Thursday, May 21, 2015

Benziga — New Book Explores Country's Modern Monetary System, Federal Spending

"The National Deb(i)t: How the Post-Gold Standard Modern Monetary System Really Works" offers insights on Treasury bonds, modern monetary theory, printing money, the debt ceiling and national debt. For instance, Delzio writes, since leaving the gold standard, the federal government now taxes its residents and businesses to regulate economic aggregate demand, not to finance spending. With its monopoly of control over dollars, the Federal Reserve Bank routinely swaps dollars for assets, acting as the banking agent for the federal government.
Federal government's spending does not just revolve on federal taxes and borrowing, leading to a spending limit – far from it. In a national economy, mass consumption and mass production must work together, and once that happens, federal deficit spending can begin to move toward balance. Above all, Delzio calls for diversity of thought about monetary policy, writing that it is just as valuable as diversity in investments, especially when it comes to the subject of the national debt.
Author Edward Delzio serves as an investment advisor representative with Primerica Advisors in Westchester County, New York. He spent nearly 30 years as a Treasury bond broker at RMJ, Cantor Fitzgerald, and eSpeed….
New Book Explores Country's Modern Monetary System, Federal Spending

THERE IS AN innocent false impression of our present day economic ecology that widely exists today. This collective misunderstanding mostly arises from a failure to distinguish the completely separate monetary functions of the United States federal government, from the monetary functions of everyone else. Since the gold standard era ended, the federal government operates under a new paradigm, different from what we were taught long ago, and different from what we are still told today. Certain idiosyncratic relics from that bygone-gold-standard era, like the formality of needing to raise a debt ceiling to increase federal government deficit spending, or the tradition of selling Treasury bonds to finance that spending, still clumsily coexist with today's post-gold-standard reality. As a result, the important needs of the rest of us, to balance our individual budgets, are routinely confused and often commingled with the more important needs of the federal government, to balance their entire economy.

In the gold-standard era, the US federal government, then a user of dollars backed by gold, needed to finance deficit spending by raising revenue via taxation, or by selling debt in the form of bonds, which are today called US Treasury bonds. When it left the gold standard, however, the federal government completely changed, from being a user of dollars (backed by gold), to becoming the issuer of dollars (that are not backed by gold). Today, in the post-gold-standard era, the function of financing federal government deficit spending has also completely changed, and Treasury bonds now play a new multifunctional role in our modern monetary system.

All US Treasury securities (short-term bills, medium-term notes, and long-term bonds) are a safe investment for all users of dollars because all US Treasury securities are risk-free, interest-bearing, time deposits in the Securities, or savings account, at the US central bank, the Federal Reserve. Treasury bonds are actively traded in a liquid global Treasury bond market which serves as a safe harbor for dollars taking flights to quality away from risky assets, into risk-free assets like Treasury bonds, during global market turbulence. Treasury bonds are used in monetary policy to set the price of dollars, or, the interest rate of money, and to keep the economy growing smoothly by accommodating or tightening economic conditions to achieve full employment and price stability. Treasury bonds are used in fiscal policy to help grow the economy whenever increased federal government deficit-spending is needed to stimulate aggregate demand. Furthermore, Treasury bond issuance today serves to neutralize the inflationary effect of newly printed, freshly created, fiat dollars that now finance federal government deficit spending.

The federal government is the issuer of dollars, and everyone else - you, me, all households, all businesses, any US local cities, US states, or foreign governments (all together, this book will refer to these as the "nonfederal government"), are the users of dollars. In today's modern monetary system, all dollars are initially added by federal government deficit-spending, and they multiply from nonfederal government deficit-spending. All dollars are printed, or created, by both federal-government and nonfederal-government deficit spending, and far from being a problem, this is how the economy grows. Injections of newly created dollars from both federal-government deficit spending and nonfederal-government deficit spending kick that flywheel, a yin-yang of supply and demand, to keep it spinning in a steady balance along with all other existing dollars in the economy. Post-gold-standard, the federal government, the issuer of dollars, doesn't need to borrow dollars to deficit-spend anymore, but the nonfederal government, the users of dollars, still does.


John said...

Has anyone read it? Is it worth reading? Any negatives?

Matt Franko said...

This book is like talking in Martian to a libertarian. ...

Unknown said...

Since when does issuing TSY bonds "neutralize the inflationary effect of printed dollars"?

I would have thought that QE would have finally put a stake through the heart of this economic myth. Does Japan need to go to a 100% reserve only model with no inflation before people finally accept such an obvious observation?

Owning TSY bonds does NOT prevent any individual entity from spending its savings. Sure its forced savings in the aggregate but then again, so are reserves. IF the Govt never issued a single TSY bond, and all deficit spent US currency was held exclusively in reserve accounts, then still in the aggregate those reserves would be "saved" at any one point in type and yet no individual's spending would be negatively impacted.

The only plausible deterrent to any individual TSY bond holder's spending would be in a rising rate environment where the T-bond holder didnt want to sell and recognize a capital loss.

But this is fundamentally different then T-bonds "neutralizing" inflationary reserves (whatever that means)

Matt Franko said...

.Auburn they think it is about quantity not price...

John said...

So a pop MMT book by someone who has misunderstood MMT. That's not helpful, and I note the lack of admiring blurbs or reviews by any MMTers. You'd think the least he would do is send it out to get it proofread by MMTers.

Unknown said...


Quantity of what? Why is the most liquid type of all M2 money (term deposits) be any less inflationary then demand deposits?

IOW if you deficit spend $1 trillion in reserves or $1 trillion in securities, the quantity is the same. Hell, even the price (very nearly) could be the same if the TSY only issued 3-6 mo T-notes.

I am utterly confused by this myth. Is the transmission mechanism for this type of fable "banks lending out all those new reserves" thinking?

Matt Franko said...

Auburn they want price stability... so lets say they want to ramp up spending on Medicare Rx Drugs, or No Child Left Behind, or standing up the Dept of Homeland Security. ...

These new efforts result in new and increased spending so just like the War Bonds in WW2, what they think is that since they are spending more than they take in, if they first require SOMEONE to save before they spend the additional amounts, iow if they issue 25B of 5 year bonds then SOMEONE has agreed to save 25B for 5 years so they think they have deferred the spending of the non-govt by an amount = to the additional 25B for 5 years...

Meanwhile, in their purchasing strategy they are ignoring the prices they are paying for things on a unit cost basis... so if the Rx firms jack up the price of Diabetes treatments by 10% they just pay it as they have already made somebody save 25B for 5 years...

They should pay more mind to the unit PRICE they are actually paying for or loaning against things rather than the total spending they do...

Right now structural steel prices are in the toilet. ... so if they were by some miracle to ramp up infrastructure spending by 50B and went out to buy steel and the steel companies were able to get a 15% increase to stick they would think that was ok because they sold 50B ofadditional Build America Bonds... meanwhile they pay the steel people 15% more and scratch their heads asking themselves "why has steel gone up?"

Rather than keeping track of where steel prices have been for the last 5 years and dictating what they will pay per ton... its this "dictating" part that the libertarian human pieces of shit currently running things have a problem with..

I saw it first hand during Iraq reconstruction the contractors wiped out lumber inventories here in the Mid Atlantic plywood tripled the DoD contractors had a blank check... they were paying $40+ for a sheet of plywood you can get today for $13 as the govt is out of the marketplace.. housing prices doubled, fomented a crisis in the banks when they exited the market. ..

But to them that should have been no problem as they were issuing bonds equivalent to what they were spending (QUANTITY ) above what they were taking in... they're morons. ..

Meanwhile the libertarians are happy as the govt can be seen as a price taker..

If they want price stability they should be mindful of what actual price the govt pays for things ... rsp

Unknown said...

Many thanx to MIKE NORMAN ECONOMICS for mentioning the book, it is much appreciated...eddie delzio

P.S. For a better explanation of T-bonds "neutralizing" inflationary reserves (selling T-Bonds to the public exclusively instead of 'monetizing' them to offset 'high-powered' dollars), may I recommend 'Beckoning Frontiers' by Marriner Eccles who posits that forcing the Fed to support Treasury's pegged interest rates "created a multiple reserve feedback loop (quoting Fed Chairman Eccles)that caused post WWII inflation, and ultimately increased the interest costs of the Korean war". Eccles won this argument with both Treasury and the White House, and as a result, the Fed gained independence with the Treasury /Fed Accord on March 4, 1951.

Tom Hickey said...

Thanks of the Eccles reference, Eddie.

Unfortunately, Beckoning Frontiers is out of print and used copies are pricey.

Here is a link to a short article explaining the Treasury accord and the role that Marriner Eccles played..

Federal Reserve History
Treasury-Federal Reserve Accord - March 1951
Jessie Romero, FRB Richmond

Unknown said...

Appreciate it, Tom.

Also thank you very much for posting the head's up about the book last month, I am thrilled it was seen on Mike Norman's website...

I got lucky that the local library here has a wide network, I was easily able to take out Eccles' memoir. The most intriguing part for me was that it was Eccles himself (not the inflationary bias of Keynesianism) which not only formed the foundations of the New Deal when Eccles first testified in a 1933 Senate Finance Committee, but also that it is his original thinking and actions even before leaving the West for Washington DC to become first Fed Chair that we today call MMT.

eddie delzio

Unknown said...

P.S. What is meant by Treasury bond sales neutralizing the inflationary bias of newly-created dollars that are created by federal gov't deficit spending: As the price setter of dollars, the fed (the wizard behind the curtain) at its core performs two basic functions, A) It does a reserve add to stoke inflation, and B) it does a reserve drain to check inflation.

"The very act of selling Treasury securities, that's a reserve drain, that's all the sale of Treasury securities is, it's a reserve drain." Mike Norman 02/04/17