Thursday, June 13, 2013

Simply An Operationally Better Way to Define "T-Bonds" - and "National Debt" Too

Commentary by Roger Erickson

Bond sales by Treasury or by Fed are “a reserve drain”; you can think of these bonds as an “IRMA” (interest rate maintenance account) to prevent budget deficits from driving interest rates to zero. That was a brilliant insight.
Randy Wray, describing Warren Mosler's approach to currency operations.

Yes, and it also tells us a lot about the agility of our policy process.

It really is telling that the fundamentals of fiat currency operations have taken so long to be disseminated, and are still difficult to explain to people. It's been 80 years since we were forced, kicking and screaming, to adopt one particular approach [and over 300 years since John Law first exposed the general principles of fiat currency in detail], and we STILL refuse to acknowledge the very operations that we're already executing? An electorate in denial can blame the river guides for repeatedly running a boat aground, but they're the ones who keep volunteering to get on board. Despite the similar, revolutionary dynamic value and impact, fiat currency operations are taking as long to catch on as the decimal math notation did! And we call ourselves intelligent.

What are the key issues we should teach citizens, by age 10? Here are three suggestions.

It's the policy space & policy agility, stupid!

1) The purpose of a fiat currency regime is to increase national agility (aka, bigger policy space & more policy agility). Therefore, we WANT inter-bank interest rates to be zero anyway. So why all the schenanigans to prevent rates falling to where we want them to be? Just a lazy, obsolete habit?  Our real goal is right-sizing the changing currency supply needed by a constantly growing nation. Every day that currency supply is wrong-sized is a day spent growing an Output Gap instead of putting ourselves to work.  Policy tempo matters more than most acknowledge. The point here is that WE HAVE BETTER THINGS TO SPEND OUR TIME ON!

2) Like what? Well, the only path to scalable innovation is to transition our self-regulatory methods. So re-gear the methods! From what to what? FROM pricing liquidity, and TO monitoring and then constantly developing participant reliability (credit review) and evaluation of outcome - not price of liquidity. Make bankers do their simplistic job - not just impose penalties on everyone doing every other required job. There's a reason we started mandatory education. To succeed, we need to scale up, not contract, that effort.

Analogy? If you want to win a war, invest in training ALL soldiers. Don't charge them extra for their weapons? The former approach has won, hands down, over the latter approach. It's called preparation, training and return-on-coordination. Duh! It's just the culmination of this concept called social species. Our calling card should be "Have Social, Will Use It." 

Corollary. Capitalism as-is, is over-simplistic, and would say "take gear from poorly developed soldiers & let the best soldiers hoard ALL the gear." We know that that's suicidal, and doesn't win wars either. There have to be tolerance limits on both personal incentives and personal penalties. To drive home the point, if we're not going to adequately prepare, equip and enable citizens, then we have to be prepared to execute one another. Any middle ground only delivers slow death to the entire group. The only path to success is universal, adequate training, and FULL investment in preparation and national development. Hoarding static assets can't scale. Hoarding coordination methods can and does scale. We need to re-gear our hoarding behaviors - every year!  To do that, we need constantly MORE, not less, policy agility.

3) With increasing scale, outcome review and credit review (planning and regulation) become minor costs - and actual benefits.  Minus such coordinated planning and regulation, liquidity costs simply scale along with liquidity - as we're now seeing.  That's how and why we're limiting our own policy agility - and subsequently constraining the extent of our own policy space.

Conclusion is that we can't afford to scale monetarism, only fiat. Our current methods just don't work anymore, as-is. We need to re-gear everything, and we need to do that today. You know it's time to change when even novelists recognize that "for things to stay the same, everything must change" - and even that was written over 50 years ago!


*  [After all, we SAY that we're the "United" States of America, not the DCMA - disjointed, clumsy mob of America. Yet if we let lazy habits accumulate, and get too far behind on re-gearing our operations ... the distance between what we ARE and what we SAY quickly grows.]


19 comments:

Matt Franko said...

"It's been 80 years since we were forced, kicking and screaming, to adopt the approach,..."

Roger,

I dont believe that any of this was "planned" and "executed" by our human "leaders" per se...

The US Treasury was losing possession of metals as domestic entities were demanding gold at the "gold window", so in an effort to avoid the loss of the possession of the gold, they "closed the window"...

Fast forward to Nixon, popular accounts have it that our foreign trade partners were likewise demanding gold for their forex USD surpluses, and the US Treasury again started to lose possession of the gold, so Nixon "closed the window" again....

Looks like none of this was "planned" by our people in authority.

Going off the use of metals was a reaction to the apparent loss of the metals.

We cant subject ourselves to the use of mass measure of metals as our medium of exchange while at the same time being able to hoard the metals.

"If you use it, you may lose it..." type of thing... they didnt want to "lose it" so they didnt "use it" anymore...

You cant do both, so our zealousness to obtain and possess the metals ended up circling back on itself and ended up undermining the use of the metals as an exchange medium in the first place...

http://pervegalit.files.wordpress.com/2010/01/snake-eats-itself.jpg

"And if ever a kingdom should be parted against itself, that kingdom is not able to stand." Mark 3:24

No one or no group "planned" our current arrangements by their own "free will" choice so to speak, that is probably why people have such a hard time understanding what is really going on currently...

We arrive here by 'happenstance' if that is the way one has to look at it... perhaps you can see an evolutionary parallel... this may be like a "random chance mutation" from an evolutionary perspective... "it just happened" like "no one is in charge" type of thing...

Not many people can see what is really going on currently... perhaps because it appears (to me anyway) it was never "thought out" in the first place...

Its all a reactionary mash-up, but yet we can see that it CAN work (and work well/better)... amazing!

I'd have to imagine this looks like textbook evolutionary activity to you...

rsp,

Roger Erickson said...

It's not evolution until emerging data is:

a) noticed (by a threshold level of participants)

b) parsed,

c) SELECTIVELY adapted to [to alter ongoing outcomes].

We're seeing stuff happening, but it's all churn so far. Whether we evolve still seems to be up in the air.

Roger Erickson said...

What'd Walter Shewhart say? "Data is meaningless without context."

Right now, too few citizens are adequately discussing the context of currency operations.

As a consequence, it simply doesn't matter what data they hear. The data is meaningless to those unaware of context.

ps: note that ignorance is not ALWAYS bliss; it's often ... how is it put? ... a "tough mistress" ?

paul meli said...

99% of the conventional wisdom regarding monetary systems is opinion that has somehow become dogma. None of it withstands minimal scrutiny.

Discussions about national finances leads to mostly emotional responses and terrible arguments from a logic perspective. It is so because they say it is so...relying on circular reasoning that never leads to a causal mechanism.

People feel threatened when their worldview is challenged, even if their worldview is actually someone elses (how many people really think about these things?) that they have ascribed to.

I believe some of the causes of this were deliberate...TPTB will not fund any institution of higher learning that teaches us about monetary systems, which in reality are pretty simple.

Most of conventional wisdom is religious belief...the bad kind. To me it follows that dissenting voices are more apt to be right...simply because the conventional wisdom is generally wrong.

Roger Erickson said...

the concept of collateral for national fiat is an outright oxymoron; it's a crude hack that causes more problems than it fixes

we can treat all fiat the same way;
no charade about getting ANYONE'S "permission" to execute national fiat

if we need to constantly improve responsibility in exercising fiat, then let's put our minds to that task and focus on it

limiting our fiat simply isn't gonna work

paul meli said...

"limiting our fiat simply isn't gonna worK"

Depends on the goal...it's working for the 0.1%.

Ralph Musgrave said...

Roger:

Where did John Law explain the MMT view of money? I'm interested. Perhaps put a link in the above article?

The Rombach Report said...

"Going off the use of metals was a reaction to the apparent loss of the metals.

We cant subject ourselves to the use of mass measure of metals as our medium of exchange while at the same time being able to hoard the metals.

You cant do both, so our zealousness to obtain and possess the metals ended up circling back on itself and ended up undermining the use of the metals as an exchange medium in the first place..."


Matt - I mostly agree with what you are saying except I think you are leaving a very big policy consideration out of the equation. Nixon's decision to unilaterally abandon the post WWII Bretton Woods agreement was the practical consequence after the fact of the US attempting to run a guns & butter policy during the 1960s.

Less policy space to pursue the Vietnam War and simultaneously launch LBJ's Great Society domestic spending programs probably would have averted the events that led up to August 15, 1971. That said, the history of fixed rate hard money regimes seems to consist of a willingness on the part of policy makers to abandon the discipline of hard money when it becomes expedient to do so, usually during a war, and then at some later time to return to hard money at pre-war conversion parities which brings on deflation.

This recurring problem might have been mitigated by returning to hard money at a new conversion rate that takes into account the inflation unleashed by the war spending to balance the scales so to speak between debtors and lenders. On the other hand, avoiding useless and costly wars might go a long way toward being forced to abandon hard money regimes in the first place.

Matt Franko said...

Right Ed,

I think at some level, they must have seen that eventually they would "run out of gold" running the 'guns and butter' policy so they left the Bretton Woods thing...

It would be interesting to listen to the tapes to hear how they framed these discussions ie whether they were concerned about leaking gold (I bet they were) or just were able to see mathematically that "the jig was up" and that they didnt have enough gold and really didnt care anymore...

A lot of people STILL bitch about Nixon doing this... so I bet there were PLENTY of gold-lovers about trying to influence policy...

But the one "game changer" that was present at that time was the breakthroughs happening simultaneously in information technology in my view...

So we also had developed the ability to communicate globally/robustly in real time with the advent of the digital satellite and microwave communications that went well past the previous radio teletype information transfer rates...

This never before available technology imo is what is allowing our current FFNC system to "stick" this time... vice the typical return to metals that agree seems to have regularly taken place at some points in the past...

With these systems our nations can "keep in touch" better and we seem to not need the mediacy of the metals to broker our national relationships as much anymore... we have better reciprocal situational awareness so we end up trusting each other a lot more than previous... higher trust between humans means we dont need the metals to mediate, etc...

rsp,





The Rombach Report said...

"With these systems our nations can "keep in touch" better and we seem to not need the mediacy of the metals to broker our national relationships as much anymore... we have better reciprocal situational awareness so we end up trusting each other a lot more than previous... higher trust between humans means we dont need the metals to mediate, etc..."

Matt - Did you say trust? You mean like this kind of trust?

http://www.businessinsider.com/snowden-us-has-been-hacking-china-2013-6

I think most people mean well and have good intentions most of the time, but then again the road to hell is paved with good intentions. Point is that despite the fact most people are mostly good, most of the time, there are still some very dark places in human nature provoking some people to do very bad things. Sometimes the zeitgeist of an entire culture becomes gripped by evil intentions or maybe the great mass of people are just too unconcerned to care about the bad things their leaders and policy makers are doing. When it comes right down to it, technology advances notwithstanding, human nature really hasn't evolved all that much in the past 10,000 years.

Anonymous said...

John Law is not a good person to appeal to as an MMT progenitor. He was a clever but unscrupulous scoundrel who was disgraced and reviled in his time as the architect of the Mississippi Bubble.

It's important not to confuse the issues of either fiat money or tax-driven chartal money with the debate about paper money vs. metal money. They are completely different issues.

Law's over-leveraged Mississippi scheme involved both stock shares and bank-issued notes. The French government made the notes legal tender and chartalized them by allowing them for the payment of taxes. But Law's bank issued too many of the notes an sparked a hyperinflation.

Matt Franko said...

Ed,

"Trust... but verify..." ;)

rsp,

Roger Erickson said...

@ Ralph Musgrave
"Where did John Law explain the MMT view of money?"

MMT is an expose of one particular set of fiat currency operations. John Law only re-opened pandora's box and described many of the general options.

ps: @ Dan Kervick, one has to separate exposes from applications. There's no avoiding John Law's impact on fiat currency operations. Literally all of the proponents of various commodity-pegged currencies were equally or more corrupt, so that's never the deciding issue. Look at guys who got Nobel prizes in economics and then used it to defraud people. LTCM?

To keep up, you HAVE to study the tools invented or advanced by friends and foes alike.

Roger Erickson said...

Ralph, there are some useful references here:
http://www.heraldica.org/econ/law.pdf

some of the pre-colonial-war scrips used in the Ma/PA/other colonies were much more successful experiments,

perhaps simply because they essentially self-managed by the semi-isolated user community minus excessive interference from european speculators acting like our current 1%

any system can work, if the participants want to make it work;

Tom Hickey said...

If there is a fixed supply of the medium of exchange and the MOE also functions as a unit of account and preferred store of value, then using the MOA as a SOV is deflationary, since it reduces the MOE available for commerce. That is to say, the UOA becomes more desirable as a SOV than as a MOE and reduces the velocity of a fixed supply of the UOA. As a result, prices fall but nominal debt remains the same, and debt-deflationary depression ensues. Read Irving Fisher's theory of debt-deflationary depression.

If something is used as a MOE and SOV simultaneously, then there must be a negative interest rate equal to the propensity to save in the UOA in order to avoid deflation.

The alternative is a deflationary economy without debt. This sounds great to the "sound money" folks but it is a recipe for negative growth and social, political and economic equality, which in turn, is a recipe for social unrest and ultimately revolt.

Roger Erickson said...

Exactly, Tom.

Aristotle's archaic dictums on "money" are just that. Archaic.

It's been true since even Greek city-state times that store-of-value and unit-of-account have to diverge. The bigger & more dynamic an economy is, the bigger that divergence.

Today, you can simply state that no fool would try to save fiat. Problem is that so few are even used to defining and discussing fiat.

It's like the average joe in a WalMart thinks fiat currency is purchased in Italy, AFTER we pay our taxes? :(

Anonymous said...

Roger, the knock against fiat money supporters from day one has always been that they are out-of-control inflationists who have no understanding of financial and monetary stability. It's an unfair charge on the whole, but if you were going to try to make that anti-fiat point, Law might be Exhibit A.

Roger Erickson said...

Dan,
No one is perfect, so everyone can be discredited, on demand. If you cede coincindence then you surrender up front to Luddites.

Just stick to the point that exposure of options and actual choices are separable processes, and that OUR only path is forward, not back. Any thing less is a waste of our time and ... worse ... betrayal of one's comrades.

Only one way forward means just that. And no shirking. Just invite the Luddites to find their missing courage, and pledge to stand with them when they do.

Anonymous said...

OK Roger. I'll stop here because as usual I have little idea what you are talking about.