Apparently fiscal and monetary cooperation is alive and well - the US Treasury and the Federal Reserve conspired to kill the platnium coin idea. In retrospect, we should have seen this coming. As the debate continued, it became increasingly evident that the platinum coin threatened the conventional wisdom in very deep and profound ways. It was a threat that could not be endured by Washington.
This realization hit me this morning, working on my last piece. Begin with the effectiveness of monetary policy at the zero bound. Or, more accurately, the lack of effectiveness as the Federal Reserve is swapping one zero-interest asset for another. Rarely do we take this to its logical conclusion for fiscal policy: If there is no difference between cash and Treasury bonds, why should we issue bonds at all? Why not simply issue cash? In other words, at the zero bound, what is the argument against monetizing deficit spending?Tim Duy's Fed Watch
On The Disruptiveness of the Platinum Coin
Tim Duy
Hitting too close to home. TPTB had to step in and end it. Definitely read this one in its entirety.
27 comments:
To understand the significance of this article, you have to know who Tim Duy is. See his bio
"it became increasingly evident that the platinum coin threatened the conventional wisdom in very deep and profound ways. It was a threat that could not be endured by Washington.
This realization hit me this morning, working on my last piece. Begin with the effectiveness of monetary policy at the zero bound. Or, more accurately, the lack of effectiveness as the Federal Reserve is swapping one zero-interest asset for another. Rarely do we take this to its logical conclusion for fiscal policy: If there is no difference between cash and Treasury bonds, why should we issue bonds at all? Why not simply issue cash? In other words, at the zero bound, what is the argument against monetizing deficit spending?"
Here we witness the cognitive ability known as Mathematical Abstraction.
http://en.wikipedia.org/wiki/Abstraction_(mathematics)
This is NOT easy for many people...
But I would now ask why is the "zero bound" relevant to the bonds/no bonds issue if the Fed now pays IOR?
And what is the need for/effect of "swapping one zero interest rate asset for another"?
Keep abstracting Tim Duy!!!
rsp,
What they don't understand is it destroys the argument against monetization anytime according to their paradigm. To monetize, you must have IOR or be at the zero bound. In either case, in the neoclassical world, bonds and money are perfect substitutes. Slowly, the light is dawning on them, but they're not there yet.
I predict the bobblehead gasbags on the Sunday news shows will have received their marching orders as well – kill the coin, bury it, and laugh as you dance on its grave.
– Joel
He doesn't mention taxes rather than rates as a means to control inflation. He isnt quite there yet.
"In retrospect, we should have seen this coming."
I did see it coming and I stated why numerous times, right here.
This really is a good article.
STF,
How does it work? I think they believe reserves with IOR are still fundametally different from bonds sonce bonds somehow force you to save, plus the multiplier effect from reserves, notwithstanding IOR?
The reason the bond is issued is so the FED can sell it back into the market to remove those dollars from circulation.
I think they believe reserves with IOR are still fundametally different from bonds sonce bonds somehow force you to save
IOR is paid to the banks whereas interest on T bonds is paid to the public - at least in the U.S., where most bonds are held by households and firms (it's different in the eurozone).
So issuing bonds should be more expansionary and/or inflationary than issuing reserves since the public's propensity to spend is likely higher than that of banks.
As Frances Coppola has pointed out the true purpose of bond issuance is to provide a default risk free asset to the financial sector. That is what modern central banking is about, and it is run by technocrats from the financial sector for the financial sector, the other true purpose, of course, being to manage price stability by trading it for unemployment as may be necessary.
Bill Mitchell also points out that when Oz was running a persistent surplus and not issuing bonds, the financial sector "arranged" for the govt to issue bonds anyway.
Because of their high liquidity and capacity to serve as high-grade collateral, bonds do not "sterilize" excess reserves. They simply drain rb from the interbank mkt so the cb can hit its target rate with less OMO. This way the $NFA are held by non-govt instead of sitting on the Fed's book.
Using treasury debt, our preposterous funny money system will continue to appear obscure, mysterious and incomprehensible to average people. Using the coin, the system would appear preposterous to average people who might begin to understand it as a purposeful system of theft and fraud. The powers-that-be know this. Only MMTers don’t.
Did anyone seriously think Obama and Timmy would actually do this? Besides once Ben said NO! it was game over.
Ben has to protect his baliwick. What would he do in his spare time if there were no debt to buy and sell? Someone might get the idea we could just do away with the Fed.
Wish I were an economist so I could also understand all this magic about interest and inflation. It seems simple to have no debt and just raise taxes? Maybe some genius will think up something like that one day.
So the magic coin coulda ended the debt? Can't have that you know. We all know that much, even Obama and Timmy. Besides it's unconstitutional you know, it says so right here. Wait a minute while I put my finger on it.
"They simply drain rb from the interbank mkt so the cb can hit its target rate with less OMO. "
Right Tom this is important to note as before IOR, reserves were flat at around only 40B or so all the time... here's the hard data:
http://research.stlouisfed.org/fred2/series/WRESBAL?cid=123
Then Treasury would do an auction of like say 60B in a day... again here is some hard data:
http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912795ZR5
So I would ask the morons to ask themselves: How could Treasury do a 60B auction day if there were only 40B in the system?
Hey morons: It's mathematically impossible.
So how did the primary dealers come up with the 60B to settle the auctions if there were only 40B in the system?
No other explanation: The govt had to give the balances to the Dealers via repo or whatever.
Scott F. has written on this...
Proving Warren's adage: "To do a reserve drain, you first have to have done a reserve add...
Checkmate! (Except for morons...)
rsp,
Did anyone seriously think Obama and Timmy would actually do this?
Did the US ever have to use a nuclear weapon after WWII? The deterrent policy worked. TPC was a "nuclear option" that acted as a deterrent to the debt ceiling. The opposition would be less likely to press the point when they realized that at the last moment the president could step in and "save the day from the crazies."
The president gave up a negotiating tool for nothing. The conclusion seems to be that the 1% realized that this was pulling back the veil too far. See Peter Cooper's satire posted today.
Tom,
In contrast, Lincoln didnt use a threat of economic chaos as some sort of weak intra-libertarian "negotiating tool"...
Lincoln just issued notes in lieu of revenues, even though he still had some reservations about the process and preferred that Congress set up a less ad hoc system...
Lincoln 1863:
"To the Senate and House of Representatives:
I have signed the Joint Resolution to provide for the immediate payment of the army and navy of the United States, passed by the House of Representatives on the 14th, and by the Senate on the 15th instant.
The Joint Resolution is a simple authority, amounting however, under existing circumstances, to a direction to the Secretary of the Treasury to make an additional issue of one hundred millions of dollars in United States notes if so much money is needed for the payment of the army and navy.
My approval is given in order that every possible facility may be afforded for the prompt discharge of all arrears of pay due to our soldiers and our sailors...."
Lincoln didnt hold up the payment of govt obligations in order to "negotiate" and neither should any President...
The admin has otions other than bond sales available to it in order to pay govt obligations .... they shouldnt dismiss any of them...
2000 years before, here is Augustus on what he did when revenues were inadequate or fell short temporarily:
"From that year when Gnaeus and Publius Lentulus were consuls (18 Bc), when the taxes fell short, I gave out contributions of grain and money from my granary and patrimony, sometimes to 100,000 men, sometimes to many more."
These two western leaders, Augustus and Lincoln, sit in historic contrast to the morons that have been foisted upon us today...
rsp,
This is actually different from Lincoln and Augustus, which required money creation. This is just liquidity provision to clear bank accounts for existing expenses already appropriated. The funds are actually created by the appropriation and the rest is just procedural "keystrokes." Neither the Fed nor Treasury have the authority to spend on their own. They just make payments (Treasury) and provide liquidity to clear (Fed). That spending has already been done. Now it's time to pay the bills that are due.
In a recent radio interview, the former Prime Minister of France Michel Rocard reminded listeners that from the foundation of the Banque de France in 1801 to January, 1973 the French government always benefitted from direct financing from its NCB at a rate of interest of zero percent.
It all changed with a 1973 law forbidding this direct financing and requiring the government to obtain all funds for deficit spending in the private markets.
A giant step backwards taken in a major European country without anybody noticing.
STF
"In either case, in the neoclassical world, bonds and money are perfect substitutes"
Don't they believe there's a "zero-sum" situation with bonds, whereby a bond seller can only spend if someone else decides not to? This then limits the amount of total spending, so Bonds restrict spending whereas IOR doesn't?
Jose,
"IOR is paid to the banks whereas interest on T bonds is paid to the public"
If banks receive IOR they "pass some on" in the form of interest to their customers.
Say the Fed were to raise IOR to 5%, the amount of interest customers recieve on their accounts would also increase accordingly.
"Using the coin, the system would appear preposterous to average people who might begin to understand it as a purposeful system of theft and fraud."
Only if they were as stupid as you Bob.
"This is actually different from Lincoln and Augustus, which required money creation."
There only thing different is the Information Technology available today (ie electronic "spreadsheets") vs back then ( notes, coins and ledgers) ....
I submit that the math and the authority (should be) the same... this is all at core more libertarian fomented chaos...
youve got libertarians on the one side, GOP, who do not recognize the govt's absolute fiscal authority, vs libertarians on the other side, Dems, who cannot recognize the executive's authority, and even vice versa depending on who has the Whitehouse or who has the Congress...
Even if the roles were reversed and you had a GOP President and a Dem Congress, we would still be here.... see then Senator Obama's scolding of then President Bush for running high deficits as EVIDENCE.
Bush/Cheney at least seemed to get this as they did a big $165B fiscal injection ($650 checks mailed out) in mid-2008 in response to the liquidation that brought down Bear Stearns in March... then they did another HUGE 350B (TARP) injection in response to the liquidation that brought down Lehman in September..
But that voice of reason in the GOP is gone from the scene now... this is the civil war battle of the libertarians now... and if we start to liquidate again here, there will be NO injection forthcoming as both sides are dominated by "debt doomsday" libertarians... scary!!
rsp,
Don't they believe there's a "zero-sum" situation with bonds, whereby a bond seller can only spend if someone else decides not to? This then limits the amount of total spending, so Bonds restrict spending whereas IOR doesn't?
In aggregate, which is how huge markets like tsys function, it would take a pretty drastic reduction in the desire to save, it seems.
After the Federal Reserve Banks were inundated with storing a billion or so extra Sacajawea coins in vaults across the nation, they drew a line in the sand at the Reagan commemorative platinum coin.
I wonder what would be an acceptable denomination to the Fed? A half trillion? A million? Fifty Thousand? One Thousand?
Didn't Bernanke testify before Congress that the FRB would, of course, do whatever Congress told it to do?
– Joel
Tom, Scott thinks the "zero-sum" argument is wrong for technical reasons, but I don't completely understand his argument.
Y,
I was thinking of banks retaining that extra interest income to boost their balance sheets by improving capital ratios.
(Btw, in Europe many NCBs are imposing ceilings on the interest rates that banks are allowed to pay to depositors).
While interest receiving pension funds and households are much more likely to spend at least some amount of it.
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