Brian Romanchuk — The Yield Curve Provides Limited Economic Information

The relentless flattening of the Treasury yield curve has been a topic of ongoing debate -- is this a signal that a recession is near? The key to interpreting the flattening is that bond market participants are not paid to to anticipate economic outcomes (outside the corner case of the inflation-linked market), rather to anticipate the path of short-term rates (and the term premium). The flattening yield curve tells us that market participants (on average) believe that we are near the end of the rate hike cycle, but that does not necessarily mean that a recession is imminent....

Bond Economics
The Yield Curve Provides Limited Economic Information
Brian Romanchuk

Robert C. Hockett & Saule T. Omarova — The Finance Franchise

The dominant view of banks and other financial institutions is that they function primarily as intermediaries, managing flows of scarce funds from those who have accumulated them to those who have need of them and can pay for their use. This understanding pervades textbooks, scholarly writings, and policy discussions – yet it is fundamentally false as a description of how a modern financial system works. Finance today is no more primarily “intermediated” than it is pre-accumulated or scarce.

This Article challenges the outdated narrative of finance as intermediated scarce private capital and maps the basic structure and dynamics of the financial system as it actually operates. We begin by developing a three-part taxonomy of ways to model financial flows – what we call the “credit-intermediation,” “credit-multiplication,” and “credit-generation” models of finance. We show that only the last model captures the core dynamic of a complex modern financial system, and that the ultimate source of credit-generation in any such system is the sovereign public, acting primarily through its central bank and treasury. We then trace the operation of this dynamic throughout the financial system, from the banking sector, through the capital and “shadow banking” markets, all the way out to the “disruptive” frontier of peer-to-peer digital finance.

What emerges from this retracing of the financial system’s operative logic is a comprehensive view of modern finance as a public-private franchise arrangement. On this view, the sovereign public acts effectively as franchisor, licensing private financial institutions to earn rents as franchisees in dispensing a vital public resource: the public’s monetized full faith and credit. We conclude the Article by drawing out some of the potentially transformative analytic and normative implications of a paradigmatic shift from the orthodox theory of financial intermediation to the franchise view of finance.

To read the complete article, click “VIEW PDF” below.
:: VIEW PDF

Cornell Law Review
The Finance Franchise
Robert C. Hockett & Saule T. Omarova

Peter Cooper — Self-Imposed Constraints as an Obfuscating Factor

From inception of a monetary economy with a government-issued currency, it is clear that government spending must come before tax payments or purchases of government debt. The order of requirements is basically: (i) government defines its monetary unit of account; (ii) government imposes taxes and other obligations that can only finally be settled in that currency; (iii) government spends (or lends) its currency into existence; (iv) non-government can now obtain the currency and, among other things, pay its taxes and purchase government debt. It is clear that government spending must logically come before tax payments or purchases of government debt because non-government must be able to get hold of the currency before it can do these things….

"Tax and spend is really "spend and tax" at the operationally level. The "tax and spend" illusion arises from optics that are created by failure of operational understanding.

It's the same with credit creation through bank lending. Loans create deposits. Deposits don't create loans and are not necessary for lending.

The government and banks create the unit of account simply be crediting accounts. But only the government can create entries in the payments system that is used for final settlement and settlement of obligations to the government, which are only redeemable using liabilities issued by government.

heteconomist
Self-Imposed Constraints as an Obfuscating Factor
Peter Cooper

Liberty Street — How the Fed Changes the Size of Its Balance Sheet: The Case of Mortgage-Backed Securities

In our previous post, we considered balance sheet mechanics related to the Federal Reserve’s purchase and redemption of Treasury securities. These mechanics are fairly straightforward and help to illustrate the basic relationships among actors in the financial system. Here, we turn to transactions involving agency mortgage-backed securities (MBS), which are somewhat more complicated. We focus particularly on what happens when households pay down their mortgages, either through regular monthly amortizations or a large payment covering some or all of the outstanding balance, as might occur with a refinancing.

As we did in our previous post, we start with a set of simplified balance sheets, shown in the next exhibit. Three of the balance sheets are for the same actors as before: the Fed, the banking sector, and the public.

We replace the balance sheet of the Treasury, which we won’t need to look at, with the balance sheet of an issuer of MBS. The MBS issuer could be one of two government-sponsored enterprises—Fannie Mae and Freddie Mac—or the government corporation Ginnie Mae. All three are agencies that guarantee the MBS into which individual mortgages are pooled. For simplicity, we will refer to these institutions as “MBS issuers” in this post. 

FRBNY — Liberty Street Economics
How the Fed Changes the Size of Its Balance Sheet: The Case of Mortgage-Backed SecuritiesDeborah Leonard, Antoine Martin, Simon Potter, and Brett Rose

Liberty Street — How the Fed Changes the Size of Its Balance Sheet

How do asset purchases increase the size of the Fed’s balance sheet? And how would reducing reinvestments reduce the size of the balance sheet? In this post, we answer these questions by describing the mechanics of the Fed’s balance sheet. In our next post, we will describe the balance sheet mechanics with respect to agency mortgage-backed securities (MBS).

We start by describing simplified balance sheets for the Fed, the Treasury, the banking sector, and the nonbank public.

FRBNY — Liberty Street Economics
How the Fed Changes the Size of Its Balance Sheet

Deborah Leonard, Antoine Martin, and Simon Potter

Bill Mitchell — Foreign sales of US government debt are largely irrelevant

… there was an article in Bloomberg media (December 30, 2016) – Beware the Foreign Exodus From Treasuries – stirring up fear about the recent sales of foreign-held US government debt. I guess it was a slow news day or something because there is very little in the story that is relevant to assessing whether the US government can run an appropriate fiscal policy stance. The fact is that the foreign sales of US government debt are largely irrelevant for the US government’s capacity to maintain its net spending program. 

The sales are in US dollars and only the US government itself issues those dollars. To think that a foreign purchaser of a US Treasury debt liability are ‘providing dollars’ to the US government is to completely misunderstand the nature of the transaction. This blog considers the current data and explains how to think correctly about these matters. The question that financial commentators really should be asking is why should the US government extend that corporate welfare (risk-free bonds with income flow) to domestic bond-buyers and foreign governments/private investors. 

There is no financial reason (in terms of facilitating fiscal policy) for the bond issuance. It is just a form of welfare spending which helps the top-end-of-town....

[Introduced paragraphing by topic sentence to improve online readability.]

Bill Mitchell – billy blog
Foreign sales of US government debt are largely irrelevant
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Ellis Winningham — Introductory Series: The Monetary System – US Currency

Today, for this introductory series on the monetary system, we’re going to discuss US paper currency: what it is, where it comes from, who enforces counterfeiting laws, and what the punishment for counterfeiting is. But, before we get to all of that, let’s begin with a review of some lies that the media, politicians and orthodox economists peddle to the general public.…

Ellis Winningham — MMT and Modern Macroeconomics
Introductory Series: The Monetary System – US Currency

Ellis Winningham

Nima Mahdjour — Modern Monetary Theory

Steve Keen ·
Chief economist at IDEAeconomics 

Excellent explanation. I hope this gets widely read in the Austrian community. I'm happily promoting it to Post Keynesian and MMT economists, because it is such a clear statement of the structure and logic of the actual monetary system. Scott Fulwiler first alerted me this this post, and he was also most impressed.

Being Libertarian
Modern Monetary Theory
Nima Mahdjour

JKH — Helicopter Recall – Fiscal Repairs Needed

The true role of accounting is fundamental to understanding these distinctions. Accounting reflects operations and operations reflect policy. If a central bank undertakes a fiscal expenditure operation, it will deliberately blow a hole in its balance sheet and create a negative capital position and a mismatched balance sheet. This activity is obviously not legitimate as a delegated responsibility for central banks. It is a usurpation of fiscal responsibility that produces a corresponding deformation of the central bank balance sheet. Accounting reflects operations and operations reflect policy. This is policy hijacking.…

Monetary Realism
Helicopter Recall – Fiscal Repairs Needed

JKH

Eric Tymoigne — Money and Banking Part 13: Balance Sheet Interrelations and the Macroeconomy

Past posts have focused on the mechanics of a specific balance sheet, specifically that of the central bank and of private banks. This post looks at the balance-sheet interrelations between the three main macroeconomic sectors of the economy: the domestic private sector, the government sector and the foreign sector. This macro view provides some important insights about issues such as the public debt and deficit, policy goals that are more likely to be achieved, the business cycle, among others.…

New Economic Perspectives
Money and Banking Part 13: Balance Sheet Interrelations and the Macroeconomy
Eric Tymoigne | Associate Professor of Economics at Lewis and Clark College, Portland, Oregon; and Research Associate at the Levy Economics Institute of Bard College

Alexander Douglas — Krugman discovers the obvious

A philosophical truth, as I see it, is a truth that is obvious once you think about it but has been obscured by overwrought theory.

Paul Krugman has discovered a philosophical truth.

Here it is. There is no operational difference between:

(a) the state spending, selling bonds to ‘fund’ its spending, and then buying back the bonds, and

(b) the state spending and not issuing the bonds in the first place.

This is a point economists outside the mainstream have been making for years (see this post).

Origin of Specious
Krugman discovers the obvious
Alexander Douglas | Lecturer in Philosophy at Heythrop College, London

Eric Tymoigne — Money and Banking – Part 6

This post concludes our study of central banking matters (there would be a lot more to cover…maybe another time). The post studies how the Fed is involved in fiscal operations and how the U.S. Treasury is involved in monetary-policy operations. The extensive interaction between these two branches of the U.S. government is necessary for fiscal and monetary policies to work properly.…

I am taking a 3-week break to take care of other things with upcoming deadlines. Next is private banks, followed by financial crises, inflation and growth, and finally issues surrounding the nature and history of money. There is probably another six/seven posts worth of material.

New Economic Perspectives
Money and Banking – Part 6
Eric Tymoigne | Associate Professor of Economics at Lewis and Clark College, Portland, Oregon; and Research Associate at the Levy Economics Institute of Bard College

Bill Mitchell — lightweight garbage from The Economist

Bill initially smacks down The Economist as a propaganda rag, but the rest of the article is an excellent primer on PQE and the difference between QE and the misnamed  PQE. QE is a monetary operation and PQE is a fiscal operation.

The differences are (see PQE is sound economics but is not in the QE family:

1. QE does not change the net financial asset position of the non-government sector at all – that is, the net wealth remains unchanged. It is an asset swap. The non-government sector just rearranges is wealth portfolio – more cash, less bonds. No net change.
That is the essence of a – monetary policy operation – which alters the liquidity in the economy. It does it by portfolio swaps and in doing so influences the interest rates and the term structure.

2. PQE (or OMF) means the central bank, as one part of the consolidated government sector, the other being the Treasury, would use the currency-issuing capacity of the government to facilitate the purchase of real goods and services to build productive infrastructure.

The NIB [National Investment Bank] is just a fancy title for a government agency and would be engaged in public spending – that is, in a fiscal operation. It would be spending out of some account the Bank of England created on its behalf and filled with numbers, presumably with many zeros after the first few digits.

PQE is not QE because it is a fiscal operation, which means it would increase the net financial assets in the non-government sector because it would increase national income (via spending on infrastructure).

PQE as envisaged is a fiscal operation, not a monetary operation, whereas QE as practiced by the Bank of England, the Federal Reserve Bank of America, the Bank of Japan etc are not fiscal operations.

Bill Mitchell – billy blog
lightweight garbage from The EconomistBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — There is no need to issue public debt

This blog was drawn, in part, from an edited version of a submission that I made with Warren Mosler in 2001 to the Commonwealth Debt Inquiry, which sought to justify why the government should continue to issue debt when it was in fact running increasing surpluses.

 ••••••••••••••••••••••

At the London event last week, I indicated that governments should not issue any public debt as the benefits of doing so are small relative to the large opportunity costs. The Modern Monetary Theory (MMT) position is that there is no particular necessity to match public deficits with debt-issuance for a currency-issuing government and deficits should be accompanied by monetary operations which we now call Overt Monetary Financing (OMF). Surprisingly there was some arguments by audience members that governments should continue to issue debt, largely, as I understand them, to provide a safe haven for workers to save for the future. So the idea is that we maintain the elaborate machinery that is associated with the public debt issuance just to provide a risk free asset that workers can use to park their hard-earned savings in. It is a strange argument given the massive opportunity costs associated with debt issuance. A far simpler solution is to exploit the currency-issuing capacity of the government to guarantee a publicly-owned National Saving Fund. No debt would be required.…

Great post.

BTW, the US Treasury already issues Savings Bonds on demand in small denominations through Treasury Direct, quite sufficient for US workers to use as safe assets, for example, for retirement, if they desire. This issuance is independent of a fiscal deficit.

Bill Mitchell – billy blog
There is no need to issue public debt
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

JP Hochbaum — T Accounts of monetary operations

Put together by Nathan Cedric Tankus

FYI.

Heretical Druthers
T Accounts of monetary operations
JP Hochbaum

Update on Term Deposit facility

Its been a few months since my earlier post discussing the Fed's new Term Deposit Facility. Since then, the scope of this program has grown significantly, with auctions growing from around $25 billion per week, to a massive $125 billion in last week's auction.

These term deposits are simply one-week CD's offered by the Fed. Participating depository institutions have their reserve accounts debited, and then re-credited 7 days later, plus the small, but free amount of interest. While each institution can only tender a maximum of $10 billion, the amount of participating institutions has more than doubled since March of this year-- from 27 to 58. Not surprisingly, this growth in participation follows the Fed's gradual raising of the rates it will pay, from 26 basis points in March, to 30bp just today. Not surprisingly, the 26bp auctions had fewer participants than the 29 bp auction, since many institutions likely figured that getting a one-basis point spread over what they receive on their excess balance accounts (25bp) was not worth the trouble. For now, the Fed has stated that 30 basis points will be the ceiling for this round of term deposit auctions, with the first 30bp auction set to go off today.

The size of this latest auction demonstrates the ease to which the Fed can drain reserves if it chooses to. It simply states the rate that it will pay on term deposits,  and accepts bids. Last week in a matter of hours, the Fed was able to drain $125 billion in reserves from the banking system, with no problems. It will be interesting to see how much higher the Fed may decide to pay on its Term Deposits, and how large these auctions may become as a result. Unfortunately, the Fed states on multiple TDF related pages that the auctions "are a matter of prudent planning and have no implications for the near-term conduct of monetary policy."

It remains to be seen if this statement holds true in the future, since it seems to me that these term deposits are an easier way of raising rates if the Fed needs to, as opposed to trying to sell off their securities portfolio and expose themselves to potential losses. From a political standpoint, it will certainly be easier to expand the TDF than to try and "unwind QE", as many analysts put it.

John Carney — John Cochrane on why the Fed's QE program has 'no effect' [Cochrane agrees with Mosler?]

Jawdropper. John Cochrane agreeing with MMT on Fed ops wrt QE? Who knew?

CNBC
John Cochrane on why the Fed's QE program has 'no effect'
John Carney | Senior Editor

circuit — On the (ir)relevance of the money multiplier model: The Fed view

Documented summary of the Fed's position as stated by a number of officials versus the conventional economics textbooks' account.

Fictional Reserve Barking
On the (ir)relevance of the money multiplier model: The Fed view
circuit

Stephanie Kelton — Former Dept. Secretary of the U.S. Treasury Says Critics of MMT are “Reaching”

A few weeks ago, I had a lengthy e-mail exchange with Frank N. Newman, former Deputy Secretary of the U.S. Treasury. Frank’s books (here and here) are so closely aligned with MMT thinking about deficits, debt, monetary operations, etc. that I wanted to get his thoughts on one of the most common criticisms of MMT. MMT recognizes that the currency itself is a simple public monopoly and that the issuer of the currency must spend (or lend) it into existence, before it can be used to pay taxes or buy bonds. The implication? Governments that issue sovereign money are not revenue constrained. Critics have argued that MMT has this all wrong because the system requires the government to have numbers on its balance sheet before it can spend — i.e. the government is not allowed to run an overdraft and is, therefore, constrained by cash on hand. Here’s what Frank Newman thinks of that critique:

New Economic Perspectives
Former Dept. Secretary of the U.S. Treasury Says Critics of MMT are “Reaching”
Stephanie Kelton| Associate Professor of Economics, UMKC

Let's bury that one.

The Economist — Platinomics

Must-read. The cat is out of the bag. TPC has done its job. The explanation is now in the mainstream. No economist or financial professional can read this and not get it. This is a really succinct and clever account that cuts to the chase. The last mile is really closing fast.

The Economist | Free Exchange
Platinomics
G. I. | Washington
(h/t y in the comments)