Friday, April 15, 2011

Ezra Klein Gets It!!! Well, Almost.

"It’s increasingly well understood — at least among the tiny slice of Americans who read wonkish economic blogs — that thinking about the government as a very big household that happens to employ an army is a bad thing."

Well and good, but what Ezra either doesn't get yet, or doesn't say if he does, is that the federal government is the opposite of households, firms and US states because it is the currency issuer and the others are all currency users. So close and yet so far.

Ezra quotes Karl Smith of Modeled Behavior here to the effect that government is different from household because it is easier for government to raise revenue (due to the power to levy taxes).

Now, to the government. The exact opposite is true. It is much easier for the government to raise revenue than to cut spending. Moreover, most of the movement in the deficit is tied to movements in revenue, not movements in spending.

This is the same mistake that Mark Thoma recently made here.

It's a mistake because a monetarily sovereign government that is the provider of a nonconvertible floating rate currency (like the US) funds itself directly, using currency issuance rather than taxation or borrowing. Government expenditure (spending and transfers) comes from the Treasury crediting bank accounts with the Fed supplying the reserves to clear. Neither taxes nor borrowing are operationally necessary under the present global monetary system, although Congress has imposed political requirements that make it seems so.

The issuance of Treasury securities in offset of the deficit is a reserve drain for interest rate maintenance, since deficits create excess reserves in the interbank settlement system that would drive the overnight rate toward zero. Draining the excess reserves allows the central bank to hit its target rate by controlling the quantity of reserves. But the same operation can be performed more efficiently by paying a support rate on excess reserves equal to or greater than the target rate, as the Fed does now, allowing it to take as many Treasuries onto its books as it desires without affecting the overnight interbank rate rate.


apj said...

Is that a way, I wonder, of saying the Fed has already, in effect, exited? If it pays IOR, where is the burning need to reduce them? They're acocunted for.

Tom Hickey said...

According to MMT professionals, the people concerned, or commenting, are clueless about monetary operations and monetary economics, or are doing a good job of covering it up if they do understand. From what I've gleaned from the MMT pros, the mid-level at Treasury and Fed know how the system operates, but the people at the top don't and don't ask.

googleheim said...

What if all the casinos start retracting their poker chips in Vegas ?

They issue their own chips, and if they started pulling liquidity out of the house by keeping back returned poker chips, then their operations will cease.

let' grind the economy to a stop