An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
From the website: As a country, we do pretty well , but we are far from perfect. We've got our share of problems, and we think that you have the answers. Fix*us is a campaign about giving you the platform to weigh in on some of the biggest issues our country is facing. You can read other users' solutions and vote on the opinions you believe in. At the end of the campaign 5 winners will be selected and LiveCitizen will award a total of $5000 to the winner's charities of choice.
...Participants will select from one of five topics (Economy, Healthcare, Social issues, Immigration, Foreign Policy). They are encouraged to give their best solutions within 360 characters or less. Every solution post must have the topic tag and the hashtag, #fixus. Once solutions are posted, they are open to public voting that will determine the winners.
Just thought this looked like an opportunity to get the subjects discussed here in front of more people.
"According to the existing operational rules the federal government follows, the Treasury can only spend X dollars if it has X dollars in its account. If annual spending G exceed tax revenues T, the Treasury is required to borrow the balance - call it B. So the total borrowings B are equal to G-T. This is the *budget* deficit. "
Does this represent a departure from your past description of this process? wrt "borrow"... ie if govt issues a Treasury security, it can be described as a "reserve drain" then it immediately follows that to do a reserve drain, you LOGICALLY HAVE TO HAVE FIRST DONE A RESERVE ADD.
So how can it be "borrowing" when govt is just doing accounting transactions that transfer previously issued USD balances from one account to another? ie from a "savings" account to a "checking" account?
Are you starting to take a different angle on this??
Matt, my understanding is that many bond purchase payments actually go into T&L accounts at commercial banks, and then are paid into the treasury account in drips and drabs over time as the treasury spends.
When a bond is purchased with T&L credit this has no effect on reserves.
The treasury normally keeps an approx $5 billion balance in its Fed account (I think).
If it spends say a $100 million, it will 'call in' the same amount from its T&L accounts, so that as $100M leaves the Treasury's Fed account, $100M is paid into the account (i.e. bank reserve accounts are debited by that amount). This minimises disruption to the interest rate, and means the Treasury's Fed account balance is never run down.
I think the treasury's $5 billion Fed balance was actually intially granted as an overdraft from the Fed.
Of course now things are a bit different given all the 'excess' reserves. The above applied before QE.
(This is my understanding at present though I may be wrong).
yup. Some of them also earn interest for the treasury apparently.
The point is, it seems like the 'reserve add' does indeed come from the treasury (in many cases) before the 'reserve drain'. It's just that the process is spread out over time and broken up into smaller chunks, with the TT&L accounts facilitating it.
Basically the treasury spends and then withdraws what it has spent by calling in the amount from TT&L accounts.
So the 'reserve add' does occur before the 'reserve drain'.
I remember reading in a paper by S Kelton that at one point the treasury had a $5 billion overdraft Fed overdraft, which implies that treasury spending came first historically speaking.
"all of which would seem to further undermine JKH's comments on this subject in his 'contingent approach' paper.
JKH's point of view aside, this isn't personal, it's arithmetic and system identities we are working with here.
As far as the sectoral balances and the economy are concerned, how money is created is irrelevant. It can be created by running a gauntlet, through a labyrinth of institutional debits and credits or through incantation while consuming huge quantities of hallucinogenic drugs.
The only thing that matters is that the spending appropriated by Congress ends up in the private sector as spending. If it doesn't, heads need to roll.
There is no possible way to quantify or measure the effect on the economy of any or all of the operations performed during the money creation process, individually or in total.
Operations don't end up on balance sheet and don't add/subtract from wealth. Operations cannot be measured, therefore they don't exist in the practical sense.
It doesn't matter if the power lines supplying your house have to go through 500 miles of wire, 377 transformers, 271 birds nests and 77 90 degree turns before it reaches your service panel. The only thing that matters is when you throw on the switch to your air conditioner the thing powers on.
I believe that in practice, reserve add and drain are separate. When the Treasury needs to credit accounts to meet govt obligations, Treasury and Fed coordinate to ensure that the reserves are available in the Tsy account that will be drawn down. Reserves management is separate in the sense that the Fed manages liquidity to hit its target rate and coordinates with Tsy in doing this so that the operations are smooth instead of "bumpy" based on timing of Tsys receipts. That is to say, when the Fed is not paying IOR but managing liquidity wrt to its target rate, it is doing this as day to day operation. However, Tsy receipts vary greatly depending on the deadlines for submitting taxes. So the Fed and Tsy cooperate in reserve management to iron out the bumps that would otherwise occur. This functions akin to OMO.
But this is just what I have gathered in reading about it.
Operations don't end up on balance sheet and don't add/subtract from wealth. Operations cannot be measured, therefore they don't exist in the practical sense.
Operations are inside the black box. What's inside doesn't matter as far as the output goes, although obviously what goes on inside the box is necessary for producing the output.
You're right, but the Treasury also tries to coordinate its spending with its calls on TT&L accounts to minimise disruptions to reserves/ the interest rate. Its goal, before QE, was to end each day with roughly the same balance in its Fed account.
By the way, I think the Treasury's Fed balance isn't called 'reserves' for a reason. It's basically just an accounting technique for noting how much comes in and how much goes out... But some people mistake the balance for 'funds', and using the term 'reserves' to describe it can possibly add to that confusion I think(?).
Paul, the point is a lot of what JKH described as being obvious and commonsense, isn't correct when you look closely.
One thing that is important about what goes on inside the 'black box', is that there's no guarantee the Fed will keep yields on govt debt at 'sustainable' levels if the market ever decides to turn against them.
This means there is a possibility that yields on US govt bonds could go up substantially at some point in the future.
Of course the govt could stop this from happening, but that would require crossing some significant 'red lines' (such as ordering the Fed to lower bond yields, for example).
"Paul, the point is a lot of what JKH described as being obvious and commonsense, isn't correct when you look closely."
y: I agree with your assessment. I qualified what I wrote in the comment because several months back when the BIg Stink™ was going on I wrote something that was in conflict with what JKH had written and he chastised me for attacking him.
paul, Fed balances, i.e., funds in accounts at the Fed, are reserve balances (rb) and these are reserve accounts. This is what shows up as entries on the Fed's book.
When reserves are transferred to the Tsy account, they no longer count a reserves, since they are no longer available to the system. But they are credits to the Tsy account at the Fed. Taxes "destroy" money means that the rb used to satisfy tax obligations are withdrawn from non-govt, that is to say, payment of taxes withdraws non-govt NFA in the amount of taxes paid. As far as non-govt is concerned, the NFA created by govt deficit expenditure are "destroyed."
If we are going to retain "banking" and/or the "lending" model for commercial loans....
Paul has made the point that at loan inception, only the balances in the amount of the principle of the loan is "created" and then leaves open the question: Where does the balances to pay the interest come from?
ok, say a bank makes a loan for an automobile, and the "payment" on the loan is say $600 per month, say in month 1 consists of 500 principle and 100 interest.
So the non-govt sector borrower pays the principle ONLY, say 500. Then the bank reports this successful principle payment to the govt and the govt then PAYS THE 100 INTEREST to the bank?????
but the govt only pays the bank the interest as long as the borrower stays on schedule with the principle payments????
This way the non-govt sector borrower only has to worry about paying back the principle (avoids usury) amount which is the only amount of $ balances that were created due to the borrowers action???? That should be the only part the borrower is responsible for as that is the only amount he really borrowed??
This means there is a possibility that yields on US govt bonds could go up substantially at some point in the future.
Yields fluctuate. No reason to think that this won't continue be true in the future.
Of course the govt could stop this from happening, but that would require crossing some significant 'red lines' (such as ordering the Fed to lower bond yields, for example).
Well, no one is supposed to order the Fed around, since the Fed is supposedly politically independent.
But according to the MMT view, the interest rates are not determined in the market but are based on benchmark rate, with the Fed setting the benchmark. In setting the overnight rate the Fed sets the benchmark rate based on which the yield curve along with expectations concerning future Fed actions, and the yield curve becomes the benchmark based on which credit is extended. Generally the Fed raises Fed when it determines inflationary pressure is building, and it acts in advance in order to get a leg up. In addition, the Fed can manage the yield curve if it chooses to do so.
"paul, Fed balances, i.e., funds in accounts at the Fed, are reserve balances (rb) and these are reserve accounts. This is what shows up as entries on the Fed's book."
Tom, I get that. It's a complicated way of saying something that is otherwise pretty simple.
/rant on
If we have to explain this kind of stuff to laymen to get MMT across to the masses we're doomed.
Most of the discussion about Fed balances, reserves, etc. are superfluous and don't add anything meaningful to the discussion, especially at our level, unless you just happen to be fascinated by arcane minutia.
I know that the steel beam I am designing has a bunch of atoms and molecules bouncing around in it and iron has a position on the Periodic Table but I don't need to know that to design my beam. It would probably make my job tougher. If I need to know more I can look it up.
I think the only reason Bill Mitchell and others discuss and address these things is because so many people are confused to the point of paralysis over the apparent complexity of it all.
People believe it when they are told "we have to borrow to spend", "were running out of money", etc.
Since credentialism is so important in our society no one gets anyone importants ear unless they have bought into the system (sold out).
Academics like Bill Mitchell, Randy Wray, Scott Fulwiller and others have to have impeccable detailed arguments to overcome the bullshit that passes for conventional wisdom these days. Even when they have the best arguments they get blown off.
We don't have to waste our time with that stuff here (of course feel free if that's what interests you). ;-)
As far as I am concerned, the complexity is by design so our pockets can be picked while we're trying to figure out what it all means.
It's this simple, All that is necessary to create new funds for spending after Congress appropriates them is to mark up balances in the appropriate bank accounts, these days using a computer keyboard. One person.
Everything else is a meaningless sideshow that adds nothing to the actual function of the system in the real world that must work properly in order for us, all of us, to prosper.
The performance of the economy is not a function of operations. In the system relationships, operations don't make an appearance. Cosmic dust dosn't have a measurable effect on our quality of life.
If the system is starved for liquidity it will not function optimally. Management will be difficult.
If the system has adequate liquidity, it will function properly and after that it is our job to manage it to produce the best outcomes wrt policy goals.
I'm not saying that politics and stupidity won't muck up the system and keep it from functioning properly. It can and it probably will, but a complete understanding of monetary operations is not going to be useful tool for eliminatingg that problem.
An understanding of monetary operations can only be useful in terms of convincing bureaucrats that money creation is not the dark magic we have been taught it is.
Bottom line, these folks do what the hell they want to grease the palms of their crony friends. Following the law and operational procedure is for the other guy.
There are two separate tasks that need doing. As you say, the public needs a simple metaphor that it can relate to that overcomes and replaces the government as big household analogy. This message has to be delivered through the media, not just blogging.
Secondly, economists need to be convinced because politicians will never act without a sign off from "experts." That's just the way the world works. This requires detailed analysis and meeting objections.
24 comments:
Now we're getting somewhere.
took long enough...
Great comments over there, Dan.
Don't know if anyone else has seen this but this could be another area to get these ideas out.
Fix*us Campaign
From the website: As a country, we do pretty well , but we are far from perfect. We've got our share of problems, and we think that you have the answers. Fix*us is a campaign about giving you the platform to weigh in on some of the biggest issues our country is facing. You can read other users' solutions and vote on the opinions you believe in. At the end of the campaign 5 winners will be selected and LiveCitizen will award a total of $5000 to the winner's charities of choice.
...Participants will select from one of five topics (Economy, Healthcare, Social issues, Immigration, Foreign Policy). They are encouraged to give their best solutions within 360 characters or less. Every solution post must have the topic tag and the hashtag, #fixus. Once solutions are posted, they are open to public voting that will determine the winners.
Just thought this looked like an opportunity to get the subjects discussed here in front of more people.
John Fremont
Oops the hyperlink didn't take. Here tis.
Fix*us Campaign
John Fremont
Dan,
From your comments over there:
"According to the existing operational rules the federal government follows, the Treasury can only spend X dollars if it has X dollars in its account. If annual spending G exceed tax revenues T, the Treasury is required to borrow the balance - call it B. So the total borrowings B are equal to G-T. This is the *budget* deficit. "
Does this represent a departure from your past description of this process? wrt "borrow"... ie if govt issues a Treasury security, it can be described as a "reserve drain" then it immediately follows that to do a reserve drain, you LOGICALLY HAVE TO HAVE FIRST DONE A RESERVE ADD.
So how can it be "borrowing" when govt is just doing accounting transactions that transfer previously issued USD balances from one account to another? ie from a "savings" account to a "checking" account?
Are you starting to take a different angle on this??
Rsp,
Matt, my understanding is that many bond purchase payments actually go into T&L accounts at commercial banks, and then are paid into the treasury account in drips and drabs over time as the treasury spends.
When a bond is purchased with T&L credit this has no effect on reserves.
The treasury normally keeps an approx $5 billion balance in its Fed account (I think).
If it spends say a $100 million, it will 'call in' the same amount from its T&L accounts, so that as $100M leaves the Treasury's Fed account, $100M is paid into the account (i.e. bank reserve accounts are debited by that amount). This minimises disruption to the interest rate, and means the Treasury's Fed account balance is never run down.
I think the treasury's $5 billion Fed balance was actually intially granted as an overdraft from the Fed.
Of course now things are a bit different given all the 'excess' reserves. The above applied before QE.
(This is my understanding at present though I may be wrong).
The TT&L accounts are facilities for reserve management, which is coordinated between the Treasury and Fed.
yup. Some of them also earn interest for the treasury apparently.
The point is, it seems like the 'reserve add' does indeed come from the treasury (in many cases) before the 'reserve drain'. It's just that the process is spread out over time and broken up into smaller chunks, with the TT&L accounts facilitating it.
Basically the treasury spends and then withdraws what it has spent by calling in the amount from TT&L accounts.
So the 'reserve add' does occur before the 'reserve drain'.
I remember reading in a paper by S Kelton that at one point the treasury had a $5 billion overdraft Fed overdraft, which implies that treasury spending came first historically speaking.
Am I making sense?
all of which would seem to further undermine JKH's comments on this subject in his 'contingent approach' paper.
"all of which would seem to further undermine JKH's comments on this subject in his 'contingent approach' paper.
JKH's point of view aside, this isn't personal, it's arithmetic and system identities we are working with here.
As far as the sectoral balances and the economy are concerned, how money is created is irrelevant. It can be created by running a gauntlet, through a labyrinth of institutional debits and credits or through incantation while consuming huge quantities of hallucinogenic drugs.
The only thing that matters is that the spending appropriated by Congress ends up in the private sector as spending. If it doesn't, heads need to roll.
There is no possible way to quantify or measure the effect on the economy of any or all of the operations performed during the money creation process, individually or in total.
Operations don't end up on balance sheet and don't add/subtract from wealth. Operations cannot be measured, therefore they don't exist in the practical sense.
It doesn't matter if the power lines supplying your house have to go through 500 miles of wire, 377 transformers, 271 birds nests and 77 90 degree turns before it reaches your service panel. The only thing that matters is when you throw on the switch to your air conditioner the thing powers on.
I believe that in practice, reserve add and drain are separate. When the Treasury needs to credit accounts to meet govt obligations, Treasury and Fed coordinate to ensure that the reserves are available in the Tsy account that will be drawn down. Reserves management is separate in the sense that the Fed manages liquidity to hit its target rate and coordinates with Tsy in doing this so that the operations are smooth instead of "bumpy" based on timing of Tsys receipts. That is to say, when the Fed is not paying IOR but managing liquidity wrt to its target rate, it is doing this as day to day operation. However, Tsy receipts vary greatly depending on the deadlines for submitting taxes. So the Fed and Tsy cooperate in reserve management to iron out the bumps that would otherwise occur. This functions akin to OMO.
But this is just what I have gathered in reading about it.
Operations don't end up on balance sheet and don't add/subtract from wealth. Operations cannot be measured, therefore they don't exist in the practical sense.
Operations are inside the black box. What's inside doesn't matter as far as the output goes, although obviously what goes on inside the box is necessary for producing the output.
You're right, but the Treasury also tries to coordinate its spending with its calls on TT&L accounts to minimise disruptions to reserves/ the interest rate. Its goal, before QE, was to end each day with roughly the same balance in its Fed account.
By the way, I think the Treasury's Fed balance isn't called 'reserves' for a reason. It's basically just an accounting technique for noting how much comes in and how much goes out... But some people mistake the balance for 'funds', and using the term 'reserves' to describe it can possibly add to that confusion I think(?).
Paul, the point is a lot of what JKH described as being obvious and commonsense, isn't correct when you look closely.
One thing that is important about what goes on inside the 'black box', is that there's no guarantee the Fed will keep yields on govt debt at 'sustainable' levels if the market ever decides to turn against them.
This means there is a possibility that yields on US govt bonds could go up substantially at some point in the future.
Of course the govt could stop this from happening, but that would require crossing some significant 'red lines' (such as ordering the Fed to lower bond yields, for example).
I might be wrong. What do you think?
or just order an unlimited overdraft from the Fed/ mint a trillion dollar coin etc.
These sorts of changes might seem minor from an MMT pov, but would seem monumental to everyone else. Really taboo.
"Paul, the point is a lot of what JKH described as being obvious and commonsense, isn't correct when you look closely."
y: I agree with your assessment. I qualified what I wrote in the comment because several months back when the BIg Stink™ was going on I wrote something that was in conflict with what JKH had written and he chastised me for attacking him.
This time I was being careful.
paul, Fed balances, i.e., funds in accounts at the Fed, are reserve balances (rb) and these are reserve accounts. This is what shows up as entries on the Fed's book.
When reserves are transferred to the Tsy account, they no longer count a reserves, since they are no longer available to the system. But they are credits to the Tsy account at the Fed. Taxes "destroy" money means that the rb used to satisfy tax obligations are withdrawn from non-govt, that is to say, payment of taxes withdraws non-govt NFA in the amount of taxes paid. As far as non-govt is concerned, the NFA created by govt deficit expenditure are "destroyed."
Everybody,
Good stuff!
Had an idea:
If we are going to retain "banking" and/or the "lending" model for commercial loans....
Paul has made the point that at loan inception, only the balances in the amount of the principle of the loan is "created" and then leaves open the question: Where does the balances to pay the interest come from?
ok, say a bank makes a loan for an automobile, and the "payment" on the loan is say $600 per month, say in month 1 consists of 500 principle and 100 interest.
So the non-govt sector borrower pays the principle ONLY, say 500. Then the bank reports this successful principle payment to the govt and the govt then PAYS THE 100 INTEREST to the bank?????
but the govt only pays the bank the interest as long as the borrower stays on schedule with the principle payments????
This way the non-govt sector borrower only has to worry about paying back the principle (avoids usury) amount which is the only amount of $ balances that were created due to the borrowers action???? That should be the only part the borrower is responsible for as that is the only amount he really borrowed??
rsp
"When reserves are transferred to the Tsy account, they no longer count a reserves, since they are no longer available to the system."
ie to do a reserve drain you first had to have done an add....
rsp,
This means there is a possibility that yields on US govt bonds could go up substantially at some point in the future.
Yields fluctuate. No reason to think that this won't continue be true in the future.
Of course the govt could stop this from happening, but that would require crossing some significant 'red lines' (such as ordering the Fed to lower bond yields, for example).
Well, no one is supposed to order the Fed around, since the Fed is supposedly politically independent.
But according to the MMT view, the interest rates are not determined in the market but are based on benchmark rate, with the Fed setting the benchmark. In setting the overnight rate the Fed sets the benchmark rate based on which the yield curve along with expectations concerning future Fed actions, and the yield curve becomes the benchmark based on which credit is extended. Generally the Fed raises Fed when it determines inflationary pressure is building, and it acts in advance in order to get a leg up. In addition, the Fed can manage the yield curve if it chooses to do so.
"paul, Fed balances, i.e., funds in accounts at the Fed, are reserve balances (rb) and these are reserve accounts. This is what shows up as entries on the Fed's book."
Tom, I get that. It's a complicated way of saying something that is otherwise pretty simple.
/rant on
If we have to explain this kind of stuff to laymen to get MMT across to the masses we're doomed.
Most of the discussion about Fed balances, reserves, etc. are superfluous and don't add anything meaningful to the discussion, especially at our level, unless you just happen to be fascinated by arcane minutia.
I know that the steel beam I am designing has a bunch of atoms and molecules bouncing around in it and iron has a position on the Periodic Table but I don't need to know that to design my beam. It would probably make my job tougher. If I need to know more I can look it up.
I think the only reason Bill Mitchell and others discuss and address these things is because so many people are confused to the point of paralysis over the apparent complexity of it all.
People believe it when they are told "we have to borrow to spend", "were running out of money", etc.
Since credentialism is so important in our society no one gets anyone importants ear unless they have bought into the system (sold out).
Academics like Bill Mitchell, Randy Wray, Scott Fulwiller and others have to have impeccable detailed arguments to overcome the bullshit that passes for conventional wisdom these days. Even when they have the best arguments they get blown off.
We don't have to waste our time with that stuff here (of course feel free if that's what interests you). ;-)
As far as I am concerned, the complexity is by design so our pockets can be picked while we're trying to figure out what it all means.
It's this simple, All that is necessary to create new funds for spending after Congress appropriates them is to mark up balances in the appropriate bank accounts, these days using a computer keyboard. One person.
Everything else is a meaningless sideshow that adds nothing to the actual function of the system in the real world that must work properly in order for us, all of us, to prosper.
The performance of the economy is not a function of operations. In the system relationships, operations don't make an appearance. Cosmic dust dosn't have a measurable effect on our quality of life.
If the system is starved for liquidity it will not function optimally. Management will be difficult.
If the system has adequate liquidity, it will function properly and after that it is our job to manage it to produce the best outcomes wrt policy goals.
I'm not saying that politics and stupidity won't muck up the system and keep it from functioning properly. It can and it probably will, but a complete understanding of monetary operations is not going to be useful tool for eliminatingg that problem.
An understanding of monetary operations can only be useful in terms of convincing bureaucrats that money creation is not the dark magic we have been taught it is.
Bottom line, these folks do what the hell they want to grease the palms of their crony friends. Following the law and operational procedure is for the other guy.
This is just my opinion, YMMV and all that.
/rant off
But I believe I am correct.
There are two separate tasks that need doing. As you say, the public needs a simple metaphor that it can relate to that overcomes and replaces the government as big household analogy. This message has to be delivered through the media, not just blogging.
Secondly, economists need to be convinced because politicians will never act without a sign off from "experts." That's just the way the world works. This requires detailed analysis and meeting objections.
Both tasks are woefully incomplete.
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