fiat systems, because economic calculations must be done in non-droppable money. So only business which are “profitable in real terms” survive. I don’t think such a system needs to be utopia to have some appeal.
I’m not sure what questions your post is trying to address.
Your claim that the existence of a pre-existing gold standard system invalidates analysis based on a fiat currency system. If it did, you would not be able to coherently analyse the gold standard system without considering the silver standard system, which you would not be able to coherently analyse without considering the silver/farmland system, etc.
Contemporary institutional reality is what it is. That the state passed through the economic cul-de-sac of a gold standard on the way to the present system does not matter.
Actually, I think “bootstrapping an industrial system” is a technology problem, not an economic one
That would be wrong. It is both.
and as far as I know, no one ever “solved” it.
China, Russia, Korea, Taiwan, Singapore and to a lesser extent Viet Nam have. For that matter, so has the US – in no small part, the American civil war was about whether the US should be an independent manufacturing power or a raw materials provider for the British empire. Policies to favour manufacturing over extraction are just that – policies. And a substantial component of imperial hegemony is to ensure that you have pliable clients who pick the latter over the former (see, e.g. mid- to late 20th century US policies in the Near East and Latin America).
After reading it, you will hopefully be able to avoid interpreting historical events as “attempts to reach the current state.”
I don’t. I merely note that the gold standard economy was objectively inferior to the present system for everyone except the large private creditors. With whom I have no great sympathy.
I also think it’s a mistake to begin economic history with “Chieftans and proto-kings collected tribute in food and other goods, and issue receipts for this payment.”
I don’t. I begin the history of money, because receipts for taxes yet unpaid is the earliest monetary instrument of which there is archeological evidence. Society and economic activity certainly existed before this, although the historical record becomes sketchy at best once you go beyond the early sedentary cultures which already had established government structures.
Now I think there are “problems” with fiat systems. The central bank is a single point of failure.
In fact, if the central bank displays a modicum of care it cannot fail.
Any gang who gets control of the money drop apparatus can totally screw up the (real) economic system for everyone else.
Any gang who gets control of the money drop apparatus already has control of the police and military, since those are the entities that make legal tender enforceable.
Besides, fiat currency has never created any problems, and we have been using it for decades now. Convertible currencies, on the other hand, have screwed up the their economies with dreary regularity for the past two hundred years.
This is a simple empirical point: Floating fiat currencies do not create Panics. Pegs – to commodities or other currencies – do.
I think this is less of a danger in non-fiat systems, because economic calculations must be done in non-droppable money.
That merely favours the interests who benefit from deflation. The real economy can be screwed over both by an excess and a shortage of money, but as a matter of historical reality the shortage is worse than the excess.
It also, crucially, prevents the sovereign from enforcing clearing of the goods and labour markets, which means that these will occasionally experience clearing failure. Which is incredibly destructive. Again, this is an empirical point: Serious industrial depressions are far more common under deflation-biased monetary regimes than under inflation-biased ones.
– Jake
> Your claim that the existence of a pre-existing gold standard system invalidates analysis based on a fiat currency system.
We’re discussing whether private money “pays for” government expenses when it buys a bond [modulo net money drops], or whether government spending “funds” private activities. I brought up a water-hose model to analyze this question. Peter raised the question of how water got into the hose in the first place. To address this, I needed to talk about what the old money system looked like and how the transition to the current money system occured.
> Actually, I think “bootstrapping an industrial system” is a technology problem, not an economic one and as far as I know, no one ever “solved” it
> That would be wrong. It is both…China, Russia, Korea, Taiwan, Singapore…Policies to favour manufacturing over extraction are just that – policies.
I recommend reading Hayek’s paper before thinking about this question. The current state of affairs is the emergent outcome of actor decisions, whether those are government actors or private ones. This is what I mean when I say that no one “solved” the problem of converting the US territory from a pre-industrial state to an industrial one. What you call “policies” are just ends that some actors want to achieve. They try to use whatever means they can to achieve them, including state power. The economic system is not steered Or bootstrapped by some exogenous policy.
> I merely note that the gold standard economy was objectively inferior to the present system for everyone except the large private creditors. With whom I have no great sympathy.
Thank you for your objective analysis. I think _many_ people are attracted to fiat systems (and MMT) because “we” can now pay for whatever we want without creditors. Economists who object are just trying to stop us from building the wonder cities of tomorrow. It’s very similar to the appeal that socialism and later Keynesianism had [the “wonder city” phrase is from Keynes].
Do you think it’s ironic that in the current system, creditors get net money drops all the time [the Fed, after all buys from them] while “we” don’t?
> Any gang who gets control of the money drop apparatus already has control of the police and military, since those are the entities that make legal tender enforceable. Besides, fiat currency has never created any problems, and we have been using it for decades now.
This is just a continuation of your “history as the great political struggle” narrative, right? Does it end with “us” [we’re the good guys in case anyone was wondering] getting control of the political system and forcing the creditors [the bad guys] to take our fiat money? Or does it end with “us” taking out loans that we spend the rest of lives paying off? Or the state either dropping money on AIG to pay their counterparties? You have traded the old “problems” for these problems.
We’re discussing whether private money “pays for” government expenses when it buys a bond [modulo net money drops], or whether government spending “funds” private activities.
A bond is just a fancy form of cash, under a floating fiat currency system with an interest rate targeting central bank. Saying that the private sector “funds” bonds is as nonsensical as claiming that two five dollar bills “fund” a ten dollar bill when you change them at the bank. The only operational difference between printing T-bonds and printing Federal Reserve Notes is that T-bonds pay interest (something there is no particular economic reason they should do – that’s actually the biggest government handout of all, and to the least deserving recipients to boot).
I brought up a water-hose model to analyze this question. Peter raised the question of how water got into the hose in the first place. To address this, I needed to talk about what the old money system looked like and how the transition to the current money system occured.
No, you don’t. The vast majority of money in circulation is new money, created ex nihilo after the abandonment of the gold peg.
I recommend reading Hayek’s paper before thinking about this question [of industrial policy].
I have read more than enough Hayek to know that he does not have anything useful to say on the subject of industrial policy.
I would suggest that you read Friedrich List and Alexander Hamilton, who actually knew what they were talking about.
The current state of affairs is the emergent outcome of actor decisions, whether those are government actors or private ones.
That is a either true but trivial, if taken in the sense that no single policy actor has full control of the direction of the economy or society as a whole. Or it is an interesting but false assertion, if it is taken to mean that policymakers cannot act with sufficient foresight to create beneficial outcomes.
This is what I mean when I say that no one “solved” the problem of converting the US territory from a pre-industrial state to an industrial one.
That does not follow from the true but trivial reading of the premise, and while it does follow from the interesting but false reading, a factually false premise does not permit you to draw conclusions.
What you call “policies” are just ends that some actors want to achieve.
No, that is not what policy means. A floating currency is a policy. Unrestricted fiscal policy in support of full employment is a policy. Prosecuting banksters for fraud when they commit it is a policy.
In short, a policy is a concrete action taken in pursuit of a policy objective – in the case outlined above, the objective of furthering the industrial development of the country.
The economic system is not steered
And that would be false.
I think _many_ people are attracted to fiat systems (and MMT) because “we” can now pay for whatever we want without creditors.
Yes. That’s precisely the point. You cut out a wholly unnecessary, unproductive middleman.
Economists who object are just trying to stop us from building the wonder cities of tomorrow.
What is the economic function of government bonds that justify paying interest on them?
This is just a continuation of your “history as the great political struggle” narrative, right?
Yes. If you think that you can make economic policy without imposing ideological positions on your fellow man, then you are deluded.
Does it end with “us” [we’re the good guys in case anyone was wondering] getting control of the political system and forcing the creditors [the bad guys] to take our fiat money?
History does not “end.”
Or does it end with “us” taking out loans that we spend the rest of lives paying off?
Nothing wrong with too much debt that bankruptcy can’t solve.
You have traded the old “problems” for these problems.
The old problems rendered millions of people homeless, gave rise to fascist parties and caused major shooting wars.
I’ll take 15 % inflation over another world war, thankyouverymuch.
– Jake
> A bond is just a fancy form of cash, under a floating fiat currency system with an interest rate targeting central bank.
Well, this is one idea which is being disputed. I don’t think they are cash in the current system since the Fed does not fix the whole curve. Further, I think fixing the curve will require lots of money drops, so inflation will probably be high. I think this will cause lots of people living on fixed incomes to oppose the policy [it will be a bit like the 1970s stagflation]. And the Fed will be forced to back down and stop dropping money. Then you will see interest rates rise again.
> it is an interesting but false assertion, if it is taken to mean that policymakers cannot act with sufficient foresight to create beneficial outcomes
It is possible. I think the deck is stacked against this.
> I have read more than enough Hayek to know that he does not have anything useful to say on the subject of industrial policy.
I would suggest that you read Friedrich List and Alexander Hamilton, who actually knew what they were talking about.
BTW, this is an interesting discussion for me. When someone says X and I don’t think X is correct, I usually try to show that it is wrong by first finding a Y that both he and I think is correct and then showing that X and Y cannot be true at the same time.
This discussion is interesting, because I’m still looking for a Y. Every time I think “well, maybe he knows this,” I turn out to be mistaken.
> The old problems rendered millions of people homeless, gave rise to fascist parties and caused major shooting wars.
I’m glad we don’t have those problems today.
> I’ll take 15 % inflation over another world war, thankyouverymuch.
I probably would as well, but I think you’re reasoning is very muddled here. For example, high inflation in Germany was one reason why people found the fascist party so appealing: they promised to stop the inflation. And I think industrialization was one of Hitler’s big campaign promises. And then we had another world war. Weird.
Anyway, don’t take it personally, but I will try to focus more on the other posts now. Thanks for sharing your thoughts.
Well, this is one idea which is being disputed. I don’t think they are cash in the current system since the Fed does not fix the whole curve.
Doesn’t matter. As long as the Fed fixes the overnight rate, it has to give you cash for your bond on demand, and it has to be prepared to sell bonds on demand to absorb overnight funds. If the Fed wanted to fix the ten-year rate, it would have to give you ten-year bonds on demand for cash, and take your ten-year bonds and return some other maturity.
Further, I think fixing the curve will require lots of money drops,
Fixing the yield curve can be done purely at the discount window. No “money drops” are required (indeed what is commonly understood as monetary policy cannot create “money drops” – only fiscal policy can do that, which is why fiscal policy is the only remedy for a serious depression).
so inflation will probably be high.
There is no reason to suppose that. The quantity of money in circulation does not matter to aggregate demand, only the risk-free interest rate, the foreign balance, the degree of due diligence in the financial sector and the fiscal position of the public sector can influence demand.
I think this will cause lots of people living on fixed incomes to oppose the policy
Boo hoo. Index transfer payments to GDP and let the bondholders eat cake.
It is possible. I think the deck is stacked against this.
Then policymakers must be geniuses, because there have historically been more cases of policymakers achieving their objectives than not.
I probably would as well, but I think you’re reasoning is very muddled here. For example, high inflation in Germany was one reason why people found the fascist party so appealing:
That is a severely revisionist version of history, although very common among certain sorts of economists. The Weimar hyperinflation predates the emergence of the Nazi party by the next best thing to a full decade. In fact, the Nazis were the product of the post 1929 depression, which was in turn caused by rigid adherence to the gold standard (that the German right wing at the time viewed democracy as an inconvenience to their repression of the labour unions was not helpful either).
– Jake
Wow, you are persistent. Sorry, I know I said I would focus on other posts, but I just can’t resist.
> Doesn’t matter. As long as the Fed fixes the overnight rate…
The discussion on bond-money equivalence started around why the government’s (non-perpetual) zero coupon bonds trade at a discount to par in the current system. Why, when the government does not fix the price/rate, does an interest rate appear? It could be inflation expectations, time preference [what other safe assets are yielding], etc. But it shows that people don’t think of a bond with $100 par as “a fancy way” to store $100 cash.
> The quantity of money in circulation does not matter to aggregate demand.
You know about the quantity theory of the price level, right? You should also check out Nick Rowe’s “money hot potato” analysis.
> That is a severely revisionist version of history.
The claim is not that Nazis came to power _in_ the hyperinflation period. The claim is that they _gained support_ [in part] because of their attacks on inflation during this period.
You can find such an attack in a translated speech in Powell’s “Wilson’s War: how Woodrow Wilson’s great blunder led to Hitler, Lenin.” I think the speech is from 1923 [the end of the hyperinflationary period]. You can find it on Google books if you google for “hitler munich gymnastic festival inflation.” Check the bottom of page 4.
Now, I wasn’t at the speech, so I can’t tell you whether it really happened. Maybe Powell made it up and “revised” history.
Also, I did not poll the audience to find out how many of them were anti-Nazi before the speech and pro-Nazi after. But I think the claim that this was part of the appeal is quite plausible.
The discussion on bond-money equivalence started around why the government’s (non-perpetual) zero coupon bonds trade at a discount to par in the current system.
Because the central bank attempts to put more of them into the private sector’s portfolio than the private sector wishes to hold at the policy rate. There is nothing magical about this which makes it different from overnight deposits – if the central bank fixed the rate on three-month bonds and attempted to put more overnight deposits into the system than was consistent with a yield curve in contango, then the yield curve would move into backwardation – or in other words, overnight reserves would trade at a discount relative to three-month bonds. The only thing that confuses you about this is that the CB fixes the rate on the shortest possible maturity, which means you only see half of the picture.
Why, when the government does not fix the price/rate, does an interest rate appear?
Because it fixes volume, and the market has to clear. There is no need to invoke rational expectations mysticism or intertemporal preference optimisation or any other such neo-Ricardian twaddle to explain why you have to charge a lower price when you wish to push a security on a saturated market.
You know about the quantity theory of the price level, right?
Which is silly. No merchant or corporation has ever examined the broad money supply when deciding upon prices. Prices are decided based on current and expected demand, current and planned capacity and the state of one’s competitors. Any influence on prices from printing money will need to pass through one of these channels (and no, inflationary expectations is not a viable pathway, because (a) they are empirically unfounded as an independent cause of inflation and (b) even if they existed they would be a third-order effect at best).
The claim is not that Nazis came to power _in_ the hyperinflation period. The claim is that they _gained support_ [in part] because of their attacks on inflation during this period.
You can find such an attack in a translated speech
I’ve read their party programme. Not in the original German, but close enough. It’s a kitchen sink of attacks on everything from inflation to usury to pacifists to Jews to trade unions. Singling out inflation as a major contribution to their popularity is fundamentally dishonest, as it overlooks at least a handful of reasons which were actually important – such as revanchism and irredentism, crushing industrial depression (and accompanying unemployment), the desire of the large industrial conglomerates to use the brownshirts as shock troops against organised labour, and the large number of German conservative politicians who were fundamentally inimical to democracy and had been looking for an excuse to overturn it since it was imposed in 1918.
There have been hyperinflationary episodes since, and they have not brought out the brownshirts. There have been periods of double digit unemployment since as well, and those almost invariably do bring out the brownshirts. I should think that the evidence is in.
Besides, the Weimar hyperinflation – like all hyperinflationary episodes have been – was caused by supply side inflationary pressures from collapsing terms of trade and structural import dependencies. Money printing is neither here nor there as a causative factor.
– Jake
> you have to charge a lower price when you wish to push a security on a saturated market
Isn’t this an admission that in “the real world,” bond and money are not the same thing [despite the MMTer viewing them as the same]? Unless the CB is willing to lend unlimited funds at some rate, private lenders will obviously want interest for future cash.
> There have been hyperinflationary episodes since, and they have not brought out the brownshirts.
I think most hyperinflationary episodes bring war or some crazy demagogue who promises to stop it. It could be brownshirts, socialists, military coups, whatever.
”You could _pretend_ that the government is “buying” your gold in exchange for notes that could be used to pay taxes. But this is not what happened. It is historically more common that the government builds demand for the notes in _other ways_ [as is the case in the US].”
Yes, there are reasons other than taxes why fiat currencies have value. The convenience and acceptance factors etc. But ultimately, and long term, the ability to enforce taxation is a sufficient condition to give fiat currency value. And almost necessary as well. You’d have to ask people why they accepted govt notes if they knew they were not promised to be able to redeem it for anything other than payment of taxes.
Also, ask yourself how long it would have taken for competing currencies to arise if the govt agreed to accept those as payment of taxes? Or did not enforce taxation?
” (1) First, it downplays the difficulty of bootstrapping a money system with only tax requirements. [BTW, you’re link above is broken].”
Here it is:
http://www.moslereconomics.com/2009/10/07/tax-driven-money/
” (2) It prevents a proper analysis of “who is funding whom” in a government bond cycle, because it changes the phase of [shifts] the cycle.
If the government dropped notes on everyone and _then_ sold bonds for these notes, then it would look like (a) their initial drop “funded” the first bond issue, and (b) I would not have been able to buy the bonds unless they had given me the money first.”
But this is exactly how it happens! Did the private sector have $10T to fund govt expenditures back in 1XXX (whatever it is the date from which our debt is tracking accum. Govt deficit)? Or, let me ask you a simpler question: if the govt wanted to spend $100 trillion tomorrow, could it do so by taxing and issuing bonds and then using the proceeds? Of course not – there are not $100T worth of HPM in circulation! But it could easily do so by changing the numbers in the accounts at the Fed. Then it could go and tax/issue bonds for that amount and pretend that it got the money from the non-govt sector. Which is what it is doing all the time.
”If the government slipped in more surreptitiously, for example, by first offering notes for assets which the claim holder can redeem at any time, and then cutting the link, then (a) the original property holders funded the first bond issue [imagine the government selling bonds for assets like gold. this is basically what it means to accept notes for bonds AND making notes immediately redeemable for gold], and (b) when they pay me back and I buy bonds again, I am starting another “funding” cycle.”
Start with the US going off the gold standard and ask whether the govt ever “surreptitiously” offered to redeem bonds in anything but USD. Explicitly or implicitly. No, it did not. I don’t see how your point is relevant.
”[I know that the Treasury dept could just adjust the numbers if they wanted, so they would probably still “spend.” But that would be a net money drop. The type of thing that the Fed normally does].”
OK, now I am confused – it seems that we’re actually agreeing here! Is the source of disagreement that you don’t see Treasury and the Fed as part of the consolidated govt sector?
I hope the above makes sense. It all comes down to what the government’s bond payoff means in legal terms. When they cut the note redeemability link, they stopped offering assets in exchange for circulating notes. In addition, they also affected the government bonds in private hands. People who thought they would be paid back in redeemable notes were now going to be paid back in non-redeemable notes.
Further, these bonds represented instances where the private bond holders _had_ funded government expenses. They represent a credit transaction which has not yet been settled. When the government settles the debt, the credit transaction ends. The private property owner becomes the owner of new notes (the hose is now full for the first time). In doing so, the government just paid bond holders back something like what they were already “owed.”
Now if the new note recipients want to buy consumer goods with their cash, they could do so. However, they can also choose to “fund” the government again by buying more bonds.
The old funding was in money (gold) and real terms.
The new “funding” is in money (note) and real terms.
”It all comes down to what the government’s bond payoff means in legal terms. When they cut the note redeemability link, they stopped offering assets in exchange for circulating notes. In addition, they also affected the government bonds in private hands. People who thought they would be paid back in redeemable notes were now going to be paid back in non-redeemable notes.”
If true, it affected only a small number of bondholders relative to those that came after the convertibility was voided.
”Further, these bonds represented instances where the private bond holders _had_ funded government expenses. They represent a credit transaction which has not yet been settled. When the government settles the debt, the credit transaction ends. The private property owner becomes the owner of new notes (the hose is now full for the first time). In doing so, the government just paid bond holders back something like what they were already “owed.””
Again, maybe true for the small number of bondholders that purchased bonds when USD was convertible.
”The old funding was in money (gold) and real terms.
The new “funding” is in money (note) and real terms.”
Exactly how is your bond worth of $X redeemable in real terms? All that you get at maturity is $X. If a gazzilion % inflation happened the second after that bond got redeemed and $X because instantaneously worthless – yes, that’s your loss.
I think it is true. The consequence is that private money “pays for” government expenses when it buys a bond [modulo net money drops]. Government spending does not “fund” private activities.
Increases in government bond issuance require either (1) private money owners deferring purchase of consumer goods, capital goods, or privately issued bonds and instead buying government bonds or (2) debt monetization [the Fed buying the bonds directly from the Treasury department].
> Exactly how is your bond worth of $X redeemable in real terms?
The bond is not redeemable in real terms. I mean that the private actor buying the bond instead of “something else,” means that the government can now go out and buy that “something else” at a lower price [the private money is no longer being used to bid the price of that thing higher]. The private actor is deferring his purchase of “real things” and permitting the government to buy the “real thing” today. Unless the government wants to bid goods away from private actors with net money drops, this “deferral” of purchases is always present.
The money in private hands to buy bonds to offset deficit spending comes from deficit spending.
This deferral of spending is called savings, and is voluntary.
Moreover bonds are highly liquid, and can be used as collateral so from an individual point of view the bond holder decides how long he wants to defer consumption.
> The money in private hands to buy bonds to offset deficit spending comes from deficit spending.
Certainly some of it comes back from the government spending money (for example, paying off older bonds) _in the past_, but that’s just _completing_ a credit transaction. The creation of a new credit transaction involves private individuals now spending money which is owned “outright.”
The older credit transaction can be traced back even further, but the analysis is the same at each stem _until_ we get back to redeemable notes. To when the actors funded a government bond issue with non-droppable money.
marris, let’s continue below. On a side note th comments layout of this blog is a PITA.
I am not sure whether I am contradicting what you’re saying but here goes:
I don’t believe people defer consumption because they buy bonds. It is the other way around: they buy bonds because they defer consumption. At least most people. There is almost no way to bring consumption forward. People first decide to save, then look for vehicles for savings, one of which happens to be govt bond. In fact, for the private sector as a whole to save is possible only in HPM and bonds, also known as Net Financial Assets in MMT-lingo (all the rest are assets and liabilities of the private sector at the same time and thus cancel each other on the consolidated private sector balance sheet). So, no, people don’t defer consumption because the govt offers a sufficiently high yield on its bonds. They decide to defer consumption first, then save for the future by buying those bonds.
“[the Fed buying the bonds directly from the Treasury department].”
If you consolidate the Fed and the Treasury it all becomes clearer. The Tsy just credits private accounts at the Fed when it spends. This causes reserves in the system to go up, after which the Fed would have to mop up any excess reserves that might cause the FFR to move away from the target by swapping bonds ad reserves. And vice versa when the govt taxes.
You agree that the consolidated govt sector operationallydoes not need bonds to issue bonds or tax in order to spend?
I’m not sure this is true. If I was going to buy lunch, and someone offered to borrow my lunch money and pay me back with interest, the offered rate of interest would clear affect my decision.
Is this not true for most people?
You could say there is some base consumption level which high interest rates cannot touch. For example, I probably won’t starve to death for a high interest rate. But we’re talking about consuming non-biologically-essentIal consumption vs. bond purchases here.
No, this hardly happens. If it did, we’d see a great deal of consumption now, with interest rates almost at 0, right? Wrong! People save based on their economic outlook. They save so that they have money for later when they don’t have as high income or for purchases that they mean to do later. Interest rate figures in such decisions in a very derivative way . It can affect real estate prices and other assets (such as forex) and thus make those asseets attractive as savings vehicles. Just about the only “consumption” that can be brought forward with interest rates falling is housing. Same with inflation expectations. Winterspeak had a nice couple of threads on this:
http://www.winterspeak.com/2010/12/why-inflations-expectation-model-is.html
http://www.winterspeak.com/2010/12/where-inflations-expectation-is-not.html
By the way, there is another reply to you I made yesterday that is still in moderation. Looks like >=2 links in a comment automatically goes in to moderation. Which would probably happen to this comment as well, now I think of it. Mr. Murphy?
I’m not sure I follow. People choose between consumption, investment, and holding cash balances. An increase in possible return makes investment more attractive. Pushing rates to zero does not necessarily push people into consumption mode. They can simply start saving money.
> You agree that the consolidated govt sector operationallydoes not need bonds to issue bonds or tax in order to spend?
Because it can just drop money, right? This was not contested.
The bonds are always “monetised.” As long as the Fed targets an overnight interbank interest rate through open market operations it has no discretionary power to refuse to purchase sovereign bonds.
In actual fact, what happens is that the Treasury issues $ 110 mil. of T-bonds, paying a subsidy of, say, 5 %; a private bank buys them, sells back $ 10 mil of them to the Fed, and borrows $ 100 mil from the Fed at, say, 1 %, for a net 4 % subsidy to the bank.
This costs the bank nothing. As long as the Fed wishes to enforce the 1 % target, it will have to buy back the bonds at any time the private bank may happen to need liquidity. $ 4 mil a year straight into the bank’s coffers, for doing nothing more than briefly participating in a bit of kabuki theatre for the benefit of the gold bugs.
– Jake
MMT has always unambiguously qualified the nature of a currency issuer and its related risk of default according to the operational ability to issue its own currency in the form of central bank notes and bank reserves.
It has never stated that a currency issuer can’t default on an obligation denominated in a currency that it doesn’t issue in this form.
There is no “cut-off” in this sense.
This qualification should also be obvious from the fact that the swaps under discussion are collateralized in the currency issuer’s currency.
So what’s the problem in terms of MMT’s clarity on this issue?
(It should also glaringly obvious that the full consequences of default on a foreign currency obligation must be considered in the context of the specific situation. Europe’s default on swap dollars would obviously be associated with banking system chaos. The US’ default on swap Euros would be weird, but of far less consequence to the US financial system. That said, in both cases the DIRECT consequence of a default by either Europe of the US on these swaps would be minimal when viewed specifically in terms of the continuing viability of the currency issuance function in each case. E.g. even if Europe imploded in dollar terms, the ECB still has the currency issuing power to recapitalize its financial system in Euro, as well as do just about anything else it wants to do in Euro.)
JKH,
Do you think that MMT can be summarized in “net money drops are possible in a fiat currency system” ? Is there anything in the theory except this?
It seems like Mosler just took classical Keynesianism, bolted this fact onto it, and wrote a whole book about how no one needs to worry about “paying” off the debt, or “paying” for social security because…. wait for it… the government can DROP MONEY when the obligation comes due!
Is there anything else that you think the theory tells us that we “did not know” before?
A good part of the “theory” of MMT is indirect or anti-theory – in the form of the dismissal of the false theories of mainstream economics.
A good example is the textbook money multiplier, which is an unambiguously false description of modern monetary operations. It is a disgrace to the economics profession that it has lacked the gumption to explore how banks actually operate in the real world. The error of their “theory” is only now being acknowledged by some of these people. MMT has led the field in exposing this. BIS and the Fed and a few others have been catching up.
There are numerous other examples.
That said, the “theory” label within MMT is not ideal. Much of what it has to say is descriptive of monetary system operations, as opposed to how other theorists imagine it works in their models.
OK, let’s say you are approached to update some textbook. You would just add a “money drops are possible” section, right? And maybe take out the parts which imply that money drops are impossible?
Is there anything else? I think interest rate fixing may already be there. It may even be in the price controls section.
MMT’ers simply observe that
a) The central bank can, for any or all points on the risk-free yield curve, fix *either* the interest rate *xor* the outstanding volume.
b) In every normal, non-panic course of events, banks can freely arbitrage against the risk-free yield curve.
c) It follows from (b) that banks have no operational reason to care about outstanding volume of securities of a given maturity – only about the yield curve.
d) It follows from (a) and (c) that obsessing over the outstanding volume or term structure of sovereign assets is silly.
It follows from these observations that the sovereign can engage in unconstrained fiscal policy in support of labour market clearing. It also, incidentally, follows that there is no economic reason why the government should ever pay interest on its bonds.
– Jake
P.S.
The US government is sovereign in dollars because it controls the Fed. The US government can be considered a currency issuer because the Fed is a currency issuer, and the US government controls the Fed.
No individual country in the EZ is sovereign in Euro because no individual country has control over the ECB.
Still, the ECB is a currency issuer in Euro.
So we have both the Fed and the ECB as currency issuers, and the US government as a currency issuer by dint of its control over the Fed, but not Greece.
A swap default would be a DIRECT concern for both central banks. And it would be a direct concern in its entirety for the US government , but only for Greece (directly) through its proportionate capital share of the ECB.
In this post you have given me a great appreciation for the propaganda value of taking over the word “modern” for one’s theory. Calling all Kochs and Scaife’s, reroute everything (and I mean everything) into an all-out assault to capture that word.
Austrian Capital Theory? How about “Modern Capital Theory.” Then we’re got “Modern Business Cycle Theory.” Hell let’s just go for “Modern Micro” and it’s ugly sister, Modern Macro. Get enough mind-share on the biggies and we’ll even get the Post-Keynesers’ precious MMT.
“Certainly some of it comes back from the government spending money (for example, paying off older bonds) _in the past_, but that’s just _completing_ a credit transaction. The creation of a new credit transaction involves private individuals now spending money which is owned “outright.”
Ok, start at period zero. The govt just declared that all the USD in circulation – say $X – are non-convertible and all the outstanding bonds – say, another $Y – are redeemable in those non-convertible USD. First, you need to recognize that $(X+Y) is effectively the accumulated govt deficit so far. From the beginning of time. Why? Because you need to ask whose asset and whose liability those $(X+Y) are. With convertibility you could pretend they were govt liability but that the govt had a corresponding asset (gold) to zero it out. Now there is no asset to zero them out expect for the “taxation” asset. Thus by definition instantaneously those $(X+Y) dollars become govt spending in excess of taxation, which is the definition of deficit. Are we on the same page so far?
Now, the govt want to spend some money. Head over here to see how it is done on the level of balance sheets:
Yes, Deficit Spending Adds to Private Sector Assets Even With Bond Sales .
You can pretend that the govt first issues bonds and uses the proceeds to pay for its spending. But let’s think what happens if the govt wanted to spend $X+1? There aren’t $X+1 in circulation! The govt would simply credit accounts with $X+1 and then issue bonds to cover this spending if needed i.a.w law. But the non-govt sector would still be buying those bonds with dollars it got from the previous govt deficit. Thus the govt always “drops money” first and issues bonds and taxes later.
One second. The initial claim that government bond issuance (deficit spending) “creates money” in the system is false, right? New money only comes from Fed money drops. In the current system they do this when they buy the bonds from private individuals [banks and other financial institutions which are part of open market operations].
Now we’re redefining “deficit spending” so that it also means (1) money in circulation at the time of the redeemability break and (2) the Fed’s net money drops?
I think it is always possible to redefine terms to make previously false statements true. The underlying conceptual model does not change when we redefine things, right?
The $X+1 is available because the Fed credited it to some account with an open market operation. [with a net money drop]. Not because of government bond issuance. And when private individuals bought these bonds, they “financed” government purchases [modulo net money drops]. Are you saying that these statements are incorrect?
http://consultingbyrpm.com/blog/2011/10/quick-question-for-the-mmters.html?replytocom=27078#respond
“The initial claim that government bond issuance (deficit spending) “creates money” in the system is false, right? “
Whaat? Bond issuance and deficit spending are not one and the same. Deficit spending is spending in excess of taxation (G-T). Bond issuance right now is operationally tracking accumulated deficit, yes, a self-imposed constraint (this is MMT101) but I don’t see how the claim that deficit spending creates money in the system is false.
“New money only comes from Fed money drops.”
If by “Fed Money Drops” you mean Fed buying previously issued govt debt (“debt monetization”) then you’re wrong, since those bonds themselves were purchased with money coming from previous govt spending. Again, start at period zero!
“Now we’re redefining “deficit spending” so that it also means (1) money in circulation at the time of the redeemability break and (2) the Fed’s net money drops?”
Nobody is redefining anything. Deficit spending by definition is spending in excess of taxation. I explained why the HPM in circulation at the time of redeemability break should be treated as such. I am not 100% sure what you mean by “Fed drops”, but I think this could be helpful:
http://neweconomicperspectives.blogspot.com/2010/01/helicopter-drops-are-fiscal-operations.html
“The $X+1 is available because the Fed credited it to some account with an open market operation. [with a net money drop]. Not because of government bond issuance. And when private individuals bought these bonds, they “financed” government purchases [modulo net money drops]. Are you saying that these statements are incorrect?”
No, the Fed cannot buy $X+1 worth of bonds because there aren’t $X+1 worth of bonds available. Yes, it can pay a premium for bonds in which case indeed it is exactly like govt spending (see above link). You still need to answer a simple question: what stops the govt from crediting accounts at the Fed with whatever amount (except for the self-imposed constraint of no-overdraft at the Fed)? Does the issue of the $US need to acquire those $US first in order to be able to spend?
It would be nice if two of my comments in moderation were actually published at some point. I guess I’d need Mr. Murphy time for that… I’d know better than including more than one link in my comments from now on.
Peter D. wrote:
t would be nice if two of my comments in moderation were actually published at some point. I guess I’d need Mr. Murphy time for that…
Sorry I sleep at night and then I went to the gym this morning before getting on the computer. Next time I’ll run my plans by you first.
It was absolutely not intended to be critical of you, Mr. Murphy. honestly! I’m sorry if it came across this way.
This is your blog, and I totally understand that you’re putting your time into it and appreciate it. I was merely stating a fact, not criticizing you
Oh, well now I feel bad. :/
that wasn’t the intention either 🙂
Ron Paul:
The Fed’s quantitative easing programs increased the national debt by trillions of dollars.
Utter nonsense. Can he be more clueless?
Wow, he really said that?
Yes he did
Ron Paul: Blame the Fed for the Financial Crisis http://on.wsj.com/pXsyEJ
Of course, we are left with utterly clueless MMTers who don’t understand the purpose of prices, especially the most important price, interest rates.
The Fed’s quantitative easing programs increased the national debt by trillions of dollars.
Ha ha!
If Ron Paul hadn’t said it I couldn’t have made it up.
Hilarious!!!
I’m perfectly content with the fact that no MMTer seems to comprehend the concept of economic calculation and the knowledge problem, much less the theft of purchasing power necessarily resulting from funny money creation.
I know, I know. Murder and torture aren’t murder and torture if the government does it, which, in addition to being inherently benevolent, is also omniscient.
As the MMTers have taught us, a government which is the monopoly issuer of currency is not constrained by the limitations of knowledge which constrain mortal humans. Suggesting it is so limited is an example of the fallacy of composition.
The limitations of knowledge of Ron Paul:
The Fed’s quantitative easing programs increased the national debt by trillions of dollars.
And the guy wants to run for office?
Funny money creation certainly facilitated a totally unnecessary increase in debt. I thought that was your mantra, except that, contrary to reality, you think unnecessary debt is good.
The Fed’s quantitative easing programs increased the national debt by trillions of dollars.
And Ron Paul wants to end the Fed but doesn’t understand it?
I’m not sure what he meant. But the idea is not completely wrong. QE debt is still on the Fed’s balance sheet, so it has not “disappeared.” It will probably be rolled until the Fed decides to unwind its balance sheet. I know some people want them to tear up the debt, but that’s not the current state of the system, right? So the debt is still there.
Further, QE hopes raise government bond prices [lowers yields], which always gets all the “low yield” junkies clamoring for more government spending. Sort of like “the government should take advantage of low yields” to spend more on infrastructure or whatever.
Wow, what twisted logic. If he said that it increased the potential debt (some sort of moral hazard argument), I’d at least give him some credit. But he claimed exactly the opposite of what happened. The debt that Fed purchased actually is now withing the consolidated govt sector – the debt the left hand of the govt owes to the right hand. So, in fact, the debt (which was unnecessary to begin with) disappeared for all intents and purposes. I have a lot of respect for Ron Paul, but understand our current monetary system he does not.
Exactly. You can say QE decreased the debt or that it left it unchanged.
The only thing you can’t say is that it increased it.
So is Ron Paul that clueless or just is he just scaremongering like Austrians love to?
My guess is: both.
Are you claiming that when people know that the Fed will buy up debt that such knowledge does not help make the debt more marketable in the future?
Without the Fed, the funds to satisfy the debt would have to be extracted from the populace by force and handed over to the bond holders.
Debt doesn’t need to be marketable, that’s the whole point. Debt does not need to be issued in the first place! The govt does a favor to the private sector in that it supplies it with a risk free option to save. If the private sector doesn’t want to save – no problem, the demand goes up , the deficit goes down. You keep putting the cart before the horse. Private sector’s savings desires determine the govt deficit (and due to current arrangements, the size of debt) not the other way around.
Historically, banking sector is the biggest lobbyist for continuing issue of govt debt. There is a funny story on NPR about how Clinton team were delusionally afraid that if they paid off the “debt” (as if that were even remotely possible) “investors looking for an asset free of credit risk can no longer count on an abundant supply of U.S. Treasury securities”.
Roddis, Bill Gross got burnt by having exactly your mindset.
No, I am claiming that claiming that the Fed’s quantitative easing programs increased the national debt by trillions of dollars is so #@%$ wrong that I am still rolling over the floor.
Senate commie Bernie Sanders has MMT Queen of Sheba Stephanie Kelton on his Fed panel of experts:
http://www.economicpolicyjournal.com/2011/10/oh-boy-bernie-sanders-forms-team-to.html
The Economics of CONTROL, to coin a phrase.
Impressive team! I guess he won’t be saying the Fed’s quantitative easing programs increased the national debt by trillions of dollars like someone else did.
Peter D:
We all completely understand your silly little “system“.
Debt does not need to be issued in the first place!
I know. I know. I know. Don’t say it again. Unless the government thugs place an unnecessary constraint upon themselves, they can issue funny money whenever and to whomever they want. Similarly, they have placed a silly and unnecessary constraint upon using third world toddlers as jet fuel. The fools.
The govt does a favor to the private sector in that it supplies it with a risk free option to save. If the private sector doesn’t want to save – no problem, the demand goes up , the deficit goes down.
That’s not one of those “operational reality” events. That’s an absurd opinion and load of crap. The private sector does not need a “risk free option to save”. This distorts economic calculation.
Further, you knuckleheads define ‘private saving’ as ‘private saving minus investment. As Bob Murphy explained long ago,
MMTers are certainly correct when they observe that “private saving net of private investment” can’t grow without a government budget deficit (again if we disregard foreign trade). But so what? The whole benefit of private saving is that it allows for more private investment.
This is the fundamental problem with relying on macro-accounting tautologies; people often bring in causal arguments from economic theories without realizing they are doing so. (I tend to think that such people are nothing more than lazy but purposeful liars.)
http://mises.org/daily/5260
The type of “savings” induced by deficits isn’t really “savings” and it’s something people do not need and which is destructive of civilization.
Historically, banking sector is the biggest lobbyist for continuing issue of govt debt.
Duh. Ever heard of “crony capitalism”? It’s a big libertarian and Austrian theme.
Roddis, when the govt is running a deficit, who is the entity running the corresponding surplus?
The people alive today who will not pay tomorrow because they are then dead?
“For in the long run we are all dead?” – Keynes.
Exactly. And everyone in the younger generation (now unemployed because of the distortion this has created) are paying the price of that, now, later and in the future beyond the callous remark by Keynes.
Fair?
I suppose that under your bizarre “accounting” system, the “private sector” runs a “corresponding surplus”. Except that the “private sector” is not an “entity”. And no one requires “risk free savings” net of investment to be created via funny money.
Of course, if we just abolish the government, we won’t have to worry any longer about a “public sector”. Further, when the government just “spends” funny money into existence, your “accounting system” fails to account for the lost purchasing power stolen from those holding the existing money. The essence of your system that it is based upon a surreptitious theft and shfting of wealth and assets, contrary to long-held concepts of private property, contract and due process.
We completely understand your silly “system”. Try learning ours or go away.
http://mises.org/resources.aspx?Id=3081&html=1
Really. Be the very first one.
>>I suppose that under your bizarre “accounting” system, the “private sector” runs a “corresponding surplus”.
Good! And nothing bizarre about it – this accounting system is used by all national accountants around the globe.
>>Except that the “private sector” is not an “entity”.
What is it then? What are you talking about when you talking about crowding out and other adverse effects of govt deficits – about virtual reality?
>>Of course, if we just abolish the government, we won’t have to worry any longer about a “public sector”.
Listen, here you go into your little Rothbardian tirade as to how a free market system in an anarcho-capitalist utopia would be superior to the current system – and I am not here to debate that. I just say that I have a lot of sympathy for these ideas but I consider such societies and systems unachievable at the moment for various reasons – that’s for another debate. But I also don’t believe that, absent total switch to anarcho-capitalism, gradually moving to such system necessarily improves on the current. It is easy to visualize our current system as suboptimal but at a local minimum and moving always from such minimum actually reduced the “utility” of the system. And then there is The Theory of Second Best
So, let’s instead concentrate on the current system and decide whether it is good or bad that the private sector runs surpluses or deficits and under what circumstances. And you inflation concerns are valid but misplaced when we have 16% un- and under-employment.
What’s left of our current system was based upon English common law notions of private property, contract, privacy and due process of law. The entire Keynesian/”progressive”/MMT meme is based upon the baseless assertion that the established system of free and voluntary exchange is unsustainable and leads to unemployment (and monopoly). That assertion is without evidentiary, historical or logical support. The unique aspect of the Rothbardian vision is to meticulously forbid the various statist exceptions to the basic outline of private property.
Regardless, the Keynesian/”progressive”/MMT program is so over the line that it is based upon the theft and shifting of purchasing power by the unconstrained state which a priori eviscerates historical notions of private property, contract and due process to solve an alleged problem that not only does not exist but is, in fact, caused by the very Keynesian-style policies promoted by the MMTers.
We understand the MMT “operational reality” BS. As we understand all of the various permutations of funny money theft and asset shifting, it is at that point we begin to analyze the results using Austrian Economics, a subject that escapes you all.
Roddis!!!! Where is the graph showing the correlation between deficit spending and inflation in the US?
If the public sector were abolished (which will never happen) then everything MMT says will still hold wrt whoever is issuing net financial assets.
When did I ever say that was a direct correlation?
All the time.
when the government just “spends” funny money into existence, your “accounting system” fails to account for the lost purchasing power stolen from those holding the existing money
Sorry pal. When Welfare Willie eats that filet mignon he bought with his new funny money, that food is no longer around for Hard Workin’ Hal to buy with his hard earned money.
Where’s YOUR CHART which reflects THAT?
Hard Workin’ Hal will buy another filet mignon.
Unless Welfare Willie made the price of the filet mignon rise, then there is no issue whatsoever about him having eaten one.
So, unless the new funny money creates inflation then it is not an issue at all. It should be easy to show how government deficits lead to inflation.
SO WHERE IS YOUR CHART RODDIS?
Hard Workin’ Hal will buy another filet mignon.
Perhaps. You don’t know that.
And things changed, right? Things weren’t as they would have been, right? That’s always true, even without a recordable rise in prices, right?
It doesn’t really matter. Let’s go back to your claim that when the government just “spends” funny money into existence, your “accounting system” fails to account for the lost purchasing power stolen from those holding the existing money
Where is the evidence? Where’s the CHART?
I’m not the one claiming omniscience, you are. Show your chart with all of the seventeen zillion changes due to your interfererence. Or lack of changes, as the case may be.
So, there I am today sitting in my limousine reading the latest interview with the finance minister here in Egypt and he goes “we have saturated the local market available to us, we can’t lend any more because it will deprive the local market of funding, so we are going to go for the quick fix and ask the IMF for a loan”.
Is MMT actually meant to be Utopian Monetary Theory?
If not, give the Egyptian Finance minister a call and explain to him that he should under no circumstances feel inhibited to continue borrowing locally and neither should he even consider running to the IMF.
Is he going to ask the IMF for a loan in Egyptian Pound? If so, he is an idiot – he can issue those pounds himself. If he is going to ask for a loan in USD, for example, then it is another matter and the question is why does he need a loan like this. Does Egypt have a dollar denominated debt? If so, it is not monetary sovereign in this debt, as a lot of comments at the beginning of this thread discuss. If Egypt wants to acquire USD and doesn’t want to go and buy those in the Forex markets (probably because that would entail devaluation of Egypt pound) then again, Egypt would be surrendering its monetary sovereignty.
Or they could be managing the exchange rate.