--"There is, however, a solution to this problem, and it was discovered by Japan. The government can spend, not by issuing bonds at interest to the public, but simply by creating an overdraft at the central bank, as Ruml recommended".--
--"There is, however, a solution to this problem, and it was discovered by Japan. The government can spend, not by issuing bonds at interest to the public, but simply by creating an overdraft at the central bank, as Ruml recommended".--
19 comments:
Japan and MMT
You better differentiate now how Japan the recession nation became Japan the MMT victor
otherwise you are correlating MMT with the fiasco's of Japan !!
The problem being referred to in the quote was the problem of debt servicing and the dollar carry trade .
oJapan the recession nation
Urban legend, look at Japan's unemployment rate (4.6%) and inflation rate (0%).
http://www.tradingeconomics.com/japan/unemployment-rate
http://www.tradingeconomics.com/japan/inflation-cpi
As Tokyo-based journalist Eamonn Fingleton has long pointed out, Japan knows what its doing, which is to make the rest of the world think they're in a recession.
For Japanese officials this is a matter of national security: Japan’s previous image as the juggernaut of world trade had proved dangerously counter-productive by the late 1980s. Since then the myth of an often absurdly dysfunctional Japan has been assiduously projected into the Western press. The result is that Western policymakers who once feared Japanese economic expansionism switched to pitying the “basket case.”
http://www.fingleton.net/?p=919
Ellen is talking about ending debt held by public. Her article neglects two points.
1. Fed-held debt (despite the interest refund to Tsy) still counts against the statutory debt limit, so every year or so the party out of power will continue to use the debt ceiling vote to score political points against the party in power.
2. To control Fed Funds rate, there must be a reserve drain-- either by open market operations (which Ellen would ditch) or a de facto drain by the Fed paying interest on reserves payment (the cost of which is deducted from Fed refund to Tsy).
Currently the Fed does both, so we're in the curious position where its actually cheaper to borrow money than to just "print it". Right now 3 month Treasuries yield 0.04%, 1 year Treasuries yield 0.12%. The IOR rate (which would be paid on the excess reserves created by "no-bond" money) is 0.25%.
To avoid the debt ceiling, Tsy can create money by minting platinum jumbo coins for deposit with Fed. To avoid paying anything more than nominal debt service costs (CBO projects avg net interest rate for this decade at 5.0%, costing $5 trillion), Congress could cap IOR/FFR at current 0.25% target.
Can you imagine the rhetoric surrounding the government overdrafting its 'checking' account, congress will never modify the US Code to allow it. A political hot potato. Beowolfs idea of minting high dwnomination coins of precious metal might be appealing to the gold bugs who won't see the bigger picture. But law enforcement will nix high denomination coins...
"But law enforcement will nix high denomination coins"
Except for the President, nobody can override the Secretary of the Treasury in the execution of his minting authority. In fact, the Mint doesn't even receive a congressional appropriation, they roll their own (money, that is).
TB,
I dont think that is in US Code... I could be wrong. Do you have a citation? resp,
15 USC Section 635 Appoints the FR Banks as Fiscal Agents of Treasury.
12 USC Section 391 Authorized F.R. Banks in their capacity as Agents to "make disbursements against deposits" as directed by treasury.
I interpret that to mean taxes, fines or bond proceeds must be deposited before disbursements can be made.
I've often been frustrated by Warren's simple description of payment collection systems for the government, The best historical description I've found is here:
http://www.federalreserve.gov/pubs/bulletin/2004/autumn04_fiscal.pdf
Interestingly in that document, the reason they give for maintaining the positive balance in the treasury account was to help manage the banking system, not because of any law or code or rule. "The Banks and the Federal Reserve Board work
closely with the Treasury every day to ensure that the
Treasury’s balance with the Banks remains stable,
between $5 billion and $7 billion. The Banks use the
Treasury Tax and Loan program to shift amounts in
excess of the targeted Treasury balance into depository
institutions’ accounts and, as a result therefore, back into
the banking system."
The tax and loan program is described in extraordinary detail in 31 C.F.R. PART 203. But I didn't see any requirement of positive balances.
TB thanks,
Here is the whole section:
"The moneys held in the general fund of the Treasury, except the 5 per centum fund for the redemption of outstanding national-bank notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits."
I keep seeing the word "may" not "must"... to me this leaves open Beowulfs coin deposit operations for sure...
Beowulf makes the understatement of the century when he says “To avoid the debt ceiling, Tsy can create money by minting platinum jumbo coins for deposit with Fed.”
First, why bother digging platinum out of the ground in order to have money? We grew out of that nonsense when we abandoned the Gold standard.
Second, not only can a country avoid a debt ceiling by minting money (i.e. printing money): it can write off as much of the national debt as it wants any time it wants. All it needs do is, first, print money and buy back the debt. That on its own probably be too inflationary. So, secondly, it needs to raise some of the money for the “buy back” from extra taxes (the effect of which is deflationary). As long as the above inflationary and deflationary tools are implemented in the right proportions, you have any amount of money with which to buy back the debt, and with no side effects – inflation or deflation wise.
Musgrave,
Who would be the "lucky" Peters robbed(taxed) to pay the Pauls(bond holders)? That does not seem politically feasible. If the debt was simply paid off, what % of that cash would not simply be reinvested in the next most risk free instrument?
Chewitup, The amount of extra tax needed would be small compared to the amount of debt bought back. Reason is that buying back debt is simply to swap two assets (government debt and cash) which are not very different in nature. Indeed government debt near maturity is almost indistinguishable from cash. So there is not a big stimulatory or inflationary effect. In contrast to swapping two similar assets, tax involves the CONFISCATION of wealth. That has a far bigger effect dollar for dollar.
In fact Rodger Mitchell advocates the same debt reduction proposal as I do, except that he thinks NO EXTRA TAX AT ALL is needed. See
http://rodgermmitchell.wordpress.com/2011/05/11/chicago-tribune-sets-new-record-for-economic-ignorance/
As to who the “lucky Peters” are it doesn’t matter from the strictly economic point of view, but given the increased inequalities in recent years, I’d prefer to see the rich pay more tax.
As to reinvesting in alternative assets, obviously former bond holders would attempt to do this. But the stock market has already risen substantially over the last year or so, so former bond holders would have a problem. I.e. they, plus banks, plus corporations are wallowing in cash and don’t know what to do with it. So just let them wallow. Miserable misers, the lot of them.
Ralph,
Beowulf's suggestion comes about only because of the peculiar set of laws on the books in the US.
The existing laws allow the Secretary of the Treasury, AT HIS DISCRETION, to mint arbitrarily denominated coins and to sell them to the public (read here the FED -- for that is how the transaction is actually done) This money is considered "miscellaneous receipts" to the US govt -- and is not considered debt.
The coins do not actually have to enter "general circulation" in order for the Treasury account to be so credited. Thus the coin can be minted say a 10 gram platinum coin denominated as "$100 billion." Such a coin may never see the light of day, and just as the "social security trust bonds" spend an eternity in the vaults of the FED. The large denomination makes such a coin be "counterfeit proof" and hence no "law enforcement " issues.
Ralph, you rightly say Reason is that buying back debt is simply to swap two assets (government debt and cash) which are not very different in nature.
But you still overestimate the difference between "government debt" and cash (just another form of government debt), and partly follow mainstream illogic.
All it needs do is, first, print money and buy back the debt. That on its own probably be too inflationary.
There are both inflationary and deflationary effects of "printing bonds" / raising interest rates - or the opposite "printing money" and lowering interest rates. Printing money, paying back interest bearing debt with currency, in current conditions would almost certainly be deflationary. Look at Japan. Look at the successful, consciously disinflationary low interest rates of WWII. There would be no additional taxation necessary. Indeed, extra spending - real money printing - might be necessary.
Clonal,
Exactly right. It'd make life simpler if Tsy had overdraft authority or could electronically create US Notes as necessary. Coins are the way to go only because Congress divided its seigniorage power between the Fed (currency) and Tsy (coins).
Incidentally, the same division exists between the ECB (currency) and ECU member nations (coins). But Germa-- oops, the ECB-- is nothing if not methodical; coins may only be issued in volumes (quantity and denomination) that the ECB approves.
Calgacus, My reason for thinking that buying back national debt with printed money would be stimulatory or inflationary is this. The less the interest that can be earned on the total of “monetary base plus national debt”, the less of the latter “total” the private sector will want to hold. Thus in the event of a “buy-back” the private sector will try to dissave monetary base, which would be stimulatory. Warren Mosler makes the same point in his “Soft Currency Economics” essay where he sets up a hypothetical economy consisting of parents and children, with “business cards” being the currency of the economy. As he points out, the higher the rate of interest that the parents offer, the more business cards the children will hold.
Also, “buy-back” is the same as QE, and its generally accepted that QE is mildly stimulatory.
I don’t understand your points about WWII and Japan. WWII economies were almost centrally planned economies, thus I’m sceptical about what parallels there are with economies in 2011. Re Japan, what has Japan done that supports your case? Japan has not printed money and bought back sizeable chunks of its national debt, far as I know.
"Japan has not printed money and bought back sizeable chunks of its national debt, far as I know."
However, Japan continues to experience deflation, in spite of the fact that its central bank holds an amount of debt that is roughly equal to its GDP. This would be equivalent to the Fed holding $15 trillion in debt.
http://www.cepr.net/index.php/blogs/beat-the-press/the-japanese-central-banks-holding-of-government-debt-also-reduces-its-interest-burden
Japan's central bank holds a bit under half of its national debt. The phrase "quantitative easing" was coined to describe its debt purchases, which according to mainstream theory should have been stimulatory, but as was discovered during the Great Depression, such actions are just "pushing on a string".
During WWII, the US ran big deficits but capped bond interest rates by Fed purchases, in essence moving toward "printing money" rather than "printing bonds". The usual idea is that raising interest rates/borrowing/printing bonds will be anti-inflationary, but there is much contrary evidence. The low interest rates policy of the US during WWII was partly due to Keynes's influence, who coined the term "Gibson's Paradox", suggesting the idea that lower rates are anti-inflationary, that raising rates is exactly the wrong medicine for inflation. The wiki article and the talk page have some further sources. My main, and I think strongest, point was that there are many effects occurring, some opposing each other, so whether buying back debt with currency is inflationary or not depends on the situation. E.g. If the kids are saving up to buy a prix fixe stuffed animal from the parents, lower rates will make them save more to reach their target.
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