I find it both puzzling and interesting that my rejection of the Quantity Theory of Money is rejected by supporters of MMT. MMTers, after all, choose to reject the Quantity Theory of Money when money is sovereign. I simply go farther and reject the Quantity Theory of Money outright.Tao Jonesing
Irony 101
18 comments:
Dan Kervick comment over there: "In fact, even calling dollars in circulation central bank "liabilities" is more an honorific term than one with substance. When you possess a dollar, which is nominally a liability of the US government, the government doesn't still owe you anything."
Dan's back!!!!
rsp
I could be wrong but the whole argument there seems to be that the central bank is a solvency-constrained private sector entity. An argument mentioned in the linked post and elaborated on in the one that came before it.
gee right.
TJ thinks the Fed is "private"...
the other thing that is false is that the Fed is buying "toxic assets": this is comepletely false.
The Fed is buying either USTs or Agency MBS which are 100% guaranteed by the US government: these are NOT toxic waste (LOL!)...
Bernanke was snookered by Paulson into buying some small amount of the AIG assets right at the beginning of all of this but they have been getting rid of most of that stuff slowly and offsetting any accounting losses there with the HUGE "profits" they make on the intrest they receive from Treasury/GSEs on their bonds...
The Fed CAN NOT go "bankrupt".
This part of TJs blog reads to me like a conspiracy theory website... irrational.
rsp,
the other thing that is false is that the Fed is buying "toxic assets": this is completely false.
In the interview with Randy, Bill Black and Michael Hudson that Tom posted yesterday, Randy voiced the suspicion of many that part of the purpose of QE3 is to buy junky toxic mortgage-backed securities to get them off of bank balance sheets.
The point is that, while this is something to worry about from the point of view of moral hazard and the message it sends to banks about the rewards for reckless behavior, there should be no concern from the standpoint of the Fed. It doesn't really matter much if every single non-Treasury security owned by the Fed turns out to be worthless and the issuer of that security fails to pay. The Fed doesn't need the money - it is the ultimate money factory.
TJ's point as I understand it is that the capitalization of the FRS is through the regional banks which are privately owned and their capitalization is provided by the private member banks that "own" the FR regional banks. He argues that with private capitalization, a regional bank can become insolvent and need a private capital infusion.
As I recall, there was a recent change in the rules to the effect that if recapitalization were required, it would a responsibility of Tsy. If that is not the case, however, Congress can change the rules anytime it chooses.
The fact is that a govt that stepped in to save the private banking sector, and indeed, the entire financial sector, as well as backstopping foreign banks, is hardly likely to let its own central bank fail.
But this point up the confusion inherent in the Federal Reserve Act over public and private in the public's mind due to the present construction.
On the other hand, the BoE was nationalized, but the setting of the overnight rate (libor) was ceded to the private sector. And we see what a mess that led to.
why does the Fed need 'capital'?
y why does the Fed need 'capital'?
For a currency sovereign, to satisfy the accounting.
BTW, national sovereignty includes currency sovereignty. A country can decide to cede it but it can never decide to cede it permanently, since a future decision can take it back and there is no way to obviate future decisions in the present. Even constitutions are changed and amended, and legal precedent reversed. Of course, such decision may have consequences nationally and internationally, but they are always possible. The basis of sovereignty is taking all steps necessary for the national interest when and if required.
"why does the Fed need 'capital'?"
Well to be 100% accurate, the Fed's H.4.1, which many refer to as "the Fed's Balance Sheet" is really NOT a "balance sheet" which would require "assets", "liabilities" and CAPITAL...
That report is titled "Factors Affecting Reserve Balances" and NOT a "balance sheet"....
.... so more semantic chaos here where the semantics refuse to enforce consistent terminology and just stand by as capricious use of words and terminology goes unexposed and unrebuked...
rsp,
"why does the Fed need 'capital'?"
I don't believe the Fed needs capital. Individual banks part of the Fedreal Reserve Banking System need capital.
The Fed does not, and if it had an entry on it's balance sheet it would represent a "placeholder" or an abstraction, not something having meaning in the real world.
" it's balance sheet"
Paul,
they dont even have one.
You cannot find a govt report called "the Fed's Balance sheet"... doesnt exist....
Now I guess the math folks ar going to have to start doing the semantics job for them and start to enforce terminology....
"words matter" ;) rsp.
Matt,
"they dont even have one."
That's what I meant by this:
"if it had an entry on it's balance sheet" although it would have been better if I used "a" instead of "it's".
I agree completely with your characterization.
System dynamics (or real-world processes) always function as abstractions. How else could it be?
These relationships have been in operation since the beginning of the Universe. Language is a relatively recent constructs.
The discussions always take place in terms of language, and it's hard to tell whether the person writing or speaking is describing an abstract "machine" that he/she can see in his/her mind or if they are parsing semantics.
Little "tells" generally out discussants pretty quickly but then what do you do? At this point you realize there is little chance of getting the idea across on tha abstract level.
Many unproductive back-and-forths ensue.
Paul,
"These relationships have been in operation since the beginning of the Universe. Language is a relatively recent constructs. The discussions always take place in terms of language, and it's hard to tell...."
"11 Not that which is entering into the mouth is contaminating a man, but that which is going out of the mouth, this is contaminating a man." Mat 15:11
At one point Tom's Meher Baba just stopped talking... I think he probably knew something....
rsp
At one point Tom's Meher Baba just stopped talking
Matt, he explained (using an alphabet board) that we are now at the culmination of a mechanical age, which is dominated by pervasive noise, and that his maintaining silence (from July 10, 1925 until he dropped the body on Jan 31, 1969) was part of his universal work to counteract that.
This is a bit ridiculous. The Fed has handed over more than $400B in retained earnings to the Tsy in the last 20 years. It would be far and away the best capitalized "private" organization in the world if it kept its retained earnings like private companies are allowed to do. The notion that somehow it is in danger because of a potential decline in the value of its capital is all about politics, not economics.
For instance, if Ron Paul has his way, this would be his opening to end the Fed; it's all about who in govt gets to call the shots, not about the Fed. Note that Fannie and Freddie were "private," too, and way more than the Fed could ever be considered to be, and the govt just took them over when they went "bankrupt"--in the case of the Fed, that'd just be going the way of the BoE rather than Paul's preferred route.
Again, on the face of it, that an organization that has handed over $400B to the govt--and $100B's more if we go back to its inception in 1914--could be analyzed as a private company in terms of potential bankruptcy is just silly. It's pure hypocrisy by Congress/Prez to hold the Fed's rather miniscule equity capital against it, but they most certainly have the power to do so if it comes down to it. Regardless, it's not about the Fed being "private" as much as it is about it being a public policy maker and regulator that turns its retained earnings over to the Tsy (i.e., the equivalent of a nearly 100% corporate tax rate).
On the topic of who rejects what and whose rejections, thought might be worth repeating here a very SmarT Fellow's observation:
Interestingly, MMT is also a quantity-theoretic model of changes in the price level. The differences are (1) net financial assets of the non-government sector, rather than traditional monetary aggregates, are the MMT’ers preferred measure of “money,” and (2) desired leveraging of the non-government sector is akin to what one might call “velocity.” In MMT, the two of those together (net financial assets of the non-government sector relative to leveraging of existing income) set aggregate demand and ultimately changes in the price level, at least the changes that are demand-driven.
Scott Sumner Agrees that MMT Policy Proposals Are Not Inflationary
@ Calgacus
Scott Fullwiler puts that very nicely. Of course, MV=PQ holds as an identity, The question is what it symbolizes. As STF observes, MMT's interpretation of it differs from QTM folks.
STF also observes that MMT is Ricardianhere, but as a side-effect rather than a strategic assumption.
Andrea Terzi has also formulated an MMT "quantity theory of net government spending", or QTN.
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