I’ve written numerous times already about how a deficit “financed” by bonds vs. “money” doesn’t matter in terms of inflationary effect. Notwithstanding my views there (which are not discussed in this post), the point of this post will be to explore the neoclassical paradigm on this matter, since this is at the core of the recent debate between Steve Randy Waldman (seehere, here, and here) and Paul Krugman (see here and here) on the so-called “permanent floor.” (It might be of interest to some that I explained how a “permanent floor” would work back in 2004.)
Let’s consider a time at some point in the future at which the Fed has ceased its current near zero interest policy, IOR, and QE’s, and has completed whatever exit strategy was deemed necessary to drain the reserve balances that the various rounds of QE produced....New Economic Perspectives
Understanding the Permanent Floor—An Important Inconsistency in Neoclassical Monetary Economics
Scott Fullwiler | James A. Leach Chair in Banking and Monetary Economics and is an Associate Professor of Economics at Wartburg College
Krugman responds to Waldman:
ReplyDeletehttp://krugman.blogs.nytimes.com/2013/01/17/all-your-base-are-belong-to-us-what-is-the-question/
Maybe if Scott hadn't insulted him by saying he was wearing a flashing sign declaring that "I don't know what I'm talking about" Krugman might respond to him too...
Krugman basically thinks that with IOR the Fed has to 'get the money to pay the interest from somewhere' (i.e. from interest it 'earns' on government bonds), so it's really no different to normal borrowing in his view.
In his paper ('IOR: it's more important than you think') Scott appears to be saying that the Fed would just credit the interest to reserve balances "ex nihilo" without having to "get the money from somewhere".
If Scott could somehow convince Krugman that this wouldn't be more inflationary than what Krugman proposes, then we might have a breakthrough on our hands.
I'd love to see a debate about that particular point, hopefully Waldman will put it forward.
Meanwhile, the Permanent Floor is what the banking lobby thinks they're mopping with us.
ReplyDeleteDoesnt this permanent floor debate in some way illustrate the power of keeping some nominal anchor to things you think are important?
ReplyDeleteSeems to me we could argue that the Fed is using the exact same logic Warren wishes to use in his JG arguments. The Fed has decided that it would be destabilizing to let the floor price of base money be absolute zero. I agree with them actually. If you care about your money (I do) then you should show a minimal level of support for it so that in times of crisis it doesnt fall to zero value...... otherwise known as worthless. That is the fear isnt it? A worthless currency? The exact definition of hyperinflation is a worthless currency.
Warren has used this exact logic and applied it to labor or PEOPLE. Why let the value of labor ever drop to zero?
Tell me what y'all think, maybe I didnt get enough sleep last night.
Bubbles and Busts: Furthering Understanding of the Permanent Floor (http://bubblesandbusts.blogspot.com/2013/01/furthering-understanding-of-permanent.html)
ReplyDeleteGregg, money is not labor. Not a good analogy.
ReplyDeleteSetting the floor to zero is for a reason. The interest rate is the basic cost of capital on top of which banks lend. The spread of the prime rate is about 3%. Historically, that has worked out pretty well as the cost of capital to firms for growth.
The nominal rate is not all that important. It's the real rate that is important. The MMT position is to use fiscal policy to manage the key rates — growth, employment and price.
Why? Because monetary policy is less effective and less efficient. Fiscal policy makes for better financial and economic management. Remember, this is ALL about management. The means serve the end (for govt this is public purpose) and intermediate objectives in getting to the goal.
Maybe you misread my question Tom or maybe Im completely off but as I understand the discussion, the Fed paying IOR is like setting a floor above zero for money. It seems it is being argued that this will be the norm from here on. That IOR is necessary to keep the rates on reserves from plummeting towards zero, which would be the rate if no rate was set. The "market" cant generate a price for reserves.
ReplyDeleteI see this as similar to the logic for the JG as Warren argues. It is a macroeconomic stabilizer of the price of a valuable commodity..... labor (not valuable enough to some.... I recognize)
Why cant we let the cost of reserves fall to zero and stop paying interest on them? As everyone else seems to believe, this is the first step down the road to hyperinflation and thus it is a macrostabilizing tool of our money to pay the IOR.
We need a macrostabilizing tool of our labor too.... our demand for the goods we wish to sell.
Hope that made my point/question clearer.
OK, I took you as adding apples and oranges.
ReplyDeleteWhat is happening in the case of the cb setting the interest rate is govt setting the own rate of its currency, which is a monopolist's power.
IN the case of the MMT JG floor wage, this is a case of the govt establishing what it will pay for an hour of unskilled labor, also a monopolist's power.
Warren argues that state money makes a currency sovereign a monopoly provider of the currency in the sense its can set own rate and the prices it pays to transfer goods and services from the private sector for public use.