Commentary by Roger Erickson
Hardly. In the end, no one can object to operations, aka, reality. If there's a problem, it's in the framing, as Randy Wray says, or in the prior mis-education of the audience. Since it's everyone's job to "create a more perfect union" by continuously shaping our own habits to Public Purpose, both tasks never end. It's called adaptive evolution. Why not just enjoy it? If the world didn't change, it wouldn't be this much fun.
It’s immoral for an electorate to spend Public Initiative* through the stroke of a key?
Seems inescapable that those working to promote awareness of existing fiat currency operations absolutely must OpenSource the education of the public about their own currency operations.
This is not something that ANY subgroup can "frame" for the whole group.
All teachers succeed fastest by letting their subject and students go. Every process is too important to be left to the presumed "process owners" or "process experts."
* Sovereign, fiat currency, backed by the full faith and will of the citizens of the USA ... reduces to tokens of public initiative. Duh!
One part missing from citizen education is the difference between liquidity and savings. The bigger and more dynamic a population is, the more a "stable store of value" and "liquity" (i.e., a unit of account) must diverge. No person or sub-group can "teach" this to an electorate. The electorate has to come to it's own consensus on how to visualize this already existing outcome.
17 comments:
Roger, there are a lot of folks that deny that there is any such things society, so there is no public purpose, public good, common good, or general welfare. They believe that all "goods" are create in the private sector exclusively through private initiative. In this model, the sole purpose of a government is security of persons and protection of private property. This seems to include about half the country in the US, and pretty certainly a quarter to a third are hardline on this.
And why waste the effectiveness of fiat by needless borrowing by the monetary sovereign (sovereign debt) and by allowing a central bank to create it for the benefit of the banks and other private interests?
At present, the US treasury DOES NOT CREATE MONEY BY SPENDING.
For most economists the US federal government finances it spending primarily by acquiring bank
money from agents outside of the domestic banking system. When one turns to Modern Money
Theory (MMT), also known as neo-Chartalism, they find that the world is upside-down. Fiscal policy
is said to be ‘really’ monetary policy. In most instances we are told that Treasury spending is financed
by net/new money creation; with the receipts from taxes and bond sales unable to be spent, but
instead ‘destroyed’. This claim defines MMT and is defective. While the federal government’s alleged
ability to print money via fiscal expenditures is said to occur without the “complicity of the central
bank” as a financing agent (e.g. Wray; 2006b) this argument is often forwarded with the term
‘government’ used ambiguously and deceptively to denote both the Treasury and the central bank.
Everyone accepts that the Federal Reserve finances its activities by issuing money ex nihilio (i.e. ‘out
of nothing’) but the Treasury finances its spending by depleting deposit balances (ceteris paribus).
That Treasury spending results in a credit to the accounts of private banks (a reserve) is taken as
evidence of ‘the State’ emitting ‘money’. That the central bank also debits the Treasury’s account
entails that the transaction is not money creation but a transfer of an existing deposit. The maths is one
credit to private accounts plus one debit to the Treasury’s account equals zero money creation (not <
0). Money creation does not shift deposits from one account to another but creates them. MMT gets
fiscal policy back-to-front by supposing that the Treasury expends funds without first procuring
funds. The Treasury is not a bank and if it does not collect fiscal receipts it cannot spend because it
has no ‘money’.
http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP279.pdf
Therefore, MMT does not describe the "reality" of the present system. You are describing a policy proposal that does not yet exist.
It's the consolidated government that creates money by spending: Fed + Treasury combined. The excess of all flows out over all flows in = the amount of dollars (non-maturing, non-interest bearing USG liabilities) added to the non-government sector.
Some circuitists disagree with MMT, some agree.
@Bob,
Do you not understand why central banks exist??? It's not price stability or full employment mandates! They exist to protect the payment system. To ensure there are funds to clear and settle payments. Period. Any other mandate is fluff.
Yes in "theory" the central bank can control the money supply by NOT increasing the supply of base money. Yet as Paul Volker found out in reality it can't do that without violating it mission - the safety of the payment system. If you deny banks base money to clear and settle payments due to new loans you also must deny the system base money to support changing liquidity preferences of depositors which risks the collapse of the whole system which would put them in direct conflict with their whole purpose of existence.
The Treasury spends in base money which means if the central bank does not fund spending or the issuance of debt then it too must be willing to put the payment system at risk. Therefore assuming the central bank does not want to violate its primary purpose - which is the safety and soundness of the payment system - the it must fund government expenses (but the treasury must be happy with paying a rate that its profitably higher than the central banks target rate).
My point is simply that of the paper that I cited. The treasury does not create money by spending, yet this is what MMTers constantly claim. The Fed creates the money. Did you people read the paper and the reply? I don't think so.
Looking over the article quickly, unless I'm missing something, Randy doesn't say that the Treasury creates money by spending. He says the government does.
The MMT economists response is not to the "points" but by explanation of MMT's position, which the MMT economists say is misunderstood in making the objection. Simply put, the person making the objection doesn't correctly understand the MMT position, like other circuits that have offered straw man objections. The first requirement is to present the actual MMT position and then object to it instead of creating a straw man.
"My point is simply that of the paper that I cited. The treasury does not create money by spending"
The currency is a US federal government liability. It can take the form of electronic reserve balances at the Fed, Federal Reserve notes, or coins.
When the Treasury receives payments into its account at the Fed, the government receives its own liabilities and as such those liabilities are extinguished. When the Treasury spends, new government liabilities are created.
Taxation results in bank deposits being debited (deleted) and reserve balances being debited (deleted). The Treasury's balance at the Fed is not part of money supply, as such when the Treasury has a positive balance in its account, that much money has been deleted from the economy. When the Treasury spends, that much is credited to the economy.
In practice when the Treasury spends this results in banks acquiring reserves in excess of the amount they wish to hold on average. This puts downward pressure on the interbank interest rate, meaning that either the Treasury or Fed has to sell bonds if it wants to keep the interest rate at the 'target' level. This means that the Treasury spends first and *then* sells bonds.
The other point is that Treasury bonds are savings accounts, or term deposits at the Fed. So Treasury spending also creates new term deposits, which can be converted into demand deposits at any time.
In wholesale money markets short-term Treasury bonds are simply "cash".
@y
Right.
As far as I can tell, the debate is over whether the private banking system is a subset of the government system or vice versa. MMT holds the former position, and some circuits the latter.
"circuits" should be "circuitists."
In wholesale money markets short-term Treasury bonds are simply "cash".
Right, when corps are said to be holding "cash," this is what is meant.
T-bills are essentially demand deposits that pay a bit of interest and are default risk-free, unlike demand deposits at bank that are above the FDIC guarantee limit.
Imagine the private banking system in the US as one bank and the consolidated customer base as one customer. The bank extends a loan denominated in USD and credits the customer's deposit account. The customer demands cash at the window. Where does the bank get the cash?
There are only two ways that the bank can get Federal Reserve notes — either from the Treasury crediting bank accounts or the bank borrowing from the Fed, which requires that the bank put up US govt securities (tsys or agencies) as collateral. Where does the bank get the collateral, which comes only from the Treasury or agencies and is purchased with reserve balances?
That's a great summary of a "pull" or "fiat" currency creation system, Tom.
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