[Frank Newman] served as Deputy Secretary of the U.S. Treasury. Prior to that, he was Vice Chairman of the Board and CFO of BankAmerica Corporation, and Executive Vice President and CFO of Wells Fargo Bank.New Economic Perspectives
["Newman then returned to the private sector, become Vice Chairman of Bankers Trust and then serving as President and Chief Executive Officer of Bankers Trust from 1996 to 1999.[1] In 2005, he became CEO of Shenzhen Development Bank." — Wikipedia]
So when Mr. Newman writes, “This author recommends Mr. Mosler’s book, as well as various writings by academic proponents of ‘Modern Monetary Theory’,” it really means something.
Former Deputy Secretary of the U.S. Treasury Department Endorses Modern Monetary Theory (MMT)
Stephanie Kelton | Professor of Economics, UMKC
43 comments:
Too bad the CURRENT Treasury Secretary thinks 'we're out of money!' and 'We're borrowing from the Chinese!' and have to 'get our fiscal house in order'.... LOL!
Here's a bunch of beauties from Secretary Lew:
http://www.brainyquote.com/quotes/authors/j/jacob_lew.html
Too bad he doesnt even know what the heck is really going on....
Here's another (qualified) endorsement by a former deputy assistant secretary of the US Treasury, Brad Delong:
"The way [Warren Mosler] sees it:
- The federal government spends: it writes a check to somebody…
- That somebody then takes that check and deposits it in their bank…
- The bank credits them with a balance equal to the government check and presents the check to the Treasury's fiscal agent, the Federal Reserve…
- The Federal Reserve then credits the bank with the amount of the check, crediting it to the bank's reserve deposit balance…
- The Treasury and the Federal Reserve can debit the bank's reserve deposit balance by open-market operations--by selling Treasury bonds--and thus transform the liquid non interest-paying debt of the government that is high-powered money into interest-paying debt…
- The Treasury can debit the bank's reserve deposit balance by imposing taxes and debiting the bank's reserve deposit by presenting check the taxpayer writes to the bank for payment…
- Briefly: (a) federal government spending creates fiat money--liquid debt of the federal government. This money can then be uncreated by (b) levying taxes or by (c ) open-market operations that transform non-interest paying reserve deposits into interest-paying federal debt. Whether you do (b) or (c ), and how much you do of (b) or (c ), are technical financing decisions, but there is no such thing as "undermin[ing] the financial integrity of the nation". Federal spending is always funded by money creation, and the government then adjusts the money supply by levying taxes and conducting open-market operations.
From my perspective, Warren's way of putting it is both (i) completely, obviously, and tautologically correct; and yet (ii) somehow obtuse…
The problem is that Warren's claim that "the deficit can present no financial risk" is both right and wrong. it is right in that the government can never find itself in a situation in which it is forced to default on its interest-paying debt. How could it be? It amortizes its interest-paying debt by simply crediting the payee's reserve deposit account. The deficit and debt can present no nominal financial risk. But it is wrong in that the government can find itself unable to keep whatever commitments it has made on what the real return on government debt--both interest-paying and non-interest paying--will be. The inability to keep such commitments is also a kind of "financial risk", and deficit and debt accumulation can create it.
Are our deficits and debt accumulation currently creating such real financial risks? No".
http://delong.typepad.com/sdj/2013/03/bill-black-is-justifiably-irate-monday-hoisted-from-comments-weblogging.html
"somehow obtuse…"
For an economists. Warren is talking to ordinary people rather than put it econo-speak, which is what I would say is obtuse as an ordinary person (non-economist).
Stiglitz has just recommended it on twitter, curious timing.
Joseph E. Stiglitz @joestiglitz
Get a copy of Frank Newman's new book "Freedom from National Debt"
" It amortizes its interest-paying debt by simply crediting the payee's reserve deposit account. "
It pays the interest coupons and then redeems at maturity.... I dont think this is 'amortization'...
"amortization is the process by which loan principal decreases over the life of a loan, typically an amortizing loan."
http://en.wikipedia.org/wiki/Amortization
I wouldnt say USTs 'amortize'...
The UST redeems the securities in full at maturity.... this is akin to Warren's 'moving it from the savings account to the checking account' (IN FULL)...
Its key to know this detail to be able to figure out what is really going on....
Does this guy think that the Treasury 'pays down' individual US Treasury securities??????
No wonder he is all confused.... and he's a former Treasury official???.. this is hopeless...
Amortization generally refers to paying down interest and principal in regular payment — which reduces credit risk.
Amortization is the paying down of principal.
Interest automatically goes away as principal is reduced.
by simply crediting the payee's reserve deposit account (Delong)
In fact, if the investor is a non-bank entity, the correct wording would be "crediting a commercial bank reserve account and an investor's deposit account at a commercial bank".
Anyway, good to see mainstream Delong recognizing that MMT has got it right in this key subject.
But it is wrong in that the government can find itself unable to keep whatever commitments it has made on what the real return on government debt--both interest-paying and non-interest paying--will be. The inability to keep such commitments is also a kind of "financial risk", and deficit and debt accumulation can create it.
Of course I've read all this before but can someone put this bit in plain English for me please.
Plain English: deficits can cause inflation, which wipes out the value of both interest and principal received by investors.
Delong is keeping TIPS out of the picture, in his story, however.
Deficits are not the cause of inflation...spending is the cause if inflation.
Let's put it this way: more deficit spending at full employment will likely cause the price level to rise.
Higher G or lower T would do that.
As would higher I or lower S or higher NX.
But only at full employment. So, no need to worry about that while we're deep in the hole of the present slump.
"Plain English: deficits can cause inflation, which wipes out the value of both interest and principal received by investors."
Some would call this default by another name.
"Delong is keeping TIPS out of the picture, in his story, however."
Note that the intent of TIPS is to compensate investors for the value lost to principal and interest due to inflation. However, it strikes me as more than a little ironic that the compensation to investors comes in the form of more of the same fiat money that caused the inflation in the first place.
It's not a default because the government is not violating a contractual promise.
The investor is buying a bond denominated in nominal dollars. That is: he or she is willingly accepting the inflation risk. The investor can't complain if he ends up misestimating the rate of future inflation. It's all part of the game.
As for TIPS: more inflation means more dollars for the investor. He/she will thus buy the same basket of goods and services as would be the case in the no inflation scenario.
The (private sector) investor will be happy - he receives welfare payments in constant purchasing powered dollars as a courtesy of the (public sector) government. With zero risk of either default or inflation, in the case of TIPS.
Not a bad deal. If they were sincere, rich people would be fanatical supporters of bond-financed government spending.
"Higher G or lower T would do that."
Higher G doesn't automatically lead to a higher deficit...and there is no way to accurately predict if it will or not. It's a wait-and-see proposition.
Higher taxes on the rich would probably result in a lower deficit.
Higher taxes on the working class would probably lead to a higher deficit.
Only the first would lead to inflation pressure.
More fiat money isn't the cause of inflation.
More spending of fiat money can cause inflation.
Some rich people likely look not at actual spending that leads to inflation but increase of funds that could be spent even though save at present. Even though prices don't rise, they see expansion of saving as "inflation" in the sense of making them less wealthy because some other people are more wealthy (able to spend). In order words their wealth has been "diluted" relatively.
Because government is "counterfeiting" dollars.
"Because government is "counterfeiting" dollars.
Those that think like that are delusional and not to be taken seriously.
Imagine a business assuming there were too many dollars in circulation and raising it's prices as a result…it would price itself out of business.
A good way to visualise the question is through Krugman's cross (later adapted and adopted by Parenteau, Fullwiler and all MMTers in general)
Higher desired net spending by the government will shift the (G - T) schedule upwards, leading, ceteris paribus, to a higher govt. deficit and a higher GDP - presuming our starting point is a below full employment level of GDP.
Higher desired private sector spending shifts downwards the (I - S) schedule, which will lead to a higher GDP and a lower government deficit.
If we're starting at full employment, however, any increase in net spending by either govt or the private sector will create - yes - inflation pressures in the economy. There will be too much demand chasing a supply of goods and services that is constrained and cannot grow above potential.
That's the way it is. MMT does not wish to defy the laws of economic gravity; quite the contrary. MMT recognizes said laws and takes the correct policy conclusion that government spending is not constrained by financial factors: only by the real, physical constraints of an economy when it reaches full employment.
Money has no cost. An economy at full employment, however, is subject to opportunity costs. To have more of good x or service y we'll have to give up on other goods and services. It´s a matter for societal choice in such situations.
"In order words their wealth has been "diluted" relatively."
Tom - I like your use of the word "diluted". Reminds me of how equity of existing shareholders in a company gets diluted when the company issues more shares. This could depress the value of the shares or not depending on what the company does with the newly raised capital. If the company has good management, superior products and innovative ideas for capturing market share the stock price can go up.
Also reminds me of the 1980s when there were large deficits and the dollar appreciated sharply. GDP doubled from roughly $3 trillion to about $6 trillion. There was a mix of reasons why the deficits were high in the 1980s, including a big increase in defense spending, tax cuts and a big drop in tax receipts from the 1982 recession. However, I think an important part of the reason why the US Dollar appreciated so sharply, with US$ Index peaking at ~ 160 in 1985, was because the reduced tax burden raised the after tax return on capital creating demand for dollars to invest in new enterprises.
"An economy at full employment, however, is subject to opportunity costs. To have more of good x or service y we'll have to give up on other goods and services. It´s a matter for societal choice in such situations."
And this is not static. The ideal is that the economy will expand at FE by adding capacity or increasing productivity through tech innovation. As wage pressure rises, then introducing new more productive methods and investing in new technology makes economic sense. Companies invest in more productive technology to make better of workers or even reduce the need for workers — think automation and robotics.
"Higher desired net spending by the government will shift the (G - T) schedule upwards, leading, ceteris paribus, to a higher govt. deficit and a higher GDP - presuming our starting point is a below full employment level of GDP."
Jose, I don't see how you can make this claim.
As soon as spending is increased all other things do not remain equal, and claiming ceterus paribus is the same mistake people make when addressing the quantity of money relationship.
The variables are all moving but in unknown directions.
As Tom pointed out, none of these things are static and it is therefore unrealistic to claim "all other things equal" in this case.
No complex circuit works like that.
I prefer Bill Mitchells approach…the deficit is not a thing and as a tool for economists it's irrelevant.
It's an ex-post measure of the savings desire of economic participants over some period…and that's pretty much the end of it.
Just to be pedantic, I'll say that inflation happens when people put up their prices. Does an increase in demand or an increase in money 'cause' them to put up their prices, or do they choose to?
In many cases what actually happens is that prices rise, and then the supply of money or level of nominal spending increases to accommodate the price rise.
Warren claims that ALL prices are a function of what the govt pays for things ("G" type things) or what price they allow their fiscal agents to lend against things....
I have a tendency to agree with Warren here... but to me it seems the MMT academics are at least "cool" to this assertion....
To Warren, it is 'about price not quantity'... but if you dont agree with that, to me, it is basically monetarism...
Its not the govt spending at full employment that causes prices to go up, its if the govt agrees to raise its bid at full employment in order to "outbid" the non-govt for the goods/services that the govt is purchasing..... or allows the banks to raise appraisal prices or both...
Then you also have to think whether the govt is spending on xfers or "G" type things at full employment... those two ways that the govt spends have to be considered separately...
rsp,
Matt.
I still don't get Mosler's point, if that is indeed his point.
If for example the govt says it will buy any quantity of a good for $1 each, but the price other people are willing to pay is $10, then the price won't stay at $1 will it?
Paul,
Examples (recent ones) of the relevance of trying to understand macro economic processes in terms of ceteris paribus.
The 2008 crisis.
Massive deleveraging by the private sector, leading to an equally massive decrease in spending. The (S - I) schedule shifted upwards, causing: an increase in the government deficit and a decrease in GDP.
Later on, as the Obama stimulus package started to have repercussions in the economy, the (G - T) schedule shifted to the right, leading to an increase in GDP and an increase in the govt. deficit.
More recently, a shift downwards of the PSFB (private sector financial balance schedule)- that is, increased net spending by the private sector - led to both an increase in GDP and a decrease in the govt. deficit.
Krugman's cross is thus a splendid model of the economy at work - of visualising the effects of changing behavior(s) by each of its three sectors and anticipating the consequences in terms of GDP levels and government deficits.
As Rob Parenteau then said, after analyzing it closely: "it would be a very good replacement of the IS-LM model of aggregate demand".
The ideal is that the economy will expand at FE by adding capacity or increasing productivity through tech innovation
Yes - but that will take time. It's a slow process.
Whereas an increase in aggregate demand operates in fast mode.
So at FE, with resources fully utilized, productivity may increase at say 2% a year. A bigger jump in AD will mean inflationary pressures.
There is no way of escaping that.
It may be prevented "the MMT way", by either increasing taxes or decreasing public spending.
Neo-keynesians (even some post-keynesians) would add, presumably: by having the CB increase its target interest rate.
Matt, just to clarify I meant $1 per unit of a good.
If the govt says it will buy any quantity of units at $1 per unit, but the price others are willing to pay is higher, then it seems to me that people will sell the good at that higher price.
The govt can set a floor price however, so any unwanted goods will always find a buyer in the govt at that floor price.
y,
13:00 mark of the video of Warren, Bill and Randy here:
http://mikenormaneconomics.blogspot.com/2011/11/infaltion.html
Warren goes first, then Bill, then Randy.... introduces the MMT concept of price "ratification"....
We need to run this down sometime.... could be too radical for the academe...
rsp,
for some reason there's no video on that page.
y,
try this link, see Video for session 1, video Part 2 (13:00 mark)
http://www.netrootsmass.net/fiscal-sustainability-teach-in-and-counter-conference/bill-mitchell-what-is-fiscal-sustainability/
I use Chrome browser under windows 7....
rsp,
On the Delong stuff, I've been reading some of his past comments on MMT and it all seems to boil down to
Yes, its operationally accurate, but it feels wrong.
Well, the first part of Delong's conclusion is certainly a huge improvement, almost an endorsement, coming from a mainstreamer.
Perhaps the more likely prospect for MMT is to end up watching some people close to the mainstream (such as Delong himself or Krugman) adopting in practice - and maybe at the theoretical and teaching levels as well - most of its findings concerning how the clearing and settlement systems of commercial banks and the CB really work.
At very least his would imply that neokeynesian economics would get one step closer to the truth.
Count this as one positive step for scientific knowledge.
Matt,
He's only talking about the ratification of legislation.
He's specifically talking about indexing prices to the CPI.
Whilst it is not clear I believe he is saying that in itself will cause more inflation and there will be an inflationary blowout because of the indexation.
"indexing prices to the CPI"
Big MMT no-no.
well said Jose.
Exactly the point Tom.
Sadly there is never any clarity to their language when discussing it.
Just to come to that conclusion you have to interpret the language used. Sad since the clarity of language is exactly the thing MMT has going for it.
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