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"My point is that these household assets (deposits) are THE NFAs remaining in the system after deficit-spending"
As I said you can get 'NFAs' in different parts of any given system.
I just paid for some drinks in a bar with a $10 IOU scribbled on a piece of paper (let's say). Assuming the barkeep has no outstanding debts or liabilities, he now has a $10 net financial asset!
For the 'currency zone' as a whole, the currency issuer can always pay its debts (denominated in that currency). So their NFA is perhaps 'slightly more NFA' than the 'NFA' I created...(perhaps)? Maybe it should be called NNFA?
(As a side note, it's also worth thinking about why we assume that bank liabilities are as good as the currency, because this wasn't always the case... It's because bank credit has a 'fixed exchange rate' with the government's credit, which in most cases is guaranteed by both the 'lender of last resort' and FDIC).
In a sense, the set-up of the system could perhaps be said to 'distribute' those government-issued assets to some degree, so they can essentially be held by more than one person at a time - given that the claim on the asset is practically as good as the asset itself, in most cases?
If you’re looking for simplification of the NFA concept for MMT purposes, I would suggest defining the application for any given discussion and prefacing the sector meaning of NFA in that discussion.
For example, the most often used context and meaning for MMT I’ve always understood to be non government NFA – which consists of bank reserves, currency, and treasuries.
But you have to be careful not to over-categorize the meaning of it.
Ramanan is very correct when he suggests that the NFA concept as a financial measurement is a bigger idea than MMT, or any particular MMT context. And even within MMT, there are occasions when you no doubt want to define NFA in a particular sector context that is different from the prototypical non government one. But there’s no reason for people to get confused about this provided that you define the context and application for the NFA concept in a particular discussion.
Examples:
- Non government NFA - Government NFA (which is the inverse of non government NFA, and usually negative) - Domestic private sector NFA - Domestic household sector NFA -Domestic business sector NFA -Domestic bank sector NFA - Foreign NFA (where foreign is defined relative to the US for example) - Tom Hickey’s household NFA
All of these are legitimate measures of NFA in their own context.
Just clarify what the context and applicable definition being used is for a particular discussion.
This stuff shouldn’t be that confusing – just start 40,000 feet and narrow down what sector you want to focus on for a given discussion.
However, I do guarantee that you’ll experience persistent frustration and trouble if you attempt to categorically define NFA to always mean non government NFA - or any other version above for that matter. You have to be flexible where the discussion warrants it.
"there’s no reason for people to get confused about this provided that you define the context and application for the NFA concept in a particular discussion"
Agreed.
Tom's idea of a signifier attached to to 'NFA' has legs. i.e. NFA*, so you know that someone's referring to that particular view of things
"What these 15 yr olds need to understand is that the gov does not borrow in order to deficit spend"
I'm starting to think of money issuance as 'borrowing'. It makes sense to me. If you're in an MMT ZIRP world with no bond issuance, the govt is basically 'borrowing' at zero interest, no maturity.
"I tend to use the term just to mean currency and reserves, which is probably wrong"
I wouldn't know if it was wrong or not. It doesn't really matter.
If we define things in terms we understand, and the average person should be able to understand, and establish relationships that are true mathematically, how could we go wrong ?
Cash is cash whether it is in your pocket or in your bank account. Liabilities are a no-brainer. The relationship between the two is simple arithmetic. The result is NFA.
As far as the Sectoral Balances identity is concerned, these are the only balance sheet entries that matter.
y I'm starting to think of money issuance as 'borrowing'. It makes sense to me. If you're in an MMT ZIRP world with no bond issuance, the govt is basically 'borrowing' at zero interest, no maturity.
When the fiscal balance is in deficit, govt is dissaving or, colloquially "borrowing," even with direct currency issuance and no tys. When the fiscal balance is in surplus, govt is "saving." When the fiscal balance is zero, govt is neither saving nor dissaving.
the difference between a creditor and a debtor is difficult to pin down at times. A bank, for example, 'credits' your account. But it's actually you that is the bank's creditor.
I mean, it's obvious of course, just more difficult maybe to see how it really applies to the government.
here's Wray being his usual expressive self:
"Credit and debt are two sides of the same coin. Both creditor and debtor are sinful. They balance. Exactly. The sinful balance is ensured by double-entry book-keeping."
See page 4 - the balance sheet. At the end of 2011, the Treasury securities held is around $1,750bn and this is valued at amortized cost not the face value.
Confirm this from page 28 of the document.
The reason this is done is that these are held to maturity, so one can value them separately from the market value.
Nonetheless, there is some logic to it than simply valuing at face value.
It is inconsistent to value something at the face value for precisely the same reason I gave in the last comment.
The flow of funds on the other hand values things using market prices - so that there is self-consistency.
The customer's asset (deposit) is the bank's liability. The bank credits (marks up) one of its liability accounts, namely the customer's deposit acct. The bank owes the customer that amount "on demand" if it is a demand account.
the most often used context and meaning for MMT I’ve always understood to be non government NFA – which consists of bank reserves, currency, and treasuries
If you apply this definition in the Lavoie example you'll end up obscuring the processes that did take place in the real economy.
Because reserves plus T-bills plus currency do add up to 100 net claims on the government sector (the amount of the initial deficit spending) but the increase in net financial assets that did take place is entirely attributable to the household sub-sector and is held as currency plus deposits - and no T-bills at all.
NFAs equal Treasuries issued by the government" story-line
"I remain unconvinced that his narrative is not correct".
Well, the Treasury did issue 100 in T-bills and NFAs did increase by 100. In that sense the story-line is "correct".
But the NFA increase was all attributable to the household sub-sector, whose higher net worth now exists as bank deposits and currency, not Treasuries.In this let's call it "reality-checked" sense the story line is not "correct".
It seems to me that the closed system with inside and outside money is correct and this shows clearly that under the present institutional arrangements, the govt issues currency into the economy through the Tsy issuing Tsy securities to obtain reserves prior to expenditure.
The reserves that are used to purchase tsys can come from only two sources — prior Tsy disbursements or bank borrowing from the cb.
For example, the govt can issue currency under the present system by the Fed auctioning tsys issued by the Tsy to the primary dealers (PDs). The Fed can also loan the PDs the reserves to purchse the tsys at auction. Then the Fed can turn around and buy the tsys from the PDs for its own account at a price that compensates the PD for their expenses, including interest payments, along with a small profit to make it worthwhile.
Of course, the same could be accomplished by the Tsy just getting the reserves from the Fed without the extra step of the PDs, but under currency rules the Tsy cannot run an overdraft at the Fed.
Alternatively, the Tsy could just be permitted to issue currency directly as Lincoln did with the greenbacks.
It boils down the same thing in the result, i.e., NGNFA add, just different loops in getting there.
Jose, say the govt taxes those bonds and reserves away from the bank for some reason. In your example the households still have their 'net financial assets', and the bank now has just liabilities. Has anything changed?
"the govt issues currency into the economy through the Tsy issuing Tsy securities to obtain reserves prior to expenditure."
You're ignoring the fact that the Treasury already has a positive balance so can spend prior to bond issuance, with the bonds acting as a reserve drain (and 'replenishment') of the Tsy account.
It's all about causation - which actually comes first - sometimes, who knows?
What we do know is the Tsy account was 'filled up' in the past through overdrafts from the Fed, and that it has basically been recycling the same small quantity of 'money', over decades, through trillions and trillions of $ worth of payments and receipts. Or I might be completely wrong.
The NGNFA narrative of MMT is "in aggregate." The initial add of the required deficit offset is the original record of the NGNFA add. The tsys was just one means of holding that. It can be switched for rb or physical cash. Asset composition is irrelevant, and so is who holds the assets as long as they remain in nongovt, and they remain there in the same amount in aggregate as long as they are not taxed away.
This is the logic of the closed system. It's like energy. In a closed system energy can neither enter nor leave although it can be transformed. Throughout all transformations the amount of energy remains constant.
To tax means a budget surplus, other things being equal.
So I'd say such a measure (a confiscation of bank sector assets, really) would decrease the NFAs of the private sector by the amount of the new tax.
First, the household sector increased its NFAs as a result of deficit spending; then the banking sector decreased its NFAs due to an increase in the budget surplus.
So I'd say such a measure (a confiscation of bank sector assets, really) would decrease the NFAs of the private sector by the amount of the new tax.
Fiscal expenditure adds to NGNFA, taxation subtracts from NGNFA. The fiscal balance at any point in time shows the amount and direction of flow and from this the stock can be derived.
"the difference between a creditor and a debtor is difficult to pin down at times. A bank, for example, 'credits' your account. But it's actually you that is the bank's creditor."
Not if you are familiar with acounting terminology and how debits and credits are applied to the different classes of accounts. If your goal is to understand and have a conversation reliant on these terms you will have to study. I understand basic accounting pretty well…I had my own construction business for 17 years and did my own bookkeeping for all those years.
My point is and always has been that understanding the dynamics of an economy requires no knowledge of accounting. It doesn't hurt, but it isn't necessary.
Accounting is unrelated to the mathematical relationships that make an economic machine what it is. Accounting is a reporting tool that tells us what has already happened.
Yes, we can do what-if's with accounting and see what will happen with flows and what-not, but in the end it is a picture of what has already happened.
Math allows one to see what will happen, or what needs to happen in order for other related events to happen. Before it happens, No knowledge of accounting is necessary. No trial-and-error necessary.
As far as the Sectoral Balances are concerned all you need to know are assets and liabilities of the cash variety, the other classes of accounts on a balance sheet are irrelevant.
I want to pull you up on this, as I re-read part of your paper (thanks for the link) and noticed that you conflate the Treasury and 'the government' at one point.
This is problematic, because Fed liabilities are US government liabilities, even though they are Treasury assets.
They can't be both assets and liabilities at the same time, can they?
"Fiscal expenditure adds to NGNFA, taxation subtracts from NGNFA. The fiscal balance at any point in time shows the amount and direction of flow and from this the stock can be derived."
Tom, another way to look at it is…
NFA = ∑ (G-T) + ∑ (X-M) over history.
No reserves are injured in this operation.
Accounting has taken the discussion of a very simple relationship into the world of Alice-in Wonderland.
Fine if one is familiar with or fascinated by accounting minutia. This can be useful.
Ordinary people with modest math skills can understand the system under discussion without any appeal to accounting whatsoever.
The Sectoral Balance identity may be accounting consistent but it is also an apt description of the economy from a closed system math perspective.
I'm going with the math approach as being more accessible to the masses than accounting.
As a matter of fact, math applied in observance of system principles is at the same time more descriptive and less prone to error as a result of unnecessary complexity.
The banks had zero NFAs after the first round: deficit spending.
Now, after the second round (new tax) they have negative NFAs.
Say the tax "confiscates" the 81 in T-bills held by banks. The banks will now have minus 81 in Assets and minus 81 in equity.
They went "81 negative" in NFAs.
The household sector still has a +100 position in NFAs, though.
Thus, the total private sector position is now +19 in NFAs: it gained 100 as a result of the initial budget deficit, it lost 81 as a result of the subsequent budget surplus.
“Because the US Treasury is not an operational currency issuer, it obviously does not issue currency in conjunction with spending. It uses currency when it spends. There has been considerable confusion in some places on this point, extending to the characterization of government as an entity that issues currency as a result of spending.”
Here you conflate 'the Treasury' with ‘government’.
Given that:
(a) Fed liabilities are US government liabilities, and that
(b) Fed/ US government liabilities are ‘currency’,
when the US government spends, it issues currency.
“CTRB is at the top of the conceptual money hierarchy, the same as its CB predecessor. It has no need for a Treasury deposit account for clearing government payments. This allows CTRB the option of issuing currency as a function of spending. CTRB spends by crediting commercial bank reserve accounts – directly when paying banks and indirectly when paying their customers. It is at the stage of this defined institutional form that we might accurately make such statements as the government “neither has nor doesn’t have money”.”
(This is a reference to one of Mosler’s ‘aphorisms’, I think).
Given that Fed liabilities are US government liabilities, and that Treasury assets are US government assets:
When the Treasury has a positive balance in its account at the Fed, the US government has both an asset (Treasury) and an equal liability (Fed).
My point there was that the mere accounting consolidation of two separate operating institutions doesn’t transform that arrangement into a single institution with identifiably different operations - even if both arrangements may seem to achieve a similar net outcome in some circumstances. The unified CTRB institution allows for the option of not issuing bonds as an intended capability of its design and balance sheet structure, as opposed that outcome being unintended by the design of the existing institutional separation. The CTRB does not have the operational separation of a central bank issuing currency and a Treasury using it. It is operationally a bank itself. There is no Treasury account at a separate central bank. So the set of operations is quite different by comparison and is described differently. Mere accounting consolidation doesn’t mean operational modification, and accounting consolidation is all that is being achieved unless you specify a different operational design and function such as with the CTRB. And “government” as shorthand for the current institutional structure is only an accounting consolidation of two distinct institutional structures and operations.
Unfortunately for this purpose I’m off now for one week, so no time left. But given your level of interest and understanding, you might want to have a close look at the referenced Fiebiger paper below. It’s also a very detailed examination of the subject of your question, essentially demonstrating as I’ve noted here that a single institution and its operation can’t be a bank and the customer of the same bank at the same time in respect of the same transaction. “Government” as shorthand notation for the accounting consolidation of two operating entities is not a single institution in the sense of the CTRB.
"The banks will now have minus 81 in Assets and minus 81 in equity.
They went "81 negative" in NFAs."
Jose, these "negative" NFA's are irrelevant wrt the NFA's in the non-government.
Banks have two sets of Balance sheets…one for transactions between the bank and the public, the other for transactions between the bank and the Fed. Transactions betwen them are reconciled between banks in the FRB and the Fed.
One can't "see" the other. As far as the non-government is concerned, those -NFA's don't exist.
Question 1 from this weeks saturday Quiz from Bill Mitchell:
Question 1:
Modern Monetary Theory (MMT) characterises the interaction between the government sector (treasury and central bank) and the non-government sector in terms of vertical transactions, which change the net financial asset position of the non-government sector. These are in contrast with transactions within the non-government sector, which net to zero in terms of the impact on the financial asset position. Both quantitative easing (a central bank operation) and net public spending (a treasury operation) fit this depiction of vertical transactions.
The answer is False.
"Quantitative easing involves the central bank buying assets from the private sector – government bonds and high quality corporate debt. So what the central bank is doing is swapping financial assets with the banks – they sell their financial assets and receive back in return extra reserves.
So the central bank is buying one type of financial asset (private holdings of bonds, company paper) and exchanging it for another (reserve balances at the central bank).
The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns.
In terms of changing portfolio compositions, quantitative easing increases central bank demand for “long maturity” assets held in the private sector which reduces interest rates at the longer end of the yield curve. These are traditionally thought of as the investment rates. This might increase aggregate demand given the cost of investment funds is likely to drop.
But on the other hand, the lower rates reduce the interest-income of savers who will reduce consumption (demand) accordingly.
How these opposing effects balance out is unclear but the evidence suggests there is not very much impact at all.
Fiscal policy adds net financial assets to the non-government sector by way of contradistinction to quantitative easing."
"The primary differences are the presentation of all SOMA securities holdings at amortized cost and the recording of SOMA securities on a settlement-date basis. Amortized cost, rather than the fair value presentation, more appropriately reflects the Reserve Banks' securities holdings given the System's unique responsibility to conduct monetary policy. Although the application of fair value measurements to the securities holdings may result in values substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on the quantity of reserves available to the banking system or on the prospects for future Bank earnings or capital. Both the domestic and foreign components of the SOMA portfolio may involve transactions that result in gains or losses when holdings are sold before maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit." blah blah blah....
Question…If some of these guys think the Fed and banks inject NFA into the economy through arbitrage why is there a line item in the budget for interest paid on the National Debt, which is made up of the same securities.
"Although the application of fair value measurements to the securities holdings may result in values substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on the quantity of reserves available to the banking system or on the prospects for future Bank earnings or capital."
A direct consequence of closed-system arithmetic…those "values" are not part of the system. QED.
Right I was thinking of you when I read this.... ie only the balances for the principle of the loans are created in the "loans create deposits" scenario...
Hey, I'm trying to fill out my card for next weekends NFL games, can you help me out:
If the Dolphins trail the Patriots 17-10 at the start of the 3rd quarter and the Refs change the scoreboard to 7-0, does this matter to the outcome of the game? ie does the fact that the previous 3 quarters of football resulted in a 7 point deficit for the Dolphins at 17-10 effect the ability of the Dolphins to make up the 7 point defict vs if the deficit was set back to 7-0? Will it be a different game in the 4th quarter due to the scores of each team or is it the lead/deficit that matters mathematically?
Had a great conversation with some guys my age at my grand-daughters b'day party yesterday. Arrived there and they were talking politics, mainly economics and they were both in agreement with me,
First, that NEVER happens around here. I live in Tea-Party Mecca, Rick Scott is a God here. Ever heard of the Villages?
Then ,we were watching football. I asked them what the scorekeeper does with the points between games. Does he box them up and save them for the next game? What happens if he runs out? Does the game get called because of a lack of points?
What would be the difference between interest payments and interest?
"What is the arbitrage?"
"arbitrage - the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset."
Well I guess if the securities were originally auctioned to the Dealers at say 100, they hold them in inventory and then the price of those securities goes up to 103 and the Fed buys them under QE3 at 103, I suppose the Dealers gain balances on them (buy low sell high)? maybe that is what they are talking about?
Hold on now I think YOU are right, they yes perhaps "budget" for it, but I believe it is not 'appropriated'...
Budgets are estimates for this and other appropriations as the govt cannot know a priori how much interest they will have to pay or how many doctors will submit for Medicare/Medicaid reimbursement, how many seniors will sign up for Social Security, etc...
So it IS budgeted for as an estimate, NOT appropriated (ie "automatic appropriation"), and paid by the Treasury via a withdrawal from a Treasury account......
262 comments:
«Oldest ‹Older 201 – 262 of 262"My point is that these household assets (deposits) are THE NFAs remaining in the system after deficit-spending"
As I said you can get 'NFAs' in different parts of any given system.
I just paid for some drinks in a bar with a $10 IOU scribbled on a piece of paper (let's say). Assuming the barkeep has no outstanding debts or liabilities, he now has a $10 net financial asset!
For the 'currency zone' as a whole, the currency issuer can always pay its debts (denominated in that currency). So their NFA is perhaps 'slightly more NFA' than the 'NFA' I created...(perhaps)? Maybe it should be called NNFA?
(As a side note, it's also worth thinking about why we assume that bank liabilities are as good as the currency, because this wasn't always the case... It's because bank credit has a 'fixed exchange rate' with the government's credit, which in most cases is guaranteed by both the 'lender of last resort' and FDIC).
In a sense, the set-up of the system could perhaps be said to 'distribute' those government-issued assets to some degree, so they can essentially be held by more than one person at a time - given that the claim on the asset is practically as good as the asset itself, in most cases?
y, I look at it this way...
Money I earn and save is my cash. If I hold some Treasuries, they are listed as cash.
Money that I've borrowed and spent is my liabilities.
The sum of the two is my NFA's.
The sum can be positive or negative.
Everyone's balance sheet can be locked at in this way.
The sum of all of those balance sheets is the aggregate level of NFA'S.
If the sum is of balance sheets in the USA, it represents the aggregate level of NFA'S in the domestic economy.
If the sum includes dollar balances of foreigners, it represents the aggregate level of NFA'S in the non-government.
Tom H.,
A suggestion:
If you’re looking for simplification of the NFA concept for MMT purposes, I would suggest defining the application for any given discussion and prefacing the sector meaning of NFA in that discussion.
For example, the most often used context and meaning for MMT I’ve always understood to be non government NFA – which consists of bank reserves, currency, and treasuries.
But you have to be careful not to over-categorize the meaning of it.
Ramanan is very correct when he suggests that the NFA concept as a financial measurement is a bigger idea than MMT, or any particular MMT context. And even within MMT, there are occasions when you no doubt want to define NFA in a particular sector context that is different from the prototypical non government one. But there’s no reason for people to get confused about this provided that you define the context and application for the NFA concept in a particular discussion.
Examples:
- Non government NFA
- Government NFA (which is the inverse of non government NFA, and usually negative)
- Domestic private sector NFA
- Domestic household sector NFA
-Domestic business sector NFA
-Domestic bank sector NFA
- Foreign NFA (where foreign is defined relative to the US for example)
- Tom Hickey’s household NFA
All of these are legitimate measures of NFA in their own context.
Just clarify what the context and applicable definition being used is for a particular discussion.
This stuff shouldn’t be that confusing – just start 40,000 feet and narrow down what sector you want to focus on for a given discussion.
However, I do guarantee that you’ll experience persistent frustration and trouble if you attempt to categorically define NFA to always mean non government NFA - or any other version above for that matter. You have to be flexible where the discussion warrants it.
P.S.
And there are others in addition to the above list - any defined balance sheet or sector has a measurable NFA position.
Ramanan;
"Second, the flow of funds (or anybody else) don't value Treasuries at par. "
The Fed does.
See note 2:
http://federalreserve.gov/releases/h41/Current/
rsp,
so you're calling bank deposits cash..?
(Paul)
"there’s no reason for people to get confused about this provided that you define the context and application for the NFA concept in a particular discussion"
Agreed.
Tom's idea of a signifier attached to to 'NFA' has legs. i.e. NFA*, so you know that someone's referring to that particular view of things
NFAs equal Treasuries issued by the government" story-line
I remain unconvinced that his narrative is not correct.
"so you're calling bank deposits cash..?"
Yes.
paul, I suppose they are 'cash'. I tend to use the term just to mean currency and reserves, which is probably wrong
or NGNFA, etc.
"why should I care that NFA creation is basically a shell game that caters to hoarders? I don't."
Because NFA injections create stability that a credit circuit does not possess.
@ JKH at 6:21 PM
Thanks. Agree. This sums it up.
That's is what I was trying to say, perhaps unclearly or inelegantly.
"What these 15 yr olds need to understand is that the gov does not borrow in order to deficit spend"
I'm starting to think of money issuance as 'borrowing'. It makes sense to me. If you're in an MMT ZIRP world with no bond issuance, the govt is basically 'borrowing' at zero interest, no maturity.
JKH said...or NGNFA, etc.
Agree that this notation looks to be best.
"I tend to use the term just to mean currency and reserves, which is probably wrong"
I wouldn't know if it was wrong or not. It doesn't really matter.
If we define things in terms we understand, and the average person should be able to understand, and establish relationships that are true mathematically, how could we go wrong ?
Cash is cash whether it is in your pocket or in your bank account. Liabilities are a no-brainer. The relationship between the two is simple arithmetic. The result is NFA.
As far as the Sectoral Balances identity is concerned, these are the only balance sheet entries that matter.
y I'm starting to think of money issuance as 'borrowing'. It makes sense to me. If you're in an MMT ZIRP world with no bond issuance, the govt is basically 'borrowing' at zero interest, no maturity.
When the fiscal balance is in deficit, govt is dissaving or, colloquially "borrowing," even with direct currency issuance and no tys. When the fiscal balance is in surplus, govt is "saving." When the fiscal balance is zero, govt is neither saving nor dissaving.
"I'm starting to think of money issuance as 'borrowing'"
It's OK if you do this, provided you understand that in this context it is in no way similar to the normal meaning of the term.
Imagine asking a thousand people waht it means to borrow. Compare their answer to the mathematical operation you are referring to as borrowing.
Are the two things remotely similar?
the difference between a creditor and a debtor is difficult to pin down at times. A bank, for example, 'credits' your account. But it's actually you that is the bank's creditor.
I mean, it's obvious of course, just more difficult maybe to see how it really applies to the government.
here's Wray being his usual expressive self:
"Credit and debt are two sides of the same coin. Both creditor and debtor are sinful. They
balance. Exactly. The sinful balance is ensured by double-entry book-keeping."
I remain unconvinced that his narrative is not correct.
Tom, can you pls rephrase without all the double negatives. What do you think this is, a Bill Mitchell quiz?
Matt,
That's factors affecting reserve balances.
See this which is more proper:
http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2011.pdf
See page 4 - the balance sheet. At the end of 2011, the Treasury securities held is around $1,750bn and this is valued at amortized cost not the face value.
Confirm this from page 28 of the document.
The reason this is done is that these are held to maturity, so one can value them separately from the market value.
Nonetheless, there is some logic to it than simply valuing at face value.
It is inconsistent to value something at the face value for precisely the same reason I gave in the last comment.
The flow of funds on the other hand values things using market prices - so that there is self-consistency.
A bank, for example, 'credits' your account.
The customer's asset (deposit) is the bank's liability. The bank credits (marks up) one of its liability accounts, namely the customer's deposit acct. The bank owes the customer that amount "on demand" if it is a demand account.
JKH,
the most often used context and meaning for MMT I’ve always understood to be non government NFA – which consists of bank reserves, currency, and treasuries
If you apply this definition in the Lavoie example you'll end up obscuring the processes that did take place in the real economy.
Because reserves plus T-bills plus currency do add up to 100 net claims on the government sector (the amount of the initial deficit spending) but the increase in net financial assets that did take place is entirely attributable to the household sub-sector and is held as currency plus deposits - and no T-bills at all.
I know. I'm musing vaguely
Tom,
NFAs equal Treasuries issued by the government" story-line
"I remain unconvinced that his narrative is not correct".
Well, the Treasury did issue 100 in T-bills and NFAs did increase by 100. In that sense the story-line is "correct".
But the NFA increase was all attributable to the household sub-sector, whose higher net worth now exists as bank deposits and currency, not Treasuries.In this let's call it "reality-checked" sense the story line is not "correct".
Trixie, should have been "this narrative."
It seems to me that the closed system with inside and outside money is correct and this shows clearly that under the present institutional arrangements, the govt issues currency into the economy through the Tsy issuing Tsy securities to obtain reserves prior to expenditure.
The reserves that are used to purchase tsys can come from only two sources — prior Tsy disbursements or bank borrowing from the cb.
For example, the govt can issue currency under the present system by the Fed auctioning tsys issued by the Tsy to the primary dealers (PDs). The Fed can also loan the PDs the reserves to purchse the tsys at auction. Then the Fed can turn around and buy the tsys from the PDs for its own account at a price that compensates the PD for their expenses, including interest payments, along with a small profit to make it worthwhile.
Of course, the same could be accomplished by the Tsy just getting the reserves from the Fed without the extra step of the PDs, but under currency rules the Tsy cannot run an overdraft at the Fed.
Alternatively, the Tsy could just be permitted to issue currency directly as Lincoln did with the greenbacks.
It boils down the same thing in the result, i.e., NGNFA add, just different loops in getting there.
Jose, say the govt taxes those bonds and reserves away from the bank for some reason. In your example the households still have their 'net financial assets', and the bank now has just liabilities. Has anything changed?
"the govt issues currency into the economy through the Tsy issuing Tsy securities to obtain reserves prior to expenditure."
You're ignoring the fact that the Treasury already has a positive balance so can spend prior to bond issuance, with the bonds acting as a reserve drain (and 'replenishment') of the Tsy account.
It's all about causation - which actually comes first - sometimes, who knows?
What we do know is the Tsy account was 'filled up' in the past through overdrafts from the Fed, and that it has basically been recycling the same small quantity of 'money', over decades, through trillions and trillions of $ worth of payments and receipts. Or I might be completely wrong.
The NGNFA narrative of MMT is "in aggregate." The initial add of the required deficit offset is the original record of the NGNFA add. The tsys was just one means of holding that. It can be switched for rb or physical cash. Asset composition is irrelevant, and so is who holds the assets as long as they remain in nongovt, and they remain there in the same amount in aggregate as long as they are not taxed away.
This is the logic of the closed system. It's like energy. In a closed system energy can neither enter nor leave although it can be transformed. Throughout all transformations the amount of energy remains constant.
y,
To tax means a budget surplus, other things being equal.
So I'd say such a measure (a confiscation of bank sector assets, really) would decrease the NFAs of the private sector by the amount of the new tax.
First, the household sector increased its NFAs as a result of deficit spending; then the banking sector decreased its NFAs due to an increase in the budget surplus.
"If you apply this definition in the Lavoie example you'll end up obscuring the processes that did take place in the real economy."
That's why you have to be flexible with your NFA diagnosis, which is what I said.
And I know obscurity.
Obscurity is not a friend of mine:
http://monetaryrealism.com/jkh-on-the-recent-mmrmmt-debates-2/
So I'd say such a measure (a confiscation of bank sector assets, really) would decrease the NFAs of the private sector by the amount of the new tax.
Fiscal expenditure adds to NGNFA, taxation subtracts from NGNFA. The fiscal balance at any point in time shows the amount and direction of flow and from this the stock can be derived.
"the difference between a creditor and a debtor is difficult to pin down at times. A bank, for example, 'credits' your account. But it's actually you that is the bank's creditor."
Not if you are familiar with acounting terminology and how debits and credits are applied to the different classes of accounts. If your goal is to understand and have a conversation reliant on these terms you will have to study. I understand basic accounting pretty well…I had my own construction business for 17 years and did my own bookkeeping for all those years.
My point is and always has been that understanding the dynamics of an economy requires no knowledge of accounting. It doesn't hurt, but it isn't necessary.
Accounting is unrelated to the mathematical relationships that make an economic machine what it is. Accounting is a reporting tool that tells us what has already happened.
Yes, we can do what-if's with accounting and see what will happen with flows and what-not, but in the end it is a picture of what has already happened.
Math allows one to see what will happen, or what needs to happen in order for other related events to happen. Before it happens, No knowledge of accounting is necessary. No trial-and-error necessary.
As far as the Sectoral Balances are concerned all you need to know are assets and liabilities of the cash variety, the other classes of accounts on a balance sheet are irrelevant.
JKH,
Obscurity is not a friend of mine
Yes, I understand this question on the decomposition of Net Financial Assets has some similarities to the S = I+(S-I) debates.
Jose, you said before that the banks didn't have any NFA
"I'd say such a measure (a confiscation of bank sector assets, really) would decrease the NFAs of the private sector by the amount of the new tax."
that can't be, by your reasoning, because the household deposits are still NFAs
JKH,
"Obscurity is not a friend of mine"
I want to pull you up on this, as I re-read part of your paper (thanks for the link) and noticed that you conflate the Treasury and 'the government' at one point.
This is problematic, because Fed liabilities are US government liabilities, even though they are Treasury assets.
They can't be both assets and liabilities at the same time, can they?
"Fiscal expenditure adds to NGNFA, taxation subtracts from NGNFA. The fiscal balance at any point in time shows the amount and direction of flow and from this the stock can be derived."
Tom, another way to look at it is…
NFA = ∑ (G-T) + ∑ (X-M) over history.
No reserves are injured in this operation.
Accounting has taken the discussion of a very simple relationship into the world of Alice-in Wonderland.
Fine if one is familiar with or fascinated by accounting minutia. This can be useful.
Ordinary people with modest math skills can understand the system under discussion without any appeal to accounting whatsoever.
The Sectoral Balance identity may be accounting consistent but it is also an apt description of the economy from a closed system math perspective.
I'm going with the math approach as being more accessible to the masses than accounting.
As a matter of fact, math applied in observance of system principles is at the same time more descriptive and less prone to error as a result of unnecessary complexity.
y,
The banks had zero NFAs after the first round: deficit spending.
Now, after the second round (new tax) they have negative NFAs.
Say the tax "confiscates" the 81 in T-bills held by banks. The banks will now have minus 81 in Assets and minus 81 in equity.
They went "81 negative" in NFAs.
The household sector still has a +100 position in NFAs, though.
Thus, the total private sector position is now +19 in NFAs: it gained 100 as a result of the initial budget deficit, it lost 81 as a result of the subsequent budget surplus.
y,
can you give me the specific point?
give me a minute :)
JKH,
“Because the US Treasury is not an operational currency issuer, it obviously does not issue currency in conjunction with spending. It uses currency when it spends. There has been considerable confusion in some places on this point, extending to the characterization of government as an entity that issues currency as a result of spending.”
Here you conflate 'the Treasury' with ‘government’.
Given that:
(a) Fed liabilities are US government liabilities, and that
(b) Fed/ US government liabilities are ‘currency’,
when the US government spends, it issues currency.
“CTRB is at the top of the conceptual money hierarchy, the same as its CB predecessor. It has no need for a Treasury deposit account for clearing government payments. This allows CTRB the option of issuing currency as a function of spending. CTRB spends by crediting commercial bank reserve accounts – directly when paying banks and indirectly when paying their customers. It is at the stage of this defined institutional form that we might accurately make such statements as the government “neither has nor doesn’t have money”.”
(This is a reference to one of Mosler’s ‘aphorisms’, I think).
Given that Fed liabilities are US government liabilities, and that Treasury assets are US government assets:
When the Treasury has a positive balance in its account at the Fed, the US government has both an asset (Treasury) and an equal liability (Fed).
That is, the US government has ‘net zero’.
y,
My point there was that the mere accounting consolidation of two separate operating institutions doesn’t transform that arrangement into a single institution with identifiably different operations - even if both arrangements may seem to achieve a similar net outcome in some circumstances. The unified CTRB institution allows for the option of not issuing bonds as an intended capability of its design and balance sheet structure, as opposed that outcome being unintended by the design of the existing institutional separation. The CTRB does not have the operational separation of a central bank issuing currency and a Treasury using it. It is operationally a bank itself. There is no Treasury account at a separate central bank. So the set of operations is quite different by comparison and is described differently. Mere accounting consolidation doesn’t mean operational modification, and accounting consolidation is all that is being achieved unless you specify a different operational design and function such as with the CTRB. And “government” as shorthand for the current institutional structure is only an accounting consolidation of two distinct institutional structures and operations.
Unfortunately for this purpose I’m off now for one week, so no time left. But given your level of interest and understanding, you might want to have a close look at the referenced Fiebiger paper below. It’s also a very detailed examination of the subject of your question, essentially demonstrating as I’ve noted here that a single institution and its operation can’t be a bank and the customer of the same bank at the same time in respect of the same transaction. “Government” as shorthand notation for the accounting consolidation of two operating entities is not a single institution in the sense of the CTRB.
http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP279.pdf
"The banks will now have minus 81 in Assets and minus 81 in equity.
They went "81 negative" in NFAs."
Jose, these "negative" NFA's are irrelevant wrt the NFA's in the non-government.
Banks have two sets of Balance sheets…one for transactions between the bank and the public, the other for transactions between the bank and the Fed. Transactions betwen them are reconciled between banks in the FRB and the Fed.
One can't "see" the other. As far as the non-government is concerned, those -NFA's don't exist.
Here's another way of looking at NFA:
By definition:
NFA (non-government)= ∑ (G-T)
NFA (domestic non-government) = ∑ (G-T) + ∑ (X-M)
This comes from the sectoral balances Identity so it must be true.
Any accounting of transactions within this defined system MUST be consistent with the identity, or the accounting is wrong.
That's why I don't bother working through all of the accounting minutia.
Academics and forensic accountants may find it useful just to see how the money-making machine is configured.
There are virtually unlimited ways to configure a machine or circuit that will produce the desired output.
All we (economic participants) care about is th eoutput…it has to be there or our system doesn't work.
If the amplifier doesn't produce an output, the speakers don't work.
y,
The 81 in T-bills were "claims" on government that disappeared.
Question 1 from this weeks saturday Quiz from Bill Mitchell:
Question 1:
Modern Monetary Theory (MMT) characterises the interaction between the government sector (treasury and central bank) and the non-government sector in terms of vertical transactions, which change the net financial asset position of the non-government sector. These are in contrast with transactions within the non-government sector, which net to zero in terms of the impact on the financial asset position. Both quantitative easing (a central bank operation) and net public spending (a treasury operation) fit this depiction of vertical transactions.
The answer is False.
"Quantitative easing involves the central bank buying assets from the private sector – government bonds and high quality corporate debt. So what the central bank is doing is swapping financial assets with the banks – they sell their financial assets and receive back in return extra reserves.
So the central bank is buying one type of financial asset (private holdings of bonds, company paper) and exchanging it for another (reserve balances at the central bank).
The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns.
In terms of changing portfolio compositions, quantitative easing increases central bank demand for “long maturity” assets held in the private sector which reduces interest rates at the longer end of the yield curve. These are traditionally thought of as the investment rates. This might increase aggregate demand given the cost of investment funds is likely to drop.
But on the other hand, the lower rates reduce the interest-income of savers who will reduce consumption (demand) accordingly.
How these opposing effects balance out is unclear but the evidence suggests there is not very much impact at all.
Fiscal policy adds net financial assets to the non-government sector by way of contradistinction to quantitative easing."
Does Bill read our threads?
Ramanan,
But from the Notes:
"The primary differences are the presentation of all SOMA securities holdings at
amortized cost and the recording of SOMA securities on a settlement-date basis. Amortized cost, rather than
the fair value presentation, more appropriately reflects the Reserve Banks' securities holdings given the
System's unique responsibility to conduct monetary policy. Although the application of fair value
measurements to the securities holdings may result in values substantially greater or less than their carrying
values, these unrealized changes in value have no direct effect on the quantity of reserves available to the
banking system or on the prospects for future Bank earnings or capital. Both the domestic and foreign
components of the SOMA portfolio may involve transactions that result in gains or losses when holdings are
sold before maturity. Decisions regarding securities and foreign currency transactions, including their
purchase and sale, are motivated by monetary policy objectives rather than profit." blah blah blah....
http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2011.pdf
Looks like they make a point of not using Fair Market Value....
rsp,
and this part is interesting on it's own: " including their
purchase and sale, are motivated by monetary policy objectives rather than profit."
Tell that to the moron Bernanke who goes in front of Congress all the time bragging about "how much money they made for the taxpayer"....
rsp,
Matt,
Question…If some of these guys think the Fed and banks inject NFA into the economy through arbitrage why is there a line item in the budget for interest paid on the National Debt, which is made up of the same securities.
If it's in the budget, it's fiscal.
"Although the application of fair value
measurements to the securities holdings may result in values substantially greater or less than their carrying
values, these unrealized changes in value have no direct effect on the quantity of reserves available to the
banking system or on the prospects for future Bank earnings or capital."
A direct consequence of closed-system arithmetic…those "values" are not part of the system. QED.
Paul,
Right I was thinking of you when I read this.... ie only the balances for the principle of the loans are created in the "loans create deposits" scenario...
Hey, I'm trying to fill out my card for next weekends NFL games, can you help me out:
If the Dolphins trail the Patriots 17-10 at the start of the 3rd quarter and the Refs change the scoreboard to 7-0, does this matter to the outcome of the game? ie does the fact that the previous 3 quarters of football resulted in a 7 point deficit for the Dolphins at 17-10 effect the ability of the Dolphins to make up the 7 point defict vs if the deficit was set back to 7-0? Will it be a different game in the 4th quarter due to the scores of each team or is it the lead/deficit that matters mathematically?
;) rsp,
Paul,
I see your point about the fiscal but I believe interest payments are an "automatic appropriation" and not "in the budget" per se...
"Interest" I believe shows up in the Treasury Statements though as a line item... which is "fiscal"...
rsp,
Matt :-)
Had a great conversation with some guys my age at my grand-daughters b'day party yesterday. Arrived there and they were talking politics, mainly economics and they were both in agreement with me,
First, that NEVER happens around here. I live in Tea-Party Mecca, Rick Scott is a God here. Ever heard of the Villages?
Then ,we were watching football. I asked them what the scorekeeper does with the points between games. Does he box them up and save them for the next game? What happens if he runs out? Does the game get called because of a lack of points?
Paul,
I dont get what you mean by this: " the Fed and banks inject NFA into the economy through arbitrage "
What is the arbitrage? Interest rate setting?
rsp,
Matt,
What would be the difference between interest payments and interest?
"What is the arbitrage?"
"arbitrage - the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset."
Well I guess if the securities were originally auctioned to the Dealers at say 100, they hold them in inventory and then the price of those securities goes up to 103 and the Fed buys them under QE3 at 103, I suppose the Dealers gain balances on them (buy low sell high)? maybe that is what they are talking about?
rsp,
paul,
I was pointing out "a technicality", you wrote:
"If it's in the budget, it's fiscal."
and I dont think "interest on the debt" is "in the budget" per se... ie Congress doesnt "budget" for it...
but it does show up on the Treasury Statement....
rsp,
"I dont think "interest on the debt" is "in the budget" per se... ie Congress doesnt "budget" for it..."
Matt, I'm not really sure but this, line 23:
http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
…Seems to track pretty close with the Treasury report.
Plus if the Treasury is making payments wouldn't that be part of the budget?
Hold on now I think YOU are right, they yes perhaps "budget" for it, but I believe it is not 'appropriated'...
Budgets are estimates for this and other appropriations as the govt cannot know a priori how much interest they will have to pay or how many doctors will submit for Medicare/Medicaid reimbursement, how many seniors will sign up for Social Security, etc...
So it IS budgeted for as an estimate, NOT appropriated (ie "automatic appropriation"), and paid by the Treasury via a withdrawal from a Treasury account......
rsp,
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