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Hey, maybe one of Mike's knowledgable readers can help me understand something. I've just started getting into MMT, all I had known about before was the Austrian school. Anyway,today I asked Jim Rickards (he didn't answer me btw)about the Fed's balance sheet. If the Fed is just giving much of their bond revenues back to the Treasury then isn't it beneficial for the Treasury for the Fed to have more and more of their bonds? How big can the Fed's balance sheet get before there are problems? Rickards thinks the IMF will bail out the U.S. with SDRs down the road since the IMF has a clean balance sheet. But what are the negatives of the Fed having trillions on it's balance sheet? If they hold, say all of the U.S.'s treasuries (hypothetically), is this a bad thing? I wanted to get MMT's take since I couldn't get Rickards to answer me on an issue he brought up in his book.
"If the Fed is just giving much of their bond revenues back to the Treasury then isn't it beneficial for the Treasury for the Fed to have more and more of their bonds?"
Why would it be benefit the Treasury? From an MMT perspective, the U.S. government doesn't need to be "funded" by revenue.
Yeah I get that MMT sees the interest income being removed from the private sector as negative in our current situation. I was just referring to much of that interest income coming back to the Treasury, since I had read that the Fed was giving that income back to the Treasury (through some complex means).
If the Fed is just giving much of their bond revenues back to the Treasury then isn't it beneficial for the Treasury for the Fed to have more and more of their bonds?
The govt doesnt need tax or Fed to return interest to be able to spend. What happens when the Fed buys bonds from the non-govt sector is that interest income on the bonds that would otherwise have gone to the non-govt sector is reduced cet par. So the Fed buying UST bonds actually creates fiscal drag and is a form of austerity...
How big can the Fed's balance sheet get before there are problems?
imo the balance sheet size doesnt matter... as the balance sheet grows the interest income reduction mentioned above is just amplified...
Rickards thinks the IMF will bail out the U.S. with SDRs down the road since the IMF has a clean balance sheet.
The IMF is largely funded by the US govt...
But what are the negatives of the Fed having trillions on it's balance sheet?
Loss of interest income for the non-govt sector...
If they hold, say all of the U.S.'s treasuries (hypothetically), is this a bad thing?
No one can earn interest on US Treasury securities...
Why would Christie and King and the other guy continue to stay in the GOP at this point?
The neo-confederate, anarcho-libertarian control of the GOP is on full display here.
Bush (Texas- confederacy) is President, hurricane hits Florida (Confederacy) money is quickly provided... Katrina hits Louisiana (Confederacy) and Mississippi (confederacy) money in 11 days and "Brownie" gives personal attention... Hurricane hits the Carolinas (Confederacy) money is right there... etc....
Now we get a storm that veers north and hits New Jersey (Union) and NY (Union) Maryland and PA (union) and these northern states have waited 68 days and counting and they cant even get these neo-confederate SOBs to even schedule a vote...
Good bye GOP, this is proof positive that the former "Party of Lincoln" has been completely infested and usurped by neo-confederate, anarcho-libertarian morons...
These 3 GOP officials from NJ and NY ought to leave the party and start to form their own caucus right now the GOP is finished...
So after reading part one of this: http://neweconomicperspectives.org/2012/12/functional-finance-and-the-debt-ratio-part-i.html per Tom's recommendation.
Why wouldn't a government just bypass bonds once their debts get high enough to where bond holders raise their rate? Why wouldn't a government just fund the government with debt free currency creation? Bonds don't makes sense to me, they seem like a holdover from the gold standard. What am I missing?
The purpose of bond issuance is to provide a subsidized (with interest) default risk-free parking place for Big Money. It's a subsidy because it is unnecessary operationally. It's a voluntary political choice.
"... it wouldn't be inflationary because the purchase of bonds from the public by the Treasury would be just a big asset swap exactly like QE ... it's not new money..."
I'm having trouble understanding how this is not money creation. People/banks buy securities. That money is spent into the economy by the gov't. Then, money arising from this platinum coin will pay off the securities + interest.
I must have an accounting error because I see this as money creation.
By definition, if expenditure into non-govt is being funded it is fiscal rather than monetary. Treasury creates a 1T liability which it exchanges with the Fed for 1T Fed liability. The Treasury liability (coin) is a Fed asset and the Fed liability (rb) is a Treasury asset. The Treasury then uses its asset (rb) for expenditure — interest payments, transfers like SS, and payment of invoices for agency purchases. The difference is that Treasury can exchange the coin with the Fed to get the rb needed for expenditure, but it cannot do that with tsys. Moreover,tsys added to the national debt and affect the ceiling, whereas coin issuance does not.
If the Mint/Treasury deposited a $1T coin at the Fed, the balances would end up in Table I "Operating Cash Balance".
You can see that this account closed at about $62B well this account would go to $1.062T.
At that point, Treasury could spend it on whatever it wanted to out of the myriad of line items that appear in Table II on the right side ("Withdrawals") among which is "Public Debt Cash Redemp. (Table III-B)".
If they just spent these new balances on perhaps another line item in Table II, such as "Defense Vendor Payments" then perhaps you are correct in your assessment that "money" would be injected, but that is not what Mike is talking about.
Mike is talking about using the new balances in Table I to redeem on the run USTs via the "Public Debt Cash Redemp. (Table III-B)" line item. This exchanges USTs held by the non-govt with bank balances now held by the non-govt and "money", or what we call $NFA around here sometimes, held by the non-govt sector does not change...
ex ante they had USTs, ex post they have bank balances, in the same amount.
I have t say it's encouraging having new faces showing up here asking thoughtful questions instead of naysayers picking nits then ignoring everything in response.
I still don't quite get QE, all the more so as people like Mike Whitney and Ellen Brown seem to claim essentially that while it doesn't help aggregate demand, it is more than a mere neutral asset swap and and actually represents a kind of sleight of hand that further enriches the big banks:
Yes, both of those are true too. While QE is a neutral asset swap in that it doesn't add $NFA to non-government, it is designed chiefly to aid the financial sector with the idea that if the US financial sector (TBTF's) collapse, then so does the US economy, taking down the global economy with it.
This is how neoliberalism works. Socialism for the rich because they are the "important" people who "count." "The little people," not so much.
This is also true with the neoliberal prescription for austerity.
Thank you Tom, Y, and Matt for your kind help and llinks.
Tom, you say, " it is designed chiefly to aid the financial sector with the idea that if the US financial sector (TBTF's) collapse, then so does the US economy, taking down the global economy with it."
Does it actually perform that function of avoiding the collapse of the financial sector or is it simply a way to extort more more for the banks? ==================== I get that the fiat system is essentially cyber credit. I also get that the majority of politicians who make policy either don't get this or pretend they don't get this. Either way, complications are introduced into the system or else previous complications are maintained in the system that are no longer necessary. But the problem is that it looks as though the powers that be either think they are still necessary or else act as if they are anyway so as to steal more money and get more power. The system, one way or the other, is being abused; it is rigged. It could be a force for good, but it seems that it has been criminalized. Operationally, I think I get it, but the powers enact a "dance of the 7 veils." How else could Rubin, Paulsen, and Geithner get away with what they do; how else could the banks commit crimes, even launder drug money, and get away with it? IN this sense, the analyses of MMT are seem at once to clarify and be applicable, yet in other ways, not applicable because distorted.
Am I making any sense here? Have I got it basically right? It looks to me that we have a political and legal problem much more than an economic one, in that the former one generate the latter.
N this sense, the analyses of MMT ... not applicable because distorted.
This should read: In this sense, the analyses of MMT are seem at once to clarify and be applicable, yet in other ways, not applicable to the extent the powers that be do this that make no operational sense and represent conceptual distortions.
Does it actually perform that function of avoiding the collapse of the financial sector or is it simply a way to extort more more for the banks?
It depends on how one looks at it. The privilege class considers itself above the law, which is only needed, in their view, for the rabble who need discipline and boundaries, like children.
The system, one way or the other, is being abused; it is rigged. It could be a force for good, but it seems that it has been criminalized.
This is not an economic problem as much as a legal and political one. Because of the power structure existing law is not being applied any more here than it was in the case of torture and other human rights violations in the CIA and military. The US has become a rogue state, sadly to say.
"The system, one way or the other, is being abused"
yeah it's a form of corruption. The state's powers are being used in the wrong way, in the service of certain private interests and a particular ideology.
25 comments:
Hey, maybe one of Mike's knowledgable readers can help me understand something. I've just started getting into MMT, all I had known about before was the Austrian school. Anyway,today I asked Jim Rickards (he didn't answer me btw)about the Fed's balance sheet. If the Fed is just giving much of their bond revenues back to the Treasury then isn't it beneficial for the Treasury for the Fed to have more and more of their bonds? How big can the Fed's balance sheet get before there are problems? Rickards thinks the IMF will bail out the U.S. with SDRs down the road since the IMF has a clean balance sheet. But what are the negatives of the Fed having trillions on it's balance sheet? If they hold, say all of the U.S.'s treasuries (hypothetically), is this a bad thing? I wanted to get MMT's take since I couldn't get Rickards to answer me on an issue he brought up in his book.
"If the Fed is just giving much of their bond revenues back to the Treasury then isn't it beneficial for the Treasury for the Fed to have more and more of their bonds?"
Why would it be benefit the Treasury? From an MMT perspective, the U.S. government doesn't need to be "funded" by revenue.
Yeah I get that MMT sees the interest income being removed from the private sector as negative in our current situation. I was just referring to much of that interest income coming back to the Treasury, since I had read that the Fed was giving that income back to the Treasury (through some complex means).
Fed remits its surplus after deducting expenses to the Treasury.
cyril,
If the Fed is just giving much of their bond revenues back to the Treasury then isn't it beneficial for the Treasury for the Fed to have more and more of their bonds?
The govt doesnt need tax or Fed to return interest to be able to spend. What happens when the Fed buys bonds from the non-govt sector is that interest income on the bonds that would otherwise have gone to the non-govt sector is reduced cet par. So the Fed buying UST bonds actually creates fiscal drag and is a form of austerity...
How big can the Fed's balance sheet get before there are problems?
imo the balance sheet size doesnt matter... as the balance sheet grows the interest income reduction mentioned above is just amplified...
Rickards thinks the IMF will bail out the U.S. with SDRs down the road since the IMF has a clean balance sheet.
The IMF is largely funded by the US govt...
But what are the negatives of the Fed having trillions on it's balance sheet?
Loss of interest income for the non-govt sector...
If they hold, say all of the U.S.'s treasuries (hypothetically), is this a bad thing?
No one can earn interest on US Treasury securities...
rsp,
I am reading a detailed explanation that Tom provided me earlier.
Why would Christie and King and the other guy continue to stay in the GOP at this point?
The neo-confederate, anarcho-libertarian control of the GOP is on full display here.
Bush (Texas- confederacy) is President, hurricane hits Florida (Confederacy) money is quickly provided... Katrina hits Louisiana (Confederacy) and Mississippi (confederacy) money in 11 days and "Brownie" gives personal attention... Hurricane hits the Carolinas (Confederacy) money is right there... etc....
Now we get a storm that veers north and hits New Jersey (Union) and NY (Union) Maryland and PA (union) and these northern states have waited 68 days and counting and they cant even get these neo-confederate SOBs to even schedule a vote...
Good bye GOP, this is proof positive that the former "Party of Lincoln" has been completely infested and usurped by neo-confederate, anarcho-libertarian morons...
These 3 GOP officials from NJ and NY ought to leave the party and start to form their own caucus right now the GOP is finished...
So after reading part one of this:
http://neweconomicperspectives.org/2012/12/functional-finance-and-the-debt-ratio-part-i.html per Tom's recommendation.
Why wouldn't a government just bypass bonds once their debts get high enough to where bond holders raise their rate? Why wouldn't a government just fund the government with debt free currency creation? Bonds don't makes sense to me, they seem like a holdover from the gold standard. What am I missing?
Haha, sorry. I see part two gets into this issue.
But feel free to answer still. :)
What am I missing?
Nothing. You got it.
The purpose of bond issuance is to provide a subsidized (with interest) default risk-free parking place for Big Money. It's a subsidy because it is unnecessary operationally. It's a voluntary political choice.
"... it wouldn't be inflationary because the purchase of bonds from the public by the Treasury would be just a big asset swap exactly like QE ... it's not new money..."
I'm having trouble understanding how this is not money creation. People/banks buy securities. That money is spent into the economy by the gov't. Then, money arising from this platinum coin will pay off the securities + interest.
I must have an accounting error because I see this as money creation.
Can someone please help? Thanks!
By definition, if expenditure into non-govt is being funded it is fiscal rather than monetary. Treasury creates a 1T liability which it exchanges with the Fed for 1T Fed liability. The Treasury liability (coin) is a Fed asset and the Fed liability (rb) is a Treasury asset. The Treasury then uses its asset (rb) for expenditure — interest payments, transfers like SS, and payment of invoices for agency purchases. The difference is that Treasury can exchange the coin with the Fed to get the rb needed for expenditure, but it cannot do that with tsys. Moreover,tsys added to the national debt and affect the ceiling, whereas coin issuance does not.
Under current law and regulation.
Kyle,
To augment what Tom says here... check out the latest DTS (open this link in another tab so you can go back and forth):
https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=13010300.pdf
If the Mint/Treasury deposited a $1T coin at the Fed, the balances would end up in Table I "Operating Cash Balance".
You can see that this account closed at about $62B well this account would go to $1.062T.
At that point, Treasury could spend it on whatever it wanted to out of the myriad of line items that appear in Table II on the right side ("Withdrawals") among which is "Public Debt Cash Redemp. (Table III-B)".
If they just spent these new balances on perhaps another line item in Table II, such as "Defense Vendor Payments" then perhaps you are correct in your assessment that "money" would be injected, but that is not what Mike is talking about.
Mike is talking about using the new balances in Table I to redeem on the run USTs via the "Public Debt Cash Redemp. (Table III-B)" line item. This exchanges USTs held by the non-govt with bank balances now held by the non-govt and "money", or what we call $NFA around here sometimes, held by the non-govt sector does not change...
ex ante they had USTs, ex post they have bank balances, in the same amount.
rsp,
Neil Cavuto just mentioned the trillion dollar coin on Fox.
Ten seconds later he said "we can't afford medicare" (or something to that effect).
Got it. Thanks, everyone!
I have t say it's encouraging having new faces showing up here asking thoughtful questions instead of naysayers picking nits then ignoring everything in response.
Welcome CyrilD and Kyle.
Maybe Tom or Matt would kindly help me out here.
I still don't quite get QE, all the more so as people like Mike Whitney and Ellen Brown seem to claim essentially that while it doesn't help aggregate demand, it is more than a mere neutral asset swap and and actually represents a kind of sleight of hand that further enriches the big banks:
http://www.counterpunch.org/2012/10/04/qe-infinity/
http://www.counterpunch.org/2013/01/04/heckuva-job-bernanke/
@ Sandy
Yes, both of those are true too. While QE is a neutral asset swap in that it doesn't add $NFA to non-government, it is designed chiefly to aid the financial sector with the idea that if the US financial sector (TBTF's) collapse, then so does the US economy, taking down the global economy with it.
This is how neoliberalism works. Socialism for the rich because they are the "important" people who "count." "The little people," not so much.
This is also true with the neoliberal prescription for austerity.
Sandy, QE:
http://www.economonitor.com/lrwray/2012/11/12/demystifying-quantitative-easing/
http://www.levyinstitute.org/publications/?docid=1342
http://bilbo.economicoutlook.net/blog/?p=661
Sandy,
"Still dont quite get QE"....
Suggest try to separate the "math" from the politics...
Suggest seek understanding of the math first, then you can be better able to see who it benefits, etc...
Try to get grounded in the math and go from there imo...
post questions about the math here at MNE any time...
rsp,
Thank you Tom, Y, and Matt for your kind help and llinks.
Tom, you say, " it is designed chiefly to aid the financial sector with the idea that if the US financial sector (TBTF's) collapse, then so does the US economy, taking down the global economy with it."
Does it actually perform that function of avoiding the collapse of the financial sector or is it simply a way to extort more more for the banks?
====================
I get that the fiat system is essentially cyber credit. I also get that the majority of politicians who make policy either don't get this or pretend they don't get this. Either way, complications are introduced into the system or else previous complications are maintained in the system that are no longer necessary. But the problem is that it looks as though the powers that be either think they are still necessary or else act as if they are anyway so as to steal more money and get more power. The system, one way or the other, is being abused; it is rigged. It could be a force for good, but it seems that it has been criminalized. Operationally, I think I get it, but the powers enact a "dance of the 7 veils." How else could Rubin, Paulsen, and Geithner get away with what they do; how else could the banks commit crimes, even launder drug money, and get away with it? IN this sense, the analyses of MMT are seem at once to clarify and be applicable, yet in other ways, not applicable because distorted.
Am I making any sense here? Have I got it basically right? It looks to me that we have a political and legal problem much more than an economic one, in that the former one generate the latter.
N this sense, the analyses of MMT ... not applicable because distorted.
This should read: In this sense, the analyses of MMT are seem at once to clarify and be applicable, yet in other ways, not applicable to the extent the powers that be do this that make no operational sense and represent conceptual distortions.
Does it actually perform that function of avoiding the collapse of the financial sector or is it simply a way to extort more more for the banks?
It depends on how one looks at it. The privilege class considers itself above the law, which is only needed, in their view, for the rabble who need discipline and boundaries, like children.
The system, one way or the other, is being abused; it is rigged. It could be a force for good, but it seems that it has been criminalized.
Yes, it has been criminalized, as Bill Black and Randy Wray have shown from the UMKC-MMT side. Ally Yves Smith of Naked Capitalism also frequently documents this in posts and her book Econned is a sustained exposé. There are many others writing about this. See Matt Taibbi's article in the lasest Rolling Stone, which I linked to in a post today.
This is not an economic problem as much as a legal and political one. Because of the power structure existing law is not being applied any more here than it was in the case of torture and other human rights violations in the CIA and military. The US has become a rogue state, sadly to say.
Sandy
"The system, one way or the other, is being abused"
yeah it's a form of corruption. The state's powers are being used in the wrong way, in the service of certain private interests and a particular ideology.
Here's Michael Hudson's take:
http://neweconomicperspectives.org/2013/01/americas-deceptive-2012-fiscal-cliff-part-3.html
Thanks to everyone for the clarifying replies!
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