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.
Can Mosler Norman or anyone make a graph showing deficit levels and shade in grey the US recessions and slow growth "almost" recessions ?
Or a black line for deficit and then shade/color the vertical with red/recession to yellow/slow-growth to green/high-growth instead of grey vertical bars for recessions.
This would be the definitive MMT graph for showing how government spending generates growth.
Make a green line for savings, purple for credit expansion, blue line for relative strength of dollar... etc
Can anyone Tom or Matt ask Mosler or Norman to generate?
At least swap out the grey vertical shading which represents recession with red, then shade the slow growth time periods with yellow, and then green for highest relative growth.
Should look like a tie dye shirt laid out, but it would be interesting.
Between red and yellow have orange, and between yellow to green have bluish ...
How should have he phrased it if he were "in paradigm" ?
No problem with the wording. Krugman and Greenspan already recognized currency sovereignty publicly, just as MMT had been saying all along, and so has Stiglitz. The mainstream is catching up.
Idk Tom I really don't like the term 'printing money'. It just sounds silly and irresponsible, and makes people immediately think hyperinflation. Notice how the audience laughed a little when Stiglitz said that.
"the U.S. can always print money to pay its debts..." (Weak.)
I have been having success with the following:
Either turn the question around and ask the questioner: "Do you think we will run out of dollars?"
or...
Simply state, "We can't run out of dollars." Period. And leave it at that.
The logic of both responses is clear and brutal. It stops them dead in their tracks.
But if they persist and say, "Yeah, but that's printing money." You say, "All government spending is printing money and printing money in any quantity does not lead to inflation." (A bit of an exaggeration, but necessary.)
The last part of that sentence makes them go crazy. They will jump all over you for that, but that's what you want.
Then you say:
"In a modern, competitive economy, printing money leads to higher output of goods and services as firms and entrepreneurs respond to the higher demand that comes from higher incomes. More supply means prices don't rise. And more real wealth is created. It's a win, win."
Let them try to refute that. All they will be able to say is inflation, but you just disproved it.
"Idk Tom I really don't like the term 'printing money'. It just sounds silly and irresponsible, and makes people immediately think hyperinflation. Notice how the audience laughed a little when Stiglitz said that."
Well, the MMT answer about crediting bank accounts sounds just as flaky. But that's what fiat is. People need to just get over it.
Even on a gold standard, government "just prints money." That's the nature of paper money and what governments do.
Even striking coins with seigniorage is also "fiat" to the extent of the discrepancy between the nominal value or face value, and real value as the actual market value of the metal contained in the coin. But even this is uneven, since coins wear down over time.
People just need to get over it, unless they are advocating for a bullion standard. They they would have to carry assessing equipment around with them to be sure that they are getting the amount bargained for.
Stiglitz' quip about the only problem being a lack of electricity to run the printing press is straight from James Galbraith. Galbraith said the exact same thing when he was last on RT.
MMT largely rests on the idea that there is very little difference between government bonds and base money. So printing and spending more 'money' is not necessarily any more inflationary than printing and issuing more bonds. If you can convince someone of that, then you can win the MMT argument. If you can't, then they will continue to think you're crazy.
"All government spending is printing money and printing money in any quantity does not lead to inflation."
y, it is about the price the govt pays for things, or the price that the govt allows its fiscal agents (ie "the banks") to lend against things...
Trying to create a relationship between "money printing" and the price level is 100% monetarist and therefore wrong.
eg When the govt raises the conforming loan limits it allows the GSEs to establish, the average home price increases... etc...
If govt came out and said that they would not allow an auto loan of more than $20k then we would be all driving decent mid-sized 4-cyl cars that cost 20k... etc...
"Under current normal operations, the Govt doesnt create any new "money".
That is clearly incorrect.
"Taxing and spending = bank deposit asset swaps"
What does 'bank deposit asset swap' mean?
When the govt taxes a non-bank person or business, their bank deposits (or other form of monetary wealth) decrease by the amount of the tax paid. Bank deposits are deleted in the process of paying taxes to the Treasury.
If I have to pay $100 in taxes, I instruct my bank to make the payment to the Treasury on my behalf. My bank deletes my $100 deposit (i.e. deletes $100 from my account) and pays $100 in reserves to the Treasury on my behalf.
When the Treasury spends and makes payments to non-banks, bank reserves and bank deposits both increase by the same amount.
Quite right you are that when looked at through half the transaction, taxing reduces bank deposits and spending increases them. I should have qualified my statement better.
"The NET effect of current normal operations results in basically a zero wrt to bank deposits for any fiscal year."
"what does bank deposit asset swap mean?" It means exactly what it says. Just work through any of the accounting and you'll see.
"Bank deposits are deleted (extinguished) in the process of buying bonds from the Treasury. They are not 'swapped'.
Again, you are talking about an individual transaction, I am referring to the NET effect of the whole.
The T-bond buyer swaps bank deposits for securities deposits The recipient of Govt spending receive (in the aggregate) the bank deposits that the T-bond buyer swapped.
"The T-bond buyer swaps bank deposits for securities deposits. The recipient of Govt spending receive (in the aggregate) the bank deposits that the T-bond buyer swapped."
Not logically possible as the bank deposit ceased to exist when the T-bond was purchased.
I'm not saying that the recipient of Govt deficit spending is getting "your" personal BDs. That is logically impossible. Only that the sum of the double entry accounting on the total number of BDs in existence is zero ceterus paribus
MMT largely rests on the idea that there is very little difference between government bonds and base money. So printing and spending more 'money' is not necessarily any more inflationary than printing and issuing more bonds. If you can convince someone of that, then you can win the MMT argument. If you can't, then they will continue to think you're crazy.
Those that think that bonds neutralize spendable money think that "printing money" in excess will lead to inflation and issuing bonds in excess will lead to insolvency.
The ability of governments is issue currency without limit if they are currency sovereigns, removes the insolvency issue but leaves the inflation issue as the sole financial constraint.
MMT shows how this is actually a real constraint in that as long as the economy can expand sufficiently to meet increasing demand, there will be no inflation problem under full employment.
So there can be an inflation issue with issuing "too much money," but only if it is transmitted through increasing demand relative to the capacity to produce supply to satisfy it.
"Those that think that bonds neutralize spendable money think that "printing money" in excess will lead to inflation and issuing bonds in excess will lead to insolvency."
T-bonds DO neutralize "spendable money" aka bank deposits.
In theory Question: Is deficit spending via T-bonds more inflationary than reserve only deficit spending?
In theory answer: Yes, because reserve only deficit spending = a net increase in "spendable money" aka BDs.
How big a difference? This is THE question IMHO. On one hand, QE demonstrates that deficit spending in reserves only is NOT inherently inflationary. On the other hand, QE has never been implemented under "normal" conditions" (if there is such a thing). Which leads us back to my initial point, I have become increasingly more convinced that the differing propensities to consume is THE most fundamental economic relationship for understanding the impacts of Govt spending.
Lets take 3 scenarios for example: 1) 20% of GDP taxing and spending (balanced budget).
2) 20% spending and 10% taxing of GDP (10% of GDP deficit) with a bond issuance model.
3) 20% spending and 10% taxing of GDP (same 10% deficit) with a reserve only model.
Which of these 3 scenarios will result (theoretically) in greater GDP = output? And why?
Its my position that the difference in GDP = output between the 3 examples will be mainly derived from the propensities to consume. Lets assume there is no foreign sector.
For #1: If the implementation of taxing results in 100% being paid by the 1% and the implementation of spending results in 100% being given to the 99%, the GDP result should be the same as #2 IF:
In #2, the implementation of taxing and bond issuance results in 100% of taxation and bond purchases coming from the 1% and 100% of spending is given to the 99%.
Obviously in this scenario the only differences (Net BDs = zero) would be the 10% of GDP wealth left over from the deficit spending. This most likely influences borrowing and lending positions. So here is a real potential difference in the 2 examples.
Now what happens when we add #3? BDs go up by 10%, but if those BDs were never going to spent on real goods and services (for the most part) anyway, then we get a QE scenario. Financial assets may appreciate, but the real economy will be largely unaffected.
Again, what conclusions can we realistically draw from 3 different options for implementing Govt spending?
Credit expansion decisions? and Propensities to consume?
T-bonds DO neutralize "spendable money" aka bank deposits.
1. Many consider the cb buying tsys to be "printing money," which they conclude is inflationary because it increases spending power. According to MMT, when the db buys and sells tsys in the private sector using PD's, the composition of $NFA is affected but not the amount. Under endogenous money, the cb always makes liquidity for bank credit available, and when not setting the rate to zero or paying IOR, this means purchasing government securities to increase rb in order to provide desired liquidity at the target rate. Of course, under a zero rate or payment of IOR, the cb can purchase any quantity of tsys without necessarily increasing spending and buying back tsys doesn't necessarily decrease spending either. Similarly when the cb credits accounts in bond redemption. This doesn't increase propensity to consume.
2, According to MMT, when private parties either buy or sell tsys to each other the amount of rb and tsys stay the same in aggregate. So many conclude that tsys neutralizes government speeding with forced saving. However, as MMT economists point out, this doesn't decrease the ability to spend if there is a desire, since the tay market is highly liquid and saving can be converted to spendable funds immediately. Also, tsys are the most secure form of collateral.
Spendable funds are not neutralized by tsys issuance. Tsys just provide a default free safe asset when issued by a currency sovereign. There are not guarantees about inflation other than TIPS. If tsys were not issued, then saving would take place in somewhat riskier assets. But this would likely affect saving desire only marginally and not increase spending substantially.
"1. Many consider the cb buying tsys to be "printing money," which they conclude is inflationary because it increases spending power."
Obviously, QE is not inherently inflationary. The impact that QE has on inflation is limited to the propensities to consume of the sellers of T-bonds. And as we've seen, they are not spending that money in the real economy. This is a point in the column of the position that Reserve only deficit spending is not significantly more inflationary than the other 2 alternatives (balanced budget and T-bond issuance).
"According to MMT, when the db buys and sells tsys in the private sector using PD's, the composition of $NFA is affected but not the amount. Under endogenous money, the cb always makes liquidity for bank credit available, and when not setting the rate to zero or paying IOR, this means purchasing government securities to increase rb in order to provide desired liquidity at the target rate. Of course, under a zero rate or payment of IOR, the cb can purchase any quantity of tsys without necessarily increasing spending and buying back tsys doesn't necessarily decrease spending either. Similarly when the cb credits accounts in bond redemption."
I understand and have accounted for all this.
"This doesn't increase propensity to consume."
No, it wouldn't necessarily. But the differing propensities to consume is the factor that is determinative of the resulting change in GDP = output. Which is my claim.
"2, According to MMT, when private parties either buy or sell tsys to each other the amount of rb and tsys stay the same in aggregate. So many conclude that tsys neutralizes government speeding with forced saving."
It is forced savings in the aggregate. Just like reserves can never leave the CB balance sheet (ignoring cash), T-bonds can never leave the CB balance sheet in the aggregate.
"However, as MMT economists point out, this doesn't decrease the ability to spend if there is a desire, since the tay market is highly liquid and saving can be converted to spendable funds immediately."
Exactly, T-bonds are never an impediment to spending on an individual level, however, they are in the aggregate. At any point in time we can infer that only people who don't want to spend their money on anything else, have their money in securities accounts at the CB. Because as soon as an individual changes their mind about their securities account, they can sell swap BDs and T-bonds with someone else.
"Also, tsys are the most secure form of collateral."
Right, which is why the impacts of the T-bond model must include the resulting effects on lending and borrowing along with the propensities to consume (propensities being more impactful than the credit impact IMHO)
"Spendable funds are not neutralized by tsys issuance."
The accounting shows that thats false in the aggregate.
"Tsys just provide a default free safe asset when issued by a currency sovereign. There are not guarantees about inflation other than TIPS."
Understood
"If tsys were not issued, then saving would take place in somewhat riskier assets. But this would likely affect saving desire only marginally and not increase spending substantially."
Exactly, another point in the column of explaining why Reserve only deficit spending would not be significantly more inflationary than our current T-bond model.
Sounds to me like you don't think that there is much of a difference between the 2 deficit spending models. I am pretty much in your camp on this one.
"Spendable funds are not neutralized by tsys issuance."
The accounting shows that thats false in the aggregate.
Conceivably the entire aggregate of tsys held by private parties or any portion of it can be used as collateral for spending on investment and consumption.
Tsys are money-good before redemption due to their widespread use as collateral, e.g., in repo.
Right, and that means more $NFA created in the process than without tsys issuance, which Warren Mosler points out adds an inflationary bias to tsys issuance.
If the non-bank private sector ends up with zero bonds after deficit spending - it will have gained extra dollar deposits in the process.
If it does buy up the bonds, it gains less liquid assets (compared to deposits) but with a promise to pay extra cash in the future (bond coupon payments).
Which is more inflationary? It will depend on the surrounding circumstances, the momentary psychology of private sector agents, etc.
For instance, when bond markets are effectively frozen (USA in WWII, maybe?) then private agents won't be able to convert newly acquired bonds into "extra spending". Until the thaw comes, bond issuance has resulted in lower spending than non issuance - in this particular case. Likely, a reason for compulsory bond financing during total wars.
But in other more "normal" situations, the promise of interest payments may lead private agents to spend more than would be the case with extra bank deposits. In such cases, Mosler's dictum will prove true.
This is getting exhausting. The ACCOUNTING demonstrates that BDs are neutralized by T-bond issuance in the aggregate.
If you want to talk about the ways that T-bonds can still be "spent" or otherwise impact GDP through lending and borrowing as Tom attempted, then I am all ears.
But if you want to dispute the double entry accounting, then by all means, it should be easy to show how BDs are not neutralized by T-bond issuance.
I was just re-reading our conversation and I realize that you've already made my point for me with the accounting:
"If I want to BUY $100 in T-bonds, I instruct my bank to make the payment to the Treasury on my behalf. My bank deletes my $100 deposit (i.e. deletes $100 from my account) and pays $100 in reserves to the Treasury on my behalf.
When the Treasury spends and makes payments to non-banks, bank reserves and bank deposits both increase by the same amount."
I substituted your 'have to pay taxes' to my 'want to buy T-bonds' and we can clearly see that the NET effect on BDs of the combined transactions is ZERO.
This is getting exhausting. The ACCOUNTING demonstrates that BDs are neutralized by T-bond issuance in the aggregate.
If you want to talk about the ways that T-bonds can still be "spent" or otherwise impact GDP through lending and borrowing as Tom attempted, then I am all ears.
But if you want to dispute the double entry accounting, then by all means, it should be easy to show how BDs are not neutralized by T-bond issuance.
It's a stock-flow issue. The neutralization view argues that the stock of tsys is not spendable, which is correct. However, why is important here is not the stock but the flow.
The fixed stock of tsys doesn't limit the flow of spending since 1) tys are easily salable by an entity wishing to invest or consume to another entity that prefers to save at the time, and 2) tsys are regularly used as collateral, e.g., repo for short term funding.
So the stock can remain the same but velocity of flow can increase or decrease, just as in the money-goods identity, MV=PQ, where the stock of money (M) can remain constant but the flow (V) can change, which by identity yields the same result as changing the money stock and keeping the velocity constant.
There's a difference between negotiable bonds and non-negotiable, like war bonds. Unlike tsys, war bonds could only be redeemed early as the government permits and not sold on a market. This effectively neutralizes that amount of money until maturity. This is not the case with tsys. If it were, no one would be concerned with deficit spending being inflationary, which some people clearly are, and as MMT admits beyond the level at which additional aggregate demand can be absorbed by expanding supply.
It comes down to the fact that Europe does not want war with Iran ( maybe all those centrifuges say "made in Germany" and "made in Russia" ) and so they are withholding liquidity to prevent war.
America follows with withholding spending and liquidity is drained. Not to prevent a war, but because Republicans are holding out on our president because he is not white. Democrats understand ?
"If govt came out and said that they would not allow an auto loan of more than $20k then we would be all driving decent mid-sized 4-cyl cars that cost 20k... etc..."
40 comments:
What do you mean Tom ?
How should have he phrased it if he were "in paradigm" ?
Can Mosler Norman or anyone make a graph showing deficit levels and shade in grey the US recessions and slow growth "almost" recessions ?
Or a black line for deficit and then shade/color the vertical with red/recession to yellow/slow-growth to green/high-growth instead of grey vertical bars for recessions.
This would be the definitive MMT graph for showing how government spending generates growth.
Make a green line for savings, purple for credit expansion, blue line for relative strength of dollar... etc
Can anyone Tom or Matt ask Mosler or Norman to generate?
At least swap out the grey vertical shading which represents recession with red, then shade the slow growth time periods with yellow, and then green for highest relative growth.
Should look like a tie dye shirt laid out, but it would be interesting.
Between red and yellow have orange, and between yellow to green have bluish ...
Presidential Spending
What do you mean Tom ?
How should have he phrased it if he were "in paradigm" ?
No problem with the wording. Krugman and Greenspan already recognized currency sovereignty publicly, just as MMT had been saying all along, and so has Stiglitz. The mainstream is catching up.
Is there a graph that shows how deficits go up when recessions go away and growth occurs?
ie growth as a function of government spending
Idk Tom I really don't like the term 'printing money'. It just sounds silly and irresponsible, and makes people immediately think hyperinflation. Notice how the audience laughed a little when Stiglitz said that.
Rather than stating it as follows:
"the U.S. can always print money to pay its debts..." (Weak.)
I have been having success with the following:
Either turn the question around and ask the questioner: "Do you think we will run out of dollars?"
or...
Simply state, "We can't run out of dollars." Period. And leave it at that.
The logic of both responses is clear and brutal. It stops them dead in their tracks.
But if they persist and say, "Yeah, but that's printing money." You say, "All government spending is printing money and printing money in any quantity does not lead to inflation." (A bit of an exaggeration, but necessary.)
The last part of that sentence makes them go crazy. They will jump all over you for that, but that's what you want.
Then you say:
"In a modern, competitive economy, printing money leads to higher output of goods and services as firms and entrepreneurs respond to the higher demand that comes from higher incomes. More supply means prices don't rise. And more real wealth is created. It's a win, win."
Let them try to refute that. All they will be able to say is inflation, but you just disproved it.
Thanks Mike those were very good narratives to use. I will use them.
"Idk Tom I really don't like the term 'printing money'. It just sounds silly and irresponsible, and makes people immediately think hyperinflation. Notice how the audience laughed a little when Stiglitz said that."
Well, the MMT answer about crediting bank accounts sounds just as flaky. But that's what fiat is. People need to just get over it.
Even on a gold standard, government "just prints money." That's the nature of paper money and what governments do.
Even striking coins with seigniorage is also "fiat" to the extent of the discrepancy between the nominal value or face value, and real value as the actual market value of the metal contained in the coin. But even this is uneven, since coins wear down over time.
People just need to get over it, unless they are advocating for a bullion standard. They they would have to carry assessing equipment around with them to be sure that they are getting the amount bargained for.
Bullion would lead to hyper problems
Stiglitz' quip about the only problem being a lack of electricity to run the printing press is straight from James Galbraith. Galbraith said the exact same thing when he was last on RT.
"All government spending is printing money and printing money in any quantity does not lead to inflation."
that's not really correct though, is it?
MMT largely rests on the idea that there is very little difference between government bonds and base money. So printing and spending more 'money' is not necessarily any more inflationary than printing and issuing more bonds. If you can convince someone of that, then you can win the MMT argument. If you can't, then they will continue to think you're crazy.
"All government spending is printing money and printing money in any quantity does not lead to inflation."
y, it is about the price the govt pays for things, or the price that the govt allows its fiscal agents (ie "the banks") to lend against things...
Trying to create a relationship between "money printing" and the price level is 100% monetarist and therefore wrong.
eg When the govt raises the conforming loan limits it allows the GSEs to establish, the average home price increases... etc...
If govt came out and said that they would not allow an auto loan of more than $20k then we would be all driving decent mid-sized 4-cyl cars that cost 20k... etc...
rsp,
Under current normal operations, the Govt doesnt create any new "money". Taxes and bond issuance are nothing but "asset swaps" just like QE.
Taxing and spending = bank deposit asset swaps
Bond issuance = bank deposits are swapped but the bond buyer still has the financial wealth
reserve only spending creates new "money"
"money" is defined narrowly as something you can transact with. you can't spend T-bonds for example.
So what is the most important thing when judging the economic impacts of any of the 3 mechanisms for Govt spending?:
differing propensities to consume.
"Under current normal operations, the Govt doesnt create any new "money".
That is clearly incorrect.
"Taxing and spending = bank deposit asset swaps"
What does 'bank deposit asset swap' mean?
When the govt taxes a non-bank person or business, their bank deposits (or other form of monetary wealth) decrease by the amount of the tax paid. Bank deposits are deleted in the process of paying taxes to the Treasury.
If I have to pay $100 in taxes, I instruct my bank to make the payment to the Treasury on my behalf. My bank deletes my $100 deposit (i.e. deletes $100 from my account) and pays $100 in reserves to the Treasury on my behalf.
When the Treasury spends and makes payments to non-banks, bank reserves and bank deposits both increase by the same amount.
"Bond issuance = bank deposits are swapped but the bond buyer still has the financial wealth"
Bank deposits are deleted (extinguished) in the process of buying bonds from the Treasury. They are not 'swapped'.
"reserve only spending creates new "money"
Deficit spending involving the sale of bonds to banks leads to a net overall increase in bank deposits (i.e. broad money).
"money" is defined narrowly as something you can transact with. you can't spend T-bonds for example."
That is not the definition of money, it is a partial definition of money. You can spend Treasury bonds, but not in your local corner shop.
Y-
Quite right you are that when looked at through half the transaction, taxing reduces bank deposits and spending increases them. I should have qualified my statement better.
"The NET effect of current normal operations results in basically a zero wrt to bank deposits for any fiscal year."
"what does bank deposit asset swap mean?"
It means exactly what it says. Just work through any of the accounting and you'll see.
Google:
http://research.stlouisfed.org/fred2/graph/?graph_id=156732&category_id=0
Here is the best demonstration of the concept that small deficits always ultimately lead to recessions
"Bank deposits are deleted (extinguished) in the process of buying bonds from the Treasury. They are not 'swapped'.
Again, you are talking about an individual transaction, I am referring to the NET effect of the whole.
The T-bond buyer swaps bank deposits for securities deposits
The recipient of Govt spending receive (in the aggregate) the bank deposits that the T-bond buyer swapped.
"The T-bond buyer swaps bank deposits for securities deposits.
The recipient of Govt spending receive (in the aggregate) the bank deposits that the T-bond buyer swapped."
Not logically possible as the bank deposit ceased to exist when the T-bond was purchased.
"It means exactly what it says"
What it says doesn't mean anything.
"Not logically possible as the bank deposit ceased to exist when the T-bond was purchased."
Yes, the T-bond buyer's 1000 in BDs cease to exist after the transaction.
And yes, the recipient of the deficit spending gets brand newly created 1000 in BDs.
The NET effect on BDs = zero
just like a said. The accounting is not difficult so I don't know why you want to disagree with me on this.
I'm not saying that the recipient of Govt deficit spending is getting "your" personal BDs. That is logically impossible. Only that the sum of the double entry accounting on the total number of BDs in existence is zero ceterus paribus
MMT largely rests on the idea that there is very little difference between government bonds and base money. So printing and spending more 'money' is not necessarily any more inflationary than printing and issuing more bonds. If you can convince someone of that, then you can win the MMT argument. If you can't, then they will continue to think you're crazy.
Those that think that bonds neutralize spendable money think that "printing money" in excess will lead to inflation and issuing bonds in excess will lead to insolvency.
The ability of governments is issue currency without limit if they are currency sovereigns, removes the insolvency issue but leaves the inflation issue as the sole financial constraint.
MMT shows how this is actually a real constraint in that as long as the economy can expand sufficiently to meet increasing demand, there will be no inflation problem under full employment.
So there can be an inflation issue with issuing "too much money," but only if it is transmitted through increasing demand relative to the capacity to produce supply to satisfy it.
Tom-
"Those that think that bonds neutralize spendable money think that "printing money" in excess will lead to inflation and issuing bonds in excess will lead to insolvency."
T-bonds DO neutralize "spendable money" aka bank deposits.
In theory Question: Is deficit spending via T-bonds more inflationary than reserve only deficit spending?
In theory answer: Yes, because reserve only deficit spending = a net increase in "spendable money" aka BDs.
How big a difference? This is THE question IMHO.
On one hand, QE demonstrates that deficit spending in reserves only is NOT inherently inflationary. On the other hand, QE has never been implemented under "normal" conditions" (if there is such a thing). Which leads us back to my initial point, I have become increasingly more convinced that the differing propensities to consume is THE most fundamental economic relationship for understanding the impacts of Govt spending.
Lets take 3 scenarios for example:
1) 20% of GDP taxing and spending (balanced budget).
2) 20% spending and 10% taxing of GDP (10% of GDP deficit) with a bond issuance model.
3) 20% spending and 10% taxing of GDP (same 10% deficit) with a reserve only model.
Which of these 3 scenarios will result (theoretically) in greater GDP = output? And why?
Its my position that the difference in GDP = output between the 3 examples will be mainly derived from the propensities to consume. Lets assume there is no foreign sector.
For #1: If the implementation of taxing results in 100% being paid by the 1% and the implementation of spending results in 100% being given to the 99%, the GDP result should be the same as #2 IF:
In #2, the implementation of taxing and bond issuance results in 100% of taxation and bond purchases coming from the 1% and 100% of spending is given to the 99%.
Obviously in this scenario the only differences (Net BDs = zero) would be the 10% of GDP wealth left over from the deficit spending. This most likely influences borrowing and lending positions. So here is a real potential difference in the 2 examples.
Now what happens when we add #3? BDs go up by 10%, but if those BDs were never going to spent on real goods and services (for the most part) anyway, then we get a QE scenario. Financial assets may appreciate, but the real economy will be largely unaffected.
Again, what conclusions can we realistically draw from 3 different options for implementing Govt spending?
Credit expansion decisions?
and
Propensities to consume?
T-bonds DO neutralize "spendable money" aka bank deposits.
1. Many consider the cb buying tsys to be "printing money," which they conclude is inflationary because it increases spending power. According to MMT, when the db buys and sells tsys in the private sector using PD's, the composition of $NFA is affected but not the amount. Under endogenous money, the cb always makes liquidity for bank credit available, and when not setting the rate to zero or paying IOR, this means purchasing government securities to increase rb in order to provide desired liquidity at the target rate. Of course, under a zero rate or payment of IOR, the cb can purchase any quantity of tsys without necessarily increasing spending and buying back tsys doesn't necessarily decrease spending either. Similarly when the cb credits accounts in bond redemption. This doesn't increase propensity to consume.
2, According to MMT, when private parties either buy or sell tsys to each other the amount of rb and tsys stay the same in aggregate. So many conclude that tsys neutralizes government speeding with forced saving. However, as MMT economists point out, this doesn't decrease the ability to spend if there is a desire, since the tay market is highly liquid and saving can be converted to spendable funds immediately. Also, tsys are the most secure form of collateral.
Spendable funds are not neutralized by tsys issuance. Tsys just provide a default free safe asset when issued by a currency sovereign. There are not guarantees about inflation other than TIPS. If tsys were not issued, then saving would take place in somewhat riskier assets. But this would likely affect saving desire only marginally and not increase spending substantially.
"1. Many consider the cb buying tsys to be "printing money," which they conclude is inflationary because it increases spending power."
Obviously, QE is not inherently inflationary. The impact that QE has on inflation is limited to the propensities to consume of the sellers of T-bonds. And as we've seen, they are not spending that money in the real economy. This is a point in the column of the position that Reserve only deficit spending is not significantly more inflationary than the other 2 alternatives (balanced budget and T-bond issuance).
"According to MMT, when the db buys and sells tsys in the private sector using PD's, the composition of $NFA is affected but not the amount. Under endogenous money, the cb always makes liquidity for bank credit available, and when not setting the rate to zero or paying IOR, this means purchasing government securities to increase rb in order to provide desired liquidity at the target rate. Of course, under a zero rate or payment of IOR, the cb can purchase any quantity of tsys without necessarily increasing spending and buying back tsys doesn't necessarily decrease spending either. Similarly when the cb credits accounts in bond redemption."
I understand and have accounted for all this.
"This doesn't increase propensity to consume."
No, it wouldn't necessarily. But the differing propensities to consume is the factor that is determinative of the resulting change in GDP = output. Which is my claim.
"2, According to MMT, when private parties either buy or sell tsys to each other the amount of rb and tsys stay the same in aggregate. So many conclude that tsys neutralizes government speeding with forced saving."
It is forced savings in the aggregate. Just like reserves can never leave the CB balance sheet (ignoring cash), T-bonds can never leave the CB balance sheet in the aggregate.
"However, as MMT economists point out, this doesn't decrease the ability to spend if there is a desire, since the tay market is highly liquid and saving can be converted to spendable funds immediately."
Exactly, T-bonds are never an impediment to spending on an individual level, however, they are in the aggregate. At any point in time we can infer that only people who don't want to spend their money on anything else, have their money in securities accounts at the CB. Because as soon as an individual changes their mind about their securities account, they can sell swap BDs and T-bonds with someone else.
"Also, tsys are the most secure form of collateral."
Right, which is why the impacts of the T-bond model must include the resulting effects on lending and borrowing along with the propensities to consume (propensities being more impactful than the credit impact IMHO)
"Spendable funds are not neutralized by tsys issuance."
The accounting shows that thats false in the aggregate.
"Tsys just provide a default free safe asset when issued by a currency sovereign. There are not guarantees about inflation other than TIPS."
Understood
"If tsys were not issued, then saving would take place in somewhat riskier assets. But this would likely affect saving desire only marginally and not increase spending substantially."
Exactly, another point in the column of explaining why Reserve only deficit spending would not be significantly more inflationary than our current T-bond model.
Sounds to me like you don't think that there is much of a difference between the 2 deficit spending models. I am pretty much in your camp on this one.
"Spendable funds are not neutralized by tsys issuance."
The accounting shows that thats false in the aggregate.
Conceivably the entire aggregate of tsys held by private parties or any portion of it can be used as collateral for spending on investment and consumption.
Tsys are money-good before redemption due to their widespread use as collateral, e.g., in repo.
"All government spending is printing money
...except when the non-bank private sector ends up owning more government bonds in the process.
That pretty much sums it up.
Right, and that means more $NFA created in the process than without tsys issuance, which Warren Mosler points out adds an inflationary bias to tsys issuance.
"Spendable funds are not neutralized by tsys issuance."
The accounting shows that thats false in the aggregate."
Auburn, you haven't actually demonstrated that, you have simply asserted it.
If the non-bank private sector ends up with zero bonds after deficit spending - it will have gained extra dollar deposits in the process.
If it does buy up the bonds, it gains less liquid assets (compared to deposits) but with a promise to pay extra cash in the future (bond coupon payments).
Which is more inflationary? It will depend on the surrounding circumstances, the momentary psychology of private sector agents, etc.
For instance, when bond markets are effectively frozen (USA in WWII, maybe?) then private agents won't be able to convert newly acquired bonds into "extra spending". Until the thaw comes, bond issuance has resulted in lower spending than non issuance - in this particular case. Likely, a reason for compulsory bond financing during total wars.
But in other more "normal" situations, the promise of interest payments may lead private agents to spend more than would be the case with extra bank deposits. In such cases, Mosler's dictum will prove true.
Y -
This is getting exhausting. The ACCOUNTING demonstrates that BDs are neutralized by T-bond issuance in the aggregate.
If you want to talk about the ways that T-bonds can still be "spent" or otherwise impact GDP through lending and borrowing as Tom attempted, then I am all ears.
But if you want to dispute the double entry accounting, then by all means, it should be easy to show how BDs are not neutralized by T-bond issuance.
Never mind Y-
I was just re-reading our conversation and I realize that you've already made my point for me with the accounting:
"If I want to BUY $100 in T-bonds, I instruct my bank to make the payment to the Treasury on my behalf. My bank deletes my $100 deposit (i.e. deletes $100 from my account) and pays $100 in reserves to the Treasury on my behalf.
When the Treasury spends and makes payments to non-banks, bank reserves and bank deposits both increase by the same amount."
I substituted your 'have to pay taxes' to my 'want to buy T-bonds' and we can clearly see that the NET effect on BDs of the combined transactions is ZERO.
This is getting exhausting. The ACCOUNTING demonstrates that BDs are neutralized by T-bond issuance in the aggregate.
If you want to talk about the ways that T-bonds can still be "spent" or otherwise impact GDP through lending and borrowing as Tom attempted, then I am all ears.
But if you want to dispute the double entry accounting, then by all means, it should be easy to show how BDs are not neutralized by T-bond issuance.
It's a stock-flow issue. The neutralization view argues that the stock of tsys is not spendable, which is correct. However, why is important here is not the stock but the flow.
The fixed stock of tsys doesn't limit the flow of spending since 1) tys are easily salable by an entity wishing to invest or consume to another entity that prefers to save at the time, and 2) tsys are regularly used as collateral, e.g., repo for short term funding.
So the stock can remain the same but velocity of flow can increase or decrease, just as in the money-goods identity, MV=PQ, where the stock of money (M) can remain constant but the flow (V) can change, which by identity yields the same result as changing the money stock and keeping the velocity constant.
There's a difference between negotiable bonds and non-negotiable, like war bonds. Unlike tsys, war bonds could only be redeemed early as the government permits and not sold on a market. This effectively neutralizes that amount of money until maturity. This is not the case with tsys. If it were, no one would be concerned with deficit spending being inflationary, which some people clearly are, and as MMT admits beyond the level at which additional aggregate demand can be absorbed by expanding supply.
It comes down to the fact that Europe does not want war with Iran ( maybe all those centrifuges say "made in Germany" and "made in Russia" )
and so they are withholding liquidity to prevent war.
America follows with withholding spending and liquidity is drained.
Not to prevent a war, but because Republicans are holding out on our president because he is not white. Democrats understand ?
"If govt came out and said that they would not allow an auto loan of more than $20k then we would be all driving decent mid-sized 4-cyl cars that cost 20k... etc..."
Matt - This is a ridiculous statement.
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