Tuesday, May 14, 2013

Auburn Parks — Of course money doesn't grow on trees.....its not a commodity!


Getting the word out to the progressive community.

Daily Kos — Money and Public Purpose
Of course money doesn't grow on trees.....its not a commodity!
Auburn Parks

28 comments:

Anonymous said...

The Govt grows the money supply by increasing the number of NET financial assets (NFA) that the private sector has.

That is true in the usual course of things since the government can and does grow the level of NFAs via deficit spending. But I don't think that it is necessarily true, even under current operational arrangements and rules. One way the consolidated government could grow the MB money supply would be by expanding its balance sheet the same way a commercial bank does. The central bank can issue loans through the discount window. Since they are loans, the expansion of central bank liabilities in this is always offset by the creation at the same time of a financial bank asset - the additional amount the borrowing bank owes. So the net financial assets of the private sector does not increase, and may even decrease depending on the interest rate. But the central bank could continue to emit liabilities in this way so that its balance sheet continuously grows, and the commercial banks continuously acquire new central bank liabilities with which to pay off the earlier rounds of discount window loans.

I'm wouldn't at all recommend this course of action - no deficit and no NFA growth with a continuous growth in the monetary base via the discount window - because experience shows that the central bank can't stabilize drops in aggregate demand and offset demand leakages by growing MB. We all know about the failure of the money multiplier model, the limited impact of QE and other financial sector stimulus operations, etc.

I'm just trying the emphasize the theoretical point that a growth in NFA's is not required for the money supply to grow, whether the "supply" we're concerned with is MB or the broader aggregates such as M2 or M3. That's why its good to get away from talk about the "money supply" altogether. What we want to emphasize is that the private sector can increase its net saving without decreasing its investment and consumption behavior because the government as a whole can increase its net indebtedness to the private sector. NFA's could grow in theory even if the money supply didn't, and the money supply could grow even if NFA's didn't.

paul meli said...

Dan, who ends up with the $NFA's from expansion of the monetary base?

"Money supply" is meaningless in the traditional context...practically speaking money supply is money earmarked for spending. If it isn't spent it may as well not exist as far as the economy is concerned.

In the system sense the money supply is government spending, credit is loans incurred in anticipation of the income generated by that spending.

Increasing the monetary base doesn't increase spending unless consumers end up with more money in their pockets as a result.

Anonymous said...

Paul, you are right, and that is one reason why it is important to distinguish the various measures of the money supply from net financial assets. Increasing the money supply doesn't necessarily increase the quantity of NFAs, and increasing the quantity of NFAs doesn't necessarily require an increase in the money supply.

It's not just a question of whether the money is spent. Most of our money in the modern world is a liability on some bank's books. The supply of money grows if the banks expand their balance sheets. But when they do that the liabilities of those who are using the money increase at the same time.

paul meli said...

"Most of our money in the modern world is a liability on some bank's "

True...this is why government spending is so important to the health of the economy...if the payment support system isn't maintained at proper levels defaults ensue...

...if allowed to go far enough we end up with a banking crisis and massive unemployment or under-employment...

...resulting in a further upward flow of wealth as collateral is taken...the money was taken when we borrowed it and they accumulated our spending...leaving us with the liabilities.

Consumer credit can be useful tool but it becomes a plague when it goes too far.

Just say no. Debt-free and loving it.

snowball1205 said...

This post is not quite right. Govt spending creates new NFA which are the T-bonds the treasury sells. Government spending does not add to the money supply. Only bank lending (and short term Fed lending) does that. When the govt spends it adds the amount to the recipient's bank's reserve account then the bank marks up the recipient's bank account. This is offset by the govt draining the reserves to pay for bond sales. Other than cash banks order and pay with reserves, the govt spends entirely with reserves. If the govt owes me $1000, it marks up mu bank's reserve account and my bank marks up mu bank account. My bank then has a new asset (reserves) and a new liability (my deposit account).

snowball1205 said...

Another point is that when the government spends (or the Fed does QE) it creates excess reserves over and above required reserves. The only thing a bank can do with excess reserves is buy cash from the Treasury, buy government debt, settle payments with other banks and the government, and loan them to other banks who may need required reserves. They may not be withdrawn or loaned to private customers. If the government did not drain the excess reserves by selling bonds, banks seek to make a return by loaning them to other banks. This causes the overnight interest rate to fall towards zero. In order for the Fed to control its positive interest rate target they drain reserves by selling bonds. However, this problem disappeared when the Fed began paying interest on excess reserves in October 2008. Now, the only reason to sell bonds is a political one. Politicians will never admit they don't have to sell debt because it would be them largely irrelevant.

Ralph Musgrave said...

MMTers have grasped the importance of NFA like no one else. If Rogoff and Reinhart read the above exchange of views, they’d be baffled. Same goes for most of the rest of the economics profession.

Tom Hickey said...

There are many meaning of "money supply," from the monetary base to M4. Best to stipulate what one means.

The monetary base is constituted of rb and vault cash = bank reserves. The $NFA value of the MB is found by subtracting rb banks have borrowed from the Fed from total bank reserves, since bank reserves come either from govt spending or banks borrowing from the CB. TINA.

Tom Hickey said...

I should clarify that the amount of $NFA held as bank reserves expands and contracts as the CB purchases and sells government securities in the market, changing the composition of $NFA but not the amount. The total amount of $NFA is some combination of bank reserves and govt securities held by non-govt.

Tom Hickey said...

This post is not quite right. Govt spending creates new NFA which are the T-bonds the treasury sells. Government spending does not add to the money supply. Only bank lending (and short term Fed lending) does that. When the govt spends it adds the amount to the recipient's bank's reserve account then the bank marks up the recipient's bank account. This is offset by the govt draining the reserves to pay for bond sales. Other than cash banks order and pay with reserves, the govt spends entirely with reserves. If the govt owes me $1000, it marks up mu bank's reserve account and my bank marks up mu bank account. My bank then has a new asset (reserves) and a new liability (my deposit account).

This is in effect what happens in the US. Owing to the deficit offset with bonds, the rb increase due to govt spending is drained into the bonds and remains there unless the Fed alters the composition of $NFA through purchases and sales of tsys.

However, tys spending does increase $NFA and the increase does not remain as rb solely due to the requirement for bond issuance as a deficit offset. That issuance is now only needed operationally if the Fed desires to conduct monetary policy through interest rate setting and doesn't want to either set the rate permanently to zero or pay IOR.

Then the reserve drain through bonds becomes part of the interest rate setting operation that is coordinated by the Fed and Treasury, e.g., through the use of tax & loan accounts held in private banks that count toward rb, in addition to the reserve drain to tsys, which reduces rb.

Tom Hickey said...

Another point is that when the government spends (or the Fed does QE) it creates excess reserves over and above required reserves. The only thing a bank can do with excess reserves is buy cash from the Treasury, buy government debt, settle payments with other banks and the government, and loan them to other banks who may need required reserves. They may not be withdrawn or loaned to private customers. If the government did not drain the excess reserves by selling bonds, banks seek to make a return by loaning them to other banks. This causes the overnight interest rate to fall towards zero. In order for the Fed to control its positive interest rate target they drain reserves by selling bonds. However, this problem disappeared when the Fed began paying interest on excess reserves in October 2008. Now, the only reason to sell bonds is a political one. Politicians will never admit they don't have to sell debt because it would be them largely irrelevant.

Right.

Anonymous said...

"The monetary base is constituted of rb and vault cash = bank reserves"

Not just vault cash Tom. It includes all physical currency, whether it is part of bank vault cash reserves or is held by other non-bank parts of the private sector.

I think it is a bit confusing to talk about the NFA value of MB (even if we just mean the bank reserves portion of MB). Those dollars are all liabilities of the government, and so are all assets of the banks, wherever they came from. However, you are certainly right to note that the banks have offsetting liabilities to the central bank from discount window loans and loans from other special and emergency lending facilities.

So rather than say "the NFA value of the MB", I think it would be clearer to say something like "the NFA value of total bank holdings of central bank liabilities minus total bank liabilities to the central bank."

Tom Hickey said...

"The monetary base is constituted of rb and vault cash = bank reserves"

Not just vault cash Tom. It includes all physical currency, whether it is part of bank vault cash reserves or is held by other non-bank parts of the private sector.

Right, my bad. I was focusing on what the CB can adjust the composition of.

I think it is a bit confusing to talk about the NFA value of MB (even if we just mean the bank reserves portion of MB). Those dollars are all liabilities of the government, and so are all assets of the banks, wherever they came from. However, you are certainly right to note that the banks have offsetting liabilities to the central bank from discount window loans and loans from other special and emergency lending facilities.

This is a big deal that many people miss. They think that reserves are reserves, but that is not true without enquiring into their their source which is either govt spending or borrowing from the cb, that resulting from cb purchases of tsys coming from pervious spending that was drained into tsys.

paul meli said...

"Government spending does not add to the money supply. Only bank lending (and short term Fed lending) does that." - snowball1205

Depends on how one defines "money supply". Money not spent on consumption or investment is irrelevant wrt economic activity. For many MMT'rs "money supply" is $NFA.

I wouldn't want to have to fund my savings for retirement by borrowing from banks... t makes no logical sense to base one cohorts retirement on another cohorts liabilities.

The "money supply" created by the Fed is unlimited, so it doesn't matter what the Fed does in this regard, the "money supply" is unlimited. The Fed controls price, not quantity.

The "money supply" created by banks adds to spending and is ultimately saved downstream. It blows up a balloon and then lets the air out when incomes can no longer support credit expansion, this is a trap. It is a temporary and dangerous source of demand because it has a particularly hard limit that seems to come out of nowhere to those that don't understand the FoF.

BTW... Government spending does create net money that is not bonds...the total of all bonds held by the public is about $10T...the sum of all deficits is about $12T, so government spending has created at least $2T in net dollars and probably more since some government spending has been off-budget.

Unknown said...

Paul, where did you get the info on quantity of bonds vs size of deficits?

Matt Franko said...

y,

You can get it here:

https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=13051300.pdf

Table III-C Line 1

FD: That total includes the holdings of the Fed which is over 1.85T here:

http://www.federalreserve.gov/releases/h41/Current/

rsp,

Anonymous said...

Depends on how one defines "money supply". Money not spent on consumption or investment is irrelevant wrt economic activity. For many MMT'rs "money supply" is $NFA.

I might be wrong, but I don't think any MMTers use the term "money supply" in that way.

paul meli said...

y,

Debt held by the public:

http://research.stlouisfed.org/fred2/series/FYGFDPUN ==> $10,128 (2011)==> $11,587B (2012)

Deficits (you'll have to do the addition yourself - use Excel or Libreoffice)…

https://dl.dropboxusercontent.com/u/33741/debthist01z1.xls

2011 total was $11,971B

2012 deficit from BEA (http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&910=X&911=0&903=87&904=2011&905=2013&906=A) = $1,193.1 ==> $13,164B

The numbers i mentioned in my comment were as of 2011.

paul meli said...

"I might be wrong, but I don't think any MMTers use the term "money supply" in that way."

Sorry I mis-spoke…that's how I think of "money supply"… MMT focuses on vertical money and that's what i was referring to. Vertical money is NFA…and what happens between Congress and our bank accounts is irrelevant (my view).

The traditional measure of "money supply" tell us very little and this emperor been exposed through multiole QE's.

What is relevant is the cash hitting my bank account. That's my "money supply".

This is my view only…as an engineer familiar with systems analysis what happens between Congress and private sector bank accounts is equivalent to a short circuit…a passive wire…in other words the Fed and Treasury don't do much more than watch the money go by.

They just do their viewing in a Rube-Goldberg sort of way, likely a consequence of integrating the FRBS into the system.

Jose Guilherme said...

Perhaps we might avoid needless confusions by agreeing on some common definitions:

Monetary base - currency held by the public, plus currency in bank vaults plus commercial bank deposits at the central bank. The last two items form the so-called "reserves".

Money supply - currency held by the public plus commercial bank deposits.

It will be easier to discuss such matters once key definitions are agreed upon.

Jose Guilherme said...

Or, we could use the following notation:

Currency held by public - Cp

Currency at bank vaults - Cb

Bank deposits at central bank - Db

Deposits of the public at commercial banks - Dp

Then the Monetary base will be (Cp + Cb + Db)

and the Money supply is (Cp + Dp)

paul meli said...

Jose, I don't care much about so-called key definitions...especially if they don't define anything meaningful. That's a straight-jacket applied by vested interests that created a flawed paradigm that clearly has moved beyond the boundaries of usefulness.

Current definitions for several measures tend to pigeon-hole the debate into corners from where a solution to a problem can't be found arrived at.

I know what the traditional definitions are and what they mean...as does pretty much everyone here. They don't mean much in many cases as far as I am concerned.

In order to have meaningful debate about solutions to real problems we will have to move beyond those limitations.

The meaning of my comments should be clear, i'm not redefining terms...just making the argument that the conventional definition in this case misses the point completely.

Conventional wisdom on the whole tends to be wrong.I am only bound by wisdom that makes sense, ie is consistent with the dynamic of the system being examined..

Next up...GDP. Is it not interesting that the sectoral balances identity cancels the term out completely?

Jose Guilherme said...

Paul,

This was simply meant to spare us precious time arguing over "what is monetary base" and "what is the money supply", etc.

Once we agree on the starting points the whole discussion becomes clearer.

Just like one has to agree about the definition of "Europe" (the eurozone? the EU? the space from the Atlantic to the Urals?) before engaging in a meaningful conversation on the subject.

:)

paul meli said...

Sorry, Jose

Didn't mean to be argumentative…bad habit of mine…just defending my right to add nuance or other ways of looking at things.

Anyone that wants to is welcome to point out errors in logic I might be making. That's one reason I pose alternative views…looking for pushback.

Wisdom of the hive mind or something like that. I do my best thinking with a foil, someone to bounce my ideas off of.

There may be a better term for what I'm trying to describe than "money supply". On the other hand English is a very context-sensitive language (maybe all languages are, Unfortunately I only speak English and not very well at that) so multiple meanings for the same term is permissible and common.

I appreciate your civility as well as most if not all of the regular posters here.

Tom Hickey said...

The problem is that economists are not always clear in their use of the term "money supply." Sometimes it is used to refer to the monetary base, as it in the idea that QE expands the "money supply." Sometimes it is used to indicate M1, which is cash in circulation, demand deposits, other checkable deposits and travelers' checks. Others may use M2. M2 is M1 plus savings deposits and time deposits less than $100,000 and money-market deposit accounts for individuals.

Specifying this is important in the identity MV=PT, for instance. Those that identified M with the monetary base erroneously concluded that GE is inflationary.

paul meli said...

"Those that identified M with the monetary base erroneously concluded that GE is inflationary."

QE4 ought to put us over the edge…:-)

Tom Hickey said...

To listen to them, it's coming any day now.

Jose Guilherme said...

QE can result in either

A) an increase in the Monetary Base only (when the Fed is buying bonds back from the commercial banks);

B) an increase in both the Base and the Money Supply (when the Fed buys back bonds held by the public).

In any case, it definitely does not boost aggregate demand through a non-existing "money multiplier" process. Consisting of mere asset swaps, it cannot cause inflation.