Paul Krugman puts on his white hat and attacks the debt and deficit posse.
The New York Times | The Conscience of a Liberal
A Double Shot of Misunderstanding
Paul Krugman | Professor of Economics, Princeton University
See also Krugman's companion post, On the Economics and Politics of Deficits
Grand Bargain or Great Scam?
167 comments:
This is a good follow up to Bill Black's post at NEP where both of these guys "name names"...
Great to see top-moron Peterson called out by name here by PK again... (imo PK could do this EVERY DAY in the NYT... Peterson is one sad disgraced human who needs to be exposed...)
and then just a run-of-the-mill moron like Starbuck's Schultz is mentioned and called out here too which is good because other morons-in-waiting might listen to a guy like Schultz who is famous for his business acumen and these other dopes might look at his completely idiotic and false and dumb humiliating display of ignorance on this issue and be led to believe him anyway if these junior morons look at him as an authority on this issue...
I hope PK keeps this up and perhaps would ramp up the rhetorical heat on these manifest idiots like top-moron Peterson and now Schultz and then hopefully more others from the "fix the debt" moron factory...
rsp,
I made the error of going to have a look at pragcap and unfortunately came across this nugget of pure misunderstanding:
"Govt spending is always a redistribution of existing money. So, when the govt deficit spends it redistributes existing money and credits the private sector with a net financial asset in the form of a t-bond. The money that the govt uses comes from the private sector. It is not created by the Fed. The Fed buys on the secondary market in order to achieve monetary policy, NOT fiscal policy."
http://pragcap.com/does-the-money-supply-increase-when-the-fed-buys-bonds-2#comment-133559
Does anyone else get annoyed by this sort of wilfull disinformation?
"Does anyone else get annoyed by this sort of wilfull disinformation?" - y
Used to, then I stopped reading his flavor of BS. When I found MNE I realized what a wasteland PC was. CR ran me away from MMR too.
Willful disinformation?…I think CR believes the crap he writes.
The paragraph you quoted is how someone that has an ideological bee in his bonnet would re-frame the main economic flow-inducer as a bad thing.
As far as redistribution being a bad thing, in reality it's the only thing that saves capitalism from itself, otherwise as the Highlander said, "there can be only one". The natural progression is for all money to end up in one pot.
BTW, bonds are money, just as much as dollars are…but better because they are dollars that pay interest.
People buy bonds because they don't want to hold dollars that do nothing and pay nothing.
It makes as little sense to refer to bonds as debt as it does to refer to dollars as debt. Both are debt by technicality only…accounting abstractions.
Yes, that Pragcap post is dead wrong.
Say the first step in deficit spending is the government selling a newly-issued Tsy to a commercial bank.
The bank creates a new deposit ("Money") out of nothing. There is no "redistribution of existing money". There is creation of new money.
I' d say the author was perhaps in a moment of low mental concentration, to put it charitably :)
In addition, he perpetuates the myth that taxes fund spending, something he used to agree taxes didn't do.
Somehow we have to reframe taxation as necessary to maintain continuous flow and regulation of the economy in a healthy state.
Without flow there is no economy…flow (GDP) is the very basis of an economy…to reduce flow is to reduce economic activity…to increase flow is to increase economic activity.
I've just posted a comment on Pragcap pointing out that Cullen Roche's description of government deficit spending ("always a redistribution of existing money") is very different from that included in Marc Lavoie's paper on neo-chartalism that Pragcap has applauded on many occasions.
Lavoie starts all his examples with the government selling new securities to the commercial banks, automatically creating a new government deposit - aka "money".
The government then transfers back the deposits to its account at the Fed, thus creating a shortage of reserves and an upward pressure on the interbank rate. The Fed has to intervene by buying back the government securities from the banks.
Then the government spends by crediting household accounts at commercial banks. These accounts are bank liabilities and household assets. They are "money".
So, if the government can sell new bonds directly to the banks it will necessarily create new deposits, aka money.
Yeah, I find Cullen Roche's recent writings to be confusing at best. As far as he is concerned, fiat currency is now privately administered, or something. Wray's pyramid of liabilities concept is much more accurate in my opinion. Beowulf, JKH, Mike S, and the other monetary realists politely ignore Roche's writings of this sort, as far as I can tell...
to reduce flow is to reduce economic activity
Right. So, if the economy is below potential the govt should increase the flow by deficit spending (cut taxes and or increase expenditures - perhaps tax cuts for lower and middle income strata are the best option in a balance sheet recession like the present one).
Also, we might say that taxes simply reallocate purchasing power from the private sector to the govt.
As for deficits, they are financed by bond issues bought at first by the private sector - in the U. S. in 2012-2013. This could change for instance if TPTB agreed on, say a Platinum coin to credit govt deposits at the Fed.
In countries such as Canada where the NCB may already buy tsys in the primary market the deficit may be "financed"...directly by an arm of the Executive branch - the NCB.
@y
So he believes in deadly innocent fraud #3.
Paul,
Does CR's pov conflict with the math behind beo's Platinum Coin?
Inquiring minds want to know... ;)
rsp,
" The Fed buys on the secondary market.."
It's a DEALER market... the Fed buys from the Primary Dealers... it' NOT a "free market"... rsp.
"In countries such as Canada where the NCB may already buy tsys in the primary market the deficit may be "financed"...directly by an arm of the Executive branch - the NCB."
I view these operational details as unnecessary for understanding the economic machine…it doesn't really matter much how it is done. It's just a money-from-thin-air creation machine, and it needs to deliver numbers to fill non-government balance sheets.
Sometimes I think that all of the Rube-Goldbergesque operational details are to mask the simplicity of what is really going on.
Do we care what kind of motor is in our car if our goal is to get from point A to point B?
The purpose of money creation is to feed the economy liquidity where it needs it and in sufficient amounts to maintain flow leading to full employment and price stability.
How the money is created is immaterial unless the procedure fails to perform it's primary function…to create net spending. Then we have to fix it and heads should roll if they screw it up.
All the other stuff is tail-chasing except for the academics that might be interested in such things.
A dollar that comes out of the black box is a dollar…they are all exactly the same…it's about quantity not quality.
The government could simply enter numbers into balance sheets…one guy with one computer could do it.
I view these operational details as unnecessary for understanding the economic machine
I agree. But our credibility will be much enhanced if - while not losing the sight of the big picture - we take care to always present correctly the Rube Goldberg details that govern the money creation and deficit spending processes as they stand today.
And the point in discussion with Cullen Roche is an important one.
Can a bank lend directly to a government or not (in the present institutional structure)? If it does, it would mean that the govt has an extra weapon at its disposition: it could always nationalize a commercial bank and then simply order it to lend funds to the new shareholder. No more need for private markets - and all done within the current legal framework.
This option would be especially important in the non monetary sovereigns of the eurozone, where most governments are majority or even single-shareholders of commercial banks.
So I agree 100% that the big picture is important but one should never forget about the complex institutional details that govern money creation.
Say the first step in deficit spending is the government selling a newly-issued Tsy to a commercial bank.
The bank creates a new deposit ("Money") out of nothing. There is no "redistribution of existing money". There is creation of new money.
I don't think that's true Jose. The bank uses its reserves to buy treasuries, and the bank can't create reserves. The purchase of a treasury is an asset swap, reserves for treasury, one USG liability for another one.
The Treasury issues treasury securities; the Fed issues dollars. There's not a massive amount of difference between the two.
The Treasury issues treasuries to buy dollars; the Fed issues dollars to buy securities - including treasuries.
The two agencies work together, but are discreet about it to preserve appearances.
It's true that Treasury operations by themselves alone, do not change the total quantity of dollars in existence. It's also true that Fed operations, by themselves, do not change the total amount of treasuries in existence. It seems a little fussy to me to focus on only the dollar side of this business as "monetary policy". For most purposes, treasuries are as good as money.
The bank uses its reserves to buy treasuries, and the bank can't create reserves
Maybe you're right.
But in that case, Lavoie's accounting tables, which are similar to those of the founders of MMT, can't be right - in the sense that they don't correspond to the way the system works.
Said tables all start with the following entries on the commercial banks´balance sheets, to finance deficit spending:
Assets: government bond (newly-issued)
Liabilities: government deposit
The meaning is: banks lend funds to the government - just like they lend to private sector borrowers. The entries are similar in both cases. The banks don't need reserves to undertake this step.
Then, when the government transfers its new deposits to the Treasury account at the Fed, the banks will be short of reserves. The Fed then intervenes to buy the bonds back fromn the banks, providing them with the needed reserves.
Is this a correct description of U.S. monetary reality in 2012-2013 - yes or no?
Then, when the government transfers its new deposits to the Treasury account at the Fed, the banks will be short of reserves. The Fed then intervenes to buy the bonds back fromn the banks, providing them with the needed reserves.
Is this a correct description of U.S. monetary reality in 2012-2013 - yes or no?
If this were the case, then all tsys would end up on the Fed's balance sheet, which is not the case.
The Treasury needs reserves to deficit spend, which it cannot obtain either directly from the Fed in the US. So it instructs the Fed as it bank (broker) to auction tsys to the PD's. Settlement is in reserves, which the PD's must obtain since they cannot create reserves, reserves being a liability of the Fed. The reserves provided to settle are credited to the Treasury account and used for spending.
Now non-govt has the same amount of reserves as before, plus the tsys, which are a govt liability. That is an increase in non-govt NFA and how money is created exogenously, i.e., by govt as a vertical transaction. Both the reserves that the Treasury uses for deficit spending and the tsys are nongovernment NFA in that the reserves are Fed liabilities and the tsys are Treasury liabilities.
This is a simplification but it is correct in essence. See "Delivery and Settlement" in The Treasury Auction Process: Objectives, Structure, and Recent Adaptations by Kenneth D. Garbade and Jeffrey F. Ingber, February 2005 Volume 11, Number 2, JEL classification: G18, G28, H63 at FRBNY.
The simplest example of a direct delivery occurs when a bidder is a depository institution and requests that awards be credited to its account in the Federal Reserve book-entry system. At 9:15 a.m. on the issue date, the Fed, acting as fiscal agent for the Treasury, credits the institution's account for the new securities, debits the institution's reserve account for the cost of the securities, and transfers the payment to a Treasury account at the Fed.
If this were the case, then all tsys would end up on the Fed's balance sheet
Not exactly, because next the Treasury deficit spends by crediting household deposits at commercial banks. The banks are now awash in reserves and the Fed must intervene again by selling the bonds back to the commercial banks - except for the amount that the banks will ecentually wish to keep as (mandatory) reserves or banknotes.
This is the process as described in Lavoie's paper http://www.boeckler.de/pdf/v_2011_10_27_lavoie.pdf
itself based on the neo chartalist/MMT description.
This description, alas, is apparently not the correct one if we are to believe the Fed "source" of Cullen Roche or the Garbade/Ingber paper cited by Tom Hickey.
It seems that the banks have to "buy" the bonds with reserves instead of simply extending credit to the government.
I don't think that in the current situation - since 2009 at least - the Fed ever needs to buy treasuries from the banks because the banks are short of reserves after they buy the treasuries from Treasury Department. The banks have been awash in excess reserves for years now, especially since the Fed started paying interest on reserves. I guess maybe there could be a little bit of upward pressure on the minuscule interest rate that needs to be offset. But how much really given the massive excess of reserves.
Personally, I think the main reason the Fed has purchased so much US debt is to save the Treasury tens of billions in interest payments, and give Treasury more space to carry out authorized spending without banging into the debt ceiling as rapidly as they would do otherwise.
But you will never hear Bernanke admit this, because it basically means the Fed has taken the White House's side against the idiot Congress, and the Fed is supposed to be independent. They'll say it's all about "easing." But Bernanke has been preaching the need for fiscal expansion for years, and I'm pretty sure he regards the current gang in Congress as a bunch of criminally incompetent retards.
Tom
From Garbade/Inger
"credits the institution's account for the new securities, debits the institution's reserve "
and yours
"non-govt has the same amount of reserves as before, plus the tsys," do not agree.
Thinking over the issue again, it's really not relevant to know whether the commercial bank extends credit to the government or buys the T bill with pre-existing reserves.
Because in any case the government will always gain a new deposit at the Fed. If the recipient of the deficit spending is the private, non-bank sector (the usual case) then said sector will end up being credited with a new bank deposit (previously a Treasury deposit at the Fed). Bank deposits are money, so the deficit spending has created new money.
However, if the buyer of the government security in the primary market is a non-bank entity (a household, a firm, a pension fund, whatever) that has to buy the T bill or bond with a pre-existing deposit - in that case no money will be created. The non-bank sector will start the process with a debit on its bank deposits, followed by a credit on the same deposits as the government spends. The net creation of deposits (money) is zero but the non-bank sector has a net gain in terms of a government security.
Summing up: when commercial banks finance the deficit (whether by "lending" to the government or by buying a newly issued Treasury security with reserves) new money is created in the process. When non depository entities finance the deficit by debiting their own bank deposits no new money will be created - but the private, non-bank sector will hold a new government security as an asset.
Jure, The Treasury Auction Process: Objectives, Structure,
and Recent Adaptations
I mentioned the dual transaction of Treasury using the tsy's to obtain the reserves (the transaction to which you refer) and the subsequent use of the those resevers by the Treasury in deficit spending (another transaction the "redistributes" those rb). After the tsys auction and deficit spending, total rb in non-govt are the same a before, and non-govt hold tsys equal to the rb spent, an add to non-govt NFA in aggregate.
A bank has to get reserves to settle the first transaction (auction). Reserves are Fed liabilities that a commercial bank cannot issue, so a bank has to obtain the rb to settle the auction either from reserves stemming from deficit spending or from Fed lending.
Treasury gets the rb fron the auction and spends them into non-govt.
This is a simple two stage process with the Fed and PD's playing the role of brokers to facilitate non-govt obtaing new tsys in exchange for existing rb, and then the Treasury deficit spending the rb into non-govt.
Clearly, the rb switch ownership from tsy purchaser to recipient of the deficit spending, but the amount of rb remains the same after the two stages, while non-govt also has tys's equal to the amount of rb involved, increasing the Treasury's liability account and non-govt asset accts. Rb remains the same in aggregate. Thus, non-govt NFA increase in aggregate by the amount "saved" as tsy's. This is an increase in saving of NFA by consolidated non-govt in aggregate.
José, you are forgetting according to MMT when the Treasury spends the reserves it receives from the auction, then it adds the rb it received from the tsy sale back into non-govt, so that non-govt now has the same amount of rb and the tsys.
Govt money creation, that is, an increase in consolidated non-government NFA in aggregate, is a two stage process. 1) Issuance of tsys into non-govt in exchange for rb. 2) Deficit spending of those rb into non-govt.
The first transaction, sale of tsys, is a wash in terms of NFA, i.e. non-govt exchanges rb for tsys and Treasury tsys for rb. Amount of non-govt NFA is unchanged.
The second stage, deficit spending using the rb in the Treasury acct into non-government, returning the rb to non-govt in addition to the tsys is where non-govt NFA increases in aggregate.
"Does CR's pov conflict with the math behind beo's Platinum Coin?" - Matt
Matt, I don't think CR is using math in this case. It looks to me like he is semantically trying to redefine mathematical reality to suit his ideological agenda...I think he is a snake- oil salesman working the con.
Dan,
"But Bernanke has been preaching the need for fiscal expansion for years,"
No way.
Dan check the testimony. EVERY TIME Bernanke testifies, he scolds Congress on the "sustainablity" issue. He is a leading "deficit scold"...
Here is this moron on this in Guardian:
http://www.guardian.co.uk/business/2011/apr/28/ben-bernanke-deficit-not-sustainable
Bernanke is even waaaaay behind Krugman on this issue, Bernanke is NOT even a "dove"....
HE IS A BIIIIIG PROBLEM IN THIS AS CONGRESS LOOKS AT HIM AS AN AUTHORITY ON THIS ISSUE.
He is second only to top-moron Pete Peterson on this at present, they both have to go.
rsp,
paul, you are welcome to your opinion, but I think that this greatly overstates the case. We can have disagreements without imputing motives. Maybe you are sure you can make a case for that, but does it matter. What we are looking for a open debate on issues that are not settled even in our rather small community of people that basically agree with the PKE POV in general. CR has stated that he bases his view on this matter on people who he thinks are experts such as JKH and Brett Fiebiger, who don't think that the position of MMT experts is correct. Let's just argue that on the merits. Same with Ramanan, who often disagrees, too. No reason to pick fights in doing this. Then emotions get in the way. There's enough emotion around this without stoking the fire.
I am not telling you what to think or say, only that I see as unnecessary antagonizing as counterproductive.So I would recommend toning down the heat and sticking to analysis without ruffling feathers.
Remember the Treasury has to redeem the security, whether it is owned by the private sector or the Fed.
Suppose Treasury sells a $1000 T-bill for $990 to Bank A. Suppose then that the Fed buys the T-bill for $995 dollars. Subsequently, Treasury redeems the T-bill by sending $1000 to the Fed. Since $10 of that payment is interest, it is then returned to Treasury. So here are the net changes to the dollar balances on the three balance sheets:
Fed: - $995 + $1000 - $10 = -$5
Bank A: - $990 + $995 = $5
Treasury: + $990 - $1000 + $10 = $0
So the private sector has acquired $5 which appears as a corresponding $5 liability on the Fed's balance sheet.
Suppose Treasury spent the $1000 it receives from the combination of T-bill sale and the return of interest from the Fed by buying cement from Paul, but taxes the $1000 to replenish its balance by taxing Peter. Then the private sector still has only a net $5 in financial assets, but there has been an additional shift in NFAs from Peter to Paul, which could be useful.
Now suppose that instead of redeeming the T-bill by taxing, Treasury redeems it by selling another $1000 T-bill to Bank A, which is purchased back by the Fed in exactly the same way. Starting with the balance sheet result from the previous example, what is the effect on balance sheets before Treasury redeems the second T-bill? We need to remember to include the T-bill itself, which is a financial asset, on the balance sheets. I'll put the T-bill values in square brackets:
Fed: no change (-$5)
Bank A: +$5 - $990 + [$1000] = + $15
Treasury: + $990 -[$1000] - $1000 = -$1010.
Paul: + $1000
Now what is the result when the Fed purchases the T-bill from Bank A for $995? Bank A no longer has the $1000 T-bill asset but has a $995 dollar asset. The Fed has relinquished $995 dollars but acquired the T-bill. So subtract $5 from the Bank A balance sheet and add it to the Fed balance sheet:
Fed: $0
Bank A: +$10
Treasury:-$1010
Paul: +$1000
So now here is the thing: if the Treasury is financing deficits by continually rolling over its debt, rather than by increasing taxes, then the private sector is continually acquiring net financial assets in the amount of the combine Treasury and Fed net liability. It's a mistake to focus just on the dollars. The T-bills themselves are a kind of "money" that the Treasury issues. However, by insisting on a debt ceiling, Congress shifts more of those assets from taxpayers to bankers.
Also, let's not make the mistake in all this of thinking that wealth and value all consist in financial assets. The point of buying the cement from Paul in the previous example is that the physical asset of cement moves first from private sector possession to public possession, after which it is then invested in a value-adding productive activity - building a bridge for example. Paul has exchanged a physical asset for a financial asset; the public has exchanged a financial asset for physical asset, and then used it to add value to that asset and deliver that value to the public. Done efficiently, its a net public benefit.
Right. The purpose of govt money creation is to move private resources to public use for public purpose. This public spending is "investment" of one sort or another in that it is generating public utility.
Of course, to the degree that "backkdoor" transactions involving unnecessary subsidies, crony capitalism corruption, etc. enter, so does parasitism.
Tom/Jose,
Scott Fullwiler has written in the past era (pre IOR, pre QE, pre excess reserves) that the Fed would do a swap with the PDs before the auctions as necessary in order to make sure the PDs had the reserves available to buy the bonds at the Treasury auction...
Remember RESBAL was only run at only about 10B or so previous to this era... that is not that much reserves. (we have single auctions of 30B today) so it was probably not surprising if the PDs would be short of reserves typically in order to take down the Treasury bonds.
Here is the graph:
http://research.stlouisfed.org/fred2/series/WRESBAL?cid=123
The Fed would simply do a multi-billion repo with the dealers and then Dealers would pledge OTR USTs as collateral and the Fed would put reserves in their accounts to buy the Treasuries.
This is the key aspect for me.
iow There is (normally) NOT enough reserves in the Dealer accounts to buy Treasuries.... HARD STOP. The "money" is simply NOT THERE...
The Fed has to give the reserves to the PDs FIRST via repo in order for there to be enough reserves in the system to even be able to buy the bonds in the first place... tyranny of the math...
There is NO "open market".
It is a "Dealer market".
Dealers need reserves to buy the bonds.
Dealers NEVER have enough.
Fed does a repo to provide these reserves in advance of the auction.
Check mate.
rsp,
when the govt deficit spends it redistributes existing money and credits the private sector with a net financial asset in the form of a t-bond (Cullen Roche)
Remember this was the question being discussed?
Turns out the statement is an accurate description of reality only when it is a non depository institution buying the government bill or bond.
When it's a bank doing the "financing" we should say instead that new money is being created (a household or firm deposit); NFAs will be in the form of either bonds, bank reserves or currency held by the public.
This can be clearly observed in the tables on deficit spending drawn by Marc Lavoie (link provided above).
I forgot to add that we should not confuse "money" (deposits) with NFAs.
A deposit cannot be a "net" Financial asset of the private sector - it is an asset for the non bank subsector but a liability for the bank subsector, netting to zero.
But a deposit sure is money (defined as currency held by the public plus bank deposits).
Matt, the principals are the Treasury and the end-purchasers of the tsys. The Fed is the fiscal agent of the Treasury, and the PD"s are the brokers or "market makers." The Fed and PD's make it happen. What actually happens is the Treasury sells tsys in exchange for rb which it then spends into non-govt.
What happens at the level of the Fed and PD's is just market facilitation.
Technically, the rb credited to the Treasury for deficit spending ultimately comes out of the end user accts. As market makers PD's inventories expand and contracts with changing demand, and so do their deposit account at the Fed, which the Fed accommodates with lending.
The Fed never borrows from te PD's here. The PD's borrow from the Fed as their deposit accounts at the Fed require.
Member banks of the FRS can only create deposits in their Fed accts in three ways: 1) they receive rb through settlement in the payments system (FRS), 2) they borrow rb in the interbank mkt from other member banks, and 3) Fed lending. That means that rb come only from deficit spending or Fed lending, TINA.
Only rb from deficit spending are non-govt NFA in that Fed lending creates a non-govt liability to govt.
To me it just doesn't matter much if the immediate effect of deficit spending is to redistribute currency. The important thing is that the government creates money-like securities from scratch to swap for that currency.
In the previous example, the currency moves from the dealer's balance sheet to Paul's balance sheet, the the dealer gets a T-bill in exchange, and the Treasury has a $1000 liability on its books. So the private sector's net financial assets have grown. The government can keep rolling over the debt and adding to private sector net financial assets by issuing T-bills.
Jose,
"Assets: government bond (newly-issued)
Liabilities: government deposit
The meaning is: banks lend funds to the government - just like they lend to private sector borrowers"
Ok, you're missing the point that the Treasury is paid when the Fed debits bank reserve balances and credits the Treasury's general account balance. This leaves the banks short of reserves in Lavoie's example.
Treasury spending comes out of its account at the Fed. The "money" in its account at the Fed is created by the Fed, not by private banks.
This is very very simple and I really don't know why people like Cullen can't understand it.
To me it just doesn't matter much if the immediate effect of deficit spending is to redistribute currency.
The immediate effect is directing flow through targeted spending and sustaining effective demand by accommodating saving desire.
I'm confused. Is govt spending always a redistribution of existing money or not? If not then what's the relative percentage/dollar figure of new money created in, say, 2012?
The deposits of the Treasury at the Fed are not money - yet. They're monetary base.
They only become money when they are transferred to the commercial banks, crediting the accounts of households and firms at said banks.
How much gets transferred to the commercial banks?
As I have already pointed out here, an interesting point made by Richard Werner is that only about 3% of money (deposits) is created by the government – the rest being created by banks as a byproduct of new loans.
How did he get this figure?
For the UK in 2012 , I suppose he’d have to sum up all new currency and deposits resulting from deficit spending
and then
divide by the total amount of net deposits created in the banking system, plus currency.
"They only become money when they are transferred to the commercial banks, crediting the accounts of households and firms at said banks".
and crediting the bank's reserve account.
(p.s. that's why I said "money")
Jose
"Turns out the statement is an accurate description of reality only when it is a non depository institution buying the government bill or bond."
This is not relevant.
@ y and Malmo
The Treasury transfers all his deposits at the Fed to the commercial banks in order to deficit spend. Deposits of the beneficiaries of said government spending (households and firms) are thus credited.
The banks will have - as a result of this - new liabilities (household and firm deposits) and new assets (reserves at the Fed).
Cullen seems to think money is created by private banks, then the Treasury borrows or taxes this money and uses it to spend. That's completely wrong.
The Treasury transfers all his deposits at the Fed to the commercial banks in order to deficit spend. Deposits of the beneficiaries of said government spending (households and firms) are thus credited.
It is a bit misleading to say the Treasury "spends," in that Treasury simply directs the Fed as its fiscal agent to credit account in order to meet existing obligations, i.e., "to pay the bills." The sending is appropriated by Congress pursuant to the Constitution, Art 1, sec. 8, and the executive branch is directed to make purchases. The various agencies do this and Treasury gets the invoices and direct the Fed to pay them from rb in its account. Treasury also handled pre-approved ongoing payments like interest and transfer payments. But Treasury is not authorized to initiate any spending on its own. I think that just about everyone understand this already, but I just want to clarify in case anyone doesn't.
"paul, you are welcome to your opinion, but I think that this greatly overstates the case. We can have disagreements without imputing motives. Maybe you are sure you can make a case for that, but does it matter."
Tom, which part of my comment are you objecting to?
The first part is my view based on my understanding of math and logic..thus the argument being made in the paragraph y posted just doesn't hold up to scrutiny...saying he is an ideologue is no different than what he accuses those of that disagree with him so I have nothing to apologize for here.
The second part I agree I could (should) have left out, I let my true feelings slip through. Every now and then this happens. I'm not as diplomatic as you are.
"But a deposit sure is money (defined as currency held by the public plus bank deposits)." - Jose
Yep, and a liability sure is anti-money.
y, it's not "completely" wrong in that there is no difference in the money stock between govt created and bank created money. Some can even borrow money (loan creates deposit) from a bank and buy T-bills with it.
The crucial point is that the Treasury exchanges tsys for rb. Tsy purchases are finally settled in rb, which the Treasury then disburses to meet obligations incurred from appropriations where tax receipts are insufficient to cover.
That is to say, if someone in the private sector writes a check to pay for a purchase of tsys, that check clears in the FRS in rb, which are credited to the Treasury and disbursed back into the economy. So the amount saved as tsys is spent as rb credited to non-govt accounts.
Therefore it is not correct to say that bank lending funds tys purchases, which only settle in rb, which banks cannot issue and have to get either from excess reserves or Fed lending.
So it is a real stretch to claim that bank credit finances tsys. Does payment come out of the money stock that is mostly bank created deposits. Yes. But it doesn't follow from this that bank created money funds govts in that both taxes and tsys purchases settle in rb, which banks have to obtain in that when they create a deposit, they promise settlement. Since the private sector cannot issue govt liabilities — physical currency, rb or tsys — there is no capacity of the private sector to settle in outside money without getting from its source, govt.
So I say it is not "completely" wrong in that I can understand how someone would see it this way. But the accounting makes it clear.
The second part, paul. Jus' sayin' maybe count to ten before hitting the send button.
"a liability sure is anti-money"
? money is a liability isn't it?
(or equity?)
Tom, I'd say it's completely wrong. The treasury receives payment in state money and spends in state money. Bank credit is a promise to pay state money.
It's really simple.
Cullen is tying himself in silly knots trying to disprove something which is really simple and obvious.
""a liability sure is anti-money"
? money is a liability isn't it?" - y
I should have been more specific...
A dollar liability is a dollar of anti-"money".
Just trying to make a point because we always seem to refer to the asset side of debt as "money" but tend to ignore the liability side, which is just as important and has real consequences.
y The treasury receives payment in state money and spends in state money. Bank credit is a promise to pay state money.
It's really simple.
True. I don't see what is so difficult to get about this either. It's simple and straightforward.
@y
Cullen seems to think money is created by private banks
Well, when banks extend loans to the private sector they do create money by crediting the deposits of the loan beneficiaries.
And it's not state money.
"And it's not state money." - Jose
Yes, it is state money, at least the asset side is.
Take out a bank loan and have them give you cash. Read what's on the currency they give you.
Unless you mean as I do...credit is not money if one believes that true "money" is net money...persistent money.
Money is a way of "keeping score" of what you have earned.
When one borrows one hasn't earned anything...there's nothing to score.
It seems to me that the kerfuffle arises out of talking about "money" instead of NFA. The MMT position is about changes in the composition )rb or tsys) and the amount (deficit) of consolidated non-govt NFA in aggregate.
From this POV, there is no substantial difference between the Treasury issuing notes as payment, e.g., "greenbacks," and the present system of the Treasury issuing tsys and the Fed issuing currency.
Regardless of direct issuance through notes or indirect though securities, there is no change in the amount of NFA added to non-govt in the case of deficit expenditure, other than the interest that is created under the present system that adds to non-govt NFA over time. The difference is in the composition only.
Gain from the interest payment is offset by interest-rate risk assumed in the case of sale prior to maturity, as well as inflation risk. But those risks are also offset by the opportunity for price appreciation and disinflation.
"there is no change in the amount of NFA added to non-govt in the case of deficit expenditure, other than the interest that is created under the present system that adds to non-govt NFA over time." - Tom
Did this come out the way you meant it?
Saving is income not spent. When income is deposited in a deposit acct that deposit is saved until spent.
A deposit from a loan is not income and therefore not saving. In fact, it is creates a liability that results in dissaving that draws income forward.
In both cases, however, the bank promises to deliver cash on demand at the window or to settle in the govt payments system as required in rb that the bank either holds as excess reserves or else borrows from another bank or the Fed.
right Tom, I would like to see more focus on $NFA in the academe...
imo Paul has done more for me over the last year to get me more focused on $NFA than anyone else ... I was personally getting off track by getting involved/following these types of discussions (What is "money", etc... all nonsense to me at this point... I think it all is misguided at this point)
$NFA flow is what should be the main point of focus imo.... What are these flows and where are they going?
ie not "How much "money" has been created?" "What is "money"?" that all leads to rabbit hole discussions...
rsp,
Should be there is no difference between the two in amount of NFA added other than the interest payment over time on the tsys.
Let's try not to fall into confusions over basic facts over which we can - indeed must, because they result from accounting rules - all agree.
1. If the Treasury sells securities directly to the banks, $1,000 of deficit spending will ultimately result in:
$1,000 in securities held as an asset by the banks
$1,000 in deposits at the same banks, held by the public (households and firms)
2. If the Treasury sells the securities to the public bypassing the banks, then said deficit spending will result in:
$1,000 in securities held by the public (households and firms).
Only in 1. is "Money" created (deposits)
In both 1. and 2. the NFAs created will be $1,000 in government securities.
We should all agree on this because this is simply accounting.
2. If the Treasury sells the securities to the public bypassing the banks, then said deficit spending will result in:
$1,000 in securities held by the public (households and firms).
The Tsys sells tsys to the public and receives either cash or rb from check settlement. In either case, the end result in the Treasury acct being credit with rb in the amount of the sale of tsys. This is change in composition of assets, no increase in assets (other than the promised interest payments).
Then the Tsy spends the rb into the economy. This adds to NFA.
As Warren says, govt "prints" when it spends. The tsys are just a reserve drain that changes asset composition not amount.
"Saving is income not spent. When income is deposited in a deposit acct that deposit is saved until spent." - Tom
They way I like to look at it is that the default state for funds is saving...a stock. Spending is a flow that doesn't alter the stock.
When one receives a paycheck, it's saving until one spends it.
Spending is an event that does not accumulate to a stock...existing financial assets move from one account to another in exchange for goods or services.
Savings is related to saving but is not the same thing...savings implies funds placed in an account for the purpose of saving.
Net saving (G-T) is a measure of the increase in NFA in the non-government over a period, and the sum of all net saving over history is NFA, the stock or level of "net money" in existence.
"As Warren says, govt "prints" when it spends. The tsys are just a reserve drain that changes asset composition not amount."
That is simply self evident, no? Wouldn't this "printing" be precisely equal to the deficit? Does CR disagree?
Let's recap number 2.
The household sector pays for the bond by debiting a bank deposit.
Result for household sector: minus a $1,000 deposit, plus a $1,000 bond.
Then the Treasury spends by crediting a household deposit (say, paying salaries to Federal employees).
Result for household sector: plus a $1,000 deposit
Net result for household sector at the end of the process: plus a $1,000 bond.
This bond is also a NFA of the private sector. The private sector has net saved, while the government has deficit spent.
Private sector saving equals the government deficit equals $1,000. To the penny.
And no new money has been created.
Oops, I forgot, obviously CR disagrees with Mosler:
CR: "Govt spending is always a redistribution of existing money."
"And no new money has been created" - Jose
Bonds are money, so new net "money" has been created.
Bonds (most) are considered "cash equivalents". Apple holds some $130B of these.
The level of net dollar currency theoretically remains unchanged...
....except if one sums all of the deficits over history the total exceeds the level of bonds held by the public by about $1.5T...which isn't supposed to be possible.
Malmo's Ghost, the kerfuffle is over intervening operations. This is the simple outline of how to understand the way that the Tsy gets rb to meet govt obligations by issuing tsys.
This is simple and straightforward. It's laid out in Warren's Soft Currency Economics and 7DIF in an easy to understand way.
However, the MR folks want to get into the operational details and that is fine. They think that the MMT economists don't understand these operations and the MMT economists disput that, saying that they are basically in agreement if one reads what they have written describing them instead of criticizing popular explanations that are necessarily simplified.
See for example, Scott Fullwiller's papers, beginning with Modern Monetary Theory - A Primer on the Operational Realities of the Monetary System, proceeding to Modern Central Bank Operations – The General Principles, and Treasury Debt Operations: An Analysis Integrating Social Fabric Matrix and Social Accounting Matrix Methodologies.
According to MMT economists there is no disagreement among the experts at MR. MR doesn't "prove MMT wrong."
CR is not an expert in central banking or Treasury ops, as he admits, nor am I. I am familiar with the basics, but not the intricate ops. So if you want to get into the fine points, study the papers.
Warren and the MMT economists don't generally respond here, so if there are questions ask them at the relevant blogs.
It's sufficient for most people to know that deficit expenditure results in an increase in the amount of consolidated non-govt NFA in aggregate, while tsys issuance is a reserve drain that operates by changing composition of assets but not amount.
And no new money has been created.
Consolidated non-govt NFA in aggregate increased by the amount of the deficit. That accommodates saving desire and leaves the private sector with the same aggregate amount of "money" to spend, so meeting increased saving desire doesn't draw down effective demand.
That is money stock is unchanged and non-govt holds tsys in addition.
The kerfuffle is over whether the tsys are increased debt or increased non-govt NFA held as savings.
Without the concept of non-govt NFA, a person will naturally thing "debt."
Thanks, Tom.
God, these arguments are frustrating. What has me most perplexed is that my intro to MMT came from CR himself. He wrote copious amounts on how MMT accurately described our monetary system. Then, out of the blue, he claims he rejects much of MMT. What? That just doesn't compute. Thus I can't help but be skeptical of MR. The bottom line, though, is that I'm more confused now than ever on the subject, along with its implications for policy, than ever. I see no way for much popular support or momentum with this internecine, eye poking, backdrop.
The thing is that these more or less arcane discussions about the fine points of cb and Tsy ops aren't necessary for most people to get into to appreciate policy implications of the MMT POV based on NFA.
Unless one is already an expert or wishes to become one, it's not the most productive allocation of time and energy.
It's kinda like going through data. Some people really like doing that, like Matt, and they report back. I don't feel that I need to go in and check his figures. But there are people who do, so we get feedback from several inputs.
Mal.
In fairness, I believe CR was "invited" to leave MMT, perhaps IIRC due to disagreement over the JG part, Cullen didnt (perhaps still doesnt) see the necessity of the JG as a "price anchor" to assist in the legally mandated policy goal of "stable prices" ... IIRC he thinks that (JG) would have externalities that would be detrimental to the proper functioning of the US economy...
rsp,
I believe CR was "invited" to leave MMT [over disagreement on the JG]
That doesn't excuse a break with reality. I mean, if the powers that be at MNE said "Go way, jerk!" well... I might grumble and come back with something biting and clever like "No, U!" on my way out the door. What I wouldn't do is walk out of the shower the next day and say it was all a dream as I regressed towards a neoclassic view of the monetary system.
The bottom line, though, is that I'm more confused now than ever on the subject, along with its implications for policy, than ever. I see no way for much popular support or momentum with this internecine, eye poking, backdrop
Internecine struggles are unfortunately an inescapable characteristic among schools of thought, particularly when they are very close to one another as is the case with MMT and MR.
The orthodoxy also does not escape this rule, witness the exchanges between freshwater and saltwater economists, Krugamn versus Cochrane, etc.
What I think MMT and MR could agree on concerning money is that, while most of it is likely issued by private banks in the form of bank deposits this is a "money" form that always has a countervailing debt attached to it. The private, non bank agent holds deposits but will have to pay them back in the future.
While government deficit spending creates net financial assets for the private sector - meaning assets free of debt.
And deficit spending, even if partially endogeneous, also depends in large measure on government tax-and-spend decisions and policies. The government is an instrument of the public and should thus use this tool of deficit spending to keep the economy always at a level close to potential.
The deficit is a means, the economy at potential is an end.
I'd guess both schools would agree on this.
I still don't get how someone who was such an avid MMTer, and spent considerable time explaining why he was, could essentially abandon his so called well though out views on the subject. I can see a quibble here or there, but Cullen says he now has little in common with MMT. This has gone far afield of the JG disagreement. CR has basically renounced himself and done a 180. That's very unusual IMO.
So it is a real stretch to claim that bank credit finances tsys. Tom Hickey
Not if a Fed lends new reserves to banks to enable them to buy tsys. In that case, the Fed and the banks split the interest from the Treasuries.
That the Fed can lend new reserves to the banks is an abomination. That they are lent and not given is a mere technicality since the loan creates new money.
I cant help but thinking that if any fence sitters were on this thread reading it they might say " SO these guys spend all these hours of the day dissecting which entity, the fed or the treasury, moves first when the govt wishes to spend!?"
Seems to me the only question which needs to be answered is; If China was found out to be planning some sort of act of aggression against the US and it was determined that the response would involve two trillion dollars of new spending, would our govt have to go hat in hand to the Buffets, Adelsons, Immelts and Dimons of the world (not to mention our true bankers the Chinese themselves!!) in order to procure funds? Of course not. If they dont need to do it to spend 2 trillion they dont need to do it to spend half a trillion.
Its all about our priorities and where they are. Full stop!
"when banks extend loans to the private sector they do create money by crediting the deposits of the loan beneficiaries."
Yes I know that Jose. Read the rest of my comment.
"no new money has been created"
Money was destroyed and then money was created. At the end of this process the amount of money in existence is the same as before, but there is also an additional bond in existence.
(whether or not you think bonds are money, like Paul, is beside the point)
Greg,
You have to tell it them though...
I remember back right before Gulf War 1, when nobody even knew where China was... the big thing back then was the Japanese... ie these morons would say: "We're borrowing from the Japanese!" just like they say "the Chinese!" today...
I remember Sen Sam Nunn being interviewed about the military operation (Desert Storm) (he was the Dem Senate leader on the Defense committee) and he said and I quote: "We're just going to have to borrow the money from the Japanese to fight this war..." I kid you not!
So I have seen these morons exhibit behavior that contradicts your assertion here...
This is so bad right now, I fully believe that these morons running things today are so stupid, that literally one part of the govt could declare war on the Chinese while at the same time another part of the govt would continue to credit their Fed account for the net imports...
If you look at warfare and can exclude it from being "stupid", we have NEVER in the history of the west had to endure such morons in top policy/govt postions in recorded history.... NEVER.
We are at an all-time peace-time low in western civilization.
rsp.
@y
Money was destroyed and then money was created. At the end of this process the amount of money in existence is the same as before, but there is also an additional bond in existence
That's also my opinion, "to the penny" :)
whether or not you think bonds are money
No, bonds are not money. They are highly liquid assets, but not money.
Glad to see we agree on every detail.
we have NEVER in the history of the west had to endure such morons in top policy/govt postions in recorded history
Yeah, I can see your point. It's difficult to imagine today a leader of the Nixon type, who simply decides to go entirely off gold after the French start asking to have their net exports to the U.S. paid in physical gold, instead of dollars.
The U.S. is now on its way to a recovery, with much better prospects than Europe. Then a fiscal cliff comes out of nowehere to derail said recovery. Unbelievable. And the obvious, simplest solution - postpone the damn thing for a couple of years and then reassess the situation - is not even seriously considered.
I think a Nixon, a Johnson even a Reagan would hardly swallow passively this kind of crap.
The only thing that is significant is amount of rb the same, plus the add of the tsys to the consolidated non-govt sector. That's an increase in the amount of NFA is equal to the deficit, since tsys issuance is a deficit offset that is mandated.
"Money," i.e., money stock (M2), is irrelevant since its size in determined endogenously. Fiscal policy is not aimed at increasing the money supply aka stock but rather to increase NFA to accomodate saving desire in order to avoid demand leakage to saving.
Tsys are not counted in any measure of the money supply-stock, although tsys, especially T-bills, are considered "close substitutes" for money.
If you look at warfare and can exclude it from being "stupid", we have NEVER in the history of the west had to endure such morons in top policy/govt postions in recorded history.... NEVER.
We are at an all-time peace-time low in western civilization.
Catch this one, if you didn't see it.
GOP Senators Want to Take the Debt Ceiling Hostage in Order to Raise the Retirement Age
Morons, sociopaths, or a combo?
If I put a one-hundred-dollar federal reserve note in an unbreakable transparent box with a time lock on it that will automatically spring open in 30 days, is it still money?
If the answer is yes, treasuries are money in every meaningful sense of the word whether this or that aggregate measure chooses to include them or not.
More sociopathy
New Outrageous Lie from NRA: Gun Silencers Protect Kids' Hearing
It should surprise no one that the NRA has recently thrown its weight behind an industry campaign to deregulate and promote the use of silencers. Under the trade banner of the American Silencer Association, manufacturers have come together with the support of the NRA to rebrand the silencer as a safety device belonging in every all-American gun closet. To nurture this potentially large and untapped market, the ASA last April sponsored the first annual all-silencer gun shoot and trade show in Dallas. America’s silencer makers are each doing their part. SWR Suppressors is asking survivalists to send a picture of their “bugout bag” for a chance to win an assault rifle silencer. The firm Silencero — “We Dig Suppressors and What They Do” — has put together a helpful “ Silencers Are Legal” website and produced a series of would-be viral videos featuring this asshole.
This Silencer Awareness Campaign is today’s gun lobby in a bottle. The coordinated effort brings together the whole family: manufacturers, dealers, the gun press, rightwing lawmakers at every level of government, and the NRA. Each are doing their part to chip away at federal gun regulation in the name of profits and ideology. Together, they plan to strip the longstanding regulatory regime around silencers, and reintroduce them to the gun-buying public as wholesome, children-friendly accessories, as harmless as car mufflers.
If I put a one-hundred-dollar federal reserve note in an unbreakable transparent box with a time lock on it that will automatically spring open in 30 days, is it still money?
If the answer is yes, treasuries are money in every meaningful sense of the word whether this or that aggregate measure chooses to include them or not.
But more to the point, T-bills can be used virtually immediately as money through repo, loan collateral, or sale. For the folks that actually use t-bills, they are as liquid as "money."
So whether one counts them as"money" is really is a non-issue, as the MMT economists observe.
"No, bonds are not money. They are highly liquid assets, but not money." - Jose
Yes, bonds are money by any meaningful definition of the term.
Bonds can be exchanged for cash on very short notice, just like any check or savings withdrawal. What one gives up in convenience is gained in interest earnings and safety.
No, bonds are not included in money supply measures like M1 or M2 but that's meaningless, since those measures of the money supply are mostly irrelevant and meaningless in terms of how money flows through the economy and as a result how the economic machine functions.
The liquidity of the banking system is unlimited, so what possible use could some measure of a subset of unlimited matter?
Anyone that wishes to take the opposite position is free to do so, bit it seems to me you are trying to solve a problem that doesn't matter, just as the mainstream neoliberal paradigm does and spins it's wheels on.
The only meaningful measure of money is NFA (if one's goal is to understand the monetary economy), of which bonds compose the majority. Most of the issues and details discussed here today will not be a part of the system analysis, because they occur outside of the system (if defined properly).
In a model (sectoral balances) of the economic system and subsequent analysis of the flows which determine economic activity, the traditional measures of the money supply are not part of the equation, and tend to obscure the solution rather than lead one to it.
Just to be clear, the sectoral balances is much more than a "model"...it is the definition of the system itself, and every element within that system is constrained by it.
Jose,
Here's an ultra-simplified example to explain why I think payment to govt destroys money, and govt spending creates money.
Example 1: You pay $1 tax.
step 1: situation before tax payment
You: +$1 asset (bank deposit)
Your bank: +$1 asset (Fed deposit), -$1 liability (bank deposit)
Treasury: $0
Fed: -$1 liability (Fed deposit)
Government: -$1 liability (Fed deposit)
step 2: You pay $1 tax
You: $0
Your bank: $0
Treasury: +$1 asset (Fed deposit)
Fed: -$1 liability (Fed deposit)
Government: $0
step 3: Government spends (pays you)
You: +$1 asset (bank deposit)
Your bank: +$1 asset (Fed deposit), -$1 liability (bank deposit)
Treasury: $0
Fed: -$1 liability (Fed deposit)
Government: -$1 liability (Fed deposit)
Example 1 simplified:
step 1: before tax payment
Non-government: +$1 asset (money)
Government: -$1 liability (money)
step 2: tax payment
Non-government: $0
Government: $0
step 3: government spends
Non-government: +$1 asset (money)
Government: -$1 liability (money)
Example 2: You buy a govt bond
step 1: situation before bond purchase
You: +$1 asset (bank deposit)
Your bank: +$1 asset (Fed deposit), -$1 liability (bank deposit)
Treasury: $0
Fed: -$1 liability (Fed deposit)
Government: -$1 liability (Fed deposit)
step 2: You buy bond
You: +$1 asset (bond)
Your bank: $0
Treasury: +$1 asset (Fed deposit), -$1 liability (bond)
Fed: -$1 liability (Fed deposit)
Government: -$1 liability (bond)
step 3: Government spends (pays you)
You: +$2 assets (bond + bank deposit)
Your bank: +$1 asset (Fed deposit), -$1 liability (bank deposit)
Treasury: -$1 liability (bond)
Fed: -$1 liability (Fed deposit)
Government: -$2 liabilities (bond + Fed deposit)
Example 2 simplified:
step 1: before bond purchase
Non-government: +$1 asset (money)
Government: -$1 liability (money)
step 2: bond purchase
Non-government: +$1 asset (bond)
Government: -$1 liability (bond)
step 3: government spends
Non-government: +$2 assets (bond + money)
Government: -$2 liabilities (bond+ money)
Paul,
I think you could take just $NFA and set up an entire new school in the academe... studying flows and stocks and designing monitoring and reporting systems around just $NFA in our economies ... and it would be very valuable to civil govts...
And do NOT put it in the "economics" dept or the "business" dept...
Put it in an entirely new dept in the academe...
That way there would be no "baggage"...
rsp,
Right, Matt. Just drop the term "money." It's too ambiguous to do anything but confuse.
Put it in an entirely new dept in the academe...
Engineering.
Tom,
Perhaps "Operational Sytems" or something like that... "Operations Studies"... "Operations Research"...
It would have to do with studying operational systems basically where the monetary system would be one of them... but it could also include other systems I suppose.. a curriculum where the focus was put on identifying system functions and a breakdown into sub-systems and interfaces, etc.. and then relevant measurement methods and measurement systems. performance parameters etc..
You can see right now that there is a dearth of operational systems analytic capability out there...
Roger writes about this a lot but Roger I view has a very specialized academic background... he is way above 99% out there..
btw from Scott F's paper you just put up:
" Mankiw and Ball (2005) summarize the feelings of the vast majority of economists, policymakers, and others—“We can only guess what level of debt will trigger a shift in investor confidence . . . If policymakers are prudent, they will not take the chance” of finding the precise tipping point that generates unbounded growth in debt service relative to the economy’s capacity. "
Have you EVER read anything as stupid as this dreck?
This is embarrassing. No other part of the academe would write something like this.. AND its not even true as Scott lays waste to these morons via the math...
rsp,
bonds are money by any meaningful definition of the term
Is Greenland a part of Europe or North America?
Geographically it has traditionally been defined as being on the North American Continent.
Of course, we could decide to include it in Europe. Change the definition of Europe and put Greenland in a new map of "Europe" - there would certainly be valid reasons for doing so. But that would confuse things a lot - especially if we introduce such a new element without warning in a discussion.
Likewise for T bonds. They have never been included as a component of money. The traditional definition of money is currency plus deposits. We may decide to change that and include T bonds in a new definition of "money" but this will likely confuse any exchange with people not part of "our school" - meaning, the majority that we have to influence in order to gain political relevance and change the world.
Hair splitting debates on what is the "true" definition of money are not helpful, IMO. There is not much to be gained by needlessly messing around with time-honoured definitions; let's spend our priceless energy in matters of substance instead.
"We can only guess what the escape velocity of that spacecraft would be..."
"we can only guess how heavy a truck could travel over that bridge..."
"we can only guess what dose of antibiotics should be administered..."
"we can only guess how fast we can modulate that laser diode..."
"we can only guess what amount of thrust is required for takeoff velocity..."
This is a complete human embarrassment what Mankiw writes here... complete failure ..
Perhaps "Operational Sytems" or something like that... "Operations Studies"... "Operations Research"...
Right, this is very much what Roger is doing. We need more scientists, engineers, systems people, and operations folks involved. Better to keep this separate from economics, just like business and management science went its own way when people realized that mainstream economists are airheads.
This is a complete human embarrassment what Mankiw writes here... complete failure ..
I view him as a partisan flak who gets rewarded by TPTB for what he does.
Hair splitting debates on what is the "true" definition of money are not helpful, IMO. There is not much to be gained by needlessly messing around with time-honoured definitions;
I'd agree if it weren't for the fact that so many pervasive misconceptions stem from that particular point. Misguided notions on the effects of policy regarding bond issuance and inflation, QE and inflation, base money and inflation.
So much of that simply evaporates proceeding from what is really a far more accurate idea of treasuries as "money".
Sometimes scrapping a time-honored definition is a big step forward.
"Inflation" is another ambiguous term that needs to be deleted. Let go to technical definitions and get rid of the magical thinking.
CR has basically renounced himself and done a 180.
"V. Do you reject Cullen Roche?
R. I do.
V. And all his works?
R. I do.
V. And all his empty promises?
R. I do."
http://www.stisidore-yubacity.org/faqbaptismvows.html
:o)
"They have never been included as a component of money." - Jose
Jose, that is the point. Traditional measures of components of "money" are valueless if one wants to understand or examine the economy in way that can be applied with confidence. Those metrics have led economists down a rabbit hole they can't find their way out of.
A bond is one of the main components of actual "base money", the other being the net dollar. This is what separates MMT from the others.
That's why all of this superfluous discussion about "money" is such a waste of time.
The discussion of "money" going on here only has any meaning if looked at from a monetarist point of view. We (MMT) reject the monetarist point of view...it doesn't compute...so why bother?
What particular problem are you trying to solve?
Matt, your $NFA descriptor gave me another thought...
Other countries (economies) rely on NFA too.
The Eurozone countries began with some level of €NFA when they exchanged their individual currencies for Euro's.
That level of €NFA has remained fixed for 10-12 years or so as the net funds have flowed out of the peripheral countries.
What has allowed the scheme to go this far is the fact that the Eurozone countries only have to make the interest payments on their operating funds...they never have to make principal payments.
If countries could "borrow" funds at 0% interest with no principal payments ever, this would be functionally equivalent to €NFA creation.
And then we have what is merely a semantic framing..."borrow" becomes "creation". Did the words create the metamorphosis or the mathematical reality (no payments).
Paul, not all government bonds are a liquid as US govt bonds, and even those are not as liquid as money.
y,
What would be an example of a relatively illiquid government bond from a sovereign issuer? Or I guess really my question is are there actually nations that don't exercise their inherent market-making capacity?
What particular problem are you trying to solve?
Just sticking to a common language so that our ideas on matters of substance are intelligible to "outsiders".
Jose, I was hoping you might respond to the examples I posted above :)
geerussell,
Most liquid govt bond: US. Least liquid govt bond: ...Somalia?
Somalia is mostly dollarized and it's unclear as to whether they issue any bonds at all denominated in somali shillings as both the government and central bank are in what might generously be termed a state of flux.
Assuming for the sake of discussion an actual functioning government and central bank, what would prevent a somali central bank from providing any desired level of liquidity for government bonds denominated in somali shillings? That would seem to be a basic feature of all currency issuers.
José Just sticking to a common language so that our ideas on matters of substance are intelligible to "outsiders".
Almost all the problems that need solving in the world today are based on the way they are framed socially, politically, and economically, and due to social, political, and economical institutional arrangements constructed based on that framing. For example, PKE is in opposition to the dominant framing of neoclassicalism and the Keynesian-neoclassical synthesis that was propounded to fit Keynesianism into the mainstream frame. Within that debate, MMT is opposed to the dominant monetarist frame in policy use today.
The first rule of cognitive science wrt to debate is not to use the opponent's framing. You cannot win arguing within that frame. It's that simple.
The right spend years and tons of money erecting the present framing. That needs to replaced with different framing rather than opposed from within it.
All discourse is conducted in a universe of discourse that is based on a POV and the norms that determine the boundaries of the framework reveal what the key values and criteria are. It is not possible to conduct expression outside of such constructs, which is a key point in the objection of Feuerabend to "scientific objectivity" and the deconstructive analysis of post structuralism and post modernism.
Human thinking isn't possible without norms, since they are the criteria for inclusion and exclusion, prioritization, etc. Human beings are stuck within the logical constraints imposed on them by the "hardware" and "operating system." A hardware constraint is the inseparability of thought and feeling at the level of brain functioning. A software constraint is the principle of non-contradiction. Humans also impose more specific constructs on themselves through the "apps" they use, some of which are consciously chosen and some not, such a cultural, subcultural biases, institutional arrangement, and group and personal preferences. It is ver difficult if not impossible for humans to be completely aware of the logical of the conceptual frameworks they use, largely unconsciously, learned along with language-use and cultural socialization. Volumes have been written on this, and it is central to the contemporary intellectual debate.
"Just sticking to a common language so that our ideas on matters of substance are intelligible to "outsiders"." - Jose
Jose, MMT essentially redefines "money" and it's relationship to the economy.
You will see very little reference to traditional forms of "money" by MMT academics except when discussing Fed/Treasury operations. These operations all exist outside the economic "container" that holds the NFA.
If one combines the two into one universe the examination of flows becomes very complicated and tedious, but is not fruitful. This has been exhibited in this thread. No consensus has been reached, no solution to the questions posed.
I don't see how one could discuss MMT couched in mainstream terms. There is no reference to traditional "money" in the sectoral balances...there is only NFA, of which bonds are the major portion. There is also no reserves. The fact that there is an offsetting accounting entry somewhere outside the system is irrelevant.
If one expects to "get" MMT I suspect one will have to abandon many traditional definitions.
Jose, I was hoping you might respond to the examples I posted above :)
First, you'll have to tell me if you're writing within the framework definition money equals currency plus deposits or not :)
"Paul, not all government bonds are a liquid as US govt bonds, and even those are not as liquid as money." - y
Y, can you give us an example of a government bond that can't be redeemed for cash on very short notice?
Seems to me you are digging in on a distinction with no real difference...trying to be technically correct. The least liquid bond is more liquid than any other investment vehicle I can think of, and the face value is always preserved.
These bonds are sold mainly because PEOPLE WANT THEM instead of holding their cash in a checking or savings account or their mattress. The buyers aren't doing us a favor. The government doesn't "need" them either...it is a choice (made with poor understanding in my view).
I'm nowhere near an expert on bonds, I hardly know anything about them...Mike or Matt are far more qualified than me on this. But, as far as I'm concerned bonds are "money" and no one has made a convincing case in opposition so far.
There is no reference to traditional "money" in the sectoral balances
Well, the sectoral balances approach was developed by Wynne Godley - later with the co-authorship of Marc Lavoie - and that didn't prevent him from referring to money within the traditional definition many and many times. Even if NFAs are a more useful concept than "money" that still allows us to refer to traditional definitions when analyzing accounting tables for deficit spending, in my view.
Sorry, I completely missed the point of this statement...
"Paul, not all government bonds are a liquid as US govt bonds, and even those are not as liquid as money." - y
y, this discussion has been wrt the US economy and money system...I suspect Somalia's money system is completely different than ours...so what would be the point of all this discussion of operations you've been engaged in if you meant to be speaking in general terms?
How is that the private credit is "money" and T-bill are not? Why are T-bills used? One reason is that bank deposits over s certain amount are not federally insured. Corps do not leave "money" in the bank. They buy T-bills and this is considered part of their "cash" holdings.
There is so much ambiguity in this that anyone from a technical field outside of economics and finance throws up their hands. The only reasonable explanation is that it is part of the "magic" used to dupe the rubes.
"Even if NFAs are a more useful concept than "money" that still allows us to refer to traditional definitions when analyzing accounting tables for deficit spending, in my view." - Jose
How so? As far as the economy and sectoral balances are concerned the only result of deficit spending is increased net dollar asset balances...hopefully matched to the level of goods and services we produce.
All of the other measures of money are based on creation of accounting abstractions from thin air.
Besides, if one tried to explain arcane Fed/Treasure operations to the public it would be very unfulfilling,
Just because something exists doesn't mean it's helpful to understand it. Abstract mathematicians can only speak to each other..we're trying to reach the average citizen.
Personally, I haven't spent 5 minutes thinking about Fed/Treasury operations, because it doesn't help me understand the flow of funds within the economy.
Different countries don't even use the "traditional" money designations in the same way.
"Well, the sectoral balances approach was developed by Wynne Godley - later with the co-authorship of Marc Lavoie - and that didn't prevent him from referring to money within the traditional definition many and many times."
Jose,, I think in the case of a lot of these older writings it was or was thought to be necessary to go into this level of detail to convince a world stuck on monetarist ideas.
The MMT academics have taken so much of the mystery out of monetary operations an money creation that it isn't really necessary any longer...monetary systems have become a "commodity" of sorts.
There are probably many dozens if not hundreds of audio amplifier topologies in existence, just as there are monetary systems, not counting minor differences. No one but the people that design the systems cares abut the architecture...everyone else cares about the performance.
What i take paul to be doing is creating a systems approach to monetary economics and the economy that is not tied to economics or finance as academic disciplines or traditional universes of discourse that embed a framing perspective.
Of course, MMT economists are going to have to address their colleagues in the language of the discipline, but outsiders are not so constrained.
The present endeavor is to create a simple to understand systems diagram showing how the stocks and flows actually work, putting aside the existing framing that is confusing and using symbols and language that is up to the task.
I don't see that it will be possible for ordinary people to get this absent such an approach.
Paul said, "Bonds can be exchanged for cash on very short notice, just like any check or savings withdrawal. "
Common equity, preferred equity, corporate bonds, gold, silver, equity put/call options, future contracts, etc. can be exchanged for cash on very short notice, just like any check or savings withdrawal.
With respect to your above definition of money, I guess the relevant question is what is not money?
Investopedia on M1:
This is used as a measurement for economists trying to quantify the amount of money in circulation. The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency.
T-bills are not "assets that can quickly be converted to currency"?
T-bills are not "assets that can quickly be converted to currency?
They are, buy you still have to convert them.
Whereas I paid my bill for lunch at the restaurant by using "plastic currency" - a debit card.
I don't think the waiter would have accepted a T-bill for payment.
So, in this sense at least the old definition of money shows its usefulness - and it's easier to explain intuitively to the non technical audience that forms the majority of the electorate.
Jose,
"you'll have to tell me if you're writing within the framework definition money equals currency plus deposits or not"
Yes I am
("Fed deposits" are "reserves").
With respect to your above definition of money, I guess the relevant question is what is not money?
All IOUs are money. They reside in a hierarchy based what they're denominated in and are higher or lower in that hierarchy based on who issues it.
In the dollar hierarchy, the sovereign issuer is at the top and its IOUs, whether reserves, notes, coins or bonds are at the top because they're IOUs of the currency issuer.
Common equity, preferred equity, corporate bonds, gold, silver, equity put/call options, future contracts, etc. can be exchanged for cash on very short notice, just like any check or savings withdrawal.
Is it a convertible promise to deliver other dollar-denominated IOUs? Then it's money. (corporate bonds for example are a promise to deliver bank deposits which are a promise to deliver government IOUs) If it doesn't it's not money, it's a thing you can own and trade for money. (gold, silver, common stock, collectible baseball cards... things you can own and trade to other people for money, the thing itself carries no promise)
"With respect to your above definition of money, I guess the relevant question is what is not money?" - Bullish Bear
Man, people are practically welded to their prior concepts of "money".
Bear, I made the distinction a few comments up thread...
Bonds are always redeemable at face value...can you say that about other equities?
If a bond is a store of some level of dollars that can always be redeemed at face value in dollars, then in what way is that not a money equivalent? Show us another equity or commodity that has that characteristic.
Anyway, MMT looks at the world in terms of NFA, which is mostly bonds, the nominal value of which is always equal, to the penny, to the record of money creation, both the flows and the accumulated stocks. Measured in net dollars of "money".
The amounts fed into the sectoral balances equation are always nominal dollar amounts that no one would have a clue were stored as bonds if they had no interest in economics.
Corporate profits are reported in dollars...retained earnings reported in dollars, even though they are mostly stored in bonds. Tell Apple it can't spend it's cash.
NFA is money, and it is the only measure of that medium that matters, because, as I wrote previously, all funds in the banking system are a subset of an unlimited pool.. The scorekeeper can't run out of points.
It is a unique measure that is the major component supporting economic activity, and I challenge any one to present any measure available that correlates as closely with economic health.
At least if we're going to have these discussions lets relate the argument to something concrete re economic performance.
That's my primary area of interest, I could care less how money is "created" because it is an uninteresting, trivial operation bogged down with complex accounting that serves mainly to make it appear as the work of Gods.
One guy with a computer could make it work. Unfortunately it take volumes of research papers just to prove it isn't magic.
"and it's easier to explain intuitively to the non technical audience that forms the majority of the electorate."
Jose, I don't see how you can say this...credit is considered by most to be "money". It's relationship to the economy is hopelessly convoluted..well beyond the capacity of the man on the street to understand.
The term "money" is simply too vague and ill-defined to be of use in any rigorous analysis.
It is like giving every one of your 10 children the same name.
you have money, then money-like, then money-ish, then kinda-sorta-money, then possibly-money, then I'm-not-sure-that's-money, then that's-probably-not-money, then thats-defo-not-money. A sliding scale of liquidity perhaps.
The end of Wray's MMT primer covered this ground pretty well.
Liquidity is a secondary property of money. Less liquidity doesn't make an IOU not-money, it just means it may have to offer interest to induce people to hold it.
Y,
I'm at the airport to board a long transatlantic flight.
I'll try to send you my answer tomorrow.
ok.
"The end of Wray's MMT primer covered this ground pretty well." - geerussell
See, I knew I wasn't crazy. I was beginning to feel like the guy holding the "repent-the end is near" sign on the street corner.
I don't think the waiter would have accepted a T-bill for payment.
Not a good example. Most establishments don't accept $1000 bills either, if only because they don't want to keep enough cash on hand to make change for large denomination bills. Try paying cash in $100's in many places. These are the counterfeiters favorite and a lot of places refuse to accept them.
Where T-bills are actually used, they function pretty much as currency. In fact, currency is not used very much in those places at all. Between large transaction, funds are regularly parked temporarily in T-bills. That is largely what their function is.
Jose, I don't see how you can say this...credit is considered by most to be "money". It's relationship to the economy is hopelessly convoluted..well beyond the capacity of the man on the street to understand.
Many if not mosts economists don't properly understand it either. Enter Minsky.
Tom,
In Brazil the largest denomination banknote is R$ 100, about US$ 45, which perhaps corresponds more closely to the ideal definition of money :)
US$ 45 is almost half the monthly wage of the poorest 10% in Brazil, isn't it?
The minimum wage is R$678, about US$330 (monthly) at current exchange rates.
what's the real minimum wage?
Real in what sense?
It's the Federal MW but some states have a specific - and higher - MW. It's R$755 or about US$ 370 in São Paulo state, for instance.
real in the sense of what do poor people actually earn.
y,
I have just re-read your accounting examples. They are technically correct, IMO.
But, also in my opinion, you haven't actually made the case that the government creates money when it deficit spends after selling a bond to the public.
You consolidate the Treasury and the Fed into a single entity. In the beginning they have a liability of $1(bank deposits at the Fed); in the end they have this same liability plus a T bond.
The commercial banks have no net change in their position.
The household sector started with a $1 deposit and ended with that same deposit plus a $1 T bond.
So what was a created was a T bond, not money (deposits at commercial banks).
Of course, you may consider T bonds as money. In that case you're right, but only by changing the definition of money to include bonds.
So let's just agree by saying that said deficit spending created a new NFA - a Treasurty bond, or bill. And let's leave the discussion over the proper definition of money to specialists in metaphysics. For me, in this example, it's enough to say that no new bank deposit was created, as opposed to the case where the Treasury sells a bond to a depositary institution - then, and only then is a new deposited created via deficit spending.
José, as I understand the MMT argument it is in aggregate, so that existing reserves held by non-govt in deposit accounts at the Fed (some of which are proxies for bank customer accounts) are switched in form from rb to tsys, that is, from a deposit acct at the Fed to a time acct, to use Warren's analogy. New rb in the same amount are created by crediting deposit accts in deficit expenditure. Thus, the initial NFA now held as tsys remains, and new NFA now held in deposit accts is added, increasing consolidated non-govt. NFA in aggregate. So there is a reserve drain into tsys and a reserve add through deficit expenditure.
Jose,
The point is that money is first destroyed, and then an equivalent amount of money is created when the government spends.
"You consolidate the Treasury and the Fed into a single entity"
Yes, that entity is called 'the federal government.'
The Fed and Treasury are different parts of the federal government.
The money issued by the Fed is an obligation/liability of the federal government.
There is no such thing as money issued by the Fed which is not simultaneously issued by the government. There is no such thing as a Treasury asset which is not simultaneously an asset of the government. There is no such thing as Treasury spending which is not simultaneously government spending.
Think of it this way:
You, Jose, are the government.
You issue liabilities with your right hand (i.e. pieces of paper with "I, Jose, owe the bearer $10" written on them).
You then you collect them in taxes with your left hand.
Your right hand is the "central bank", and your left hand is the "Treasury".
When a liability issued by your right hand ends up in your left hand, that liability is extinguished.
That piece of paper is no longer a liability to you. It is no longer "promise to pay" anyone. It is now just a piece of paper with words and pictures on it.
It is no longer money!
Then, when your left hand 'spends' by re-issuing those pieces of paper, they once again become liabilities, i.e. "promises to pay", i.e money.
So taxation destroys money, and government spending creates it.
Understanding this idea requires a realisation that money is simply a liability of the issuer and nothing more.
In the case of US currency, the issuer is always the US government. the US government issues it liabilities through both the Fed and the Treasury.
"Money" is destroyed in two ways, 1) taxation, and 2) loan extinguishment.
When a tsys is bought money is not destroyed but its form switches from "money of zero maturity" to "money of non-zero maturity" (NFA remains the same).
Tom, I disagree.
When payment is made to the Treasury's account at the Fed, money is destroyed - whether it's for payment of taxes or for the purchase of bonds.
If one considers govt bonds to be money, then when a bond is purchased from the Treasury:
1. money is destroyed in payment to the Treasury.
2. money is created in the form of a bond,
3. money is created when the Treasury spends.
But the basic logic still holds even if you don't consider govt bonds to be money.
y,
"The point is that money is first destroyed, and then an equivalent amount of money is created when the government spends."
Your own example starts with
Non-government: +$1 asset (money)
Government: -$1 liability (money)
And ends with
Non-government: +$2 assets (bond + money)
Government: -$2 liabilities (bond+ money)
A bond was created; no new money was created - or destroyed.
When payment is made to the Treasury's account at the Fed, money is destroyed - whether it's for payment of taxes or for the purchase of bonds.
If you don't count bonds as "money."
Whar actually happens is some numbers are deleted on one account at the Fed, a deposit acct, and are entered in another acct, a time acct.
That is, rb is debit to one acct and tsy is credited to another.
1.
Non-government: +$1 asset (rb)
Government: -$1 liability (rb)
And ends with
Non-government: +$2 assets (tsy + rb)
Government: -$2 liabilities (tsy + rb)
2.
rb is debit to non-govt acct, some govt asset acct is credit in amt of real resources purchased.
"A bond was created; no new money was created - or destroyed"
No!
Step 1: Before tax payment
Non-government: +$1 asset (money)
Government: -$1 liability (money)
Step 2: Tax payment
Non-government: $0
Government: $0
Money destroyed!!!
Step 3: Government spends
Non-government: +$1 asset (money)
Government: -$1 liability (money)
Money created!!!
That's what I mean: destroyed, then created.
For example:
1. write the word 'one' in pencil on a piece of paper.
2. Erase it with an eraser.
('one' destroyed!)
3. write the word 'one' on the piece of paper with a pencil again.
('one' created!)
I was referring to your second example, where "you buy a bond". This example didn't involve payment of taxes.
Same thing, Jose!
Step 1: Before bond purchase
Non-government: +$1 asset (money)
Government: -$1 liability (money)
Step 2: Non-govt pays for bond
Non-government: $0
Government: $0
Step 3: Govt hands over bond
Non-government: +$1 asset (bond)
Government: -$1 liability (bond)
Step 4: Government spends
Non-government: +$2 assets (bond + money)
Government: -$2 liabilities (bond + money)
(you could do step 3 before step 2 if you want, or you could do them at the same time, it makes no difference).
Yes. There is net creation of a bond and no destruction of money.
Money starts at $1 and ends at $1. Bonds increase by $1.
Ok, Jose, let's walk through this one together.
You are the government, and I am the 'non-government'.
I have +$1 asset (money). Therefore you have -$1 liability (money).
You ask me to lend you $1.
So I give you my $1.
I now have $0, and you have $0.
Money has been destroyed.
You then give me a bond (because you're "borrowing the money from me", remember).
I now have +$1 asset (bond), and you have -$1 liability (bond).
A bond has been created.
Then you spend "the money you borrowed from me".
I now have +$2 assets (bond + money), and you have +$2 liabilities (bond + money).
Money has been created.
Destroyed, then created.
Ok, I see what you mean.
Money - first destroyed, then created again. Net change: zero.
Bonds: simply created. Net change: plus one.
I suppose we can agree on that :)
yes, though it's worth noting that, when looking at the government as a whole, spending comes out of 'zero', or nothing. i.e. spending is 'money creation'
this is obscured by the separation of the Treasury and Fed. However, this separation does not change the basic logic or reality.
the relationship between Fed and Treasury is a case of 'intra-governmental' accounting. One part of the government has a liability and the other has an asset. They net to zero.
The division is not irrelevant or unimportant, but it needs to be seen for what it is.
Money - first destroyed, then created again
One account debited and another credited at the cb. This reflected in corresponding entries in non-govt, but it's the entries at the cb that "count."
Of course in my example the 'non-government' starts off with $1.
That $1 has to come from the govt in the first place.
So the 'monetary circuit' starts with money creation out of nothing, obviously.
Post a Comment