There’s been a bit of confusion of late in blogland about whether endogenous money really matters all that much. Endogenous money is, of course, the theory that, contrary to what mainstream economics would have you believe, private banks in modern capitalist economies actually create money out of thin air. In my experience, theoretical economists grasp very quickly how much of an impact such a theory would have if it were accepted as true. Less theoretically inclined commentators who are generally more interested in policy and practical matters, however, often express confusion over what exactly all the fuss is about. “Does endogenous money really matter?” they ask.
In what follows I will lay out the three leading reasons why endogenous money does, in fact, matter. While I will try not to go too much into theory I will briefly mention the ISLM, but as we move from point three to point one our discussion will become less and less abstract. Hopefully such an endeavour will play a part in lifting the fog surrounding the relevancy of endogenous money. Then it will simply be up to commentators themselves to decide what approach they want to accept.Naked Capitalism
Philip Pilkington: Three Reasons Why Endogenous Money Matters
(h/t paul in the comments)
76 comments:
Let me get this straight. The old-fashioned Keynesians never realized that the banks create fiat funny money out of thin air. And the newfangled Keynesians believe that there is no such thing as "crowding out" because everyone knows that resources can be in two places at the exact same time. The metal used to make all those phones to buy all those votes for Obama could have been used AT THE EXACT SAME TIME to make cars in Michigan.
http://www.flickr.com/photos/bob_roddis/4163003939/in/set-72157600951970959
With arguments like these, there is still hope for the future of mankind.
Didn't realize there was a shortage of metal.
I'm confident we can find a substitute or learn to live without.
I think this is excerpted from an older post by Wray but it seems appropriate wrt recent discussions:
http://larspsyll.wordpress.com/2012/10/01/who-rules-the-roost/
Bob,
Metal is not money. Money is a debt record, metal was just used to record the record, just like clay tablets or wood tallies.
Is clay or wood money? Should we go on clay standard or on bamboo standard?
@ paul
Wray quote is dated April 19 at Economonitor.
Bob, there's a difference between real crowding out and financial crowding out. Financial crowding out doesn't occur, but real crowding out (using up real resources) is possible.
Bob Roddis equates the financial economy with the real economy somewhat.
As if the financial economy was a perfect representation of the state of real production economy. This is nonsense.
In particular because any increase in money supplies represents production added, but the stock of money supply can't ever represent unused resource stocks.
Unused available resource stocks are an unknown which do not form part of the economy and cannot be represented by monetary assets until they actually do, the same as future technological breakthroughs, for example.
Bob Roddis seems to think we should run on a fixes money stock because the universe after all has probably a fixed quantity of mass=energy and 'resources are scarce'. I can't say how dumb this idea is.
@Bob
> The old-fashioned Keynesians never realized that the banks create fiat funny money out of thin air.
Seems very unlikely, right? If they did not realize this, then why were they so hung up on getting away from the gold standard? I think the author is basically confused about what the ISLM Keynesians know and don't know.
[As an aside, I think the author himself is a bit confused about where he wants to go with his definition of endogeneous. I don't think he has a very convincing argument that the Fed cannot boost economic activity (not taking a stand on whether this would be an unstable boom or not)]
> And the newfangled Keynesians believe that there is no such thing as "crowding out" because everyone knows that resources can be in two places at the exact same time.
Now this one I can answer. I don't think the old Keynesians believed this either!
@Ignacio
Um, I think you're trying to make fun of Bob here, but I can't really understand what you're saying, so...
> any increase in money supplies represents production added
What does this mean? Money supplies can be increased without additional "real production."
> the stock of money supply can't ever represent unused resource stocks
No one thinks they do.
> Unused available resource stocks are an unknown...
Huh? Undiscovered resources would be part of neither the real economy *nor* the financial one. How does this show that the real and financial economies are different?
[Be advised, I'm agree that there is a distinction between real and nominal values and that nominal changes can have real effects (Bob thinks this too!). But your examples here don't show this.]
Mass-energy conservation? I don't think that's what anyone is talking about either. If I had to summarize Bob's point about crowded out, I'd say the important stuff happens in *non-specific factors of production* and the degree to which you're going to need to use *currently non-idle ones* to increase production.
Do you have anything interesting to say about this idea?
I'm not trying to make fun, I'm saying he is wrong.
If you have read Roddis in the past you will know that he in some weird way equates the money stock to available resources. He is very serious on his idea that the humanity should run on a fixed money stock because 'resources are scarce' (on his own words).
Just read his past posts and you will see this idea transpires all his talking.
"What does this mean? Money supplies can be increased without additional "real production."
Yeah well, that happens on hyperinflation scenarios exactly, which isn't a realistic scenario right now. It's not a physical law but money supply increases usually increase demand and production of goods and services.
OFC if you believe that humanity has lost hope to increase production capacity you may as well have this discourse, but given that in reality we have overcapacity at almost any sector of the economy I can only deduce when people talks about 'limited resources' they must be talking about 'unexploited resources' (commodities) which as you say don't form part yet of any anthropocentric financial-economic cycle (because there is a real economy in biological terms that is of higher hierarchy than our human socially constructed concept of 'economy'). (So metal could have been used both to make phones and cars, because you could increase the production of that metal.)
If they can only be talking about these, how can matter at all monetary/financial matters, as if money scarcity was a representation of available resources? This does not make any sense, as the current level money supply is a function of past economic activity, not a function of future unknown supply.
> If you have read Roddis in the past you will know that he in some weird way equates the money stock to available resources.
I don't think this is what he's saying. You can't equate apples and oranges. I think he's saying that the price of goods acts like a signal. And you don't want to dump money into the system and screw up those signals.
> Yeah well, that happens on hyperinflation scenarios exactly, which isn't a realistic scenario right now.
No, it doesn't have anything to do with hyperinflation. I'm saying the Fed could just credit your account with $100 extra dollars. It's not the case that "money supplies represents production added."
The fact that the government can never run out of "dollars" does not solve the problem of where to find hundreds of thousands of people who would voluntarily work changing the adult diapers of tens of millions of senile baby boomers at a wage that will support a lifestyle they might prefer. In fact, the entire fiat funny money and welfare system prevents almost everyone from properly planning, calculating and saving for such an obvious eventuality. And creating funny money with keystrokes will not solve this problem. All that such a mad adventure might accomplish is the snatching of purchasing power from those holding the existing money and granting it to others who did not earn it and to whom it does not belong thus destroying the plans of the smart and thrifty for the benefit of the lazy and slothful.
Bob, is that meant to be economics or moralizing? If it is meant to be economics, there is a problem with the arithmetic wrt sectoral balances. Hint: It involves the paradox of thrift pointed out by non other than J. M. Keynes.
> there is a problem with the arithmetic wrt sectoral balances
I don't think Keynes used the phrase sectoral balances, right? He talked about safe assets.
Friedman's contribution to macro was to show that if people want money in times of crisis, the CB could just give them money. We don't need Keynesian fiscal policy, except to satisfy moral urges.
the CB could just give them money
Fiscal helicopter drops by the Fed are against the law in the US, although not in some other jurisdictions. The Fed increasing the monetary base by asset swaps doesn't affect the money supply by either increasing net financial assets of non-govt or increasing bank lending. The Bush admin's sending everyone a check from Tsy was a true helicopter drop but that must be appropriated by Congress.
Keynes's observations on the result of saving in aggregate as demand leakage is basic to the sectoral balance approach of maintaining effective demand at optimal resources use, including full employment, while also managing price stability.
"... is the snatching of purchasing power from those holding the existing money and granting it to others who did not earn it..."
Where have you been the last ten years with all the fraud in the FIRE industries. Do you think fraudsters & banksters holding "existing money" earned it?
Existing money only gives you the right to spend that amount, no need to hold the future hostage to a nonsensical ideology that produces detrimental economics.
Thanks for the LMAO.
Bob,
I don't think the actuarial data suggests anywhere near 10s of millions will succumb to senility in the future in the US...
You are afraid of something that will never happen....
Rsp
Do you think fraudsters & banksters holding "existing money" earned it?
No. Duh. The banksters invented the present system in order to steal purchasing power so that the public would not be able to understand the cause of their loss of wealth. Which of course comes in quite handy in the financing of unending war.
http://www.lewrockwell.com/lewrockwell-show/2012/09/28/311-war-and-the-fed/
Existing money only gives you the right to spend that amount, no need to hold the future hostage to a nonsensical ideology that produces detrimental economics.
So, being allowed to save or spend one's own money "produces detrimental economics". See. MMTers really are totalitarian socialists. Nothing more to it than that.
Marris, the Fed handing out money (a 'helicopter drop') is a fiscal operation.
Fiscal.
> Fiscal helicopter drops by the Fed are against the law in the US, although not in some other jurisdictions.
This is not a serious response to any policy debate. It stems from a conflating of institutionalism and theory.
The current system does not have the Fed giving out cash. It also does not have JG nor Fed fixing the yield curve. Those are also not going to happen without approval from Congress. Would "but the JG is currently not approved!" dissuade any JG advocate? I think not.
> The Fed increasing the monetary base by asset swaps doesn't affect the money supply by either increasing net financial assets of non-govt or increasing bank lending.
No, I'm not talking about money supply. I'm talking about prices. Anyone who thinks the Fed cannot target prices is going to need to back that up with a powerful argument.
> Marris, the Fed handing out money (a 'helicopter drop') is a fiscal operation.
Uhm no. According to the definition that most people use, it would not be fiscal unless the Fed either also taxed, or the Fed sold bonds while they did the drops.
I understand why you want to change the definition of fiscal: it would make MMT pronouncements slightly easier to parse. That's not a compelling reason.
marris,
In practice that does not happen, money created endogenously by banks is used for consumption (production). Money created via deficit spending also results in increased consumption (production). I'm not saying if it's good or bad consumption or production, that's an other matter.
Most monetary unconventional programs are asset swaps, there is no actual increase of money supply. Even monetary injections are carried through reserves, these do not increase the money supply available to the population (unless you believe loans are created by reserve supply, in that case idk what are you doing here), but even if they did, they are usually done under circumstances of credit contraction and balance sheet degradation, that is, to offsetg previous expand of money now being destroyed.
Reckless money printing beyond the ability to be controlled by tax system (case of regimes under ongoing social unrest, revolve,e tc.), and the capability of the productive fabric to supply the demand would result in in practice in cases of increasing monetary mass without added production. That's why, I mentioned hyperinflation.
> Keynes's observations on the result of saving in aggregate as demand leakage is basic to the sectoral balance approach of maintaining effective demand at optimal resources use, including full employment, while also managing price stability.
Three words: shifting Philips curve.
No need to beat around the bush. The sectoral balances approach was thrown out when it stopped working.
When it:
- failed to maintain effective demand at optimal resource use, +especially* failing to achieve full employment.
- while also failing to maintain price stability.
"I don't think this is what he's saying. You can't equate apples and oranges. I think he's saying that the price of goods acts like a signal. And you don't want to dump money into the system and screw up those signals."
So, you believe money a neutral construct and that the level of money does not matter at all?
That increased production and consumption should not ever be matched with an increased quantity of money and that we could run on a limited stock of money?
How does NOT increasing (or decreasing) the money supply don't affect the price level? There are no 'leakages' of money in the system (like savings)? As long as people hoards money you must increase the supply or you will be creating an other artificial distortion of that signal, inducing artificial scarcity because the lack of payment means.
The importance of price levels is the relativeness between prices of different goods and products, and also relative to incomes (flows), not absolute levels which are meaningless by theirself.
"Uhm no. According to the definition that most people use, it would not be fiscal unless the Fed either also taxed, or the Fed sold bonds while they did the drops."
Come on marris, this is just dissembling. How can you argue that "fiscal" MUST be accompanied by bond issuance or debt?
"According to the definition that most people use"…
I'm calling bullshit here. You want to use that one first bring us a poll that shows that "most people" think that …ball's in your court.
Then you will have to prove that anyone here gives a damn what "most people think".
Finally, after all of the institutional arrangements and laws and conventions are wheeled out in your argument try to remember that at it's root an economic system is a math system, the activity of which is directly a function of spending.
It can be crippled by bad policy, because those policies can affect the flows, but the system remains intact.
Bond issuance in exchange for money creation is not part of the system. It's an add-on that is intended to put a governor on money creation, an input. It is not an part of the system itself.
> Most monetary unconventional programs are asset swaps, there is no actual increase of money supply.
Well, certainly all purchases are asset swaps (money for non-money). This is also true of most fiscal operations. The government buys a building, or a plane, or a computer system. The only non-asset-swap purchase would be transfer payments and government employee wages, although if you squint, you could.probably squeeze these in as well.
> Even monetary injections are carried through reserves, these do not increase the money supply available to the population.
I agree that the basic reserve-based money multiplier. But the Fed can certainly control lending by targeting inflation. For example, Canadian inflation has remained steady at the BoC target of 2 percent for many years now. Since most money in the system comes from the banking system, this indicates a clear influence on loans by BoC policy: reserve increase, interest on reserve, and commitment.
I don't think the actuarial data suggests anywhere near 10s of millions will succumb to senility in the future in the US...
You are afraid of something that will never happen...
You're right. There's nothing to worry about. No one is going senile. And the government can never run out of "dollars".
http://tinyurl.com/9y7tbmm
World faces ageing population time bomb says UN
The world needs to take urgent action to cope with the impact of a rapidly ageing population, according to a new report, which forecast that the number of people older than 60 would surpass one billion within a decade.
http://tinyurl.com/99kvmdt
But as Mr. Franko said, that's all lies. And it doesn't matter anyway because the government can never run out of dollars.
> How can you argue that "fiscal" MUST be accompanied by bond issuance or debt? ... I'm calling bullshit here. You want to use that one first bring us a poll that shows that "most people" think that.
Gosh, I've left all my polls in my other jacket. How about we just look it up, instead?
Here's wikipedia:
http://en.wikipedia.org/wiki/Fiscal_policy
Describes taxes and expenditures.
Here's CliffNotes:
http://www.cliffsnotes.com/study_guide/Fiscal-Policy.topicArticleId-9789,articleId-9749.html
Describes taxes, expenditures, AND... long-term, interest-bearing bonds.
MMT assigns a "fiscal" label here because it bundles together the Fed and the Treasury. People who *don't* confuse the two would call the actions of the former monetary policy. It would call the actions of the latter fiscal policy.
Of course, the two can work together, such as a tax cut + open market operations. But if the Fed acts alone, no one except an MMTer would call that fiscal.
> Then you will have to prove that anyone here gives a damn what "most people think".
Hmm... why do you think this is relevant to the truth or falseness of what I said?
> it's root an economic system is a math system, the activity of which is directly a function of spending... Bond issuance in exchange for money creation is not part of the system. It's an add-on...
Oh, and *this* is not BS? What is the criteria for what is and is not an addon? Lots of spending is enabled by credit.
"Hmm... why do you think this is relevant to the truth or falseness of what I said?"
True or false isn't the right framing I don't believe. It just isn't germane to the problem at hand. You are looking at the periphery of the problem instead of the core.
That's your business, but how are you going to bring your argument home if the people you are arguing with only give credence to the core relationships? The tail does not wag the dog.
marris, I can see that you are very bright person. From where I sit you are attacking the problem from an entirely different perspective than we are here, one that we (most of us) have already rejected.
That's why we have chosen MMT as the framework. Nothing you have said undermines any part of the MMT framework. You are presenting opinions, not facts. You may say that we are also presenting opinions. Maybe so.
Fact: there can exist no exceptions wrt nominal dollar balances and the sectoral balance identity. Not measurable data, the virtual S/B.
Fact: as far as the non-government economy is concerned the only input that matters from the operational perspective is that spending is introduced as needed to maintain the system in a stable dynamic.
Fact: The mechanics of bond issuance have no measurable effect on the dynamic as long as the flows are maintained. There is no negative feedback loop constraining the governments ability to create dollars, only voluntary obstacles.
Thus, your argument is moot from a system point of view. Politics and bad management can undermine the smooth operation of the core system, no one is denying that. We just have to recognize where the problem lies before we can approach the solution.
Your point of view as presented is a very common one.
"But if the Fed acts alone, no one except an MMTer would call that fiscal."
Problem is, the Fed can't act alone. No "helicopter drop" for you.
Now maybe marris will try to explain that the Fed is not really part of the government and only an MMTer would think that it is...
marris I'm not talking about money supply. I'm talking about prices. Anyone who thinks the Fed cannot target prices is going to need to back that up with a powerful argument.
Are you talking asset prices or goods prices or the price of money, or do you see the interest rate directly influencing either asset price or goods price or both. Just what are the equations?
Price theory is hardly a settled matter in the economics profession. Neoclassicals, Austrians, PKEs and Marxians have different views on price determination, and there are differences within these schools.
@paul, I'm not sure what you're talking about when you say "sectorial balance evidence." Obviously the government will issue bonds to make up for it's deficit. The amount of outstanding bonds is going to match the cumulative deficit. That's an accounting identity.
Tne fiscal discussion is a response to y's incorrect statement:
"Marris, the Fed handing out money (a 'helicopter drop') is a fiscal operation."
Statements like y's comes from the confusion between what is Fed and what is Treasury in the MMT model [in the simplest form, there is no distinction]. I could just as easily take the MMT model and say that all government spending is "monetary operations."
Now from your statements, I get the impression that you don't know what MMT policy is really trying to accomplish. [I could be wrong about this, but manybe not].
MMT tries to target the level of net financial assets. These include cash + government bonds. MMT measures *add together* Treasuries and cash [The simplest techniques for doing so converts a bond to it's cash equivalent by summing up the coupon and principal amounts. More complex treatments include the interest rate.]
Whether or not MMT confuses Fed and Treasury is not a matter of opinion (mine or yours). It's a consequence of this NFA calculation. It's an integral part of the MMT framework!
BTW, this is why folks like James Galbraith Jr. don't want to reduce the national debt. They think that outstanding supply *contributes* to the NFA total.
marris This is not a serious response to any policy debate. It stems from a conflating of institutionalism and theory.
How so? Seems to me that this is basic. If Congress won't permit itself direct issuance, why would it permit the Fed to do independently.
The current system does not have the Fed giving out cash. It also does not have JG nor Fed fixing the yield curve. Those are also not going to happen without approval from Congress. Would "but the JG is currently not approved!" dissuade any JG advocate? I think not.
Apples and oranges. The US already has a fairly =robust safety net. A JG just modifies the existing system. Allowing the Fed to do fiscal independently would amount to Congress sharing its most powerful tool to the Fed.
Moreover, direct issuance w/o tsys offset would be perceived as inflationary. If it was realized that it is not, then Congress would make use of this powerful tool itself.
A counter-argument is that Congress doesn't trust itself with loose pursestrings but it would trust the Fed. Plausible but I think unlikely.
Another counter is that other cb's have this ;power and it hasn't resulted in the end of the world there so it would not here either, and it would give Congress political cover.
> Are you talking asset prices or goods prices or the price of money, or do you see the interest rate directly influencing either asset price or goods price or both. Just what are the equations?
Price of goods. For example, an inflation target by the BoC [between 1 and 3 percent since 1991].
http://www.bankofcanada.ca/monetary-policy-introduction/framework/inflation-control-target/
Evidence:
http://www.bankofcanada.ca/rates/price-indexes/cpi/
Prices are not set by equations. Trades reflect double INequality of wants. CPI is controlled by base money, bank lending, and price expectations.
marris, the MMT definition of "fiscal" is that which increases non-govt NFA. Asset swaps that don't affect the amount of non-govt NFA but only its composition are "monetary," as are changing the interest rate or influencing the yield curve.
> How so? Seems to me that this is basic.
Because the current institution is looking around for new ideas. They are unhappy with what they're currently doing. If the case for modified monetary policy is strong, they will probably adopt it. Consider for example, the impact of the recent Mike Woodford paper on monetary discouse.
I'm saying it's an invalid move to argue that a proposed plan should not be considered because it is currently not approved.
As paul would say, this is a "voluntary obstacle."
Bill Mitchell " The Philips curve is bosh. Read my bookwritten with J. Muysken."
> marris, the MMT definition of "fiscal" is that which increases non-govt NFA. Asset swaps that don't affect the amount of non-govt NFA but only its composition are "monetary," as are changing the interest rate or influencing the yield curve.
Uhm, isn't this evidence of what I said to y and paul? They are using a definition of "fiscal" which is limited to the MMTers. Most people do not use "fiscal" this way.
Also, it seems foolish to limit "monetary policy" to interest rate targeting. That's a small part of the space. Before interest rate targeting became popular, monetary policy was used to target money supply measures. Further, the Fed has continued monetary actions even after rates have dropped to zero. They seem to be doing inflation targeting now.
Most monetary unconventional programs are asset swaps, there is no actual increase of money supply.
Well, certainly all purchases are asset swaps (money for non-money).
Sorry, marris, but I thought you were familiar enough with the conversation that has been going on here for a long time that would make one aware that I was talking about the Fed swapping rb for tys and vice versa. There is no change in the amount in non-govt NFA in those swaps.
BTW, the Fed paying IOR is fiscal and the Fed to get permission from Congress to do so because it is fiscal.
Recall also that Bernanke refused to do what Paulson wanted to relieve the crisis at its peak on the grounds that doing what Paulson requested was fiscal and the Fed was not allowed to do fiscal under any circumstances w/o the approval of Congress. Bernanke was not going to stick his neck out w/o cover.
But as Mr. Franko said, that's all lies. And it doesn't matter anyway because the government can never run out of dollars.
As Greenspan testified before Paul Ryan's budget committee, the US cannot run out of dollars and so SS and Mediare are not a financial issue. The issue is whether the real resources will be available in the future to meet future needs.
Quite clearly, the way to best insure that real resources are available for future needs is to run the global economy as optimal output based on present resources. The problem here is over-supply resulting in widespread unemployment due to insufficient effective demand traceable to insufficient income, i.e., lack of purchasing power. There is not enough money in the system where it needs to be for a number of reasons, demand leakage to savings and maldistribution of income and wealth being at the top of the heap, along with too high a ratio of private financing to public financing. In addition, there is too much resource waste and negative externality creating drag on the world economy and the militaries of the world are in great measure the cause of this waste.
marris, say the US went to "greenbacks" and stopped issuing tys in deficit offset. Is that not fiscal? Hint: it increases non-govt NFA, or as you would say, the money supply.
The point is that changes to the money base that don't directly change the money supply are not fiscal but monetary. Changes that directly affect the amount of the money supply are fiscal.
A key insight of MMT (Warren Mosler) was that taxing and spending are fiscal in that they affect the amount of non-govt NFA, while tsys issuance is monetary in that it is only serves as a reserves drain.
Of course, you won't find this in the non-MMT lit because it is an MMT "discovery."
paul Fact: there can exist no exceptions wrt nominal dollar balances and the sectoral balance identity. Not measurable data, the virtual S/B.
Fact: as far as the non-government economy is concerned the only input that matters from the operational perspective is that spending is introduced as needed to maintain the system in a stable dynamic.
Fact: The mechanics of bond issuance have no measurable effect on the dynamic as long as the flows are maintained. There is no negative feedback loop constraining the governments ability to create dollars, only voluntary obstacles.
Nice.
"@paul, I'm not sure what you're talking about when you say "sectorial balance evidence." Obviously the government will issue bonds to make up for it's deficit. The amount of outstanding bonds is going to match the cumulative deficit. That's an accounting identity."
Marris, you mean sectoral balance identity right?
Your statement is not strictly true, which kind of gets to the issue of voluntary constraints through the back door.
Currently the National Debt consists of about $11 Trillion in bonds held by the public and foreign entities, the rest must be cash.
By law, the government has no way to issue cash into the non-government. How did this happen?
A clarification, I consider bonds (state-backed) cash-equivalents. The sum of all bonds held by the public plus foregn entities plus all net cash equals the National Debt and also equals the sum of all government deficits/surpluses over history.
These NFA's (the number, level, whatever) are representative of the closed system of MMT.
The sum of net financial assets on all balance sheets in the U.S. combined plus the amount held by foreign entities is equal to the National Debt.
"I could just as easily take the MMT model and say that all government spending is "monetary operations.""
You could but would you believe it? In any case if you understand how the underlying system works it doesn't matter what you call it except when communicating with others.
The functioning of the underlying system is abstract, words don't make it work or not work. In the mind the system is a "picture" that words can only paint approximately.
> Marris, you mean sectoral balance identity right?
Well, *I'm* referring to an identity. I'm not sure what *you're* referring to when you mentioned "no measurable data"... what evidence could there be?
> By law, the government has no way to issue cash into the non-government. How did this happen?
Huh?!?! That is *exactly* what open market operations do. You are probably not considering the full sequence of events that happens with a bond.
Government issues a zero bond with face value $100. This sells for a $95 discounted value. The government spends $95 dollars.
Now the Fed comes along and does an open market operation. They buy the bond for $96 dollars. The bond has been removed from circulation and gets put on the Fed's balance sheet. $1 net dollar has been added to the non-private sector.
We can continue the analysis further if the Fed sells the bond for less than $96.
Not sure what question you're asking about "How did this happen?" How did what happen?
> The sum of net financial assets on all balance sheets in the U.S. combined plus the amount held by foreign entities is equal to the National Debt.
Nope. The national debt refers to the amount of outstanding *bonds*, not cash. Now if someone takes the MMT approach and aggregates cash + bonds, then they're going to need to disaggregate this total to figure out the national debt. The rest of the world (which did not aggregate them i the first place), just needs to look at their actual bond total.
I believe people sometimes report the total face value of the bonds and other times do an NPV calculation.
> You could but would you believe it?
Yes. Yes, I would. After all, money is being spent into the economy.
marris MMT tries to target the level of net financial assets. These include cash + government bonds.
Non-govt NFA = cash in circulation + reserves (includes cash in bank vaults) + tsys.
Total currency creation is through the cb (reserves-cb liability) and TSY (tsys-Tsys liability), with banks obtaining cash for window demand from the Fed by exchanging rb for notes (cb liability) and coin (Tsy liability) .
With "outside money," the liability in the unit of account is not within non-govt, therefore constitutive of NFA.
With "inside money," the asset-liability in the unit of account is within non-govt, hence nets to zero.
See Bill Mitchell, The consolidated government – treasury and central bank. At least look at the diagram.
> Bill Mitchell " The Philips curve is bosh. Read my bookwritten with J. Muysken."
Yeah... I'm probably not going to buy this book. I'm also a bit confused. The "Philips" curve is the tradeoff between inflation and unemployment.
MMT certainly *accepts* such a tradeoff. After all, MMT thinks taxation is necessary to regulate aggregate demand and avoid raising prices.
Now if Mitchell thinks that such a tradeoff *does not* exist, then I don't really know what to say to that... It seems like another reason to *not* adopt MMT. After all, they don't even *claim* to reduce unemployment without raising prices...
@ marris
That's one theory, based on correlation not causation.
> Non-govt NFA = cash in circulation + reserves (includes cash in bank vaults) + tsys.
Why is there "non-govt" here? What is government NFA?
I believe this is just NFA (the *net* stuff). After all, *other* financial assets are assets on one guy's sheet and a liability on someone else's, right?)
marris I'm saying it's an invalid move to argue that a proposed plan should not be considered because it is currently not approved.
Agreed. In that case, I would agree for direct issuance by Congress, which is responsible to the people, and consolidating Fed and Tsy formally to eliminate the command system at the top of the US economy that is in charge of a small group of unelected and unaccountable technocrats. Giving the command system more power seems to me to be insane.
marris monetary policy was used to target money supply measures.
Until it was found that it doesn't work in a system with a lender of last resort.
marris: Also, it seems foolish to limit "monetary policy" to interest rate targeting. That's a small part of the space. Before interest rate targeting became popular, monetary policy was used to target money supply measures. Further, the Fed has continued monetary actions even after rates have dropped to zero. They seem to be doing inflation targeting now.
According to MMT economists and financial professionals, all the Fed can do is set rates and influence the yield curve, and the sooner they wake up to this the better.
> Sorry, marris... There is no change in the amount in non-govt NFA in those swaps.
Please see $95, $96 example above.
> BTW, the Fed paying IOR is fiscal and the Fed to get permission from Congress to do so because it is fiscal.
Nope. It doesn't become fiscal just because Congress needs to be informed and approve the initial policy. After all, Congress needed to create the Fed. That does not make all Fed actions fiscal!
IOR is not a budget item. It doesn't need to be offet with bond sales. The Fed can also change the IOR rate without talking to Congress. All that makes IOR monetary policy.
Here is a paper from the Fed discussing the idea:
www.federalreserve.gov/pubs/ifdp/2010/996/ifdp996.pdf
It's also useful to look at *another central bank* to help separate the US institution from how US economists think of the Fed (as an abstract central bank).
Here's another doc from Mike Woodford, discussing the BoC
www.columbia.edu/~mw2230/ParkinInterview.doc
@ marris
from Warren Mosler's review of Mitchell and Muysken
“Regarding unemployment (aka the ‘output gap’ by today’s central bankers), it is readily acknowledge that inflation isn’t all that sensitive to changes in unemployment. In their words, “The good news is that the Phillips curve is flat. And the bad news is that the Phillips curve is flat.” The essence of what Bill proposes is that an employed labor bufferstock is a far superior price anchor than today’s labor bufferstock of unemployed. And this is one of those things that seems obvious and indeed is absolutely correct, yet entirely overlooked as a policy option.”
marris Why is there "non-govt" here? What is government NFA?
I believe this is just NFA (the *net* stuff). After all, *other* financial assets are assets on one guy's sheet and a liability on someone else's, right?)
Read "net-financial assets held by non-govt as consolidated private sector (households and firms) and external sector." This includes cash held by the public, reserve balances held in non-govt Fed accounts, and tsys held by non-govt.
I@ marrris, it is true that the Fed can and does increase non-govt NFA in pursuit of its policy and this is not added to the deficit so it doesn't require a tsy offset. MMT would still say that if this changes the amount of non-govt NFA it is technically "fiscal."
Congress does give the Fed a bit of fiscal power in conduct of its ops and a bit more in extremis. But I have followed the legal discussion somewhat and I haven't found any legal experts who think that the Fed can do a helicopter drop of currency into the money supply without the approval of Congress.
The issue that MMT is concerned with is effective demand. The small amount of fiscal add that the Fed may do in pursuit of ops is a lot less than the fiscal drag resulting from interest from tsy purchases that removes future interest from non-govt and transfers it to Tsy as Fed "profit" from ops.
Marris,
"Well, *I'm* referring to an identity. I'm not sure what *you're* referring to when you mentioned "no measurable data"... what evidence could there be? "
Searched the page for the phrase "no measurable data"…couldn't find it.
"Huh?!?! That is *exactly* what open market operations do. You are probably not considering the full sequence of events that happens with a bond."
If you believe open market operations add cash to the non-government, then you can't believe this, which I also stated:
The sum of all bonds held by the public plus foregn entities plus all net cash equals the National Debt and also equals the sum of all government deficits/surpluses over history.
Which you don't, at least partially based on another comment.
The trouble is, the number is based on an identity, the sectoral balances relationship, and must be true.
It follows that your claim cannot be true. Houston, we have a problem!
Then there's this:
http://www.treasurydirect.gov/NP/BPDLogin?application=np
Debt to the penny as of 9/28/2012: …16,066,241,407,385.89
Debt held by the public:…11,269,585,800,039.32
Intra-governmental holdings:… 4,796,655,607,346.57
How does Intra-governmental holdings manifest itself? Cash spent into the economy without bonds held by the public maybe? The Fed holding debt rather than citizens or foreigners?
You've backed yourself int a corner by claiming the National debt doesn't exist in the non-government except as bonds, because the historical record says the entire National Debt exists as a consequence of the net sum of all deficits/surpluses.
No cash from open market operations to be found anywhere, unless they are included in the budget as a line item as interest paid on the debt. That, I don't know but it doesn't really change anything.
In that event there is no doubt…it's fiscal, and it goes through the Treasury.
Once again, you can't have it both ways.
> Read "net-financial assets held by non-govt as consolidated private sector (households and firms) and external sector."
Ah, I see what you mean. But what are you saving the "government NFA" category for? Will this ever have any items in it? Or will all NFAs be non-govt NFAs?
A helicopter drop is either 'expenditure' or what they call a 'transfer payment'. In either case it falls into the category of fiscal policy.
So-called "funding" for fiscal policy can come from taxation, "borrowing", seigniorage, "consumption of fiscal reserves", or sale of fixed assets.
Seigniorage is the "benefit" from "printing money".
A helicopter drop need not change interest rates if the central bank carries out other appropriate (monetary) operations.
> Searched the page for the phrase "no measurable data" ...couldn't find it.
Sorry, it should be "not measureable data." You should find it this time.
> The sum of all bonds held by the public plus foregn entities plus all net cash equals the National Debt and also equals the sum of all government deficits/surpluses over history.
Sorry, I think you're quite confused. The National Debt does not include cash (reserves or otherwise). The MMT definition of (non-govt for Tom :) NFAs includes bonds + cash, but the National Debt does not.
> You've backed yourself int a corner by claiming the National debt doesn't exist in the non-government except as bonds, because the historical record says the entire National Debt exists as a consequence of the net sum of all deficits/surpluses.
What? If the government taxes $50 and spends $100 dollars this year, then it sold $50 in bonds. So far so good? The National Debt (you know those clocks) will go up by $50 (I think a bit more, since they're counting face value).
What do *you* think happens? There is now $100 in cash and $50 in bonds floating around. Do you think the National Debt has gone up by $150? If not, then why do you think the debt includes cash?
Marris,
By definition, through net government spending, both deficits and surpluses combined, the government has spent some $16 Trillion DOLLARS into the non-government directly.
The government has also sold some $11.3 Trillion DOLLARS worth of BONDS, removing an equal amount of DOLLARS from the non-government.
By simple arithmetic, that leaves some $4.7 Trillion net DOLLARS in the non-government.
Ah, I see what you mean. But what are you saving the "government NFA" category for? Will this ever have any items in it? Or will all NFAs be non-govt NFAs?
From the MMT vantage, govt NFA is meaningless since neither has nor doesn't have money in a fiat (non-convertible floating rate) regime, where money creation is unlimited and govt doesn't need to fund itself or finance itself other than by its own power of currency creation. Tsys are just interest-bearing "savings accounts" for currency.
The govt's bank creates currency just by marking up spreadsheets. The taxing power allows govt to withdraw currency from non-govt use to regulate the money supply and control effective demand-inflation, as well as manage price stability.
According to MMT, fiscal powerful is much more powerful than monetary policy and unlike monetary policy it can be tightly targeted.
This is based on Lerner's "functional finance." The central point of MMT involves using fiscal policy to regulate effective through changes to non-govt based on changing saving desire or non-govt in order to optimize income-consumption, investment-production, employment, and price stability.
This is called "the full employment budget," and the economic policy to achieve and maintain it is based on variable tax rates, automatic stabilization, and the MMT JG as a buffer stock of employed and a price anchor that anchors the "real" value of the currency in terms of an hour of unskilled labor.
> By definition, through net government spending... By simple arithmetic, that leaves some $4.7 Trillion net DOLLARS in the non-government.
???
Here is the breakdown from TreauryDirect http://www.treasurydirect.gov/NP/BPDLogin?application=np.
It shows 16.1T total debt. 11.3T held by public. 4.8T held by intragovernmental agencies (http://en.wikipedia.org/wiki/Intragovernmental_holdings)
Once again, I think you're missing the point of MMT macro. The goal is not to spend more than *debt held by the public*. It's to spend more than *taxes*.
According to MMT, the 11.3T contibutes to NFA. The 4.8T does not. It would be *better* according to MMT for the intragovernment agencies to HAND OUT the bonds to the public [this would increase NFAs to 16.1T], even thought this would makes the amount of publicly held bonds equal the national debt.
> From the MMT vantage, govt NFA is meaningless since...
OK Tom, that's what I thought. I've basically been using NFA (unqualified) to discuss MMT. Since there is no other kind that MMTers care about, I think this is probably a correct usage.
Right. The govt books musst net out, so there are no net financial assets in the unit of account within govt, since the govt is the source. It's "net financial asset" is its money creation power that gives it unlimited financial capacity, the sole constraint on the use of which is real, i.e., the availability of real resources, which then implies the financial contraint of inflation if effective demand exceeds the capacity of the economy to expand to meet it. Another real constraint is supply shortage, such as an OPEC oil embargo. Political restrictions can be imposed voluntarily but they are not operational constraints.
Marris:
"According to MMT, the 11.3T contibutes to NFA."
According to MMT the entire 16 Trillion is NFA's (see sectoral balances identity). Don't know where you got the wrong idea.
NFA is the net sum of all budget deficits and surpluses over history.
Ok so far?
The net sum defined above totals about $16 Trillion (the exact number is on this page).
Still good?
The government has issued about $11.3 Trillion (exact number also on the page) in bonds to the public, and at the same time removed $11.3 Trillion in dollars from the non-government.
Still with me?
No matter which calculator or spreadsheet I use the net amount of dollars that must be remaining in the non-government is some $4.7 Trillion.
This is a simple 2+2=4 arithmetic operation, for which as far as I know there has never been an observed exception.
Net financial assets include all state-issued financial assets with no claims against them in the non-government.
Where in the arithmetic did you find an error?
Do you have so little faith in the laws of arithmetic that you are unable to believe what your eyes and your brain must tell you is true?
No wonder this stuff is hard for the public to grasp.
"The goal is not to spend more than *debt held by the public*. It's to spend more than *taxes*."
…or less than taxes. Running with this statement above alone and nothing else:
More than taxes is a deficit.
Less than taxes is a surplus.
The sum of all of these annual net adds/subtracts over history is equal to the National Debt.
The National Debt is about $16 Trillion.
This means that a net 16 Trillion in dollars, not bonds has been spent into the non-government.
We know that the government has issued some $11.3 Trillion in bonds to the public in exchange for dollars.
There is no other outcome possible than a net of $4.7 Trillion dollars cash in the non-government.
I'm not asking you to accept some complex theory.
It doesn't get any more black-and-white than this.
> According to MMT the entire 16 Trillion is NFA's (see sectoral balances identity). Don't know where you got the wrong idea.
Nope. See (1) below.
> NFA is the net sum of all budget deficits and surpluses over history.
Nope again. See (2) below.
> The net sum defined above totals about $16 Trillion (the exact number is on this page).
This part is true. The total amount of outstanding debt is sum of surplus and deficit.
> The National Debt is about $16 Trillion.
Yes! This is also correct. I think all of your confusion stems from confusing this with the NFA supply.
(1) The 4.7T is on the *government's* books. It's not in the non-government. Maybe you are confusing this with the *corresponding* 4.7T of cash in the economy. That cash *is* a part of NFAs. However, the only bonds which count toward NFAs are the bonds held by the non-government sector. These are considered "good" because they satisfy the desire for safe assets.
Try thinking through the case with the Fed, which is simpler. If the Fed does an open-market operation, it puts out cash and takes a bond onto it's balance sheet. MMTers criticize this because it DOES NOT INCREASE the supply of NFAs. A bond left private holdings. Cash entered private holdings. Since both count toward NFAs, the operation is considered ineffective.
The same is true for bonds held by *any* government agency (not just the Fed).
In my $100 budget example, the national debt increases by $50, but NFAs increase by $150. The $50 bond and the $100 cash both contribute to NFAs. They don't both contribute to the national debt.
(2) No, that sum is the national debt (the set of outstanding bonds). This is the 16T number. This is NOT the NFA number.
Sorry, here is a more clear example.
Scenario 1: Government issues bonds to the non-government sector.
Government decides to spend $100. It taxed $50.
NFA effects:
- $50 (tax)
+ $50 (tax-financed spending)
- $50 (bond sale)
+ $50 (bond-financed spending)
+ $50 (bond)
Here, we see the net change in NFAs is $50. This is what happens when government issued bonds get held privately. [I think in the previous post, I said this is +$150, which is incorrect.]
Scenario 2: Government agency acquires government bonds.
Government decides to spend $100. It collected $50 in Federal income taxes. It collected $50 in Social Security taxes.
NFA effects:
- $50 (income tax)
- $50 (SS tax)
+ $100 (tax-financed spending)
As you can see, the net NFA change is 0.
Further, the government can't just spend SS taxes without taking some care. It needs to write down that it had a SS surplus and spent it. It records this by adding a non-marketable (series E?) Treasury to the SS fund.
This bond IS included in the national debt (+$50). It is not handed out to the public. It is an example of debt which is not part of NFAs.
Scenario 3: Fed buys $50 Treasury bond from public.
NFA effects:
- $50 (bond)
+ $50 (reserves)
The net NFA change is also 0. The bond is simply swapped with cash.
Scenario 4: Fed buys $50 MBS from public.
NFA effects:
- $0 (MBS was not an NFA)
+ $50 (reserves)
The net NFA change here is $50. Here is an example of NFAs increasing without increasing the national debt.
marris,
I have to give you a h/t for forcing me to re-think what I thought I had already figured out. I've discovered a lot of new stuff and along with that has altered my perspective on how the money-creation circus works.
Unfortunately, this is likely to create additional confusion rather than clear anything up.
First, I have to correct some statements I made :
at October 2, 2012 2:09 PM:
"The sum of all bonds held by the public plus foreign entities plus all net cash equals the National Debt and also equals the sum of all government deficits/surpluses over history."
For this to be correct National Debt must be replaced by National Savings (MMT version) which is also the sum of all NFA's in the non-government. There is no such thing as a National Debt except as an accounting abstraction. Even the numbers are in dispute.
at October 2, 2012 2:55 PM:
"By definition, through net government spending, both deficits and surpluses combined, the government has spent some $16 Trillion DOLLARS into the non-government directly."
The sum of all deficits/surpluses combined over history add up to about $11.7 Trillion (not counting OFF-BUDGET spending), not $16 Trillion as of 12/31/2011. The 2012 budget numbers aren't in yet, and the NIPA table deficit estimates are updated to actual deficits at the end of the budget year.
So, going back to my argument at October 2, 2012 4:22 PM:
The sum of all def/sur thru 12/31/2011 ≈ $11.7 Trillion (more on this later)
Debt held by the Public thru 12/31/2011 ≈ $10.5 Trillion, therefore…
Net cash component of NFA's ≈ $1.2 Trillion; so there IS a cash component of NFA's, I had the amount wrong. Even this amount is in question, see below.
The sum of all deficits/surpluses above are for ON-BUDGET items. There are additional OFF-BUDGET items that total about $2.6 Trillion, registered as a SURPLUSES on the Summary.
That makes no sense to me since the surpluses went down and budget deficits went up drastically when Obama apparently changed the accounting of them.
The amounts must be budgeted wrt the non-government, changing sign. My conclusion here is that deficits previous to the 2010 budget are understated. I can't say whether those funds are manifested as additional net cash in the non-government.
So here's how the spending cycle works: The government taxes income out of the right pocket and spends it back into the left pocket, figuratively speaking, creating flow.
Government-induced flow is injected into the system. From a system perspective this is a necessary action or the economy just won't function in a stable way. Some will say private debt would serve the same purpose, I don't think it is possible.
The National Debt is created by borrowing funds from the same pool of funds over and over again, keeping track of the sequence as a running total, and spending the funds back into the economy. Talk about something from nothing.
Try filling up your swimming pool using that method. More evidence it is nothing more than an accounting abstraction. You can't increase the number of beans by counting the same beans over and over again adding to the total each time in the real world.
continued…
continued from previous comment…
Conclusions:
• National Debt has no real-world meaning, it's an accounting fiction. (already thought that). Even the number is in dispute.
• The sum of all deficits/surpluses = National Saving = NFA's in the non-government.
• "Paying off" the National Debt is an absurd framing, would be mathematically impossible except that the government money making machine is an elegant Rube-Goldberg contraption where anything is possible. There just isn't any reason to do it.
From the perspective of the non-government it would be impossible because the funds don't exist to pay it off. The government would have to print new dollars into the economy to make it possible, or it would have to come from the banking system thru the Fed. Another example of the government ultimately being responsible for it's own liabilities, one way or another.
• The taxpayer is not liable for the National Debt. Already knew that too.
• Don't bother trying to explain this to the man-on-the-street. This is Alice-and-Wonderland stuff. It reinforces the notion that the government can do anything it wants and call it anything it wishes.
• The institutional arrangement that requires the government must "borrow" to spend by issuing bonds is about as much of a constraint as the 65 mph speed limit.
MMT still rules. It recognizes the government operations are an irrelevant Rube-Goldberg contraption that gets the job done - supplies the system with both funds and flow that provides for the entire population.
Without this only a tiny subset would be involved in the economy.
marris, this hopefully addresses many of your example arguments at least indirectly.
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