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Who says that it isn't promising to return the gold in the future? I think that’s more or less exactly what it’s promising to do.
Let's think for a moment about a normal high street bank.
Say that you have a deposit account at a bank that effectively pays out at zero (it could be that real rates are zero, but it’s not important). Is the deposit still a liability of the bank? Of course it is.
Or say that you own shares in a company. The company is tanking and it suspends dividend payments. Are the shares still a liability of the company? Of course they are.
Deposits and shares are both claims on the assets of the company that issued them (with different levels of seniority), and sources of funding for those companies.
A Fed note pays out at zero in nominal terms (amusingly, last time I looked the IROR was higher than on that t-bills), but it is still a claim on the Fed’s assets. That is, it is a claim on the Fed. So, Fed notes are liabilities of the Fed.
I agree. But the Fed doesn't promise to convert its $ liabilities into anything other than $ liabilities, of which it has an unlimited supply (it creates them).
It doesn't owe anything other than its own promise. You can't take your Fed notes back to the Fed and demand gold in return. Although the Fed may choose to sell you some gold, for whatever reason, in return for your Fed notes if it wants to.
In contrast, a bank liability (a deposit) is a claim on something other than just a bank liability. It is also a claim on Fed notes, i.e. government currency.
I’m afraid that you’re getting a bit confused between saving and net saving and national saving and private saving, which is understandable.
Your last response basically amounts to asserting that if the private sector is saving then the government must be dissaving.
I’ve already shown that that isn’t true and my counterexample is about as simple as it gets.
This is bog-standard first year undergrad macro, which is also where the sectoral balance equation comes from. IOW, it's totally uncontroversial.
You write,
in the equation (Y-C-G) + (T - G) = I
This is not the equation. You are subtracting G twice and have taxes in the bracketed government term but not in the bracketed private sector term. The actual equation is,
(Y – T – C) + (T – G) = I
[iff Y – C – G – T + T = I iff Y – C – G = I iff Y = C + I + G]
If (T-G) is in surplus (positive) then the expression (Y-C-T) must evaluate to a negative number for the private sector to be in surplus.
[NB: I corrected the term in the above quote.]
If T > G, then (T – G) > 0. Does this mean that (Y – T – C) < 0? No, it does not. It just means that (Y – T – C) = I – (T – G). That is, as long as I > (T – G), then (Y – T – C) > 0.
To make it a bit easier on the eye, define Sp = (Y – T – C) and Sg = (T – G). Now we can write Sp + Sg = I, or Sp = I – Sg. In words, private saving is equal total investment, minus government saving. If investment is zero, then we have Sp = (– Sg); otherwise, we don’t.
The equations you wrote distill down to…
Y= C + I + G Y = C + S + T
which you have already stated indirectly.
Actually, they don’t distil down to that, and I was quite careful to state directly that,
S = Y – C – G
Which I called National Saving.
You have defined S differently, as,
S = Y – T – C
Which I defined as Private Saving.
Then you derive,
(S – I) = (G – T)
With S is defined as private saving. To avoid confusion, I’ll write this as,
(Sp – I) = (G – T)
But again, it’s still obviously possible for the private sector to save when the government is also saving. To see this just rewrite the above as,
Sp = I – (T – G)
Or, private saving is equal to investment minus government saving. If I > (T – G), then Sp > 0, which is exactly what I showed above.
Think of a share that doesn't pay a dividend. The share can still have value, because it's a claim on the company's assets. Fed notes don't pay interest, but they still have value, because they're claims on the Fed's assets.
In contrast, I can go to my bank and demand to withdraw my bank deposit as Fed notes. The bank can potentially run out of those, though with direct access to the Fed that is unlikely to happen except in extreme cases.
In accounting "net saving" def= "saving net of investment (fixed capital(." This is different from aggregate non-govt saving of net financial assets, which are financial assets held by non-govt, the liability entry of which is "outside."
What they give you is part ownership of the Fed's assets.
This is called "backing theory". But whatever you call it, the important point is that holders of Fed notes are ultimately in possession of a claim on the Fed’s assets, just like holders of shares in Google own a claim on their assets.
It might not be immediately obvious how to go about redeeming them for the average person on the street, but it there are various channels by which Fed notes can be “converted” into Fed assets. This is known as “reflux”.
How or why would the Fed convert its outstanding liabilities into its assets?
Imagine, as a example, what would happen if everyone suddenly decided that they no longer want to hold cash, so that demand for cash goes to zero. Will the Fed leave all these notes floating around the economy?
No, the Fed is constrained by its mandate. It will be forced to sell its assets in order to maintain control of its IR and inflation targets.
When it wants to contract the money supply, it swaps some of its assets for... some of its liabilities. Just like a regular bank.
Should be "When the cb wants to contract the money base to manage its target rate, it swaps some of its assets for... some of its liabilities. The money supply (money circulation) is endogenous rather than exogenous.
I don't disagree that you can convert Fed notes into Fed assets, but holding a Fed note doesn't entitle you to ownership of those assets.
As you say, the Fed does regularly exchange its assets for its liabilities, to manage the interest rate, though it could use other means to do that if it chose to.
Well, I agree, Tom--that's another restatement of the law of reflux, which is what I've been arguing in favour of here.
But I'm not sure that it's really necessary (always) to add that the Fed takes action for a reason, since, presumably, we know it already.
Sometimes, it can be helpful to just talk generally. If, for whatever reason, the Fed decided to contract the money supply, then it would do so buy selling assets, i.e., converting them into its liabilities. We can afford to give ourselves some leeway WRT inserting caveats about the Fed's reaction function when we're abstracting away from its particular concerns like this. At least, I think so.
Because you apparently don't understand the MMT analysis.
That’s certainly possible.
I don’t think that it’s true, though. I think that I understand it, and that I agree with it in some parts and disagree with it in others, which I hope you would agree is also possible, at least in principle.
What you wrote was that,
In accounting "net saving" def= "saving net of investment (fixed capital(." This is different from aggregate non-govt saving of net financial assets, which are financial assets held by non-govt, the liability entry of which is "outside."
But this seems to contradict itself. If we’re defining “net saving” as private saving net of investment, then this is equal to—in fact the same thing as—the acquisition of new NFA by the private sector, give or take some qualifications about the terms and the foreign sector, etc.
A liability is a claim on a company's assets. Claims on assets can have different degrees of seniority. The value of liabilities depends on the value of the underlying assets. That's the conventional story.
You say that the Fed's liabilities are different and that they don't entitle you to a claim on the Fed's assets.
On the other hand, when the Fed wants to retire them, it redeems them for assets, which seems to contract what you say. It also issues them to finance the acquisition of new assets, which also seems to contradict you. And of course, it holds these assets against its liabilities.
In short, it looks just like a conventional entity that issues liabilities. So why should I believe your claim about the Fed being different? Different how?
vimothy, the monetary base is irrelevant to anything but the interest rate. The Fed conducts monetary policy in terms of the interest rate, its effect on saving and borrowing and expectations about future change the Fed may make to the interest rage, which determines the yield curve. Changing the monetary base simply affects liquidity by changing the composition and term of assets held by non-govt rather than the amount. No one's net worth increases or decreases through asset swaps. The amount is affected by changes in govt fiscal policy, which increases or decreases non-govt-NFA and bank credit which increases deposit accounts. Amount of rb is irrelevant to bank lending. Banks don't lend because they have rb and don't not lend because they don't have enough rb at the time.
"I’m afraid that you’re getting a bit confused between saving and net saving and national saving and private saving, which is understandable."
I don't think I'm confused, just trying to get to the bottom of your argument and other than a typo here and there I don't see where I've made any mistakes.
Don't really disagree much with what you have written but your original statement at July 19, 2012 9:41 AM…
(In fact, it's possible for the government & private SECTOR to save at the same time, even if the CA is in balance.)
…is an appeal to the sectoral balances relationship because you referred to whole sectors and not subsets, and your numbers fail this test.
The private sector (every cohort combined in the aggregate) cannot net save unless the government runs a deficit, ie cannot have an increase in net financial assets on the private sector balance sheet.
If you had said that it was possible for private savings to increase at the same time as the government runs a budget surplus I would say sure. It is possible for some cohort in the private sector to net save as long as some other cohort is net dis-saving by a greater amount while the government is also net-saving, but it is impossible for this to occur for the private sector in the aggregate as net saving.
The instant you included "sector" in your statement you made it false.
You posted your statement on an MMT blog where you have to know that when we apply the sectoral balances relationship we are referring to net savings and in that context the government sector and the private sector (sector means as a whole) cannot net save at the same time. The MMT claim goes no further than that. It's uncontroversial that some can save in the private sector while others dis-save and the government is also saving.
Just not in the aggregate.
Other measures of saving, whatever they might be, are generally uninteresting. Total money in savings accounts? Total change in money in savings accounts? Not very useful re the overall picture.
It is possible for the private and public sectors to both be aggregate savers at the same time.
I have showed this analytically and I gave a simple example with numbers. I did this using the standard national saving identity and I did it using the private saving saving identity you referred to.
It's not like it's tensor analysis on manifolds, is it? It's one of the most basic things in macroeconomics. And all of this is one and the same as the sectoral balances. It's just different ways of writing the same GDP identity.
The private sector (every cohort combined in the aggregate) cannot net save unless the government runs a deficit
Like I said, you're getting confused between saving and net saving. Even though in my quote I make no mention of net saving, you switch to it here. Yes, I agree that the government can't be a net supplier and user of funds.
However, it is possible for both the government and the private sector to save at the same time (not "net save", save).
If we’re defining “net saving” as private saving net of investment, then this is equal to—in fact the same thing as—the acquisition of new NFA by the private sector, give or take some qualifications about the terms and the foreign sector, etc.
Yes! Full stop. That's exactly the MMT position.
Each sector aggregate describes a net of income minus spending. The labels for spending (G, I, X) vary according to which sector you are standing in at the time as do the labels for income (T, S, M) but that's the apples-to-apples comparison.
"However, it is possible for both the government and the private sector to save at the same time (not "net save", save)"
I think I said that.
You have to know that when you make that kind of statement it is irrelevant in the MMT context.
In MMT there is only net saving and total saving, which is the total of net saving over all budget cycles, and all saving consists of NFA's.
When Bill Mitchell says the private sector and government can't save at the same time it's absolutely true in the MMT context and it's absolutely true re the sectoral balances. Saving (or savings) in the MMT context is net financai assets, increasing as a flow from year to year and as a running total over history.
NFA's can not increase if the government is running a surplus and the external account is in balance.
Plug that into your equation.
What does it even mean to say that the private sector can "save" over a budget cycle?
I know what the equation says but what does it mean in the context of the economy as a whole.
How is it calculated and how is it different from NFA's or what is the realtionship wrt NFA's?
What things of importance can we learn from it?
Why do you think the numbers you presented fail the sectoral balances test?
Do you agree that in the context of the MMT definition of savings that the math is correct re NFA's?
What I wrote was that it is possible for the private sector and the government to save at the same time.
You asked me to show how this was possible, saying that it violates the sectoral balances identity, and so I did. Then you asserted that my original statement was false.
What I wrote was not wrong. It’s actually very basic.
It certainly doesn’t contradict the sectoral balances identity. It basically is the sectoral balances identity.
I don’t want to get into the whole net saving thing again. You say that in MMT there is only net saving and something you call “total saving”. That’s fine. I didn’t refer to net saving, though. I referred to saving. That said, you also seem to suggest that aggregate saving is impossible unless there is another sector running a deficit. This is simply not true: just look at the sector balances identity. Even if CA and govt balances are zero, we have S = I, and there are a potentially infinite range of values that satisfy it. What this means is that aggregate saving and net saving are not synonyms.
Here is Scott Fullwiler on the possibility of saving without deficits from other sectors:
In other words, OBVIOUSLY there can be an increase in financial assets without govt deficits if the former "net" to zero in that case, otherwise there would be nothing to "net" in the first place. Similarly, there can OBVIOUSLY be saving without govt deficits or a current account surplus, but not NET saving.
So the MMT position seems pretty straightforward to me. Again, this is basic macro. It would be weird if professors were contradicting it, especially ones who places as much emphasis on the importance of stock-flow consistency.
NFA's cannot increase if the government is running a surplus and the external account is in balance.
I agree.
What does it even mean to say that the private sector can "save" over a budget cycle?
That’s a really strange question. What does it have to do with the budget cycle? It would be better to simply ask: what does it mean to say that the private sector can save? What it means is that the private sector does not consume all the resources it generates over a given period, but keeps some to one side for future use.
How is it calculated and how is it different from NFA's or what is the realtionship wrt NFA's?
Saving is unconsumed income. The definitions for private sector, government and national saving are in my post above. NFA in the MMT sense is a proper subset of saving for either the private sector or the non-government sector.
"when the Fed wants to retire them, it redeems them for assets, which seems to contract what you say"
Yes the fed does swap its assets for its liabilities. Totally voluntary, no obligation to do so.
It buys and sells government debt as a way of controlling interest rates. It doesn't have to do it that way, it's something that it chooses to do. There are other ways for it to control interest rates, if that's what it wants to do.
"It also issues them to finance the acquisition of new assets, which also seems to contradict you"
It could potentially issue liabilties to purchase what it wants, be that government bonds or ice cream.
It tends not to buy ice cream in this way, though. Buying bonds is about interest rate management.
"it holds these assets against its liabilities"
Not sure why it needs to hold them against its liabilities. What does it gain from that?
Fed liabilities are different in the sense that the fed only promises to exchange them for other fed liabities, i.e. for more of the same. You can't demand payment in gold, or government bonds from the Fed. You can demand to pay debts owed to the Fed or the treasury with them, though.
However, the Fed does at present exchange its liabilities for assets, mainly govt bonds, as part of its method of maintaining its target interest rate.
The Fed doesn't owe its assets to anyone, though it does regularly choose to buy and sell assets in OMOs.
Let's forget about the issue of interest payments on Fed notes for a moment.
Instead of debt, compare them to equity claims that don't pay dividends.
What are equity claims? They are ultimately claims on a company's assets.
You can't take your shares to Google and get a bit more of their HQ, but still, the claims are obviously worth something.
If what you say about the Fed is true, then it seems to me that it should also apply to other companies. If you can't go to Google and demand your assets back, and you don't earn dividends, then where does the value of the share come from?
"Although it seems fair to offer the last word to Paul"
My only comment is that you know MMT has it's particular definition of saving and it rejects nearly everything mainstream economics theory has to offer, including the unimportant distinction between saving and net saving.
The only saving that matters (to MMT'rs) is accumulation of NFA's. You're commenting on an MMT site.
At least you should be aware of that by now.
Why bother to throw that statement in there if you know the discussion can't go anywhere fruitful?
You say you aren't interested in the saving/net saving argument as its been worn out but you spent most of your time on that and ignored more interesting (in my view) arguments in my other responses.
IMHO, Paul has the systems analysis right, which is what MMT is. Reread his comments. They are straightforward and simply to understand if one understands the basics of systems. It could be that all funding comes from bank credit, but that is not the way it is and if it were the system would function very differently, as Paul observes. Read Neil Wilson's stuff at 3spoken too for the systems view.
What are equity claims? They are ultimately claims on a company's assets.
You can't take your shares to Google and get a bit more of their HQ, but still, the claims are obviously worth something.
If what you say about the Fed is true, then it seems to me that it should also apply to other companies. If you can't go to Google and demand your assets back, and you don't earn dividends, then where does the value of the share come from?
It comes from the same place as the value of a baseball card. It's worth whatever someone will pay you for it. It's not a redeemable promise, not an IOU.
For that reason I don't think it's a proper analog for any of the other things being discussed (notes, bonds, reserves, deposits). All those things are either base money or a promise to deliver base money. The corporate equivalent is a corporate check or corporate bond.
In the same sense that a corporate bond/check is not an equity claim but a narrow dollar-denominated promise to redeem for other dollar IOUs, the Fed liabilities being discussed are also not an equity claim.
I’m afraid that I can’t work out what you’re getting at!
Are you saying that the value of a share has nothing to do with the value of a company’s assets?
It seems that you are. I don’t think that’s true. Then you go onto say that a share isn’t an IOU, so it can’t be compared to base money. But the point of comparison between shares and base money was that base money doesn’t always seem like an IOU either. It’s not a bond that pays out anything, because it's not discounted, but it’s still a liability of the central bank though, so it’s a kind of junior unsecured claim against it whose value is unbounded in principle. That looks like an equity claim to me.
I'm saying that if people don't want to hold money any more, the Fed has to accommodate them. This means that the money supply is endogenous, i.e., that it's not determined by the Fed but by the private sector.
You said (or seemed to) that the Fed doesn't have to accommodate them. But this implies that the Fed can determine the money supply, i.e., that the money supply is exogenous.
The money supply (money available to be spent) is endogenous because it is largely bank money and when a cb is an LLR, then the cb loses control of the monetary base as a means of regulating the amount of bank lending. The cb can restrict lending by restricting liquidity but as LLR it gives up this tool.
The section entitled "Contingent Institutional Reform – A Central Treasury Bank" describes a supposedly hypothetical situation, but one which MMTers argue is already the case today (if you look at the bigger picture).
When I say it's "already the case today" I don't mean that literally. I just mean that for all intents and purposes it may as well already be the case today (if you know what I mean), as the potential outcome is no different overall.
Someone pointed me to that post in another thread, but I haven’t had the chance to read it properly yet. I did have a quick scan of the section you referred to though. I don’t think that it really describes the situation that most governments are currently in. For example, the Fed can be said to indirectly lend to the government, since it purchases government debt in OMO; but it doesn’t lend to it directly.
Probably I’m not understanding what you’re getting at though.
What happens if the Fed doesn't accomodate them? Please spell it out for me as I want to know what you mean exactly.
The Fed will lose control of its interest rate target and/or its inflation target.
To describe the situation in very broad terms, if the Fed forces people to hold more of its liabilities than they ultimately want, something has to change—and the only thing that can change is the terms on which people are willing to hold them.
I just thought that paper has some interesting parts, though I wouldn't agree with all of it.
"For example, the Fed can be said to indirectly lend to the government, since it purchases government debt in OMO; but it doesn’t lend to it directly."
Yes but given that bond auctions don't and won't fail, that the fed provides the reserves for bond purchases and can control yields if it wants to, and given that Treasury cheques never bounce, it all seems like much of a muchness to me, really. (Though there are some tangential differences of course).
"The Fed will lose control of its interest rate target and/or its inflation target"
That's why I said asset (bond) purchases and sales by the Fed are simply method of maintaining its target interest rate. If it didn't accomodate, as you say the interest rate would move from the Fed's target - unless it uses some other means to maintain that target. (We discussed IOR before, for example).
As before the question is to what extent the interest rate is necessarily directly related to inflation, and whether targeting interest rates is the best way to control inflation.
"if the Fed forces people to hold more of its liabilities than they ultimately want, something has to change—and the only thing that can change is the terms on which people are willing to hold them."
The interest rate will fall, unless the Fed uses some other method to maintain it at its target level.
Yes but given that bond auctions don't and won't fail, that the fed provides the reserves for bond purchases and can control yields if it wants to, and given that Treasury cheques never bounce, it all seems like much of a muchness to me, really. (Though there are some tangential differences of course).
I don’t know about that. It seems like there could be some pretty big differences. At the same time, it’s often possible to construct hypothetical situations that are equivalent to our own in some way. That’s a lot of what economics is all about.
If the Fed, and only the Fed, were to lend directly to the government, then the asset side of its balance sheet would represent the national debt. That’s not what we have now. On the other hand, the national debt does still exist, so in that sense the two situations are similar.
Presumably you want to be able to say that the government can always finance whatever level of spending it likes because it has the ability to print money. But the one doesn’t necessarily follow from the other. Pointing to a case where the Fed lends directly to the government and saying that it is equivalent to the current arrangement only helps advance your argument if in the case where the Fed lends directly the government it really can finance whatever level of spending it likes.
So let’s say that we assume for the sake of argument that the two setups are exactly the same. What should we conclude from that? If it’s that the government can finance whatever level of spending it likes, why should that be the case?
If the government were to retire all its debt, and then finance all subsequent spending with new 'money creation', the banking system would end up with "excess" reserves (cash).
If the central bank did nothing to maintain a positive interest rate, the interest rate on those reserves would fall to zero.
The banks would have no interest-bearing alternative to reserves (govt bonds), so would just have to hold the non-interest bearing reserves in their reserve accounts.
The central bank could, however, choose to maintain a positive interest rate on reserve balances, if it wanted to, simply by paying interest on them.
(Thinking off the top of my head, it could also potentially offer longer-term alternatives, such as interest-bearing 'time deposits' or 'savings accounts' for banks, if it chose to).
But let's say the cb decided to leave the interest rate at zero, and all government spending was 'money-financed', leading to more 'excess' reserves building up within the banking system over time (assuming the govt is running a deficit). What effect would this have?
Any effect would necessarily be through the interest rate, rather than the quantity of excess reserves per se.
Bear in mind that whilst the base rate would be zero, the risk-adjusted rate at which banks lend would still be higher than that.
The question is not "how much cash will people be willing to hold?", but rather "what effect might different interest rates have on the economy?".
Mosler argues that, given correct government fiscal policy:
"there are a number of good reasons for setting the overnight rate at its natural or normal rate of zero and allowing markets to factor in risk to determine subsequent credit spreads. The Japanese experience has already demonstrated that this does not cause inflation or currency depreciation. If anything, lower rates support investment, productivity, and growth. While changing rates can have important distributional or micro effects (and that can spur employment and output growth, such as shifting income from “savers” to working people), the net income or macro effect is zero since for every dollar borrowed from the banking system there is a dollar saved, as the Fed clearly recognizes in its literature. Additionally, it can be argued that asset pricing under a zero interest rate policy is the “base case” and that any move away from a zero rate policy constitutes a (politically implemented) shift from this “base case.”
If the Fed pays the financial system to hold the national debt in its entirety in the form of reserves or other longer term securities, how is that different to paying the private sector to hold the national debt in the form of bonds?
You might say that the government can achieve slightly lower rates by paying IOR than if it paid interest on bonds—although, obviously the maturity is a lot shorter!
If that is so, then it seems like a question of degree. It might be that the government make some marginal savings on its debt service by issuing more of one particular instrument and less of another. I imagine that this would be contingent on states of the world. For example, at present the interest rate on reserves is substantially higher than that on t-bills (I think it was four times higher the last time I looked).
This does not seem like a radical departure from the current regime, but rather a debt management question. So what do you gain if you finance the national debt in this way and what do you give up?
Now, if you don’t pay the banks interest, then that does look like a different regime. However, someone still has to hold that extra base money. Banks can’t force their customers to hold it, so it will have to stay in the financial sector where it will drive down interest rates.
So say that this happens. Then what? It’s hard to see how setting the interbank rates to zero forever would be optimal in every state of the world. Even if mainstream theory is wrong about the inflationary or deflationary possibilities of such a move, what is potential upside supposed to be?
The question is not "how much cash will people be willing to hold?", but rather "what effect might different interest rates have on the economy?".
From the point of view of economics the two questions are the same. You can’t ask one without implicitly asking the other.
"someone still has to hold that extra base money. Banks can’t force their customers to hold it, so it will have to stay in the financial sector where it will drive down interest rates."
Yes, someone has to hold that base money. Either it sits in reserve accounts at the central bank, or it is withdrawn as notes and coins. The only other option is to use it to buy treasuries.
If the government decides to stop issuing tsys and instead starts financing its deficit spending with new 'money creation' then the additional base money will simply accumulate in reserve accounts at the central bank or it will be withdrawn as notes and coins. In this situation, banks will simply end up holding whatever quantity of reserves they are given. People aren't suddenly going to start withdrawing more notes and coins.
259 comments:
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Who says that it isn't promising to return the gold in the future? I think that’s more or less exactly what it’s promising to do.
Let's think for a moment about a normal high street bank.
Say that you have a deposit account at a bank that effectively pays out at zero (it could be that real rates are zero, but it’s not important). Is the deposit still a liability of the bank? Of course it is.
Or say that you own shares in a company. The company is tanking and it suspends dividend payments. Are the shares still a liability of the company? Of course they are.
Deposits and shares are both claims on the assets of the company that issued them (with different levels of seniority), and sources of funding for those companies.
A Fed note pays out at zero in nominal terms (amusingly, last time I looked the IROR was higher than on that t-bills), but it is still a claim on the Fed’s assets. That is, it is a claim on the Fed. So, Fed notes are liabilities of the Fed.
"Fed notes are liabilities of the Fed"
I agree. But the Fed doesn't promise to convert its $ liabilities into anything other than $ liabilities, of which it has an unlimited supply (it creates them).
It doesn't owe anything other than its own promise. You can't take your Fed notes back to the Fed and demand gold in return. Although the Fed may choose to sell you some gold, for whatever reason, in return for your Fed notes if it wants to.
In contrast, a bank liability (a deposit) is a claim on something other than just a bank liability. It is also a claim on Fed notes, i.e. government currency.
But that's just like saying that bank deposits are a claim on the bank's assets (cash & reserve balances are an asset for banks).
In a similar way, Fed notes are also a claim on the Fed's assets.
"Deposits and shares are both claims on the assets of the company that issued them"
Agreed again. Deposits are also a claim on the bank's assets, which include Fed liabilities (notes).
What assets are Fed notes a claim to?
*claim on
Paul,
I’m afraid that you’re getting a bit confused between saving and net saving and national saving and private saving, which is understandable.
Your last response basically amounts to asserting that if the private sector is saving then the government must be dissaving.
I’ve already shown that that isn’t true and my counterexample is about as simple as it gets.
This is bog-standard first year undergrad macro, which is also where the sectoral balance equation comes from. IOW, it's totally uncontroversial.
You write,
in the equation (Y-C-G) + (T - G) = I
This is not the equation. You are subtracting G twice and have taxes in the bracketed government term but not in the bracketed private sector term. The actual equation is,
(Y – T – C) + (T – G) = I
[iff Y – C – G – T + T = I iff Y – C – G = I iff Y = C + I + G]
If (T-G) is in surplus (positive) then the expression (Y-C-T) must evaluate to a negative number for the private sector to be in surplus.
[NB: I corrected the term in the above quote.]
If T > G, then (T – G) > 0. Does this mean that (Y – T – C) < 0? No, it does not. It just means that (Y – T – C) = I – (T – G). That is, as long as I > (T – G), then (Y – T – C) > 0.
To make it a bit easier on the eye, define Sp = (Y – T – C) and Sg = (T – G). Now we can write Sp + Sg = I, or Sp = I – Sg. In words, private saving is equal total investment, minus government saving. If investment is zero, then we have Sp = (– Sg); otherwise, we don’t.
The equations you wrote distill down to…
Y= C + I + G
Y = C + S + T
which you have already stated indirectly.
Actually, they don’t distil down to that, and I was quite careful to state directly that,
S = Y – C – G
Which I called National Saving.
You have defined S differently, as,
S = Y – T – C
Which I defined as Private Saving.
Then you derive,
(S – I) = (G – T)
With S is defined as private saving. To avoid confusion, I’ll write this as,
(Sp – I) = (G – T)
But again, it’s still obviously possible for the private sector to save when the government is also saving. To see this just rewrite the above as,
Sp = I – (T – G)
Or, private saving is equal to investment minus government saving. If I > (T – G), then Sp > 0, which is exactly what I showed above.
It's that old "net saving" discussion again?
vimothy,
The question I mean to ask above is, what Fed assets are Fed notes a claim on? What can you demand they be converted into?
Y,
What assets are Fed notes a claim to?
Whatever assets its got!
Think of a share that doesn't pay a dividend. The share can still have value, because it's a claim on the company's assets. Fed notes don't pay interest, but they still have value, because they're claims on the Fed's assets.
Also, think about what the Fed does.
When it wants to contract the money supply, it swaps some of its assets for... some of its liabilities. Just like a regular bank.
vimothy, you said when it WANTS to contract the money supply... Yes it can do that if it wants to.
"Whatever assets its got!"
I can't take my Fed notes to the Fed and demand anything other than Fed notes. It can't run out of those.
It can sell some of its assets to me in exchange for my Fed notes if it wants to though, of course.
In contrast, I can go to my bank and demand to withdraw my bank deposit as Fed notes. The bank can potentially run out of those, though with direct access to the Fed that is unlikely to happen except in extreme cases.
You can't take your shares to Apple and demand some of its factory either. Still...
In accounting "net saving" def= "saving net of investment (fixed capital(." This is different from aggregate non-govt saving of net financial assets, which are financial assets held by non-govt, the liability entry of which is "outside."
Blog 39: MMT for Austrians: Disagreements Among Reasonable People
Elaborated in the comments.
Tom, I don't understand that comment.
A share gives you part ownership of the company, or at least the company stock.
Fed notes don't give you part ownership of the Fed or the US government does it? It does give you a 'stake' in the US though.
I'm talking like a child now, sorry.
Fed notes don't give you part ownership of the Fed or the US government they? They doe give you a 'stake' in the US though.
wow, how many typos?
Third time lucky (concentrate now).
Fed notes don't give you part ownership of the Fed or of the US government, do they? They do give you a 'stake' in the US (economy) though.
Y,
What they give you is part ownership of the Fed's assets.
This is called "backing theory". But whatever you call it, the important point is that holders of Fed notes are ultimately in possession of a claim on the Fed’s assets, just like holders of shares in Google own a claim on their assets.
It might not be immediately obvious how to go about redeeming them for the average person on the street, but it there are various channels by which Fed notes can be “converted” into Fed assets. This is known as “reflux”.
How or why would the Fed convert its outstanding liabilities into its assets?
Imagine, as a example, what would happen if everyone suddenly decided that they no longer want to hold cash, so that demand for cash goes to zero. Will the Fed leave all these notes floating around the economy?
No, the Fed is constrained by its mandate. It will be forced to sell its assets in order to maintain control of its IR and inflation targets.
When it wants to contract the money supply, it swaps some of its assets for... some of its liabilities. Just like a regular bank.
Should be "When the cb wants to contract the money base to manage its target rate, it swaps some of its assets for... some of its liabilities. The money supply (money circulation) is endogenous rather than exogenous.
vimothy: Tom, I don't understand that comment
Because you apparently don't understand the MMT analysis.
"This is known as “reflux”.
I don't disagree that you can convert Fed notes into Fed assets, but holding a Fed note doesn't entitle you to ownership of those assets.
As you say, the Fed does regularly exchange its assets for its liabilities, to manage the interest rate, though it could use other means to do that if it chose to.
Well, I agree, Tom--that's another restatement of the law of reflux, which is what I've been arguing in favour of here.
But I'm not sure that it's really necessary (always) to add that the Fed takes action for a reason, since, presumably, we know it already.
Sometimes, it can be helpful to just talk generally. If, for whatever reason, the Fed decided to contract the money supply, then it would do so buy selling assets, i.e., converting them into its liabilities. We can afford to give ourselves some leeway WRT inserting caveats about the Fed's reaction function when we're abstracting away from its particular concerns like this. At least, I think so.
Tom
Because you apparently don't understand the MMT analysis.
That’s certainly possible.
I don’t think that it’s true, though. I think that I understand it, and that I agree with it in some parts and disagree with it in others, which I hope you would agree is also possible, at least in principle.
What you wrote was that,
In accounting "net saving" def= "saving net of investment (fixed capital(." This is different from aggregate non-govt saving of net financial assets, which are financial assets held by non-govt, the liability entry of which is "outside."
But this seems to contradict itself. If we’re defining “net saving” as private saving net of investment, then this is equal to—in fact the same thing as—the acquisition of new NFA by the private sector, give or take some qualifications about the terms and the foreign sector, etc.
Y,
What you say seems a bit strange to me.
A liability is a claim on a company's assets. Claims on assets can have different degrees of seniority. The value of liabilities depends on the value of the underlying assets. That's the conventional story.
You say that the Fed's liabilities are different and that they don't entitle you to a claim on the Fed's assets.
On the other hand, when the Fed wants to retire them, it redeems them for assets, which seems to contract what you say. It also issues them to finance the acquisition of new assets, which also seems to contradict you. And of course, it holds these assets against its liabilities.
In short, it looks just like a conventional entity that issues liabilities. So why should I believe your claim about the Fed being different? Different how?
vimothy, the monetary base is irrelevant to anything but the interest rate. The Fed conducts monetary policy in terms of the interest rate, its effect on saving and borrowing and expectations about future change the Fed may make to the interest rage, which determines the yield curve. Changing the monetary base simply affects liquidity by changing the composition and term of assets held by non-govt rather than the amount. No one's net worth increases or decreases through asset swaps. The amount is affected by changes in govt fiscal policy, which increases or decreases non-govt-NFA and bank credit which increases deposit accounts. Amount of rb is irrelevant to bank lending. Banks don't lend because they have rb and don't not lend because they don't have enough rb at the time.
@vimothy
"I’m afraid that you’re getting a bit confused between saving and net saving and national saving and private saving, which is understandable."
I don't think I'm confused, just trying to get to the bottom of your argument and other than a typo here and there I don't see where I've made any mistakes.
Don't really disagree much with what you have written but your original statement at July 19, 2012 9:41 AM…
(In fact, it's possible for the government & private SECTOR to save at the same time, even if the CA is in balance.)
…is an appeal to the sectoral balances relationship because you referred to whole sectors and not subsets, and your numbers fail this test.
The private sector (every cohort combined in the aggregate) cannot net save unless the government runs a deficit, ie cannot have an increase in net financial assets on the private sector balance sheet.
If you had said that it was possible for private savings to increase at the same time as the government runs a budget surplus I would say sure. It is possible for some cohort in the private sector to net save as long as some other cohort is net dis-saving by a greater amount while the government is also net-saving, but it is impossible for this to occur for the private sector in the aggregate as net saving.
The instant you included "sector" in your statement you made it false.
You posted your statement on an MMT blog where you have to know that when we apply the sectoral balances relationship we are referring to net savings and in that context the government sector and the private sector (sector means as a whole) cannot net save at the same time. The MMT claim goes no further than that. It's uncontroversial that some can save in the private sector while others dis-save and the government is also saving.
Just not in the aggregate.
Other measures of saving, whatever they might be, are generally uninteresting. Total money in savings accounts? Total change in money in savings accounts? Not very useful re the overall picture.
Paul,
It is possible for the private and public sectors to both be aggregate savers at the same time.
I have showed this analytically and I gave a simple example with numbers. I did this using the standard national saving identity and I did it using the private saving saving identity you referred to.
It's not like it's tensor analysis on manifolds, is it? It's one of the most basic things in macroeconomics. And all of this is one and the same as the sectoral balances. It's just different ways of writing the same GDP identity.
The private sector (every cohort combined in the aggregate) cannot net save unless the government runs a deficit
Like I said, you're getting confused between saving and net saving. Even though in my quote I make no mention of net saving, you switch to it here. Yes, I agree that the government can't be a net supplier and user of funds.
However, it is possible for both the government and the private sector to save at the same time (not "net save", save).
@vimothy,
If we’re defining “net saving” as private saving net of investment, then this is equal to—in fact the same thing as—the acquisition of new NFA by the private sector, give or take some qualifications about the terms and the foreign sector, etc.
Yes! Full stop. That's exactly the MMT position.
Each sector aggregate describes a net of income minus spending. The labels for spending (G, I, X) vary according to which sector you are standing in at the time as do the labels for income (T, S, M) but that's the apples-to-apples comparison.
@vimothy
"However, it is possible for both the government and the private sector to save at the same time (not "net save", save)"
I think I said that.
You have to know that when you make that kind of statement it is irrelevant in the MMT context.
In MMT there is only net saving and total saving, which is the total of net saving over all budget cycles, and all saving consists of NFA's.
When Bill Mitchell says the private sector and government can't save at the same time it's absolutely true in the MMT context and it's absolutely true re the sectoral balances. Saving (or savings) in the MMT context is net financai assets, increasing as a flow from year to year and as a running total over history.
NFA's can not increase if the government is running a surplus and the external account is in balance.
Plug that into your equation.
What does it even mean to say that the private sector can "save" over a budget cycle?
I know what the equation says but what does it mean in the context of the economy as a whole.
How is it calculated and how is it different from NFA's or what is the realtionship wrt NFA's?
What things of importance can we learn from it?
Why do you think the numbers you presented fail the sectoral balances test?
Do you agree that in the context of the MMT definition of savings that the math is correct re NFA's?
Paul,
What I wrote was that it is possible for the private sector and the government to save at the same time.
You asked me to show how this was possible, saying that it violates the sectoral balances identity, and so I did. Then you asserted that my original statement was false.
What I wrote was not wrong. It’s actually very basic.
It certainly doesn’t contradict the sectoral balances identity. It basically is the sectoral balances identity.
I don’t want to get into the whole net saving thing again. You say that in MMT there is only net saving and something you call “total saving”. That’s fine. I didn’t refer to net saving, though. I referred to saving. That said, you also seem to suggest that aggregate saving is impossible unless there is another sector running a deficit. This is simply not true: just look at the sector balances identity. Even if CA and govt balances are zero, we have S = I, and there are a potentially infinite range of values that satisfy it. What this means is that aggregate saving and net saving are not synonyms.
Here is Scott Fullwiler on the possibility of saving without deficits from other sectors:
In other words, OBVIOUSLY there can be an increase in financial assets without govt deficits if the former "net" to zero in that case, otherwise there would be nothing to "net" in the first place. Similarly, there can OBVIOUSLY be saving without govt deficits or a current account surplus, but not NET saving.
So the MMT position seems pretty straightforward to me. Again, this is basic macro. It would be weird if professors were contradicting it, especially ones who places as much emphasis on the importance of stock-flow consistency.
NFA's cannot increase if the government is running a surplus and the external account is in balance.
I agree.
What does it even mean to say that the private sector can "save" over a budget cycle?
That’s a really strange question. What does it have to do with the budget cycle? It would be better to simply ask: what does it mean to say that the private sector can save? What it means is that the private sector does not consume all the resources it generates over a given period, but keeps some to one side for future use.
How is it calculated and how is it different from NFA's or what is the realtionship wrt NFA's?
Saving is unconsumed income. The definitions for private sector, government and national saving are in my post above. NFA in the MMT sense is a proper subset of saving for either the private sector or the non-government sector.
I think this was covered previously in the tortuous MMR savings/net savings debate.
Yes, let's not go there. No more on the subject from me.
Although it seems fair to offer the last word to Paul.
vimothy,
"when the Fed wants to retire them, it redeems them for assets, which seems to contract what you say"
Yes the fed does swap its assets for its liabilities. Totally voluntary, no obligation to do so.
It buys and sells government debt as a way of controlling interest rates. It doesn't have to do it that way, it's something that it chooses to do. There are other ways for it to control interest rates, if that's what it wants to do.
"It also issues them to finance the acquisition of new assets, which also seems to contradict you"
It could potentially issue liabilties to purchase what it wants, be that government bonds or ice cream.
It tends not to buy ice cream in this way, though. Buying bonds is about interest rate management.
"it holds these assets against its liabilities"
Not sure why it needs to hold them against its liabilities. What does it gain from that?
Fed liabilities are different in the sense that the fed only promises to exchange them for other fed liabities, i.e. for more of the same. You can't demand payment in gold, or government bonds from the Fed. You can demand to pay debts owed to the Fed or the treasury with them, though.
However, the Fed does at present exchange its liabilities for assets, mainly govt bonds, as part of its method of maintaining its target interest rate.
The Fed doesn't owe its assets to anyone, though it does regularly choose to buy and sell assets in OMOs.
It's at the top of the "pyramid".
Y,
If the Fed doesn't have to redeem its liabilities for its assets, then this seems to imply that the supply money is not endogenous. Is that your view?
Let's forget about the issue of interest payments on Fed notes for a moment.
Instead of debt, compare them to equity claims that don't pay dividends.
What are equity claims? They are ultimately claims on a company's assets.
You can't take your shares to Google and get a bit more of their HQ, but still, the claims are obviously worth something.
If what you say about the Fed is true, then it seems to me that it should also apply to other companies. If you can't go to Google and demand your assets back, and you don't earn dividends, then where does the value of the share come from?
"Although it seems fair to offer the last word to Paul"
My only comment is that you know MMT has it's particular definition of saving and it rejects nearly everything mainstream economics theory has to offer, including the unimportant distinction between saving and net saving.
The only saving that matters (to MMT'rs) is accumulation of NFA's. You're commenting on an MMT site.
At least you should be aware of that by now.
Why bother to throw that statement in there if you know the discussion can't go anywhere fruitful?
You say you aren't interested in the saving/net saving argument as its been worn out but you spent most of your time on that and ignored more interesting (in my view) arguments in my other responses.
Puzzling.
Paul,
Why don't you quote the bits that you felt were more interesting and I will respond to them.
IMHO, Paul has the systems analysis right, which is what MMT is. Reread his comments. They are straightforward and simply to understand if one understands the basics of systems. It could be that all funding comes from bank credit, but that is not the way it is and if it were the system would function very differently, as Paul observes. Read Neil Wilson's stuff at 3spoken too for the systems view.
What are equity claims? They are ultimately claims on a company's assets.
You can't take your shares to Google and get a bit more of their HQ, but still, the claims are obviously worth something.
If what you say about the Fed is true, then it seems to me that it should also apply to other companies. If you can't go to Google and demand your assets back, and you don't earn dividends, then where does the value of the share come from?
It comes from the same place as the value of a baseball card. It's worth whatever someone will pay you for it. It's not a redeemable promise, not an IOU.
For that reason I don't think it's a proper analog for any of the other things being discussed (notes, bonds, reserves, deposits). All those things are either base money or a promise to deliver base money. The corporate equivalent is a corporate check or corporate bond.
In the same sense that a corporate bond/check is not an equity claim but a narrow dollar-denominated promise to redeem for other dollar IOUs, the Fed liabilities being discussed are also not an equity claim.
Tom,
De gustibus non est disputandum.
Geerussell,
I’m afraid that I can’t work out what you’re getting at!
Are you saying that the value of a share has nothing to do with the value of a company’s assets?
It seems that you are. I don’t think that’s true. Then you go onto say that a share isn’t an IOU, so it can’t be compared to base money. But the point of comparison between shares and base money was that base money doesn’t always seem like an IOU either. It’s not a bond that pays out anything, because it's not discounted, but it’s still a liability of the central bank though, so it’s a kind of junior unsecured claim against it whose value is unbounded in principle. That looks like an equity claim to me.
"If the Fed doesn't have to redeem its liabilities for its assets, then this seems to imply that the supply money is not endogenous."
Why's that?
I'm saying that if people don't want to hold money any more, the Fed has to accommodate them. This means that the money supply is endogenous, i.e., that it's not determined by the Fed but by the private sector.
You said (or seemed to) that the Fed doesn't have to accommodate them. But this implies that the Fed can determine the money supply, i.e., that the money supply is exogenous.
The money supply (money available to be spent) is endogenous because it is largely bank money and when a cb is an LLR, then the cb loses control of the monetary base as a means of regulating the amount of bank lending. The cb can restrict lending by restricting liquidity but as LLR it gives up this tool.
We're talking about the monetary base in particular here.
vimothy,
Have you read this paper by JKH?
http://monetaryrealism.com/treasury-and-the-central-bank-a-contingent-institutional-approach/
The section entitled "Contingent Institutional Reform – A Central Treasury Bank" describes a supposedly hypothetical situation, but one which MMTers argue is already the case today (if you look at the bigger picture).
"if people don't want to hold money any more, the Fed has to accommodate them"
I assume by money you mean 'base money' (cash, reserves).
What happens if the Fed doesn't accomodate them? Please spell it out for me as I want to know what you mean exactly.
When I say it's "already the case today" I don't mean that literally. I just mean that for all intents and purposes it may as well already be the case today (if you know what I mean), as the potential outcome is no different overall.
Y,
Someone pointed me to that post in another thread, but I haven’t had the chance to read it properly yet. I did have a quick scan of the section you referred to though. I don’t think that it really describes the situation that most governments are currently in. For example, the Fed can be said to indirectly lend to the government, since it purchases government debt in OMO; but it doesn’t lend to it directly.
Probably I’m not understanding what you’re getting at though.
What happens if the Fed doesn't accomodate them? Please spell it out for me as I want to know what you mean exactly.
The Fed will lose control of its interest rate target and/or its inflation target.
To describe the situation in very broad terms, if the Fed forces people to hold more of its liabilities than they ultimately want, something has to change—and the only thing that can change is the terms on which people are willing to hold them.
I just thought that paper has some interesting parts, though I wouldn't agree with all of it.
"For example, the Fed can be said to indirectly lend to the government, since it purchases government debt in OMO; but it doesn’t lend to it directly."
Yes but given that bond auctions don't and won't fail, that the fed provides the reserves for bond purchases and can control yields if it wants to, and given that Treasury cheques never bounce, it all seems like much of a muchness to me, really. (Though there are some tangential differences of course).
"The Fed will lose control of its interest rate target and/or its inflation target"
That's why I said asset (bond) purchases and sales by the Fed are simply method of maintaining its target interest rate. If it didn't accomodate, as you say the interest rate would move from the Fed's target - unless it uses some other means to maintain that target. (We discussed IOR before, for example).
As before the question is to what extent the interest rate is necessarily directly related to inflation, and whether targeting interest rates is the best way to control inflation.
"if the Fed forces people to hold more of its liabilities than they ultimately want, something has to change—and the only thing that can change is the terms on which people are willing to hold them."
The interest rate will fall, unless the Fed uses some other method to maintain it at its target level.
Yes but given that bond auctions don't and won't fail, that the fed provides the reserves for bond purchases and can control yields if it wants to, and given that Treasury cheques never bounce, it all seems like much of a muchness to me, really. (Though there are some tangential differences of course).
I don’t know about that. It seems like there could be some pretty big differences. At the same time, it’s often possible to construct hypothetical situations that are equivalent to our own in some way. That’s a lot of what economics is all about.
If the Fed, and only the Fed, were to lend directly to the government, then the asset side of its balance sheet would represent the national debt. That’s not what we have now. On the other hand, the national debt does still exist, so in that sense the two situations are similar.
Presumably you want to be able to say that the government can always finance whatever level of spending it likes because it has the ability to print money. But the one doesn’t necessarily follow from the other. Pointing to a case where the Fed lends directly to the government and saying that it is equivalent to the current arrangement only helps advance your argument if in the case where the Fed lends directly the government it really can finance whatever level of spending it likes.
So let’s say that we assume for the sake of argument that the two setups are exactly the same. What should we conclude from that? If it’s that the government can finance whatever level of spending it likes, why should that be the case?
Why shouldn't it be the case?
Because people don't want to hold that much cash.
If they did want to hold that much, because the Fed supplies it elastically, then we'd already be in that world. But we're not, so...
If the government were to retire all its debt, and then finance all subsequent spending with new 'money creation', the banking system would end up with "excess" reserves (cash).
If the central bank did nothing to maintain a positive interest rate, the interest rate on those reserves would fall to zero.
The banks would have no interest-bearing alternative to reserves (govt bonds), so would just have to hold the non-interest bearing reserves in their reserve accounts.
The central bank could, however, choose to maintain a positive interest rate on reserve balances, if it wanted to, simply by paying interest on them.
(Thinking off the top of my head, it could also potentially offer longer-term alternatives, such as interest-bearing 'time deposits' or 'savings accounts' for banks, if it chose to).
But let's say the cb decided to leave the interest rate at zero, and all government spending was 'money-financed', leading to more 'excess' reserves building up within the banking system over time (assuming the govt is running a deficit). What effect would this have?
Any effect would necessarily be through the interest rate, rather than the quantity of excess reserves per se.
Bear in mind that whilst the base rate would be zero, the risk-adjusted rate at which banks lend would still be higher than that.
The question is not "how much cash will people be willing to hold?", but rather "what effect might different interest rates have on the economy?".
Mosler argues that, given correct government fiscal policy:
"there are a number of good reasons for setting the overnight
rate at its natural or normal rate of zero and allowing markets to factor in risk to determine
subsequent credit spreads. The Japanese experience has already
demonstrated that this does not cause inflation or currency depreciation. If anything,
lower rates support investment, productivity, and growth. While changing rates can have important distributional or micro effects (and that can spur employment and output growth, such as shifting income from “savers” to working people), the net income or macro effect is zero since for every dollar borrowed from the banking system there is a dollar saved, as the Fed clearly recognizes in its literature. Additionally, it can be argued that asset pricing under a zero interest rate policy is the “base case” and that any move
away from a zero rate policy constitutes a (politically implemented) shift from this “base
case.”
http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF
I'm undecided on the ZIRP.
If the Fed pays the financial system to hold the national debt in its entirety in the form of reserves or other longer term securities, how is that different to paying the private sector to hold the national debt in the form of bonds?
You might say that the government can achieve slightly lower rates by paying IOR than if it paid interest on bonds—although, obviously the maturity is a lot shorter!
If that is so, then it seems like a question of degree. It might be that the government make some marginal savings on its debt service by issuing more of one particular instrument and less of another. I imagine that this would be contingent on states of the world. For example, at present the interest rate on reserves is substantially higher than that on t-bills (I think it was four times higher the last time I looked).
This does not seem like a radical departure from the current regime, but rather a debt management question. So what do you gain if you finance the national debt in this way and what do you give up?
Now, if you don’t pay the banks interest, then that does look like a different regime. However, someone still has to hold that extra base money. Banks can’t force their customers to hold it, so it will have to stay in the financial sector where it will drive down interest rates.
So say that this happens. Then what? It’s hard to see how setting the interbank rates to zero forever would be optimal in every state of the world. Even if mainstream theory is wrong about the inflationary or deflationary possibilities of such a move, what is potential upside supposed to be?
The question is not "how much cash will people be willing to hold?", but rather "what effect might different interest rates have on the economy?".
From the point of view of economics the two questions are the same. You can’t ask one without implicitly asking the other.
"someone still has to hold that extra base money. Banks can’t force their customers to hold it, so it will have to stay in the financial sector where it will drive down interest rates."
Yes, someone has to hold that base money. Either it sits in reserve accounts at the central bank, or it is withdrawn as notes and coins. The only other option is to use it to buy treasuries.
If the government decides to stop issuing tsys and instead starts financing its deficit spending with new 'money creation' then the additional base money will simply accumulate in reserve accounts at the central bank or it will be withdrawn as notes and coins. In this situation, banks will simply end up holding whatever quantity of reserves they are given. People aren't suddenly going to start withdrawing more notes and coins.
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