An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
I was reading but it just got too long. I will say I do appreciate the for a change polite introduction.
I'm happy to concede the accounting/finance jargon argument because it is exactly that jargon.
MMT as described in that article uses plain English which makes it open to comprehension by the masses unlike professional jargon which serves to act as a veil and maintain elitism in a profession.
So whilst concession of the point is valid, the point itself is not very effective.
I'd to hear from Matt Franko on JKH's discussion of bond vigilantes. I think there's some stuff that's just plain wrong there with JKH's characterization.
"Furthermore, dealers will not force themselves to buy bonds of longer and riskier duration just because the Fed has supplied excess reserves in the system. Taking bonds into position requires the allocation of capital for interest rate risk. Interest rate risk is similar to credit risk in this sense of capital requirements. We know that banks don’t “lend reserves” to take credit risk. Neither will they or their dealers necessarily assume interest rate risk simply because of the presence of excess reserves. And in the nightmare scenario, when dealers at least consider withdrawing in order to protect their own capital positions, a technical default scenario is more imaginable, unless the central bank steps in with extraordinary measures that go well beyond providing dealers with reserves. Like bank lending officers, dealers lend (i.e. buy bonds) based on risk to capital. And in the case of bank-owned primary dealers (i.e. most of them), that decision is not centered rationally on excess reserve availability."
As noted by Senexx, the post was rather long, and there was probably stuff that I missed.
Yes, the Treasury is operationally distinct from the Central Bank. The people that work there have to worry about the details such as how government payments will affect reserve balances. But such a level of detail would disappear from most macroeconomic models.
From an analytical point of view, consolidation is pretty much a necessity. The private sector in a model may distinguish between types of government liabilities (money versus debt), but there is no reason to believe that the makeup of short-duration government liabilities really matters for macroeconomic performance (assuming that the Treasury and Central Bank avoid doing things that are obviously stupid, like dropping provided reserves below required reserves).
His discussion of default and interest rate risk seemed questionable. Interest rate risk is the easiest risk on the planet to hedge; there are tons of counterparties with big balance sheets that allow the primary dealers to lay off their risk. If anything, the dealers should welcome some volatility being injected into the market; if not, they should hire some more competent traders.
If his point is that there are limits to how much long duration debt a government can get away with issuing, he is presumably correct. But so what? The sizing of Treasury issues is completely under the control of the Treasury. They could drop their issuance pattern to be only 3-month T-Bills if they so desired.
First you consolidate to get the logic. Then you can show that even if you don't consolidate the logic holds. So you can fully describe the complex system. As the MMT does. Standard scientific method. Apparently it confuses some. Weird.
I'd assume JKH and Ramanan work in some capacity for one of these big banks on the econ staff or thereabouts... so if JKH says that is the mentality over there, I'd assume it to be accurate...
The US Treasury has this "TBAC" committee comprised of industry people at the banks who contribute like "recommendations" to the US Treasury on bond issuance and so forth so there is that avenue to facilitate coordination wrt the terms of upcoming issues, etc...
I would look at JKH and Ramanan as separate from the "bond vigilante" cohort that would include media people like Santelli and industry people like Bill Gross... I dont think JKH looks at the banks/Dealers like "vigilantes" but rather they are businesses engaged as 'fiscal agents' of the govt that have capital at risk so they make pragmatic decisions in the area of portfolio management and "interest rate risk" which their "partners" in the govt foist upon them...
I would say MMT looks upon these banks ('fiscal agents') as "private public partnerships" as well... and JKH is imo just telling the story from the "private" side of this "partnership"...
Like, to me, the govt would not be a very good "partner" if they went out and did a lot of longer duration bonds and at the same time started to raise interest rates substantially thus forcing potential markdowns on your "partner"...
so if I were a bank and had a non-zero risk assessment that my "partner" would take such a somewhat capricious/arbitrary action like that, I would probably try to build that in to my business model as a contingency at least...
i think the "MMT Position" is a policy of 90-day USTs only, if this was so, I think effectively all of this risk that JKH identifies here (as the banks see it) would go away and probably all the current (thin) margin in the business of "UST Bond Dealing" would evaporate... it would probably transition to a fixed fee based model like "$100 per $10M" or something like that... like banks do now with "25 cents per check" or whatever, ie a fee based model...
What imo pisses many in/around MMT off (myself included) with this "bond vigilantes" metaphor is the disrespect it implies to our govt institutions... gets back to the "who is in charge?" issue for us and imo we believe it is "the people" thru their institution of govt not our "private partners" the banks...
My point on the vigilante term is that it’s really about interest rate expectations, and not directly about the market’s perception of “affordability” or “solvency”. It’s more the politicians that think that way about “affordability” than the bond market, at least in the case of the US.
I.e. the market sells off the bond market when it expects that the Fed will have to raise interest rates. Sometimes it can also be a market voting signal that the Fed should be raising interest rates. So the vigilantism comes out of the market warning that the Fed is going to have to do something.
BTW, I don’t particularly like the term. By commenting on it, I’m not endorsing it.
I think the idea that its interest rate related should be pretty consistent with an MMT view though – i.e. that term yields are driven by interest rate expectations, as reflected in the expected path of the Fed policy rate, which should be incorporated in term bond yields.
It’s also consistent with the idea that this effect could be eradicated by eliminating the bond market or shortening up duration of bonds issue according to policy. That’s an idea that some in MMT like also.
It has to be a tough business with "partners" like these current people in position in govt who dont even know at any level what the heck is even going on!
Even if the banks went to the govt with some new recommendations in the area of public finance that was "win/win" for the "partnership", they would STILL have to get by the Sarah Palins who think we are "borrowing from the Chinese", etc..
I could see you all going in there with some recommendations on term/rate stability or something and then the first question you would get would be "what do our Chinese lenders think of this???" or something LOL!
Hang in there up there! Appreciate your large effort here with your paper to respond from the "private" side of the "partnership" as I view it... adds to the dialogue and sheds more light on "what is really going on" in the world....
"The US Federal Reserve in its current arrangement is institutionally separate from the US Treasury. An important defining feature of this separation is that the US Treasury has a bank account with the Federal Reserve. From an accounting perspective, it is an asset of the US Treasury and a liability of the Federal Reserve."
And:
"The consolidation of the financial statements of separate institutions does not negate the fact that the government still holds money as an asset and issues money as a liability – through two separate operating units."
Question:
Is the Treasury's deposit at the Fed a liability of the government?
In an attempt to anticipate a possible line of questioning:
Treasury has money (TGA balances).
Treasury is a department of government.
So the government has money as reflected on Treasury’s balance sheet.
The Fed has issued money (TGA balances).
So it has a money liability in that sense.
The Fed is a department of government (in the sense we’re talking of generally).
So the government has a money liability as reflected on the Fed’s balance sheet.
So the government has both a money asset and a money liability via those two “subsidiary” operations.
If you consolidate the financial statements of those two deconsolidated entities, that item disappears.
But Treasury still has an operating balance it can use. That’s a fact.
So Treasury still has money.
So the Government still has money.
And the Fed still has a money liability.
So the Government still has a money liability.
The key thing is that the fact that one department of government has money that is a liability of another department of government is not the issue from an operational perspective.
Treasury and therefore the Government still has access to a cash operating balance it can use for real world operations in dealing with the banks.
The moral of the story:
Financial statement consolidation is not the same thing as operational consolidation.
Hence, when govt seeks to "increase the deficit" via a tax cut as alleged "stimulus", it doesnt help as the 'consolidated non-govt sector' is first required to save the increased amount of the bond issuance and this new savings is a leakage for at least the term of the bonds... rsp,
"the 'consolidated non-govt sector' is first required to save the increased amount of the bond issuance and this new savings is a leakage for at least the term of the bonds"
no the deficit is an addition to non-govt saving.
JKH put this quite succinctly in another post:
"for any accounting period, it is the expenditure on investment and the act of government deficit spending (as well as foreign sector effects in the more general case) that allows the actual private sector saving result."
"So the government has both a money asset and a money liability via those two “subsidiary” operations"
The problem with this is that the government's money asset is also the government's money liability. So it's not really an asset for the government, even though it is an asset for the Treasury.
...Treasury and therefore the Government still has access to a cash operating balance it can use for real world operations in dealing with the banks."
I think the problem here is that you tend to identify the government with the Treasury.
But if the Treasury and Fed are both parts of the government it doesn't really make sense to identify the government with the Treasury more than with the Fed.
govt is planning on spending 325B in the upcoming month, projected deficit of 75B...
Hurricane hits the SE, $15B in damage, Congress does an emergency supplementary appropriation of $5b and issues $5b in FEMA debit cards to pass out in the zone over the immediate next 30 days...
increases the projected deficit by $5b to $80b, govt CANNOT spend this additional $5b without SOMEONE in the consolidated non-govt agreeing to first increase their previous savings intents by $5b to "fund" the increase in required bond issuance for this month... ie SOMEBODY in non-govt has to agree to increase their previously planned savings and agree to move an addtional $5b "from the checking to the savings" account", savings is a leakage....
It's very simple. It is a simple question of establishing facts.
Even if you consolidate the Treasury and the central bank ...
The government holds deposits at banks.
That statement alone is sufficient to prove that the government has the money.
In general, the government whichever way you define it holds domestic financial assets and foreign exchanges which is also money and not "not money".
In other words why is there so much confusion over this simple fact?
You can write a model in which the government does not hold financial assets. That's OK. In that model, the government has no money. Your model may closely resemble the way the world works.
I kind of agree with your point about foreign currency.
Bank deposits are a bit more complicated because a bank deposit is a loan to a bank. If the government holds a bank deposit it has made a loan to a bank. The difference with a non-bank depositor is that the money loaned to the bank is a liability of the government itself.
"In other words why is there so much confusion over this simple fact?"
I'm not confused, I just think its incoherent to say that a government liability is a government asset.
"The test of revenue is not necessarily the creation of an asset. The application of revenue to the reduction of liabilities is common place, and not just in government. A simple example is the payment of interest on a commercial bank loan by debit to a deposit held at the same bank."
The comparison doesn't work because the liabilities in question are very different.
A bank deposit liability is a promise to pay money, and government money is not.
When a bank's liabilities are reduced as the result of interest payment on a loan (by a debit to a deposit held at the bank), the bank's net financial assets increase. This is not the case when government liabilities are reduced through taxation.
This is an interesting discussion because I think you’re a person who is prepared to look at this analytically and who also has a strong view on it, but perhaps leaves the door slightly open to be persuaded otherwise, however unlikely that seems at the time.
I think and hope I’m the same kind of person. I’m open to persuasion.
So let me try this:
I think there’s a problem here in terms of a human asymmetric perception bias between the asset and liability sides of financial claims in this area. Let me expand.
Let’s simplify language by thinking of both Treasury and the Fed as being “subsidiaries” of the government.
Go back to where I started on the “having money” side of things.
So Treasury as a deconsolidated government operation has money.
There is a bank account there. It’s undeniable. Go up to the Fed and check it out if they’ll allow that. And the important thing is that this money is operationally usable in the way in which Treasury deals with the banks – pari passu as I said in the post. It’s what happens at the level of money. It’s the truth of actual financial transactions.
So the government owns Treasury, which has money.
So the government has money, via its subsidiary.
So the government has money.
At the same time, another subsidiary of government – the central bank – issues that money as a liability.
So the central bank as a deconsolidated operation has issued a money liability.
Now here is the asymmetric bias:
I say that because the central bank has a money liability, and because government owns the central bank, then the government has a money liability.
The asymmetry is that the most common perception of that statement would be that it must mean that the government has an external liability.
But that’s not a requirement for truth in logic.
If it’s the case that the government can have a true asset - money – as an internal asset, then it must also be true that the government can have a true liability – money – as an internal liability.
Both are true.
But the important operational truth is that the government has money. And it can use that money.
And therefore it is false that the government “neither has nor doesn’t have money”.
And there’s no contradiction on the liability side of things, because the perception of such a contradiction is based on a bias or false perception that the asset and liability sides of the logic are asymmetric – when in truth they are not – they are symmetric.
Also, I agree with Ramanan’s comment which focuses on the money asset side.
Say you issue an IOU (on paper) with your right hand, and then take it back with your left hand. Do you then have money, or an asset, in your left hand?
I'd say no.
What if you decided to call the IOU a liability of your right hand and an asset of your left hand. Would you then have an asset, or money, when you held the IOU in your left hand?
Not really. You could say your left hand has an asset and your right hand has a liability, but in reality when you hold the IOU you have neither an asset nor a liability.
What if you then made a rule which stated that you could only issue as many IOUs with your left hand as had previously been issued by your right hand and subsequently acquired by your left hand. Would you then have an asset, or money, in your left hand? Again, not really.
This rule would change the operational procedure for issuing IOUs with your left hand, but wouldn't change the overall logic at all.
As a result of this rule, you might find yourself in a situation where you couldn't issue IOUs with your left hand because you hadn't previously acquired enough IOUs with that hand that had previously been issued by your right hand. This means you would be constrained, by your own rule, in your ability to issue IOUs with your left hand, but it still wouldn't change the accounting logic.
The simple answer is it depends on what "money" means.
If "money" is defined economically in terms of the money supply, i.e., measures of the monetary base, M1, M2, etc. and the Treasury's account at the cb is excluded (it is), how does the Treasury "have money"?
Cash in circulation and bank reserves used to pay taxes, fees an fines that are credited to the Treasury account are not counted in the money supply, and they decrease the money supply, both M1 (deposit account or cash in circulation) and the monetary base (rb, vault cash and cash in circulation). "Destroy money."
If we say that Treasury "has money," then it seems so must we say that the central bank "has money." That's only the case in the sense that both the Treasury and Fed have the power to issue government liabilities.
In a fiat system that power is unlimited operationally and is only constrained by consequences on price level and voluntary restraints imposed by the political authority regarding Treasury and cb operations as agents of government under the direction of the political authority.
in my example it's just a rule I made up, of course.
The point is that if I impose a rule on myself where I have to get IOUs into my left hand before I can 'spend' them with that hand, the basic accounting doesn't change.
You can have a rule which might limit certain actions (debt ceilings, no overdraft etc), but doesn't change the basic accounting logic.
In the real world these rules are established by congress, such as the debt ceiling and no-overdraft, etc. Whether they are really hard rules or soft is open to question I think. It's possible that the Treasury does occasionally become temporarily overdrawn at the Fed intra-day (under unusual circumstances), for example. (You might know more about that than me).
Yes, always seems good to specify dollars instead of "money" when you are talking about dollar deposits.
Seems like quantity regulations on the liability side of banking and the very idea of screwing around with interest rates would seem to be the main source of credit risk in buying gov't bonds.
Seems like the relationship b/n Treasury and the FED is "operational" or the gov't checks don't clear and the point in having a banking system and a government is defeated.
Seems like primary dealer banks are public-private partnerships engaged in an additional partnership with the government.
Nice paper. I think I have seen it but good to see it again with all those nice graphs!
About your point about government deposits at banks, the fact is that the government has money. It's funding the bank but even I am funding a bank when keeping deposits at a bank.
Whatever said, the government has money.
"money loaned to the bank is a liability of the government itself."
It's not true. Does one add bank deposits when calculating the US government's debt or liabilities? I haven't seen any institution or national accountants do that.
Thanks. I’d seen the paper before but just read it closely again.
Everything I said in the post accords with it I believe.
Post September 16, 2008 is an entirely different story, which is a function of the production of chronic excess reserves and payment of interest on reserves and knock-on interest rate arrangements for Treasury. To be honest, I had not previously looked closely at the interest margin math that motivates Treasury to keep higher TGA balances in the zero bound era, but it makes sense. The authors suggest things may revert back to the way they were if the Fed can ever drain all those excess reserves.
Great paper. New York Fed papers are generally very well done. Tremendous information on operational detail.
Read the conclusion in that paper.... It sounds like in order for the Fed to be able to raise rates EVER again the Fed is going to first convince the Treasury to take steps that are 'not in the best interests of the taxpayers' and move balances OUT of the TGA FIRST (which are paying interest 'to the taxpayer') and sweep these excess TGA balances into the TTLs which will 'pay NO interest to the taxpayers'...
FAT CHANCE THAT!
These morons are probably STUCK at zero until they convince Treasury to take this step that 'is NOT in the best interests of the taxpayers'... Which Treasury may NEVER be willing to do... Hello permanent ZIRP....
It reads like balances in the TTLs earn FFR minus 0.25 (currently zero) while in the TGA currently they earn >FFR... Why would Treasury EVER switch back?
It's a little difficult to follow, but the way it actually works is that TGA balances earn a zero rate of interest.
The reason its more advantageous for Treasury to hold balances at a zero rate is that in doing so it displaces reserves that would otherwise be on the Fed's balance sheet and would otherwise cost the interest on reserves rate. Treasury can't recover that cost by putting its balances elsewhere. So its advantageous for Treasury and the taxpayer to do it this way.
There's no question that the Fed's preferred outcome would be for a full reserve drain eventually. When that happens, things will revert to the previous configuration between TGA and TT&L, which will be advantageous to taxpayers in that environment.
I think they will eventually drain the reserves, but it could take a long time.
here are some quotes from the second paper which I think are particularly relevant to MMT:
"An important part of the decision-making process for open market operations is anticipating changes in the Treasury’s Reserve Bank balance, because increases in that balance drain reserves from the banking system while decreases in the balance supply reserves. Participants in the 9:20 conference call use the projections developed earlier in the morning by Treasury cash managers and staff of the Federal Reserve Bank of New York, as well as a third projection developed by Board staff." (p.5)
"If the Treasury deposited all of its receipts in its Reserve Bank accounts as soon as the receipts came in, and if it held the funds in those accounts until they were disbursed, increases in its cash position would drain reserves from the banking system and, conversely, decreases would add reserves... Maintaining Treasury balances primarily at Federal Reserve Banks would, therefore, necessitate frequent and large-scale open market operations to mitigate undesirable fluctuations in bank reserves and the federal funds rate." (p.1)
"The Treasury Tax and Loan program is a cooperative effort of the U.S. Treasury and the Federal Reserve System that is important for both monetary policy and Treasury cash management." (p.9)
Well I guess what I am seeing is that currently the Treasury is getting FFR as any balances they leave in the TGA ends up reducing the Feds IOR payments and hence the Feds depo to Treasury is that much higher...
Once they try to raise, say to 1% the Treasury will be faced with a decision to either leave the TGA balances alone and effectively "earn" the FFR of 1% thru the increased Fed deposits of "profits" over to Treasury OR put the TGA balances back in the TTLs where they will earn FFR-0.25 or 0.75% (ie less than the FFR...) "for the taxpayers"...
If the Treasury leaves the TGA balances as excess reserves seems like the Fed would be faced with the same chaos in the FF market that they originally had which prompted the move over to the TTLs to begin with... but this was before the IOR...
Now with the IOR, the Treasury would have to "take a hit for the taxpayers" and move the TGA funds back into the TTLs where they "earn" 0.25% LESS than the IOR in order to help the Fed avoid the chaos...
The TGA can easily have over 100B in it overnight these days... How big is the market for FF these days? may be indicative of how much chaos in the FF market they were looking at trying to manage...
I think it is an open question as to whether the Treasury would easily agree to do this... as I have talked to those people down there and they are aaaaaaall about "doing right for the taxpayers"...
Even if they agree to do this "against the taxpayers best interests" maybe if you watch the DTS for an increase in TTL balances this would be a tip-off that they would be about ready to start raising the rates...
"The Treasury Tax and Loan program is a cooperative effort of the U.S. Treasury and the Federal Reserve System that is important for both monetary policy and Treasury cash management." (p.9)
An example of what MMT calls informal consolidation. This is from the operational perspective, while both agencies maintain their own separate books.
I think your left-hand right-hand analogy captures perfectly the sacr(um)al smoke and mirrors game of Govt. $money.
$money (for me) is just a concept - like the border between Canada and the USA; like the data stored on your HD flickering in a wavering magnetic field.
Like the ‘difference’ between ‘being Canadian’ ‘Indian’ ‘American’ (besides a tiny little bit of biology) just a bunch of concepts; like the ‘difference’ between ‘being Christian’ ‘Islamic’ or ‘Atheistic’ yet another bunch of concepts. It is ridiculous to chase concepts in minutiae. The mind lives on vapour! Our compass should point towards our reality.
More visceral is ‘following the money’. How do the ‘top’ 400 families in the USA own more than the ‘bottom’ 150 million families; how do they manipulate the concepts fed to the masses (hypnotics) and wield power? How does this impact on human, national, international and environmental health, peace, security, happiness, well being, and development. These are not concepts. These are essential human experience. But it is concepts that put these fundamental necessities at risk.
If there is to be a nation like America, then it should uphold its highest ideals: the current veil of concepts are illogical and stupid, but serve to maintain the status quo. Everybody knows to chop at the root if you want to bring the tree down and turn it into something useful; pruning little branches just makes it stronger. Anybody who reads MMT knows $money is just a score – I do not care in attribution whether or not the Govt. is conceived as having or not having ‘scores’ – why obscure a fundamentally useful concept with a ‘mystical’ and useless one? I do not understand how the latter concept can be used to better what is wrong with the status quo? I do understand how the former can be used and is being used effectively.
Concepts can be used to bind or set free. All concepts have direction and carry within them their own magnetic and radiant quality, composing to form a veil that either obscures or reveals. I am always concerned with this direction and revealing nature of concepts.
Does a human being have or not have concepts? Well, both can be true.
More to the point: what is the reality of a human being? And I would say fulfilment is at the heart of this reality. So do the concepts we hold help us get there or not? Or do they lead deeper into the maze of delusional minutiae? The monetary system (if there is one) of 3013 will look a lot different to the one of today, just as today is different to 1013; but the human fundamentals will always be the same. They need to be recognised, celebrated and made manifest. Human beings need a world in which they can grow – in consciousness - where the true wealth is. It is the strength, kindness, integrity and beneficial intelligence (or absence of it) of the human persona that our systems reflect. Another way of saying this is the presence or absence of consciousness.
So for me it is always - cut to the chase! How does it help?
Y’s left-hand right-hand analogy expresses the essence of $money perfectly!
"Aphorisms are sometimes a way of dumbing down the subject matter. In the case of this particular subject matter, they can be words that suggest the feasibility of a predetermined policy orientation. For example, the government can spend its own currency into existence by “crediting bank accounts” in a counterfactual world where by contrast the normal constraint of bond issuance is lifted. But in the world that already exists, this happens with no greater logic than does household spending from a credit card or business spending from a standby line of credit, in the sense that those things act to expand the creation of broad money. The constraint structure is different, but the crediting of bank accounts is pretty similar. Indeed, it happens to an even lesser degree for Treasury with respect to the expansion of bank reserves in the existing system, according to the intention of the constraint structure. The actual rules for Treasury are even more onerous than for the other two. All sectors spend with bank accounts credited on the counterparty side. And in any event, it is a commercial bank and not the government that in the first instance credits bank accounts with the proceeds of government expenditures."
Once again you identify the government exclusively with the Treasury and not with the central bank.
Given that the central bank is part of the government, it is correct to say that the government can spend its own currency into existence by “crediting bank accounts”, regardless of whether the Treasury is required to have a positive balance in its account at the CB before it makes payments or not. When the government spends the central bank credits bank reserve accounts, and banks in turn credit their customer's deposit accounts.
Imagine you are expecting your $2,000 Social Security payment to hit your bank account, which already has $3,000 in it. If you are watching your account on the computer screen, you can see how government spends without having anything to spend. Presto! Suddenly your account statement that read $3,000 now reads $5,000. What did the government do to give you that money? It simply changed the number in your bank account from 3,000 to 5,000. It didn’t take a gold coin and hammer it into a computer. All it did was change a number in your bank account by making data entries on its own spreadsheet, which is linked to other spreadsheets in the banking system. Government spending is all done by data entry on its own spreadsheet called “The U.S. dollar monetary system.”
Here is a quote from the good FEDERAL RESERVE Bank Chairman, Ben Bernanke, on 60 Minutes for support:
Scott Pelley: Is that tax money that the Fed is spending?
Chairman Bernanke: It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.
The Chairman of the Federal Reserve Bank is telling us in plain English that they give out money (SPEND and lend) simply by changing numbers in bank accounts. There is no such thing as having to “get” taxes (or borrow) to make a spreadsheet entry that we call “government spending.” Computer data doesn’t come from anywhere. Everyone knows that!
...When it comes to the dollar, our government, working through its Federal agencies, the FEDERAL RESERVE Bank and the U.S. Treasury Department, is the score keeper. (And it also makes the rules!)"
I’ve never identified the government exclusively with the Treasury. You won’t find that in the post or anywhere else.
In the piece about Bernanke, which MMT uses as an example (incorrectly) all the time, it’s about central bank lending. Bernanke was referring to that and not Treasury. That was the whole point of saying that taxes were not involved - not that the Fed credits bank accounts before it borrows in the case of Treasury operations. He was very specifically not talking about Treasury.
There is no functional difference between central bank lending and commercial bank lending in terms of “crediting bank accounts” at the level of money hierarchy that applies to each. It becomes a trivial observation in the case of bank lending. So that’s a non-issue. The issue pertains to the Treasury function.
(BTW, the central bank credits reserves after commercial banks credit deposits, not before.)
Even though Bernanke was not referring to Treasury, MMT uses this example all the time as it might apply to Treasury. But in fact it doesn’t.
It was around this time that MMT began to replace its stock use of the term “spend” with “spend and lend” to conflate the two.
This is all consistent with why the characterization of existing operations should make a distinction between the two functions.
"I’ve never identified the government exclusively with the Treasury. You won’t find that in the post or anywhere else."
You seem to in this part:
"For example, the government can spend its own currency into existence by “crediting bank accounts” in a counterfactual world where by contrast the normal constraint of bond issuance is lifted."
You say the government can't spend its own currency into existence by "crediting bank accounts" because the Treasury has to sell bonds before it can spend. But the government is not just the Treasury.
The Treasury's account is just numbers on the Fed's computer system. Government spending just involves the Fed changing numbers on its computer, i.e. crediting and debiting accounts. The currency is simply credits on that system, credits which blink in and out of existence when numbers are typed in or deleted.
As Warren says in the quote above: "Computer data doesn't come from anywhere".
The 'dollars' that the government spends are created on, and exist on, its own computer inside the Fed. When the government spends it changes numbers on that computer (credits accounts). When it taxes it changes numbers on that computer (debits accounts). The fact that the Treasury is required to have a positive balance in its account and is not supposed to be overdrawn doesn't change that.
Warren again:
"When you pay taxes by writing a check to the federal government, they debit your bank’s reserve account at the Federal Reserve Bank. Reserves can only come from the Fed; the private sector can’t generate them. If your bank doesn’t have any, the check you write results in an overdraft in that bank’s reserve account. An overdraft is a loan from the Fed. So in any case, the funds to make payments to the federal government can only come from the federal government." (p.20)
In the MMT description 'the government' includes the Treasury and the central bank.
"In the piece about Bernanke, which MMT uses as an example (incorrectly) all the time, it’s about central bank lending."
They use it to show that the Fed creates money on a computer with keystrokes. It just 'marks up accounts'. This might seem obvious to you but it isn't to many people.
"not that the Fed credits bank accounts before it borrows in the case of Treasury operations"
The Fed doesn't borrow in the case of Treasury operations.
"It was around this time that MMT began to replace its stock use of the term “spend” with “spend and lend” to conflate the two."
Warren Mosler, 'The 7 Deadly Innocent Frauds':
"To repeat: the funds to pay taxes, from inception, come from government spending (or lending). Where else can they come from?" (p.20)
The US currency is a liability of the government. So when the government spends it issues liabilities, and when it taxes those liabilities are 'returned' to it. In effect this cancels the liability, as it is then held by the issuer. However, operationally the liability is still noted as an entry on the Fed's books and as an asset on the Treasury's books. Nonetheless for the government as a whole it adds up to zero.
As such, we can say that when the government spends it issues currency and when it taxes it does the opposite. Note that I am talking about the government here, not specifically the Treasury Department. The Treasury does not issue its own currency in the act of spending. In your 'Contingent Institutional Approach' paper, you argue that this means the government doesn't either, because you identify 'the government' with 'the Treasury'. But when MMT refers to the 'the government' it is not just referring to 'the Treasury'.
"Because the *US Treasury* is not an operational currency issuer, it obviously does not issue currency in conjunction with spending. It uses currency when it spends. There has been considerable confusion in some places on this point, extending to the characterization of *government* as an entity that issues currency as a result of spending. This is meaningless at the operational level, which is the level that is relevant to the act of government spending."
As a simple example, write "IOU $1" on a piece of paper and give it to someone. Now take the IOU back. Put the IOU in a box, write "the Treasury" on a label and stick the label on the box. Do you have $1 worth of money in that box? No. Does the box contain a piece of paper with "IOU $1" written on it? Yes.
The quote from Greenspan to Paul Ryan about "unfunded liabilities" and US solvency is about fiscal, e.g., Treasury issuing tsys and the Fed purchasing them in the market to keep the rate where it wants to if it not paying IOR and just taking up the slack if there is a dearth of buyers. The Fed can always finance the bond sale to the PD's and then just buy them back.
Marriner Eccles also testified that government can always fund itself through cb/Treasury coordination of policy long previously.
In general, spending is fiscal, lending is monetary.
In general, treasury is fiscal, CB is monetary.
In the counterfactual that I specified in the post, treasury can spend without borrowing first.
It can’t in the factual.
No contradiction in any of that, and no way have I ever referred to the government as treasury only.
I’ve seen everything that Mosler has said on this subject. It has no bearing on what I’ve said or written here - because I've already considered it for whatever I agree with and whatever I disagree with. I understand the accounting and operations of treasury and central banking - as do the other critics. And I understand what financial consolidation means and what institutional/operational consolidation means and the difference between the two.
"In the case of actual institutional operations, and notwithstanding the logical overlay of the MMT consolidated interpretation, a specific department of government still does have money at the operating level – Treasury through its TGA balances – and Treasury is part of government. And in the case of counterfactual operations where Treasury and the central bank are indeed a single consolidated institution and the TGA balance disappears from operations, no government department has money (at least in normal cumulative deficit modes), so the characterization is false there as well (see section below on SOMA/TGA fusion, where the TGA balance disappears by intended construction). At this point, I’m not sure whether to say the aphorism fails to display the intended logic of the “consolidation hypothesis”, or succeeds at conveying the nature of its challenged logic.
Financial consolidation does not mean actual operational consolidation, unless it is accompanied by a specified counterfactual consolidation of actual Treasury and central bank operations. The consolidation of the financial statements of separate institutions does not negate the fact that the government still holds money as an asset and issues money as a liability – through two separate operating units. On the other hand, an explicit operating consolidation that whose financial statement representation looks similar to financial statement consolidation in the deconsolidated case means that the government issues money (not TGA balances but bank reserves) as a liability but it does not normally hold any form of money as an asset."
I think that's self-explanatory, and fits with what I've repeated several times. The logic is there, and nowhere do I identify the government as Treasury in the factual case.
JKH "a specific department of government still does have money at the operating level – Treasury through its TGA balances – and Treasury is part of government."
TGA doesn't count in any of the measures of money supply from the monetary base to M1, M2, etc. It has no relation to MV=PQ in any interpretation of M either.
As far as money that can be spent or saved in the economy goes, the government doesn't have money. It as liabilities to non-government that are non-government assets.
IN this sense, taxes, fees and fines withdraw (destroy) money in the economy.
Of course, government keep books and the entries on the unit of account, so the government "has money" in that that sense. But since the government is the issuer of money, the amount on the books at any time is irrelevant to the economy and economics.
The private sector can also increase money in non-government endogenously by extending credit and decrease it by paying down credit obligations. But that money is in the economy and is a chief factor in the economics of a monetary production economy, figuring in the broad money supply.
Tom, MMT doesn't even have a coherent definition of the word "money" and in fact doesn't even use the term consistently across its literature so I don't think that referring to definitions of "money" really strengthens your case here.
Saying that "the amount [of money] on the [govt] books at any time is irrelevant to the economy and economics" is a bit of an overstatement, no?
The govt does create money, but not in the sense MMT often presumes. It creates reserve balances to help settle payments occurring in inside money, it creates cash and coin to facilitate the use of an inside money account and it creates T-bonds (which are not money) in order to obtain inside money which it then redistributes through the monetary system. These specific uses of money are due to specific legal constructs, institutional design and a specific flow of funds between entities. MMT just erases a few laws, consolidates a a few entities that aren't consolidated, does a bit of rewriting of history and says "see, the accounting is the same!" How is that helpful?
There's no need for all this "new paradigm" stuff. Why must we create this tortured and inconsistent version of reality? It's not helping push the Post-Keynesian ball forward....The MR guys can explain every single thing the MMT people can without having to create this tortured version of reality. So what's the value in reinventing the wheel here?
All the critics understand what the MMT "paradigm" is. It won't do much good to put it on continuous loop playback at this point.
The point of the post is that the "paradigm" confuses financial consolidation with operational consolidation.
The government has a bank account. It uses it to make budgetary payments. That one point in recognizing how monetary operations actually work.
You can go ahead and pretend that account doesn't exist as a result of slapping two balance sheets together - but what you're doing is pretending. It's actually known in reality as consolidating financial statements. But it doesn't change monetary operations at all. That's the confusion in the "paradigm".
You have to construct a counterfactual in order to get something like what MMT wants to believe.
Just plug in the actual operating units in the sentence as is, each of which can be viewed as subsidiaries, and the statement is correct.
The point is that the TGA balance is used for payment purposes in transacting with the banking system. It's real. The fact that corresponding liability is the liability of another government unit doesn't change that fact.
The point is that the TGA balance is used for payment purposes in transacting with the banking system. It's real. The fact that corresponding liability is the liability of another government unit doesn't change that fact.
No one denies that as far as I know. The Fed and Treasury balance sheets are available for all to see.
However, it is also possible to consolidate the government's books to determine the government's financial position overall. For example, many non-MMT'ers point out what percentage of the public debt is owned by government and therefore owed to itself. For instance, Ron Paul recommended to Congress just canceling it as irrelevant. Since Congress did not act to do it, it remains counterfactual, but obvious to anyone who looks at it.
Moreover, the cb and treasury balances are irrelevant wrt to the monetary production economy and the money available to it, other than what the cb and Treasury make available to it by lending and spending. In the US, tthe legal availability of the platinum proof coin and consol issuance, for example, show that government is not limited either financially or operationally.
The cb and treasury are not limited operationally in any way by the amounts on their books, other than the political restraints that may be imposed, such as a prohibition of cb lending to Treasury, a debt ceiling, and other such regulations that result in special cases that alter the general case operationally at present, although Congress could agree to change this. There is a bill in the House to rescind the platinum proof coin options, for instance. But as yet that has not passed and remains counterfactual.
Additionally, the US is a special case where the Fed and Treasury are not consolidated financially, nor are they formally consolidated operationally ("cb independence"). (Even this has legal limits, as beowulf and others have pointed out. In an emergency, the Treasury secretary can direct the Fed chairman to carry out administration policy.)
What MMT holds is that the Fed and Treasury are "informally" consolidated operationally (not financially), meaning that the Fed and Treasury coordinate monetary and fiscal policy so that the Treasury can meet its payment schedule and the Fed can hit its target rate while providing the necessary liquidity to the banking system. Of course, this will be reflected on the respective books.
A primary means of coordination is through the TT&L accounts, which receive funds paid by non-government to government, withdrawing them from non-government use without draining the monetary base when the Fed is not paying IOR and setting the target rate above zero. Non-government funds paid to government and held in TT&L accounts are moved to the TGA, draining the monetary base in a coordinated way so that Treasury can make its payments on time and the Fed doesn't have to engage in the level of OMO that it would have to otherwise to adjust the quantity of the base to set (monopoly) price.
Again, the threat that there will not be purchasers of tsys available without drastically raising rates or failed auctions —bond vigilantism — is unfounded in that the Fed can take the bonds on its books by purchasing them from the PD's after providing financing to the PD's if needed, thereby indirectly funding the Treasury when it is prohibited from purchasing tsys directly.
JKH: All the critics understand what the MMT "paradigm" is. It won't do much good to put it on continuous loop playback at this point.
This is is the crux of the dispute. The MMT economists deny that this is true and that what they are saying is being either misunderstood or misrepresented.
There are many type of consolidation. We have been talking about operational and financial. There are also legal and conceptual.
Financial and operational are determined by the legal and are specific to legal jurisdictions.
Conceptual may choose to abstract from legal, financial, and operational, e.g., in developing a conceptual model of the general case that abstracts from specific cases. This where MMT economists start.
Certain aspects of the general case hold across specific cases, but not all aspects.
One that does hold conceptually across the board is that when government finance is consolidated conceptually, a government liability denominated in the government's unit of account is offset by a government asset, so that if one government entity holds a government financial liability, e.g., tsys as Treasury liability, it is offset by a government financial asset held by another government entity, e.g, cb holding tsys as assets, such that the net is zero. Even Ron Paul understands this conceptually wrt to the Fed holding tsys as a Treasury liability as assets on its books and has proposed to make it legal as well.
Tom, you're way overstating the relevance of this "netting" concept. Aside from the obvious fact that you're altering laws and institutional structures to get at this netting effect, you're also ignoring its operational relevance. As JKH noted previously, the global economy does not have a positive net financial asset balance. Would you also describe the global economy as "not having" money? Of course not. But that's the logical equivalent of what you're saying here.
You can understand the solvency points MMT makes, the inflation constraint, endogenous money and 100% of the points MMT makes without having to create this alternative reality where you guys just erase certain laws and consolidate certain balance sheets where it's convenient. There is literally nothing of value added from pretending to have created a whole new paradigm here. Not one thing. All these smart Post-Keynesians like Ramanan, JKH, Lavoie, Brett, etc who are critiquing MMT understand MMT perfectly fine. They just don't see any need for reinventing the wheel here when any smart Post-Keynesian can understand all of MMT's most important points without having to create an alternative reality or pretend that there's a "new paradigm".
Cullen, you’ve just asserted one position against another when that is what the debate is all about. Obviously, the MMT economists don't agree with you and they are much more knowledgeable than I am about this. They have me convinced so far.
"the government still holds its liability as an asset and issues that asset as a liability – through two separate operating units."
This is not a logical statement.
Yet it is what you are saying.
................ I didn’t say that, but there’s no real problem with it according to the framework that I’ve specified. It's quite logical in that context.
The government has two operating units as subsidiaries so to speak. Reserves are an asset of Treasury and a liability of the central bank. Treasury is part of the government, so reserves are a government asset. The central bank is part of the government, so reserves are also government liability.
I’ve said this before, but with respect, I think the mistake you are making in category logic is to suggest that in order for what I just said to be true, the asset must be a claim on something external to government and the liability must be an obligation to something external to government. It doesn’t. You are jumping the gun in moving to a consolidated mentality in attempting to disprove something that is undeniably true in the actual deconsolidated operational framework that I’ve specified. There is no requirement that reserves must be an external asset or an external liability when observing the facts of deconsolidation. This becomes manifestly evident when observing that the cash balance that the government holds, via Treasury, is used in conducting transactions with the banking system. It is very real in that sense – as real as your bank account or mine. And the fact that those balances are issued by another unit of government is irrelevant to that fact. This remains an operational fact whether you consolidate mere financial statements or not. Financial statement consolidation is not operational consolidation. Where it doesn’t remain a fact is when you actually consolidate the operations of the institution and come up with an entirely new institutional and balance sheet structure – which is what I did by specifying very explicitly the CTRB architecture in the Contingent Institutional Approach, on which I elaborated in this paper in the final section on SOMA/TGA fusion.
I can only speak for myself, but I can interpret what I see in the writings in the case of Lavoie and Fiebiger, and I feel quite certain that we all understand it.
(Can't speak for others, and can't interpret others, not having looked closely)
It's a potentially interesting point, but it doesn't remove the strong likelihood that at least a subset understands what is being said very well.
BTW, I thought MMT was the cat's meow in the first 6 months of wading through it - because it was saying things about a subject I knew quite well, but saying it in a somewhat different way. It was only after that when I began to question the way in which things were being said and began to wonder why they were being said that way. The point being that I actually took the time to learn a "foreign language" so to speak in a subject about which I have considerable depth of actual experience. And so the issue for me becomes how that subject is being presented - "taught" actually, and I have a very natural interest in that. Hence the observations, which I try to put forward as respectfully and dispassionately as I can, most of the time, in the circumstances.
JKH: "I can only speak for myself, but I can interpret what I see in the writings in the case of Lavoie and Fiebiger, and I feel quite certain that we all understand it."
This is the essence of the debate. The MMT economists disagree with Lavoie and Fiebiger on this and have said why. So far I am persuaded that the MMT economists are correct, but I am not really in a position to judge since this is way beyond my field of study.
These are significant issues that affect policy and therefore everyone in the world. It's encouraging that qualified people are debating this and confronting conventional understanding.
It's also good that the issues are being framed accessibly in the blogs, since most people are never going to read the relevant papers, even if they have the chops to do so and not confuse their own understanding with the author's intent. I confess to having read only a smidgeon of the MMT literature.
Something is inevitably lost in trying to simplify the complex and intricate for more accessibility. This is where the rhetoric and persuasion come it, since most people understand that these issues are germane to policy and so they will present them in a light that is favorable to policy they prefer. This is why there are Libertarian, conservative, liberal and progressive economists.
Since I am a constructionist more than a realist, I take the position that "reality" is experience and experience is heavily influenced by matters other than observation so that there is no "objective" observation. As Wittgenstein said, seeing is seeing-as and see-as is perspective dependent. Hardly a new revelation in that it is the message of a group of blind people describing an elephant.
Most significant issues are not disputes about fact but about different constructions. That’s the way I view this debate, too. It's doubtful that the parties will ever find agreement since they see things differently. Libertarians, conservatives, liberals, progressives and radicals live in (differently constructed) worlds.
In the end one narrative will prevail and it may not be either that of MR or MMT but rather the one that emerges victorious in a larger struggle over policy and the narrative that shapes it. Time will tell. All we can do now is do our best in our respective roles.
My role is as a popularizer. I do my best to understand what the experts are saying and present that in an accessible way.
“Since I am a constructionist more than a realist, I take the position that "reality" is experience and experience is heavily influenced by matters other than observation so that there is no "objective" observation. As Wittgenstein said, seeing is seeing-as and see-as is perspective dependent. Hardly a new revelation in that it is the message of a group of blind people describing an elephant. Most significant issues are not disputes about fact but about different constructions. That’s the way I view this debate, too.”
Yes, this is certainly about construction, at least as it pertains to my post. I said to somebody off-stage that I thought the crux of the issue was philosophical/epistemological, although I think epistemological may not be the best word. If I knew more about formal philosophy and you saw my intention more clearly in dissecting the detail of the logical construction, the ensuing discussion might be quite interesting.
JKH: "Yes, this is certainly about construction, at least as it pertains to my post. I said to somebody off-stage that I thought the crux of the issue was philosophical/epistemological, although I think epistemological may not be the best word. If I knew more about formal philosophy and you saw my intention more clearly in dissecting the detail of the logical construction, the ensuing discussion might be quite interesting."
Yes. I was preparing a response but it is a bigger topic than a comment can handle. I'll work up a post on it when I get a chance. This spans logic, ontology, and epistemology with the debate extending over millennia. It's a hot topic in philosophy of economics now, too.
See the link I put up to David Ruccio's post on essentialism v. constructivism today here. I commented in the thread too.
79 comments:
I was reading but it just got too long. I will say I do appreciate the for a change polite introduction.
I'm happy to concede the accounting/finance jargon argument because it is exactly that jargon.
MMT as described in that article uses plain English which makes it open to comprehension by the masses unlike professional jargon which serves to act as a veil and maintain elitism in a profession.
So whilst concession of the point is valid, the point itself is not very effective.
I'd to hear from Matt Franko on JKH's discussion of bond vigilantes. I think there's some stuff that's just plain wrong there with JKH's characterization.
Specifically, this section:
"Furthermore, dealers will not force themselves to buy bonds of longer and riskier duration just because the Fed has supplied excess reserves in the system. Taking bonds into position requires the allocation of capital for interest rate risk. Interest rate risk is similar to credit risk in this sense of capital requirements. We know that banks don’t “lend reserves” to take credit risk. Neither will they or their dealers necessarily assume interest rate risk simply because of the presence of excess reserves. And in the nightmare scenario, when dealers at least consider withdrawing in order to protect their own capital positions, a technical default scenario is more imaginable, unless the central bank steps in with extraordinary measures that go well beyond providing dealers with reserves. Like bank lending officers, dealers lend (i.e. buy bonds) based on risk to capital. And in the case of bank-owned primary dealers (i.e. most of them), that decision is not centered rationally on excess reserve availability."
As noted by Senexx, the post was rather long, and there was probably stuff that I missed.
Yes, the Treasury is operationally distinct from the Central Bank. The people that work there have to worry about the details such as how government payments will affect reserve balances. But such a level of detail would disappear from most macroeconomic models.
From an analytical point of view, consolidation is pretty much a necessity. The private sector in a model may distinguish between types of government liabilities (money versus debt), but there is no reason to believe that the makeup of short-duration government liabilities really matters for macroeconomic performance (assuming that the Treasury and Central Bank avoid doing things that are obviously stupid, like dropping provided reserves below required reserves).
His discussion of default and interest rate risk seemed questionable. Interest rate risk is the easiest risk on the planet to hedge; there are tons of counterparties with big balance sheets that allow the primary dealers to lay off their risk. If anything, the dealers should welcome some volatility being injected into the market; if not, they should hire some more competent traders.
If his point is that there are limits to how much long duration debt a government can get away with issuing, he is presumably correct. But so what? The sizing of Treasury issues is completely under the control of the Treasury. They could drop their issuance pattern to be only 3-month T-Bills if they so desired.
First you consolidate to get the logic. Then you can show that even if you don't consolidate the logic holds. So you can fully describe the complex system. As the MMT does. Standard scientific method. Apparently it confuses some. Weird.
Charles,
I'd assume JKH and Ramanan work in some capacity for one of these big banks on the econ staff or thereabouts... so if JKH says that is the mentality over there, I'd assume it to be accurate...
The US Treasury has this "TBAC" committee comprised of industry people at the banks who contribute like "recommendations" to the US Treasury on bond issuance and so forth so there is that avenue to facilitate coordination wrt the terms of upcoming issues, etc...
I would look at JKH and Ramanan as separate from the "bond vigilante" cohort that would include media people like Santelli and industry people like Bill Gross... I dont think JKH looks at the banks/Dealers like "vigilantes" but rather they are businesses engaged as 'fiscal agents' of the govt that have capital at risk so they make pragmatic decisions in the area of portfolio management and "interest rate risk" which their "partners" in the govt foist upon them...
I would say MMT looks upon these banks ('fiscal agents') as "private public partnerships" as well... and JKH is imo just telling the story from the "private" side of this "partnership"...
Like, to me, the govt would not be a very good "partner" if they went out and did a lot of longer duration bonds and at the same time started to raise interest rates substantially thus forcing potential markdowns on your "partner"...
so if I were a bank and had a non-zero risk assessment that my "partner" would take such a somewhat capricious/arbitrary action like that, I would probably try to build that in to my business model as a contingency at least...
i think the "MMT Position" is a policy of 90-day USTs only, if this was so, I think effectively all of this risk that JKH identifies here (as the banks see it) would go away and probably all the current (thin) margin in the business of "UST Bond Dealing" would evaporate... it would probably transition to a fixed fee based model like "$100 per $10M" or something like that... like banks do now with "25 cents per check" or whatever, ie a fee based model...
What imo pisses many in/around MMT off (myself included) with this "bond vigilantes" metaphor is the disrespect it implies to our govt institutions... gets back to the "who is in charge?" issue for us and imo we believe it is "the people" thru their institution of govt not our "private partners" the banks...
rsp,
Matt,
My point on the vigilante term is that it’s really about interest rate expectations, and not directly about the market’s perception of “affordability” or “solvency”. It’s more the politicians that think that way about “affordability” than the bond market, at least in the case of the US.
I.e. the market sells off the bond market when it expects that the Fed will have to raise interest rates. Sometimes it can also be a market voting signal that the Fed should be raising interest rates. So the vigilantism comes out of the market warning that the Fed is going to have to do something.
BTW, I don’t particularly like the term. By commenting on it, I’m not endorsing it.
I think the idea that its interest rate related should be pretty consistent with an MMT view though – i.e. that term yields are driven by interest rate expectations, as reflected in the expected path of the Fed policy rate, which should be incorporated in term bond yields.
It’s also consistent with the idea that this effect could be eradicated by eliminating the bond market or shortening up duration of bonds issue according to policy. That’s an idea that some in MMT like also.
JKH, no worries...
It has to be a tough business with "partners" like these current people in position in govt who dont even know at any level what the heck is even going on!
Even if the banks went to the govt with some new recommendations in the area of public finance that was "win/win" for the "partnership", they would STILL have to get by the Sarah Palins who think we are "borrowing from the Chinese", etc..
I could see you all going in there with some recommendations on term/rate stability or something and then the first question you would get would be "what do our Chinese lenders think of this???" or something LOL!
Hang in there up there! Appreciate your large effort here with your paper to respond from the "private" side of the "partnership" as I view it... adds to the dialogue and sheds more light on "what is really going on" in the world....
rsp,
JKH, I have a question.
You write:
"The US Federal Reserve in its current arrangement is institutionally separate from the US Treasury. An important defining feature of this separation is that the US Treasury has a bank account with the Federal Reserve. From an accounting perspective, it is an asset of the US Treasury and a liability of the Federal Reserve."
And:
"The consolidation of the financial statements of separate institutions does not negate the fact that the government still holds money as an asset and issues money as a liability – through two separate operating units."
Question:
Is the Treasury's deposit at the Fed a liability of the government?
y,
In an attempt to anticipate a possible line of questioning:
Treasury has money (TGA balances).
Treasury is a department of government.
So the government has money as reflected on Treasury’s balance sheet.
The Fed has issued money (TGA balances).
So it has a money liability in that sense.
The Fed is a department of government (in the sense we’re talking of generally).
So the government has a money liability as reflected on the Fed’s balance sheet.
So the government has both a money asset and a money liability via those two “subsidiary” operations.
If you consolidate the financial statements of those two deconsolidated entities, that item disappears.
But Treasury still has an operating balance it can use. That’s a fact.
So Treasury still has money.
So the Government still has money.
And the Fed still has a money liability.
So the Government still has a money liability.
The key thing is that the fact that one department of government has money that is a liability of another department of government is not the issue from an operational perspective.
Treasury and therefore the Government still has access to a cash operating balance it can use for real world operations in dealing with the banks.
The moral of the story:
Financial statement consolidation is not the same thing as operational consolidation.
That’s sort of a theme of my post.
Make sense or not?
I'm consolidating the non-govt sector:
Hence, when govt seeks to "increase the deficit" via a tax cut as alleged "stimulus", it doesnt help as the 'consolidated non-govt sector' is first required to save the increased amount of the bond issuance and this new savings is a leakage for at least the term of the bonds... rsp,
"the 'consolidated non-govt sector' is first required to save the increased amount of the bond issuance and this new savings is a leakage for at least the term of the bonds"
no the deficit is an addition to non-govt saving.
JKH put this quite succinctly in another post:
"for any accounting period, it is the expenditure on investment and the act of government deficit spending (as well as foreign sector effects in the more general case) that allows the actual private sector saving result."
http://monetaryrealism.com/briefly-revisiting-s-i-s-i/
JKH,
"So the government has both a money asset and a money liability via those two “subsidiary” operations"
The problem with this is that the government's money asset is also the government's money liability. So it's not really an asset for the government, even though it is an asset for the Treasury.
JKH,
"So Treasury still has money.
So the Government still has money...
...Treasury and therefore the Government still has access to a cash operating balance it can use for real world operations in dealing with the banks."
I think the problem here is that you tend to identify the government with the Treasury.
But if the Treasury and Fed are both parts of the government it doesn't really make sense to identify the government with the Treasury more than with the Fed.
y,
Hypo:
govt is planning on spending 325B in the upcoming month, projected deficit of 75B...
Hurricane hits the SE, $15B in damage, Congress does an emergency supplementary appropriation of $5b and issues $5b in FEMA debit cards to pass out in the zone over the immediate next 30 days...
increases the projected deficit by $5b to $80b, govt CANNOT spend this additional $5b without SOMEONE in the consolidated non-govt agreeing to first increase their previous savings intents by $5b to "fund" the increase in required bond issuance for this month... ie SOMEBODY in non-govt has to agree to increase their previously planned savings and agree to move an addtional $5b "from the checking to the savings" account", savings is a leakage....
rsp,
y,
It's very simple. It is a simple question of establishing facts.
Even if you consolidate the Treasury and the central bank ...
The government holds deposits at banks.
That statement alone is sufficient to prove that the government has the money.
In general, the government whichever way you define it holds domestic financial assets and foreign exchanges which is also money and not "not money".
In other words why is there so much confusion over this simple fact?
You can write a model in which the government does not hold financial assets. That's OK. In that model, the government has no money. Your model may closely resemble the way the world works.
But ...
In the real world, the government has money.
I kind of agree with your point about foreign currency.
Bank deposits are a bit more complicated because a bank deposit is a loan to a bank. If the government holds a bank deposit it has made a loan to a bank. The difference with a non-bank depositor is that the money loaned to the bank is a liability of the government itself.
"In other words why is there so much confusion over this simple fact?"
I'm not confused, I just think its incoherent to say that a government liability is a government asset.
JKH:
"The test of revenue is not necessarily the creation of an asset. The application of revenue to the reduction of liabilities is common place, and not just in government. A simple example is the payment of interest on a commercial bank loan by debit to a deposit held at the same bank."
The comparison doesn't work because the liabilities in question are very different.
A bank deposit liability is a promise to pay money, and government money is not.
When a bank's liabilities are reduced as the result of interest payment on a loan (by a debit to a deposit held at the bank), the bank's net financial assets increase. This is not the case when government liabilities are reduced through taxation.
y
This is an interesting discussion because I think you’re a person who is prepared to look at this analytically and who also has a strong view on it, but perhaps leaves the door slightly open to be persuaded otherwise, however unlikely that seems at the time.
I think and hope I’m the same kind of person. I’m open to persuasion.
So let me try this:
I think there’s a problem here in terms of a human asymmetric perception bias between the asset and liability sides of financial claims in this area. Let me expand.
Let’s simplify language by thinking of both Treasury and the Fed as being “subsidiaries” of the government.
Go back to where I started on the “having money” side of things.
So Treasury as a deconsolidated government operation has money.
There is a bank account there. It’s undeniable. Go up to the Fed and check it out if they’ll allow that. And the important thing is that this money is operationally usable in the way in which Treasury deals with the banks – pari passu as I said in the post. It’s what happens at the level of money. It’s the truth of actual financial transactions.
So the government owns Treasury, which has money.
So the government has money, via its subsidiary.
So the government has money.
At the same time, another subsidiary of government – the central bank – issues that money as a liability.
So the central bank as a deconsolidated operation has issued a money liability.
Now here is the asymmetric bias:
I say that because the central bank has a money liability, and because government owns the central bank, then the government has a money liability.
The asymmetry is that the most common perception of that statement would be that it must mean that the government has an external liability.
But that’s not a requirement for truth in logic.
If it’s the case that the government can have a true asset - money – as an internal asset, then it must also be true that the government can have a true liability – money – as an internal liability.
Both are true.
But the important operational truth is that the government has money. And it can use that money.
And therefore it is false that the government “neither has nor doesn’t have money”.
And there’s no contradiction on the liability side of things, because the perception of such a contradiction is based on a bias or false perception that the asset and liability sides of the logic are asymmetric – when in truth they are not – they are symmetric.
Also, I agree with Ramanan’s comment which focuses on the money asset side.
"the government “neither has nor doesn’t have money”.
I have to say that I have never understood this statement 'logically' so to speak...
But for myself I don't understand these systems thru 'logic' but rather IMO thru quantitative closed systems type analysis...
Tom,
What is your opinion on a statement like this from a purely 'logical' standpoint?
Would someone who is trying to come into this knowledge strictly thru logic be able to use something like this?
Just speaking for myself I don't feel I need a statement like this....
RSP,
JKH,
Say you issue an IOU (on paper) with your right hand, and then take it back with your left hand. Do you then have money, or an asset, in your left hand?
I'd say no.
What if you decided to call the IOU a liability of your right hand and an asset of your left hand. Would you then have an asset, or money, when you held the IOU in your left hand?
Not really. You could say your left hand has an asset and your right hand has a liability, but in reality when you hold the IOU you have neither an asset nor a liability.
What if you then made a rule which stated that you could only issue as many IOUs with your left hand as had previously been issued by your right hand and subsequently acquired by your left hand. Would you then have an asset, or money, in your left hand? Again, not really.
This rule would change the operational procedure for issuing IOUs with your left hand, but wouldn't change the overall logic at all.
As a result of this rule, you might find yourself in a situation where you couldn't issue IOUs with your left hand because you hadn't previously acquired enough IOUs with that hand that had previously been issued by your right hand. This means you would be constrained, by your own rule, in your ability to issue IOUs with your left hand, but it still wouldn't change the accounting logic.
The simple answer is it depends on what "money" means.
If "money" is defined economically in terms of the money supply, i.e., measures of the monetary base, M1, M2, etc. and the Treasury's account at the cb is excluded (it is), how does the Treasury "have money"?
Cash in circulation and bank reserves used to pay taxes, fees an fines that are credited to the Treasury account are not counted in the money supply, and they decrease the money supply, both M1 (deposit account or cash in circulation) and the monetary base (rb, vault cash and cash in circulation). "Destroy money."
If we say that Treasury "has money," then it seems so must we say that the central bank "has money." That's only the case in the sense that both the Treasury and Fed have the power to issue government liabilities.
In a fiat system that power is unlimited operationally and is only constrained by consequences on price level and voluntary restraints imposed by the political authority regarding Treasury and cb operations as agents of government under the direction of the political authority.
hey y,
who's taking away Treasury's asset?
who's taking away the government's asset?
who's preventing the government from using that asset as the medium of exchange in dealing with the banks?
Like I said in the post, MMT has made quite an error in portraying financial statement consolidation as if it implies operational consolidation.
It doesn't.
JKH,
I'm not sure what you mean. Could you clarify the question?
y,
I mean, who's the left hand that's preventing Treasury and the government from using the money that "it has"
in my example it's just a rule I made up, of course.
The point is that if I impose a rule on myself where I have to get IOUs into my left hand before I can 'spend' them with that hand, the basic accounting doesn't change.
You can have a rule which might limit certain actions (debt ceilings, no overdraft etc), but doesn't change the basic accounting logic.
In the real world these rules are established by congress, such as the debt ceiling and no-overdraft, etc. Whether they are really hard rules or soft is open to question I think. It's possible that the Treasury does occasionally become temporarily overdrawn at the Fed intra-day (under unusual circumstances), for example. (You might know more about that than me).
JKH,
have you read this?:
http://www.newyorkfed.org/research/current_issues/ci18-3.pdf
Thanks Matt!
Yes, always seems good to specify dollars instead of "money" when you are talking about dollar deposits.
Seems like quantity regulations on the liability side of banking and the very idea of screwing around with interest rates would seem to be the main source of credit risk in buying gov't bonds.
Seems like the relationship b/n Treasury and the FED is "operational" or the gov't checks don't clear and the point in having a banking system and a government is defeated.
Seems like primary dealer banks are public-private partnerships engaged in an additional partnership with the government.
y,
Nice paper. I think I have seen it but good to see it again with all those nice graphs!
About your point about government deposits at banks, the fact is that the government has money. It's funding the bank but even I am funding a bank when keeping deposits at a bank.
Whatever said, the government has money.
"money loaned to the bank is a liability of the government itself."
It's not true. Does one add bank deposits when calculating the US government's debt or liabilities? I haven't seen any institution or national accountants do that.
y,
Thanks. I’d seen the paper before but just read it closely again.
Everything I said in the post accords with it I believe.
Post September 16, 2008 is an entirely different story, which is a function of the production of chronic excess reserves and payment of interest on reserves and knock-on interest rate arrangements for Treasury. To be honest, I had not previously looked closely at the interest margin math that motivates Treasury to keep higher TGA balances in the zero bound era, but it makes sense. The authors suggest things may revert back to the way they were if the Fed can ever drain all those excess reserves.
Great paper. New York Fed papers are generally very well done. Tremendous information on operational detail.
Thanks for pointing to it.
Ramanan,
"Does one add bank deposits when calculating the US government's debt or liabilities? I haven't seen any institution or national accountants do that."
I didn't mean that the bank deposit is a liability of the government. The deposit is a liability of the bank.
Y/jkh,
Read the conclusion in that paper.... It sounds like in order for the Fed to be able to raise rates EVER again the Fed is going to first convince the Treasury to take steps that are 'not in the best interests of the taxpayers' and move balances OUT of the TGA FIRST (which are paying interest 'to the taxpayer') and sweep these excess TGA balances into the TTLs which will 'pay NO interest to the taxpayers'...
FAT CHANCE THAT!
These morons are probably STUCK at zero until they convince Treasury to take this step that 'is NOT in the best interests of the taxpayers'... Which Treasury may NEVER be willing to do... Hello permanent ZIRP....
RSP,
It reads like balances in the TTLs earn FFR minus 0.25 (currently zero) while in the TGA currently they earn >FFR... Why would Treasury EVER switch back?
The Fed's screwed....
Rsp
JKH,
this paper is also very good. It goes into even more detail and covers some other aspects:
http://www.ny.frb.org/research/current_issues/ci10-11.pdf
Matt,
It's a little difficult to follow, but the way it actually works is that TGA balances earn a zero rate of interest.
The reason its more advantageous for Treasury to hold balances at a zero rate is that in doing so it displaces reserves that would otherwise be on the Fed's balance sheet and would otherwise cost the interest on reserves rate. Treasury can't recover that cost by putting its balances elsewhere. So its advantageous for Treasury and the taxpayer to do it this way.
There's no question that the Fed's preferred outcome would be for a full reserve drain eventually. When that happens, things will revert to the previous configuration between TGA and TT&L, which will be advantageous to taxpayers in that environment.
I think they will eventually drain the reserves, but it could take a long time.
here are some quotes from the second paper which I think are particularly relevant to MMT:
"An important part of the decision-making process for open market operations is anticipating changes in the Treasury’s Reserve Bank balance, because increases in that balance drain reserves from the banking system while decreases in the balance supply reserves. Participants in the 9:20 conference call use the projections developed earlier in the morning by Treasury cash managers and staff of the Federal Reserve Bank of New York, as well as a third projection developed by Board staff." (p.5)
"If the Treasury deposited all of its receipts in its Reserve Bank accounts as soon as the receipts came in, and if it held the funds in those accounts until they were disbursed, increases in its
cash position would drain reserves from the banking system and, conversely, decreases would add reserves... Maintaining Treasury balances primarily at Federal Reserve Banks would, therefore, necessitate frequent and large-scale open market operations to mitigate undesirable fluctuations in bank reserves and the federal funds rate." (p.1)
"The Treasury Tax and Loan program is a cooperative effort of the U.S. Treasury and the Federal Reserve System that is important for both monetary policy and Treasury cash management." (p.9)
Well I guess what I am seeing is that currently the Treasury is getting FFR as any balances they leave in the TGA ends up reducing the Feds IOR payments and hence the Feds depo to Treasury is that much higher...
Once they try to raise, say to 1% the Treasury will be faced with a decision to either leave the TGA balances alone and effectively "earn" the FFR of 1% thru the increased Fed deposits of "profits" over to Treasury OR put the TGA balances back in the TTLs where they will earn FFR-0.25 or 0.75% (ie less than the FFR...) "for the taxpayers"...
If the Treasury leaves the TGA balances as excess reserves seems like the Fed would be faced with the same chaos in the FF market that they originally had which prompted the move over to the TTLs to begin with... but this was before the IOR...
Now with the IOR, the Treasury would have to "take a hit for the taxpayers" and move the TGA funds back into the TTLs where they "earn" 0.25% LESS than the IOR in order to help the Fed avoid the chaos...
The TGA can easily have over 100B in it overnight these days... How big is the market for FF these days? may be indicative of how much chaos in the FF market they were looking at trying to manage...
I think it is an open question as to whether the Treasury would easily agree to do this... as I have talked to those people down there and they are aaaaaaall about "doing right for the taxpayers"...
Even if they agree to do this "against the taxpayers best interests" maybe if you watch the DTS for an increase in TTL balances this would be a tip-off that they would be about ready to start raising the rates...
rsp,
You have to keep track of 3 different scenarios:
1. The way things should be...
2. The way are...
3. The way the morons think they are...
rsp,
"The Treasury Tax and Loan program is a cooperative effort of the U.S. Treasury and the Federal Reserve System that is important for both monetary policy and Treasury cash management." (p.9)
An example of what MMT calls informal consolidation. This is from the operational perspective, while both agencies maintain their own separate books.
Y,
I think your left-hand right-hand analogy captures perfectly the sacr(um)al smoke and mirrors game of Govt. $money.
$money (for me) is just a concept - like the border between Canada and the USA; like the data stored on your HD flickering in a wavering magnetic field.
Like the ‘difference’ between ‘being Canadian’ ‘Indian’ ‘American’ (besides a tiny little bit of biology) just a bunch of concepts; like the ‘difference’ between ‘being Christian’ ‘Islamic’ or ‘Atheistic’ yet another bunch of concepts. It is ridiculous to chase concepts in minutiae. The mind lives on vapour! Our compass should point towards our reality.
More visceral is ‘following the money’. How do the ‘top’ 400 families in the USA own more than the ‘bottom’ 150 million families; how do they manipulate the concepts fed to the masses (hypnotics) and wield power? How does this impact on human, national, international and environmental health, peace, security, happiness, well being, and development. These are not concepts. These are essential human experience. But it is concepts that put these fundamental necessities at risk.
If there is to be a nation like America, then it should uphold its highest ideals: the current veil of concepts are illogical and stupid, but serve to maintain the status quo. Everybody knows to chop at the root if you want to bring the tree down and turn it into something useful; pruning little branches just makes it stronger. Anybody who reads MMT knows $money is just a score – I do not care in attribution whether or not the Govt. is conceived as having or not having ‘scores’ – why obscure a fundamentally useful concept with a ‘mystical’ and useless one? I do not understand how the latter concept can be used to better what is wrong with the status quo? I do understand how the former can be used and is being used effectively.
Concepts can be used to bind or set free. All concepts have direction and carry within them their own magnetic and radiant quality, composing to form a veil that either obscures or reveals. I am always concerned with this direction and revealing nature of concepts.
Does a human being have or not have concepts? Well, both can be true.
More to the point: what is the reality of a human being? And I would say fulfilment is at the heart of this reality. So do the concepts we hold help us get there or not? Or do they lead deeper into the maze of delusional minutiae? The monetary system (if there is one) of 3013 will look a lot different to the one of today, just as today is different to 1013; but the human fundamentals will always be the same. They need to be recognised, celebrated and made manifest. Human beings need a world in which they can grow – in consciousness - where the true wealth is. It is the strength, kindness, integrity and beneficial intelligence (or absence of it) of the human persona that our systems reflect. Another way of saying this is the presence or absence of consciousness.
So for me it is always - cut to the chase! How does it help?
Y’s left-hand right-hand analogy expresses the essence of $money perfectly!
Thanks!
JKH,
from your text:
"Aphorisms are sometimes a way of dumbing down the subject matter. In the case of this particular subject matter, they can be words that suggest the feasibility of a predetermined policy orientation. For example, the government can spend its own currency into existence by “crediting bank accounts” in a counterfactual world where by contrast the normal constraint of bond issuance is lifted. But in the world that already exists, this happens with no greater logic than does household spending from a credit card or business spending from a standby line of credit, in the sense that those things act to expand the creation of broad money. The constraint structure is different, but the crediting of bank accounts is pretty similar. Indeed, it happens to an even lesser degree for Treasury with respect to the expansion of bank reserves in the existing system, according to the intention of the constraint structure. The actual rules for Treasury are even more onerous than for the other two. All sectors spend with bank accounts credited on the counterparty side. And in any event, it is a commercial bank and not the government that in the first instance credits bank accounts with the proceeds of government expenditures."
Once again you identify the government exclusively with the Treasury and not with the central bank.
Given that the central bank is part of the government, it is correct to say that the government can spend its own currency into existence by “crediting bank accounts”, regardless of whether the Treasury is required to have a positive balance in its account at the CB before it makes payments or not. When the government spends the central bank credits bank reserve accounts, and banks in turn credit their customer's deposit accounts.
This is how Warren Mosler puts it in his book:
"How the Federal Government Spends
Imagine you are expecting your $2,000 Social Security payment to hit your bank account, which already has $3,000 in it. If you are watching your account on the computer screen, you can see how government spends without having anything to spend. Presto! Suddenly your account statement that read $3,000 now reads $5,000. What did the government do to give you that money? It simply changed the number in your bank account from 3,000 to 5,000. It didn’t take a gold coin and hammer it into a computer. All it did was change a number in your bank account by making data entries on its own spreadsheet, which is linked to other spreadsheets in the banking system. Government spending is all done by data entry on its own spreadsheet called “The U.S. dollar monetary system.”
Here is a quote from the good FEDERAL RESERVE Bank Chairman, Ben Bernanke, on 60 Minutes for support:
Scott Pelley: Is that tax money that the Fed is spending?
Chairman Bernanke: It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.
The Chairman of the Federal Reserve Bank is telling us in plain English that they give out money (SPEND and lend) simply by changing numbers in bank accounts. There is no such thing as having to “get” taxes (or borrow) to make a spreadsheet entry that we call “government spending.” Computer data doesn’t come from anywhere. Everyone knows that!
...When it comes to the dollar, our government, working through its Federal agencies, the FEDERAL RESERVE Bank and the U.S. Treasury Department, is the score keeper. (And it also makes the rules!)"
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
Hi y,
I’ve never identified the government exclusively with the Treasury. You won’t find that in the post or anywhere else.
In the piece about Bernanke, which MMT uses as an example (incorrectly) all the time, it’s about central bank lending. Bernanke was referring to that and not Treasury. That was the whole point of saying that taxes were not involved - not that the Fed credits bank accounts before it borrows in the case of Treasury operations. He was very specifically not talking about Treasury.
There is no functional difference between central bank lending and commercial bank lending in terms of “crediting bank accounts” at the level of money hierarchy that applies to each. It becomes a trivial observation in the case of bank lending. So that’s a non-issue. The issue pertains to the Treasury function.
(BTW, the central bank credits reserves after commercial banks credit deposits, not before.)
Even though Bernanke was not referring to Treasury, MMT uses this example all the time as it might apply to Treasury. But in fact it doesn’t.
It was around this time that MMT began to replace its stock use of the term “spend” with “spend and lend” to conflate the two.
This is all consistent with why the characterization of existing operations should make a distinction between the two functions.
JKH,
"I’ve never identified the government exclusively with the Treasury. You won’t find that in the post or anywhere else."
You seem to in this part:
"For example, the government can spend its own currency into existence by “crediting bank accounts” in a counterfactual world where by contrast the normal constraint of bond issuance is lifted."
You say the government can't spend its own currency into existence by "crediting bank accounts" because the Treasury has to sell bonds before it can spend. But the government is not just the Treasury.
The Treasury's account is just numbers on the Fed's computer system. Government spending just involves the Fed changing numbers on its computer, i.e. crediting and debiting accounts. The currency is simply credits on that system, credits which blink in and out of existence when numbers are typed in or deleted.
As Warren says in the quote above: "Computer data doesn't come from anywhere".
The 'dollars' that the government spends are created on, and exist on, its own computer inside the Fed. When the government spends it changes numbers on that computer (credits accounts). When it taxes it changes numbers on that computer (debits accounts). The fact that the Treasury is required to have a positive balance in its account and is not supposed to be overdrawn doesn't change that.
Warren again:
"When you pay taxes by writing a check to the federal government, they debit your bank’s reserve account at the Federal Reserve Bank. Reserves can only come from the Fed; the private sector can’t generate them. If your bank doesn’t have any, the check you write results in an overdraft in that bank’s reserve account. An overdraft is a loan from the Fed. So in any case, the funds to make payments to the federal government can only come from the federal government." (p.20)
In the MMT description 'the government' includes the Treasury and the central bank.
"In the piece about Bernanke, which MMT uses as an example (incorrectly) all the time, it’s about central bank lending."
They use it to show that the Fed creates money on a computer with keystrokes. It just 'marks up accounts'. This might seem obvious to you but it isn't to many people.
"not that the Fed credits bank accounts before it borrows in the case of Treasury operations"
The Fed doesn't borrow in the case of Treasury operations.
"It was around this time that MMT began to replace its stock use of the term “spend” with “spend and lend” to conflate the two."
Warren Mosler, 'The 7 Deadly Innocent Frauds':
"To repeat: the funds to pay taxes, from inception, come from government spending (or lending). Where else can they come from?" (p.20)
JKH,
The US currency is a liability of the government. So when the government spends it issues liabilities, and when it taxes those liabilities are 'returned' to it. In effect this cancels the liability, as it is then held by the issuer. However, operationally the liability is still noted as an entry on the Fed's books and as an asset on the Treasury's books. Nonetheless for the government as a whole it adds up to zero.
As such, we can say that when the government spends it issues currency and when it taxes it does the opposite. Note that I am talking about the government here, not specifically the Treasury Department. The Treasury does not issue its own currency in the act of spending. In your 'Contingent Institutional Approach' paper, you argue that this means the government doesn't either, because you identify 'the government' with 'the Treasury'. But when MMT refers to the 'the government' it is not just referring to 'the Treasury'.
"Because the *US Treasury* is not an operational currency issuer, it obviously does not issue currency in conjunction with spending. It uses currency when it spends. There has been considerable confusion in some places on this point, extending to the characterization of *government* as an entity that issues currency as a result of spending. This is meaningless at the operational level, which is the level that is relevant to the act of government spending."
http://monetaryrealism.com/treasury-and-the-central-bank-a-contingent-institutional-approach/
As a simple example, write "IOU $1" on a piece of paper and give it to someone. Now take the IOU back. Put the IOU in a box, write "the Treasury" on a label and stick the label on the box. Do you have $1 worth of money in that box? No. Does the box contain a piece of paper with "IOU $1" written on it? Yes.
The quote from Greenspan to Paul Ryan about "unfunded liabilities" and US solvency is about fiscal, e.g., Treasury issuing tsys and the Fed purchasing them in the market to keep the rate where it wants to if it not paying IOR and just taking up the slack if there is a dearth of buyers. The Fed can always finance the bond sale to the PD's and then just buy them back.
Marriner Eccles also testified that government can always fund itself through cb/Treasury coordination of policy long previously.
y
In general, spending is fiscal, lending is monetary.
In general, treasury is fiscal, CB is monetary.
In the counterfactual that I specified in the post, treasury can spend without borrowing first.
It can’t in the factual.
No contradiction in any of that, and no way have I ever referred to the government as treasury only.
I’ve seen everything that Mosler has said on this subject. It has no bearing on what I’ve said or written here - because I've already considered it for whatever I agree with and whatever I disagree with. I understand the accounting and operations of treasury and central banking - as do the other critics. And I understand what financial consolidation means and what institutional/operational consolidation means and the difference between the two.
y
from the paper:
"In the case of actual institutional operations, and notwithstanding the logical overlay of the MMT consolidated interpretation, a specific department of government still does have money at the operating level – Treasury through its TGA balances – and Treasury is part of government. And in the case of counterfactual operations where Treasury and the central bank are indeed a single consolidated institution and the TGA balance disappears from operations, no government department has money (at least in normal cumulative deficit modes), so the characterization is false there as well (see section below on SOMA/TGA fusion, where the TGA balance disappears by intended construction). At this point, I’m not sure whether to say the aphorism fails to display the intended logic of the “consolidation hypothesis”, or succeeds at conveying the nature of its challenged logic.
Financial consolidation does not mean actual operational consolidation, unless it is accompanied by a specified counterfactual consolidation of actual Treasury and central bank operations. The consolidation of the financial statements of separate institutions does not negate the fact that the government still holds money as an asset and issues money as a liability – through two separate operating units. On the other hand, an explicit operating consolidation that whose financial statement representation looks similar to financial statement consolidation in the deconsolidated case means that the government issues money (not TGA balances but bank reserves) as a liability but it does not normally hold any form of money as an asset."
I think that's self-explanatory, and fits with what I've repeated several times. The logic is there, and nowhere do I identify the government as Treasury in the factual case.
JKH "a specific department of government still does have money at the operating level – Treasury through its TGA balances – and Treasury is part of government."
TGA doesn't count in any of the measures of money supply from the monetary base to M1, M2, etc. It has no relation to MV=PQ in any interpretation of M either.
As far as money that can be spent or saved in the economy goes, the government doesn't have money. It as liabilities to non-government that are non-government assets.
IN this sense, taxes, fees and fines withdraw (destroy) money in the economy.
Of course, government keep books and the entries on the unit of account, so the government "has money" in that that sense. But since the government is the issuer of money, the amount on the books at any time is irrelevant to the economy and economics.
The private sector can also increase money in non-government endogenously by extending credit and decrease it by paying down credit obligations. But that money is in the economy and is a chief factor in the economics of a monetary production economy, figuring in the broad money supply.
Tom, MMT doesn't even have a coherent definition of the word "money" and in fact doesn't even use the term consistently across its literature so I don't think that referring to definitions of "money" really strengthens your case here.
Saying that "the amount [of money] on the [govt] books at any time is irrelevant to the economy and economics" is a bit of an overstatement, no?
The govt does create money, but not in the sense MMT often presumes. It creates reserve balances to help settle payments occurring in inside money, it creates cash and coin to facilitate the use of an inside money account and it creates T-bonds (which are not money) in order to obtain inside money which it then redistributes through the monetary system. These specific uses of money are due to specific legal constructs, institutional design and a specific flow of funds between entities. MMT just erases a few laws, consolidates a a few entities that aren't consolidated, does a bit of rewriting of history and says "see, the accounting is the same!" How is that helpful?
There's no need for all this "new paradigm" stuff. Why must we create this tortured and inconsistent version of reality? It's not helping push the Post-Keynesian ball forward....The MR guys can explain every single thing the MMT people can without having to create this tortured version of reality. So what's the value in reinventing the wheel here?
JKH,
"the government still holds money as an asset and issues money as a liability – through two separate operating units."
That money is a liability of the government, correct?
If so, your sentence can be re-written as follows:
"the government still holds its liability as an asset and issues that asset as a liability – through two separate operating units."
Is that a logical statement?
Tom,
All the critics understand what the MMT "paradigm" is. It won't do much good to put it on continuous loop playback at this point.
The point of the post is that the "paradigm" confuses financial consolidation with operational consolidation.
The government has a bank account. It uses it to make budgetary payments. That one point in recognizing how monetary operations actually work.
You can go ahead and pretend that account doesn't exist as a result of slapping two balance sheets together - but what you're doing is pretending. It's actually known in reality as consolidating financial statements. But it doesn't change monetary operations at all. That's the confusion in the "paradigm".
You have to construct a counterfactual in order to get something like what MMT wants to believe.
y,
We don't need to rewrite it.
Just plug in the actual operating units in the sentence as is, each of which can be viewed as subsidiaries, and the statement is correct.
The point is that the TGA balance is used for payment purposes in transacting with the banking system. It's real. The fact that corresponding liability is the liability of another government unit doesn't change that fact.
As I said in the paper, the extension of paradigm is that the global economy neither has nor doesn't have money.
Zing - that's a worm hole right into neoclassical economics.
Rather ironic, that.
Don't confuse financial consolidation with operational consolidation.
Financial netting does not elimination the operation of gross accounts.
... or neither has nor doesn't have financial assets of any type.
JKH,
"Just plug in the actual operating units in the sentence as is, each of which can be viewed as subsidiaries, and the statement is correct".
Your statement:
"the government still holds money as an asset and issues money as a liability – through two separate operating units."
I'm sorry JKH but if the money in question is a liability of the government (which it is), then your sentence can be correctly re-stated as follows:
"the government still holds its liability as an asset and issues that asset as a liability – through two separate operating units."
This is not a logical statement. Yet it is what you are saying.
"You can go ahead and pretend that account doesn't exist as a result of slapping two balance sheets together"
No one is pretending the TGA account doesn't exist.
The point is that the TGA balance is used for payment purposes in transacting with the banking system. It's real. The fact that corresponding liability is the liability of another government unit doesn't change that fact.
No one denies that as far as I know. The Fed and Treasury balance sheets are available for all to see.
However, it is also possible to consolidate the government's books to determine the government's financial position overall. For example, many non-MMT'ers point out what percentage of the public debt is owned by government and therefore owed to itself. For instance, Ron Paul recommended to Congress just canceling it as irrelevant. Since Congress did not act to do it, it remains counterfactual, but obvious to anyone who looks at it.
Moreover, the cb and treasury balances are irrelevant wrt to the monetary production economy and the money available to it, other than what the cb and Treasury make available to it by lending and spending. In the US, tthe legal availability of the platinum proof coin and consol issuance, for example, show that government is not limited either financially or operationally.
The cb and treasury are not limited operationally in any way by the amounts on their books, other than the political restraints that may be imposed, such as a prohibition of cb lending to Treasury, a debt ceiling, and other such regulations that result in special cases that alter the general case operationally at present, although Congress could agree to change this. There is a bill in the House to rescind the platinum proof coin options, for instance. But as yet that has not passed and remains counterfactual.
Additionally, the US is a special case where the Fed and Treasury are not consolidated financially, nor are they formally consolidated operationally ("cb independence"). (Even this has legal limits, as beowulf and others have pointed out. In an emergency, the Treasury secretary can direct the Fed chairman to carry out administration policy.)
What MMT holds is that the Fed and Treasury are "informally" consolidated operationally (not financially), meaning that the Fed and Treasury coordinate monetary and fiscal policy so that the Treasury can meet its payment schedule and the Fed can hit its target rate while providing the necessary liquidity to the banking system. Of course, this will be reflected on the respective books.
A primary means of coordination is through the TT&L accounts, which receive funds paid by non-government to government, withdrawing them from non-government use without draining the monetary base when the Fed is not paying IOR and setting the target rate above zero. Non-government funds paid to government and held in TT&L accounts are moved to the TGA, draining the monetary base in a coordinated way so that Treasury can make its payments on time and the Fed doesn't have to engage in the level of OMO that it would have to otherwise to adjust the quantity of the base to set (monopoly) price.
Again, the threat that there will not be purchasers of tsys available without drastically raising rates or failed auctions —bond vigilantism — is unfounded in that the Fed can take the bonds on its books by purchasing them from the PD's after providing financing to the PD's if needed, thereby indirectly funding the Treasury when it is prohibited from purchasing tsys directly.
JKH: All the critics understand what the MMT "paradigm" is. It won't do much good to put it on continuous loop playback at this point.
This is is the crux of the dispute. The MMT economists deny that this is true and that what they are saying is being either misunderstood or misrepresented.
All the critics understand what the MMT "paradigm" is. It won't do much good to put it on continuous loop playback at this point.
JKH, I was not saying that for your benefit, but for others reading this thread that who may not be aware of it. I should have stated that. Sorry.
There are many type of consolidation. We have been talking about operational and financial. There are also legal and conceptual.
Financial and operational are determined by the legal and are specific to legal jurisdictions.
Conceptual may choose to abstract from legal, financial, and operational, e.g., in developing a conceptual model of the general case that abstracts from specific cases. This where MMT economists start.
Certain aspects of the general case hold across specific cases, but not all aspects.
One that does hold conceptually across the board is that when government finance is consolidated conceptually, a government liability denominated in the government's unit of account is offset by a government asset, so that if one government entity holds a government financial liability, e.g., tsys as Treasury liability, it is offset by a government financial asset held by another government entity, e.g, cb holding tsys as assets, such that the net is zero. Even Ron Paul understands this conceptually wrt to the Fed holding tsys as a Treasury liability as assets on its books and has proposed to make it legal as well.
Tom, you're way overstating the relevance of this "netting" concept. Aside from the obvious fact that you're altering laws and institutional structures to get at this netting effect, you're also ignoring its operational relevance. As JKH noted previously, the global economy does not have a positive net financial asset balance. Would you also describe the global economy as "not having" money? Of course not. But that's the logical equivalent of what you're saying here.
You can understand the solvency points MMT makes, the inflation constraint, endogenous money and 100% of the points MMT makes without having to create this alternative reality where you guys just erase certain laws and consolidate certain balance sheets where it's convenient. There is literally nothing of value added from pretending to have created a whole new paradigm here. Not one thing. All these smart Post-Keynesians like Ramanan, JKH, Lavoie, Brett, etc who are critiquing MMT understand MMT perfectly fine. They just don't see any need for reinventing the wheel here when any smart Post-Keynesian can understand all of MMT's most important points without having to create an alternative reality or pretend that there's a "new paradigm".
Cullen, you’ve just asserted one position against another when that is what the debate is all about. Obviously, the MMT economists don't agree with you and they are much more knowledgeable than I am about this. They have me convinced so far.
y,
"the government still holds its liability as an asset and issues that asset as a liability – through two separate operating units."
This is not a logical statement.
Yet it is what you are saying.
................
I didn’t say that, but there’s no real problem with it according to the framework that I’ve specified. It's quite logical in that context.
The government has two operating units as subsidiaries so to speak. Reserves are an asset of Treasury and a liability of the central bank. Treasury is part of the government, so reserves are a government asset. The central bank is part of the government, so reserves are also government liability.
I’ve said this before, but with respect, I think the mistake you are making in category logic is to suggest that in order for what I just said to be true, the asset must be a claim on something external to government and the liability must be an obligation to something external to government. It doesn’t. You are jumping the gun in moving to a consolidated mentality in attempting to disprove something that is undeniably true in the actual deconsolidated operational framework that I’ve specified. There is no requirement that reserves must be an external asset or an external liability when observing the facts of deconsolidation. This becomes manifestly evident when observing that the cash balance that the government holds, via Treasury, is used in conducting transactions with the banking system. It is very real in that sense – as real as your bank account or mine. And the fact that those balances are issued by another unit of government is irrelevant to that fact. This remains an operational fact whether you consolidate mere financial statements or not. Financial statement consolidation is not operational consolidation. Where it doesn’t remain a fact is when you actually consolidate the operations of the institution and come up with an entirely new institutional and balance sheet structure – which is what I did by specifying very explicitly the CTRB architecture in the Contingent Institutional Approach, on which I elaborated in this paper in the final section on SOMA/TGA fusion.
y
"You can go ahead and pretend that account doesn't exist as a result of slapping two balance sheets together"
If you purport to describe existing government operations according to the "consolidated hypothesis", that is the logic of what you are doing.
Financial statement consolidation is not operational consolidation.
Tom,
I can only speak for myself, but I can interpret what I see in the writings in the case of Lavoie and Fiebiger, and I feel quite certain that we all understand it.
(Can't speak for others, and can't interpret others, not having looked closely)
It's a potentially interesting point, but it doesn't remove the strong likelihood that at least a subset understands what is being said very well.
BTW, I thought MMT was the cat's meow in the first 6 months of wading through it - because it was saying things about a subject I knew quite well, but saying it in a somewhat different way. It was only after that when I began to question the way in which things were being said and began to wonder why they were being said that way. The point being that I actually took the time to learn a "foreign language" so to speak in a subject about which I have considerable depth of actual experience. And so the issue for me becomes how that subject is being presented - "taught" actually, and I have a very natural interest in that. Hence the observations, which I try to put forward as respectfully and dispassionately as I can, most of the time, in the circumstances.
JKH: "I can only speak for myself, but I can interpret what I see in the writings in the case of Lavoie and Fiebiger, and I feel quite certain that we all understand it."
This is the essence of the debate. The MMT economists disagree with Lavoie and Fiebiger on this and have said why. So far I am persuaded that the MMT economists are correct, but I am not really in a position to judge since this is way beyond my field of study.
These are significant issues that affect policy and therefore everyone in the world. It's encouraging that qualified people are debating this and confronting conventional understanding.
It's also good that the issues are being framed accessibly in the blogs, since most people are never going to read the relevant papers, even if they have the chops to do so and not confuse their own understanding with the author's intent. I confess to having read only a smidgeon of the MMT literature.
Something is inevitably lost in trying to simplify the complex and intricate for more accessibility. This is where the rhetoric and persuasion come it, since most people understand that these issues are germane to policy and so they will present them in a light that is favorable to policy they prefer. This is why there are Libertarian, conservative, liberal and progressive economists.
Since I am a constructionist more than a realist, I take the position that "reality" is experience and experience is heavily influenced by matters other than observation so that there is no "objective" observation. As Wittgenstein said, seeing is seeing-as and see-as is perspective dependent. Hardly a new revelation in that it is the message of a group of blind people describing an elephant.
Most significant issues are not disputes about fact but about different constructions. That’s the way I view this debate, too. It's doubtful that the parties will ever find agreement since they see things differently. Libertarians, conservatives, liberals, progressives and radicals live in (differently constructed) worlds.
In the end one narrative will prevail and it may not be either that of MR or MMT but rather the one that emerges victorious in a larger struggle over policy and the narrative that shapes it. Time will tell. All we can do now is do our best in our respective roles.
My role is as a popularizer. I do my best to understand what the experts are saying and present that in an accessible way.
Thanks Tom, that’s a balanced take.
“Since I am a constructionist more than a realist, I take the position that "reality" is experience and experience is heavily influenced by matters other than observation so that there is no "objective" observation. As Wittgenstein said, seeing is seeing-as and see-as is perspective dependent. Hardly a new revelation in that it is the message of a group of blind people describing an elephant. Most significant issues are not disputes about fact but about different constructions. That’s the way I view this debate, too.”
Yes, this is certainly about construction, at least as it pertains to my post. I said to somebody off-stage that I thought the crux of the issue was philosophical/epistemological, although I think epistemological may not be the best word. If I knew more about formal philosophy and you saw my intention more clearly in dissecting the detail of the logical construction, the ensuing discussion might be quite interesting.
JKH: "Yes, this is certainly about construction, at least as it pertains to my post. I said to somebody off-stage that I thought the crux of the issue was philosophical/epistemological, although I think epistemological may not be the best word. If I knew more about formal philosophy and you saw my intention more clearly in dissecting the detail of the logical construction, the ensuing discussion might be quite interesting."
Yes. I was preparing a response but it is a bigger topic than a comment can handle. I'll work up a post on it when I get a chance. This spans logic, ontology, and epistemology with the debate extending over millennia. It's a hot topic in philosophy of economics now, too.
See the link I put up to David Ruccio's post on essentialism v. constructivism today here. I commented in the thread too.
JKH, I just put up a post by Daniel Little on ontology, epistemology and philosophical logic that addresses knowledge construction in a preliminary way.
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