Wednesday, July 29, 2015

Blankfein on rate hike


You hate to agree with Blankfein but I think he is correct here.




A rate hike is our best chance of getting any increase in the leading government spending flows any time soon.


68 comments:

Anonymous said...

Recent weakness of the dollar looks like fear of rate increase derailment, with a partial correction today. Lackluster as U.S. economic activity may be, it's better than any other major market.

Dan Kervick said...

I don't see how a rate hike would increase the total flow of dollars in the economy in the net. If rates on government debt goes up, the treasury's interest expenses go up. If treasury expenses go up, the treasury either collects more revenue or increases its debt issuance. Both processes lead to more dollars being extracted from the economy, the first via taxes, the second via private sector purchases of securities.

Michael Norman said...

Whaaaaattt???????

Dan Kervick said...

In our system, the one we actually have rather than the imagined one we could have instead, the Treasury spends by drawing on the funds in its accounts at the central bank. If those accounts have insufficient funds, the treasury sells debt. If the treasury sells debt, the buyer gives the treasury dollars in exchange for a security. There is no third way for the treasury to spend.

Anonymous said...

Someone who wants to save gets a security and someone who wants to spend gets a deposit, hence a net increase in spending.

Dan Kervick said...

Possibly, but you could get the same increase in spending by just taxing savers and not giving them any money in return.

Anonymous said...

Yes, a negative incentive on saving can induce spending, but as things currently stand it's easier to just mark up accounts.

Dan Kervick said...

I'm not talking about "inducing" spending Ben. I'm just pointing out that if you want more spending, one way to get it is for the public to simply take money from people who are not spending it, and then to spend it.

There is no such things as just "marking up accounts" under the current system. When the Treasury spends, the recipient's account is marked up, but the Treasury's account is marked down by the same amount. The treasury then needs to replenish the funds if it wants to spend more. The Fed is just the Treasury's banker.

We could have a different system, of course, in which directly marking up accounts was a permissible operational moves. But we don't.

Matt Franko said...

Treasuries can be bought by the dealers with credit Dan...

In any case we look at what we call leading spending flow... its total Treasury withdrawals minus Treasury securities redemptions... this number would go up with higher rates as govt pays higher amounts of interest on the short term bonds that are rolled over post the rate increase....

Savers would get a shot in the arm via higher interest payments they receive...

We dont look at the deficit or the "M" quantities we look at what the govt "spends first"....

Rsp

Tom Hickey said...

When the Treasury auctions a security (Treasury liability) and credits the Treasury account (Fed liability, Treasury asset) for spending, after spending the aggregate amount of settlement balances (Fed liabilities, bank assets) is the same (settlement balances (Fed liabilities, bank assets) used to buy the tsys are replaced by Fed crediting banks with settlement balances (Fed liabilities, bank assets) from Treasury spending , the aggregate credits in non-government deposit accounts (bank liability) in the same (deposit accounts debited to purchase securities are offset by credits to deposit accounts from spending), and non-government's stock of tsys increases in the amount of spending in aggregate. This is an increase in non-government net financial assets in aggregate. Non-government holds Treasury securities (Treasury liability) as assets.

These are the stocks after the flows have been accounted for. It's the flow of funds from spending through the economy that affects demand.

Jose Guilherme said...

If treasury expenses go up, the treasury either collects more revenue or increases its debt issuance. Both processes lead to more dollars being extracted from the economy, the first via taxes, the second via private sector purchases of securities

Not necessarily.

If the "private sector" buying the Treasuries is the banking sector, then no dollars will be extracted from the economy - because the banks can buy the Treasuries simply by expanding their balance sheet.

In the end, the banks will hold more Treasuries - and the public (individuals or corporations) will hold more bank deposits as a result of the deficit spending "financed" with bond sales.

Matt Franko said...

Jose here in the US we have Primary Dealers that are BD divisions of banks that buy all the Treasury securities at the auctions FIRST in the manner you point out... and THEN later deal them to clients who "made money" and want to save this "money" (ie USD balances) in Treasury securities accounts... rsp

Matt Franko said...

Jose,

Here's the list:

http://www.newyorkfed.org/markets/pridealers_current.html

Mostly banks... perhaps some are just BDs but even those would have bank relationships backing them from somewhere...

I looked into getting in to it you need $200M to get in so I am coming up short about $199.9M ...

rsp,

Dan Kervick said...

"In any case we look at what we call leading spending flow... its total Treasury withdrawals minus Treasury securities redemptions... this number would go up with higher rates as govt pays higher amounts of interest on the short term bonds that are rolled over post the rate increase...."

Why do you only look at the outflow Matt? What about changes in the inflow?

Dan Kervick said...

"... the aggregate credits in non-government deposit accounts (bank liability) in the same (deposit accounts debited to purchase securities are offset by credits to deposit accounts from spending),"

... which is also the result if the money is taxed from the private sector and then spent back into it.

"... and non-government's stock of tsys increases in the amount of spending in aggregate."

That is an important difference. But it is also the case in the borrow-and-spend model the debt service obligations of the Treasury have increased by the amount of the security+interest. The amount and maturity structure of those obligations represent the size of the future required draw of the treasury on the private sector, over various time periods. If rates go up and the interest component increases, you may get larger treasury payouts over the long-run, but you also get larger treasury draws over that time period to collect the funds needed to fulfill the Treasury's obligations.

The point is that under the system we actually have in place - one where there is no unfunded "marking up" of accounts, minting of high denomination coins, greenbacking etc. - the treasury functions just like any other entity with an account at the central bank. The inflows of dollars to and outflows of dollars from those accounts balance out. We could have a different system but we don't.

Dan Kervick said...

If the "private sector" buying the Treasuries is the banking sector, then no dollars will be extracted from the economy - because the banks can buy the Treasuries simply by expanding their balance sheet.

That's an important point Jose. It indicates that to understand the potential macroeconomic impact of the various different kinds of fiscal policies, it is not enough to look at the dollar flows between government and private sectors. We need to look at the difference between MB and M2, and which forms the outflows take.

Brian Romanchuk said...

Dan,

Although you are right that "marking up accounts" is too much of a simplification, but bond issuance by the Treasury has to be offset by central bank lending to the private sector. Therefore, there is no net decrease in the private sector's liquid asset position.

In my book, I wrote about this using the Canadian "no reserves" system as a baseline. My feeling is that the existence of reserves makes the analysis too complicated, and you end up with arguments like this.

Dan Kervick said...

"... but bond issuance by the Treasury has to be offset by central bank lending to the private sector."

I don't see why that would necessarily be the case Brian. If the government issues and sells more bonds in order to increase its spending, then the offset is accomplished by the increased spending itself. The central bank doesn't need to increase its lending to preserve the private sector's stock of liquid government assets.

Matt Franko said...

You have to examine it in time domain Dan...

I think Brian has member banks in his private sector and the CB in the govt sector...

Remember member banks can leverage their capital account.. so if they have 100M in a capital account they can probably buy 1B+ of govt bonds ...

So to simplify, if the govt issues 1B of new securities, the "non-govt" in the form of a bank, only needs 100M to buy the 1B of new bonds...

"What about changes in inflow?"

Dan I go back to my training in electrical systems theory (I have a cognitive bias for this) this is analogous to thermal loss in a motor circuit, its not like you don't want to ultimately be aware of thermal loss (ex post in order to determine circuit efficiency) but what matters is what the motor output is towards what purpose you are trying to achieve...

So if you are flooding and you need to increase motor output of a pump, you increase the rpm thru the motor controller to get your gallons/min increase you need... thermal loss will also increase at the same time but that is not related to what you are trying to do.... think of taxes as analogous to thermal loss in this case...

its like the 'conservation of energy' principle: "energy cannot be created or destroyed but only changed... yada yada" This is true for a closed system but it doesn't mean that we cant get anything accomplished utilizing energy because 'everything sums to zero" ... you have to foremost look at the parts of the system that are actually accomplishing something... yes you are never going to have 100% efficiency but that doesn't mean nothing is getting done...

rsp,

Brian Romanchuk said...

Dan,

If we ignore changes in notes and coins, bond issuance would reduce reserves. If we are in a non-QE environment, or in Canada, where "reserves" are always equal to zero, that reserve drain has to be made up. The central bank either has to lend money to the private sector via repos, or buy back debt (which can be viewed as functionally equivalent to lending). Those compensatory actions have to occur by the "end of the day." Isolating just the auction itself loses the required balancing mechanism.

This is in my book; I will eventually post excerpts. But even if you do not want to bother with my book, just force reserves to always equal zero, and look at how transactions occur. You can then add back reserves into your model, and you will see that they do not change matters.

Jose Guilherme said...

By "forcing" net reserve changes to zero, either of the following situations may arise at the end of a process with deficit spending financed by bond issuance:

1. The banks buy the Treasuries: in that case, for every $100 of deficit spending, we'll have + $100 of Tsys held as Assets by the commercial banks and + $100 bank deposits held by households and/or corporations

2. The households and/or corporations buy the Treasuries: in that case we'll have just + $100 of Tsys held by the non bank private sector (households and/or corporations).

In any of these cases, NFAs of the private sector rise by $100.

Jose Guilherme said...

On the Canadian system of zero reserves (or "settlement balances"), the following excerpt from the Lavoie and Seccareccia textbook is to the point:

To achieve the target overnight rate, the Bank of Canada supplies bank notes on demand and it usually sets the supply of settlement balances to zero...(T)his is called settlement-balance management, which is done by shifting government deposits from the central bank to banks, or vice-versa (Macroeconomics Principles and Policy, page 301)

Dan Kervick said...

"If we ignore changes in notes and coins, bond issuance would reduce reserves."

Brian, sure that would be true if you look at the bond issuance all by itself. But governments never issue bonds just for the sake of issuing bonds, but only to spend. The reserves that are drawn down as bonds are purchased are restored by the spending that goes out the door at the same time. So the central bank repos and reverse repos to maintain the target rate would only be modest adjustments to smooth out the transient bumps of the daily flows.

Basically, governments don't hoard. They build the balances they need only to carry out planned spending.

Brian Romanchuk said...

In your original comment, you said that bond issuance would drain money from the private sector. It doesn't, as you now seem to be arguing. I was responding to your original comment.

From a technical perspective, any net spending by the Trasury forces the central bank to compensate by the end of the day. It has to undertake operations to offset the creation of reserves. The odds of bond issuance matching net spending on any given day is minuscule; bond issuance is extremely lumpy.

Matt Franko said...

Dan consider the reserves used to buy the bonds are created in real-time in the banking/dealer system for the specific purpose of buying the bonds..... they dont use previously issued reserves to buy the bonds... rsp

Dan Kervick said...

Brian, what I said in that first comment was that bond issuance drains reserves, while the principal and interest payments add reserves. The point was just that if the interest payments go up, the treasury will either have to tax more or issue more debt to make those increased payments. So, the extra additions of reserves are counterbalanced by increased reserve drains.

Dan Kervick said...

Dan consider the reserves used to buy the bonds are created in real-time in the banking/dealer system for the specific purpose of buying the bonds.

I don't really know what that means Matt. The banks don't simply manufacture their own assets. To buy bonds, they make payments from their accounts.

Auburn Parks said...

Dan-

Increased interest spending (any deficit spending) adds financial wealth to the non-Govt. Its not any more complicated than this. The makeup of the NFAs is largely irrelevant as QE has ably demonstrated. More reserves and less securities or less reserves and more securities doesnt make much of a macroeconomic impact. Its the total # of Govt liabilities outstanding that matters.

Auburn Parks said...

Dan-

And dollars that flow into M2 are not "extracted from the private sector" any more than dollars that into TSY securities. Where do you come up with this stuff? You used to be a respected opinion on these matters.

Matt Franko said...

Dan the Fed can do a repo with the dealers to provide reserves at the time of the auction.... the dealers just woyld need to deal the bonds to a client before the end of the repo period they have with the Fed.... rsp

Tom Hickey said...

There are two extreme scenarios, neither of which actually happens but could. The first is the scenario in which all tsys issued in a period are purchased using bank deposits. The changes to accounts — stocks and flows — is set forth there.

The second is that the tsys are purchased by the dealers and then quickly bought back by the central bank. Then the amount of settlement balances is the same — dealers pay using settlements and then the Fed buys the issue back using settlement balances. Deposit account increase in the amount of spending and transfers. This could even be done with the dealers buying the securities using their overdraft privilege and then repaying the loan to the central bank with the settlement balances the cb exchanges in the repurchase. This is essentially the same as the central bank purchasing the issue directly from Treasury. It just circumvents the rule against direct purchase.

What actually happens most of the time occurs along the range between the extremes. The issue is purchased by the dealers who keep some for their inventory and sell the rest on. Those sold on get purchased by other banks for their inventory and o non-bank entities. Some may be purchased by the Fed as part of implementing monetary policy through OMO or POMO.

This is constantly shifting with different decisions made by the parties participating, the major player being the central bank, which is continually adjusting the size of the monetary based in terms of liquidity desire and the policy rate, maintaining the amount of liquidity necessary to clear while also maintaining the policy rate.

Whatever, the Treasury spends using securities issuance at present rather than notes and coin. Some think that this makes a difference wrt outcomes, and others not so much.

I think it can make a difference politically and therefore economically, but not operationally. Operationally,it doesn't make much difference other than the interest paid on the securities, which is a non-issue when the central bank purchases tsys.

Moreover, the interest makes no difference operationally, since the interest is also paid through issuance.

The sole operational constraint on the currency issuer is availability of real resources and price level. These are two sides of the same coin, financial and real.

But it can make a difference politically through debt fetishism and adopting policy based on it. This affects the economy as a whole.

Tom Hickey said...

It doesn't make any difference operationally where the cb sets the reserve requirement. This just adjusts the cost of banks' doing business.

It doesn't make any different operationally where the cb sets the policy rate either, although this will have financial and economic effects.

Whatever the cb decides wrt reserve requirement and policy rate, the cb has to supply liquidity to clear while maintaining its chosen policy rate.

Dan Kervick said...

"Increased interest spending (any deficit spending) adds financial wealth to the non-Govt. Its not any more complicated than this. The makeup of the NFAs is largely irrelevant as QE has ably demonstrated. More reserves and less securities or less reserves and more securities doesnt make much of a macroeconomic impact. Its the total # of Govt liabilities outstanding that matters."

I have never seen a single piece of careful empirical analysis providing any evidence that changes in private sector "net financial assets" is a macroeconomically significant quantity. An economy can grow during any given period, and increase its levels of consumption, investment and savings even if the financial assets in that economy consistently net to zero throughout that period.

Also, as I pointed out before, while increased treasury interest spending injects more dollars into the economy, to make those increased interest payments the treasury needs to acquire more dollars - which means taxing them out of the economy or swapping more debt for them. So a commitment by the treasury to more interest spending requires a concomitant commitment to a higher level of of dollar extraction to fund the payments.

There is no such treasury operation as "marking up accounts" or "directing the Fed to mark up accounts." The Fed is the treasury's banker, and the treasury spends the same way other enterprises spend, by drawing on its bank account. Nothing flows out of the treasury that hasn't previously flowed into it. Again, we could create a different system if we wanted to, but we haven't created that system at this point.

Dan Kervick said...

Dan the Fed can do a repo with the dealers to provide reserves at the time of the auction.... the dealers just woyld need to deal the bonds to a client before the end of the repo period they have with the Fed.... rsp

What is the significance of that Matt? If the dealer enters a repurchase agreement with the Fed to get a reserve advance, then it is committed to buying back the securities it has sold. It's not a net injection of reserves by the Fed. It's just a loan. The Fed gives the dealer some reserves in exchange for a security, and then the dealer buys the security back with the same amount of reserves.

Tom Hickey said...

" The Fed is the treasury's banker, and the treasury spends the same way other enterprises spend, by drawing on its bank account.":

That it tops up by issuing tsys, which the Fed liquifies indirectly through auctioning the tsys to the dealers and ensuring that the liquidity is available to purchase them, It's effectively the same as the Fed buying the tsys directly from Treasury. There are no bond vigilantes, and the asserton that tsys are bought with bank credit is just false.

Tom Hickey said...

I don't want to be cavalier about this, but, "I have never seen a single piece of careful empirical analysis providing any evidence that changes in private sector "net financial assets" is a macroeconomically significant quantity. An economy can grow during any given period, and increase its levels of consumption, investment and savings even if the financial assets in that economy consistently net to zero throughout that period," appears to me to be cavalier.

First, what "empirical testing" and "evidence" mean in macro is hardly agreed upon in the profession, and there is considerable controversy over it in philosophy of science, philosophy of social science, philosophy of mathematics, and philosophy of economics.

The issues leveled I criticism of social "science" relate to this. It is therefore not a very relevant criticism of MMT.

Theories are not testable. However, assumptions can be examined empirically, and it is assumed that in a science major hypotheses can be "tested empirically" at least in the sense that they are falsifiable. But even Popperianism is no longer the received dogma it used to be.

I'm not going to get into an analysis of this here or state a summary view of it, but rather note that this is an ongoing controversy that is hardly resolved.

If one rejects the MMT position, then one needs to put forward a macro theory that generates "testable hypotheses," or the conclusion is that macro is not (yet) an "empirical" science (like most of physics) but a science only in a looser sense, e.g., Keynes's "moral science." But the cutting edge of physics doesn't appear to be empirical in any ordinary sense either.

This is an issue worth raising, and I doubt it can be resolved in this thread. But it is something we should be returning to.

Matt Franko said...

Dan its sig here because the Dealer uses the repo/loan of reserves to buy the newly issued Treasury securities at the auction... ie the reserves are "created" specifically to buy the Treasury securities...

Lets say the repo period is 30 days, then the dealer buys Treasury securities on day 1 of the repo period at the auction with these loaned reserves and deals them to clients in 25 days... then they are ready to do the same thing next month... the clients (who are in the non-govt) buy the securities with new net USDs that they receive from the UST account via new govt spending...

So its not like "neutral" ... iow, I see your point where you say "if the govt spends after having issued UST securities then there is no net new USD issued as they have to issue bonds FIRST".... BUT.... that is not what happens via the dealer system... no preexisting reserves are used to buy the Treasury securities via the dealer system... the dealers use new reserves that are created SPECIFICALLY for the dealers to buy bonds at the auction.... the dealers will deal these securities to clients AFTER those clients receive the USD balances from the new govt spending...

So lets say govt DOD wants to increase the amount they spend for fuel for military operations by 10B this month ... dealers have 10B pre existing bonds, they repo the bonds and use the reserves provided by the Fed via the repo to buy ANOTHER 10B of bonds, the TGA is credited the reserves the dealers just borrowed from the Fed via the repo and the dealers take the bonds... the dealers then sell the bonds to the oil companies who get the 10B from the TGA in payment for the fuel and then the oil co has the bonds, the dealers get reserves back in time to repurchase the original 10B in bonds they gave the Fed in the original repo...

No previously issued reserves are used in this transaction... rsp,

Tom Hickey said...

"If the dealer enters a repurchase agreement with the Fed to get a reserve advance, then it is committed to buying back the securities it has sold. It's not a net injection of reserves by the Fed. It's just a loan. The Fed gives the dealer some reserves in exchange for a security, and then the dealer buys the security back with the same amount of reserves."

What it means is that the auction clears, the Treasury account is credited for spending. Instead of purchasing the tsys directly from Treasury and crediting the Treasury account, the cb made it happen indirectly.

The point is that under the conventional theory tsys are bought with bank credit and this competes in the private sector against the private sector for loanable funds (intermediation of deposits), crowding out investment. That does not happen.

Tom Hickey said...

No previously issued reserves are used in this transaction... rsp,

To put it in another way, the Treasury cannot run an overdraft with the Fed and the Fed cannot lend to the Treasury or purchase securities directly. But the Fed can do all these thing with the dealers (an banks in general), so it can use the backdoor instead of dealing with the Treasury directly, which has been taken off the table.

Marriner Eccles explains this in congressional testimony (Eccles, 1947), telling Congress that they can close the backdoor if they choose, but it would risk chaotically volatile markets, which is what central banking was instituted to avoid.

Dan Kervick said...

First, what "empirical testing" and "evidence" mean in macro is hardly agreed upon in the profession, and there is considerable controversy over it in philosophy of science, philosophy of social science, philosophy of mathematics, and philosophy of economics.

Sorry Tom, you're general philosophy of science ruminations won't hunt here. There is nothing mysterious about the methods that would be used for the kinds of empirical studies that would be needed to evaluate hypotheses about the alleged causal dependency of changes in various macroeconomic values on changes in either private sector or non-government sector net financial assets. We know how to measure and gather statistics on the quantities that would be tested, and we know how to apply tests for causation to these statistics.

Dan Kervick said...

Lets say the repo period is 30 days, then the dealer buys Treasury securities on day 1 of the repo period at the auction with these loaned reserves and deals them to clients in 25 days... then they are ready to do the same thing next month... the clients (who are in the non-govt) buy the securities with new net USDs that they receive from the UST account via new govt spending...

Matt, the dollars received from the UST are not "new". The treasury spends from its account. Those accounts accumulate their dollar balances by either taxing from the non-government sector or selling additional securities to the non-government sector. In our system, only the Fed is involved in any substantial way in the issuance of new dollars.

Also, in your account of what the dealers are doing each month you left out the fact that each time a dealer temporarily sells securities to the Fed in exchange for reserves, it acquires a new equivalent liability, since it has a contract to re-purchase those securities (in your example, in 30 days). Repos are just loans against good collateral, and as you know, a loan does not increase the net financial assets of the borrower.

Dan Kervick said...
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Dan Kervick said...
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Dan Kervick said...

What it means is that the auction clears, the Treasury account is credited for spending. Instead of purchasing the tsys directly from Treasury and crediting the Treasury account, the cb made it happen indirectly.

Sure, but that's just a way of making a loan to the Treasury. The Treasury has a obligation to the Fed for the amount of the securities the Fed now has in its portfolio.

Matt Franko said...

"Those accounts accumulate their dollar balances by either taxing from the non-government sector or selling additional securities to the non-government sector."

This is not technically accurate Dan.

The govt gets its balances by (taxing/fees) and by selling additional securities to DEALERS... these dealers are licensed/regulated agents of the said government itself...

If the dealers had USD balances in a bank account and went to the auctions and bought the securities with these previously issued USD balances then I would somewhat agree with you....

They don't use existing deposit balances to buy at auction they transact with the Fed (govt) using repo of previously issued govt securities to temporarily obtain NEW reserves issued by the Fed (govt) itself for the express purpose of buying NEW bonds to temporarily hold them in inventory as available for sale until the Treasury spends these new net USDs from the TGA into the non-govt and THEN the DEALERS can deal the bonds into the non-govt sector...

You have to include the role and functions of the dealers in the analysis... rsp,

Auburn Parks said...

Dan-

You are so far off the deep end here. "I have never seen a single piece of careful empirical analysis providing any evidence that changes in private sector "net financial assets" is a macroeconomically significant quantity." Since the quantity of NFAs is dependent on the level of deficit spending, what you just said here is that there is no evidence that deficits contribute to the economy macroeconomically. Which is just as dumb a comment as any an austrian goldbug would make.

GDP = Govt spending + non-Govt spending - Net Imports

Deficits increase GDP by definition either via increased direct spending = Increased GDP
Increased transfers = increased Non-Govt spending = Increased GDP
Tax cuts = increased Non-Govt spending = Increased GDP

So there is your empirical evidence, the way we calculate GDP proves you wrong from the outset, its a tautology that increased deficits increase GDP.

We await your mea culpa

Dan Kervick said...

Sorry Auburn, but you are wrong. Deficits do not increase GDP "by definition."

First of all, the "G" that is used in the calculation of GDP for national accounting purposes consists only of government consumption and investment expenditures. The government engages in other spending through its various transfer programs, and those expenditures are not included in the GDP calculation. So it is entirely possible for the government deficit to increase due to changes in overall government spending and revenue collection while the government's contribution to GDP falls.

Also, the quantity of NFAs is not dependent entirely on the level of deficit spending. The major contribution to changes in NFAs comes from the Fed's balance sheet, not the Treasury balance sheet. Private sector NFAs can go up or down independently of what the Treasury is doing.

Dan Kervick said...

The govt gets its balances by (taxing/fees) and by selling additional securities to DEALERS... these dealers are licensed/regulated agents of the said government itself...

Matt the dealers are licensed by government, but they are not government agencies. They are private sector firms. A transaction between the government and a dealer is a transaction between the government sector and the private sector.

Auburn Parks said...

Dan-

"First of all, the "G" that is used in the calculation of GDP for national accounting purposes consists only of government consumption and investment expenditures. The government engages in other spending through its various transfer programs, and those expenditures are not included in the GDP calculation."

Its almost as if I said exactly that and then in your supposed rebuttal you pretend as if you are saying something different when you are not.

I used three examples, Increased DIRECT spending which is "govt consumption and investment expenditures"
Govt transfers which i said increases the NON-GOVT spendingvia increased incomes. I never said that it increases Govt spending in the GDP equation.

So please either actually comprehend the comment you are responding to or dont respond at all.

"So it is entirely possible for the government deficit to increase due to changes in overall government spending and revenue collection while the government's contribution to GDP falls."

This comment is totally irrelevant to the point. All increased deficits increase GDP by defintion as there is no Govt fiscal activity increase that has a negative GDP mulitiplier. So wrong again Dan.


"Also, the quantity of NFAs is not dependent entirely on the level of deficit spending. The major contribution to changes in NFAs comes from the Fed's balance sheet, not the Treasury balance sheet. Private sector NFAs can go up or down independently of what the Treasury is doing."

This is hilariously ignorant. Changes on the Fed's balance sheet do not change the total number of NFAs of the Non-Govt as the Fed doesnt have the authority to give free money to anyone, they can only trade financial assets. Only deficits increase the level of NFAs ini existence. Another tautology.

How can you not know this basic stuff

Dan Kervick said...

Its almost as if I said exactly that and then in your supposed rebuttal you pretend as if you are saying something different when you are not.

No, it's not the same Auburn. You said government deficits increase GDP by definition, and that is simply not true. Although the G in the National income and product accounts - what you are calling "direct" government spending - is indeed a component of GDP, the government's deficit can increase without any change in G. So changes in the government deficit do not definitionally entail a change in GDP.

It is certainly true that a well-aimed deficit spending via increased transfers or well-targeted tax cuts can boost GDP. But that is not a simple matter of a definitional entailment from the accounting identities, but a causal effect. Whether such an effect occurs or not is an empirical question that can be studied by empirical means.

It is a further empirical question whether any important macro economic effects can be tied to changes in either private sector or non-government sector net financial asset holdings. Nothing whatsoever about such putative effects can be deduced from identities alone.

This comment is totally irrelevant to the point. All increased deficits increase GDP by defintion as there is no Govt fiscal activity increase that has a negative GDP mulitiplier. So wrong again Dan.

This statement is both garbled and inconsistent with the clarification you just tried to make, Auburn. A multiplier effect is not something that happens "by definition". The fiscal multiplier that happens to prevail at any given time is a contingent empirical fact, not a definitional consequence of accounting logic.

This is hilariously ignorant. Changes on the Fed's balance sheet do not change the total number of NFAs of the Non-Govt as the Fed doesnt have the authority to give free money to anyone, they can only trade financial assets.

In fact it does. The Fed can pay dividends to its member banks, and also pays interest on deposits. Also, it sometimes realizes a profit or loss on its asset transactions. Total capital (assets minus liabilities) on the most recent Fed balance sheet is $58 billion. Total equity on the Treasury's balance sheet at the end of FY 2014 was only $40.5 billion. Since the NFA position of the non-government sector is the mirror image of the consolidated balance sheets of the Treasury and the Fed, then the Fed's balance sheet position is more significant determinant of non-government NFAs.

But again the main issue here is the lack of empirical evidence connecting changes in non-government NFA's with macroeconomic variables of importance.

Auburn Parks said...

Dan

Increased deficits come from 3 places

Lower tax revenues = more income to non govt = MORE non govt spending = more GDP

Increased govt spending on transfers = more income to non-govt = more non-govt spending = more GDP

Increased govt direct consumption = more GDP directly and more income to non-govt = more spending by non-govt = even more GDP

That's it those are the 3 options and all of them increase the deficit and thus GDP. Feel free to actually rebut any of this

Dan Kervick said...

Auburn, what you said initially is that "deficits increase GDP by definition." What I pointed out is that that statement is not true. Only increases in government consumption and investment increase GDP "be definition."

The other two deficit-increasing factors you mention - lower tax revenues and higher transfer spending - may or may not increase GDP. But when they do increase GDP, they do not do so "by definition", but by stimulating the spending of others.

Nothing I have said has anything to do with any "gold bug" thinking or anything like it. I have pointed out that changes to the non-government's NFA position depends on changes to the consolidated Treasury+Fed balance sheet position, not just what the treasury does. I have also expressed skepticism about the claim that changes in the non-government NFA position are causally responsible for changes in growth, employment. etc., since changes in the latter quantities, and even in the quantities of MB and M2 can take place without a change in net financial assets. If there is a demonstrable connection between NFA changes and other macroeconomic changes, they can and should be established with empirical evidence. They can't be deduced from definitions.

Tom Hickey said...

Dan, why don't you frame up some of those hypotheses and tell us how to test them empirically.I am not being testy here. If we are going to get to the bottom of the issues then they have to be stated clearly and precisely in a way that can be scrutinized "scientifically." What "scientifically" means is another issue, which is not decided in econ except among those who have declared the methodological debate over and that rigor is important and empirics is not. Their answer is that a representational model that we recognize as a model would be nice. Show us one and we'll consider it. But until there is an alternative, there is no present ly available alternative to what we are doing. This is not just the die-hards. It's Paul and Brad's position, too. The prior question, "Where's your model?" Only then does the question come up about how representational it is. If you can't get a consistent model together, you don't have a ticket to the game no matter where your PhD is from.

There is a reason that there are no grand theories in the social sciences, and the gran theories in economic are just speculative philosophies. They don't admit of empirical testing anything like the natural sciences. There is a reason that conventional econ eschews correspondence in favor of consistency. It's difficult to impossible to create representational models of grand theories in econ that can be supported strongly by evidence. The simple theory aren't representational of event other than special cases, and complex theories are as yet to difficult to construct. If this were easy it would have been done already in econ, social science, and psychology. As a result these "sciences" have not yet spun off from philosophy and there are reasons to think that they never will using presently developed methods.

The best the social sciences has been able to do is limited studies based on statistical reasoning, which, as Lars Syll points out, is seldom causal because of the way the studies are set up. In business schools, the case method developed by HBR has been dominant for some time. Academic econ is sidelined in business schools and businesses for the simple reason that it is not helpful to achieving business objectives.

Anyway, even in philosophy of science now, a dominant position follows American pragmatism in the tradition of Peirce, Dewey, and James, whose most recent major contributor was Richard Rorty. Opposed to this is the critical realism of folks like Roy Bhaskar, who want to stick with Aristotle's conception of explanation in terms of real causes. But they haven't yet overcome the objections that Aristotelianism met.

I don't expect us to resolve these issues in a thread or perhaps even in blog posts, because it is still unresolved in the literature, unless one picks sides and declares the debate over. But it's is useful to understand the issues in some detail and how they apply in specific cases, for example, wha would be confirmatory wrt to MMT and what disconfirmatory. Are the assumptions statable comprehensively, or are there hidden assumptions that are relevant. To what degree is the method causal.

The foundation of MMT is operations and operations are not hypothetical and don't involve a theory. They are descriptions of what actually happens that subsequently serve as assumptions in a theory. Does MMT have operations right, or do the circuitists that disagree with MMT, or someone else? How would this be decided in a compelling way?

Dan Kervick said...

Tom, well step one is to formulate a precise definition of "net financial assets" for the private sector. (Let's leave the external sector out of it for now.) How does MMT define this concept? What criteria are used for distinguishing a financial asset from a non-financial asset? How about liabilities? Are there non-financial liabilities, or are all liabilities financial by definition? How are equities handled?

Empirical testing doesn't always depend on a complex model. If, for example, someone claims that the rate of unemployment in Sweden is causally dependent on the price of tea in China, you can examine that hypothesis fairly directly so long as you can collect time series statistics on Swedish unemployment rates and Chinese tea prices.

MMT does much more than offer a descriptive account of operations. It offers all sorts of macroeconomic hypotheses about what causes what in our economy. Many of those claims are amenable to empirical testing, and that's one of the things professional economists are supposed to be doing. That's what they are paid for.

Tom Hickey said...

Empirical testing doesn't always depend on a complex model. If, for example, someone claims that the rate of unemployment in Sweden is causally dependent on the price of tea in China, you can examine that hypothesis fairly directly so long as you can collect time series statistics on Swedish unemployment rates and Chinese tea prices.

Right. But do disconfirmations of very specific hypothesis such has this show the neoclassical theory to be "wrong" and "useless." If so it would have jettisoned long ago.

This cannot be the criterion that professional economists use.

MMT does much more than offer a descriptive account of operations.

Agreed. But the operational description is a foundational set of assumptions. Is it accurate or is not accurate, as many hold? On the basis of what criteria would this be decidable?

It offers all sorts of macroeconomic hypotheses about what causes what in our economy. Many of those claims are amenable to empirical testing, and that's one of the things professional economists are supposed to be doing. That's what they are paid for.

You seem to be implying that you have specifics in mind. Where specifically do you see MMT falling short on this?

BTW, I know something of how the MMT economists think. There are few of them and time is valuable. They have teaching responsibilities in addition to doing research. Stephanie is effectively out of the game now while she is working in government.

Their strategy is not to respond to pot shots. It's good basic strategy and it is becomes more necessary as time becomes more valuable. One strategy of those who oppose something is to create distractions, hijack the debate, and tie up time in trivial matters. They know this.

So to advance the ball, it's necessary to be both constructive and targeted.

Auburn Parks said...

Dan-

"Auburn, what you said initially is that "deficits increase GDP by definition." What I pointed out is that that statement is not true. Only increases in government consumption and investment increase GDP "be definition."

The other two deficit-increasing factors you mention - lower tax revenues and higher transfer spending - may or may not increase GDP. But when they do increase GDP, they do not do so "by definition", but by stimulating the spending of others."

Yes Dan the other 2 do increase GDP by definition since there is no real world scenario where increased incomes of the non-Govt (due to tax reductions or increased transfers) do not lead to any increased NON-Govt spending which is of course captured in the total spending equation aka GDP. So you are clearly wrong about this point.

"Nothing I have said has anything to do with any "gold bug" thinking or anything like it."

Anyone who thinks that issuing TSy securities "extracts money from the economy" (your exact words) just like taxes do is simply wrong, and its most often mainstreamers and austrians that spout that type of nonsense. Buying a 6-mo TSY-bill is no different than buying a 6-mo CD at a commercial bank, and as adding to M2 at the expense of M1 (exchanging checking deposits for term deposits) is not "extracting money from the economy" neither can be exchanging checking deposits for term deposits at the public or central bank.

"I have also expressed skepticism about the claim that changes in the non-government NFA position are causally responsible for changes in growth, employment. etc."

As we've already established, increases in the deficit increase GDP by definition, so this claim is just plain wrong, especially since changes in NFAs only come from fiscal policy and not monetary policy.



Jose Guilherme said...

issuing TSy securities "extracts money from the economy" (your exact words) just like taxes do

Why are we still wasting precious time with this kind of plain error?

A tax receipt destroys a private sector deposit. The private sector loses an asset and gets nothing in return.

A T-bond sale destroys a deposit of the private sector (when it's the non bank sector that is buying) but adds a security - an asset - for the private sector. It swaps a promise to pay dollars on demand (a bank deposit) for a promise to pay dollars later, with interest (the T-bond).

And when the government spends the receipt a new deposit is added as an asset of the private sector.

Auburn Parks said...

Dan-

On the matter of NFA's only being issued by the TSY, you are absolutely correct that the Fed paying dividends and IOR would both be examples of NFA additions. What I wrote was sloppily written, overstated, and wrong, my bad. See its not hard to admit you're wrong when you obviously are and when you are being intellectually honest. Hopefully you will live up to the same standards and take back your claim that deficit spending (increasing NFAs) does not add to GDP.

Jose-

I cant imagine why anyone would make such a basic error, however so many people do.

Dan Kervick said...

Yes Dan the other 2 do increase GDP by definition.

Auburn, you either don't know what "by definition" means, or you are deliberately playing fast and loose with the term because you do not want to admit a mistake.

... the other 2 do increase GDP by definition since there is no real world scenario where increased incomes of the non-Govt (due to tax reductions or increased transfers) do not lead to any increased NON-Govt spending.

There certainly are such real world scenarios. First, an economy that was running near full capacity would not see a real spending boost as a result of a nominal income injection. Whether such a situation obtains or not is a contingent empirical fact, not a universal condition that obtains necessarily.

Buying a 6-mo TSY-bill is no different than buying a 6-mo CD at a commercial bank.

Good example. A 6-mo CD is not the same thing as a demand deposit balance. Similarly, if a bank buys a security from the treasury, the bank has a greater balance in its maturing security account, but fewer spendable dollars. At the same time, the Treasury account has more spendable dollars as a result. Those spendable dollars have moved from the private sector to the government sector.



Tom Hickey said...

A 6-mo CD is not the same thing as a demand deposit balance. Similarly, if a bank buys a security from the treasury, the bank has a greater balance in its maturing security account, but fewer spendable dollars. At the same time, the Treasury account has more spendable dollars as a result. Those spendable dollars have moved from the private sector to the government sector.

This is only relevant in the case that the Treasury market fails, which the central bank would not let happen. Treasury securities are highly liquid and holding them doesn't impact the spending ability of the holders, either by selling securities or using them as collateral.

Dan Kervick said...

This cannot be the criterion that professional economists use.

I don't know what you are talking about Tom. Economists directly evaluate, and sometimes refute or undermine, specific causal conjectures with empirical data all of the time. I'm not talking about a grandiose and complex set of claims like "neoclassical theory". I'm talking about a very specific group of empirical claims that can be considered: the causal claims MMT supporters make about net financial assets. Not all of economics consists of grand theory.

You seem to be implying that you have specifics in mind. Where specifically do you see MMT falling short on this?

MMT makes a variety of claims about the causes of unemployment and the determinants of prices that are incomplete at best and in many cases empirically unwarranted.

Dan Kervick said...

A T-bond sale destroys a deposit of the private sector (when it's the non bank sector that is buying) but adds a security - an asset - for the private sector.

Agreed Jose. But a T-bond isn't money. It's an asset of another kind. There are various ways of measuring the money supply, but none of them include t-bonds in the measure. So when the treasury swaps a t-bond for dollars, money is removed from the private sector.

Tom Hickey said...

MMT makes a variety of claims about the causes of unemployment and the determinants of prices that are incomplete at best and in many cases empirically unwarranted.

You seem to have specifics in mind. Why don't you state them, or some of them, or one of them so we can discuss it.

Tom Hickey said...

So when the treasury swaps a t-bond for dollars, money is removed from the private sector.

And this is a reason that MMT economists avoid use of an ambiguous term like "money," especially since it has resulted in a lot of confusion and specify what they mean.

When a non-bank entity that doesn't have an account at the central bank purchases a newly issued tsy, then M1 decreases, the monetary base decreases and the purchaser as an asset that is exchangeable for dollars in the highly liquid tsys market.

When a previously issued tsys is sold at market one deposit account is marked up and if a non-bank without an account at the cb purchases the tsy, then a deposit account is marked up. MB and M1 remain the same. If a bank or a non-bank with an account at the cb purchases the security, MB is the same but M1 increases by the realized amount of the sale.

When the cb purchases tsys, MB is marked up and when the cb sells tsys, MB is marked down. One government liability is exchanged for another.

When a non-bank entity with an account at the cb buys and sells tsys for its account, it is an exchange of one liability of the currency zone government for another within the cb unless there is a rule that all purchases and sales of tsys must take place in the market. Then the accounts affected are the dealers who are the market makers. (At least this is how I understand the general rule of the operation.)

Matt Franko said...

"money" is a metonym it comes from the slang name of the god's temple in Rome that administered the minting functions of their nomisma..... the whole thing is pagan:

https://en.wikipedia.org/wiki/Moneta

Juno Moneta, an epithet of Juno, was the protectress of funds. As such, money in ancient Rome was coined in her temple. The word "moneta" is where we get the words "money", or "monetize", used by writers such as Ovid, Martial, Juvenal, and Cicero. In several modern languages including Russian and Italian, moneta (Spanish moneda) is the word for "coin".

As with the goddess Moneta, Juno Moneta's name is derived either from the Latin monēre, since, as protectress of funds, she "warned" of instability or more likely from the Greek "moneres" meaning "alone, unique".


Matt Franko said...

Tom,

Dan is probably talking about 1. the claim that higher/lower deficits are causal and 2. the claim that "all prices are necessarily a function of how much the govt pays for things and how much they let their banks lend against things"....

I personally don't agree with the first but I do agree with the second...

Dan Kervick said...

You seem to have specifics in mind. Why don't you state them, or some of them, or one of them so we can discuss it.

I have stated them several times in the past, Tom. We've already had those discussions. There is no need to keep returning to the same issues.

Dan Kervick said...

And this is a reason that MMT economists avoid use of an ambiguous term like "money," especially since it has resulted in a lot of confusion and specify what they mean.

I would put it differently: The term "money" is not all that ambiguous. MMT likes to equivocate slough over the difference between money and other assets so they can pass off Warren Mosler's fantasies as something approaching reality.