Pages

Pages

Wednesday, June 26, 2013

Joe Firestone — Lavoie's Critical Look at Modern Money Theory: A Reply

In October 2011 Marc Lavoie, a post-keynesian economist, very friendly to Modern Money Theory (MMT) wrote a paper presenting a friendly critical look at MMT. In his conclusion, Lavoie states that “. . . the neo-chartalist analysis is essentially correct . . . “ affirming his substantial agreement with MMT's analysis of banking operations and fiscal realities in nations with non-convertible fiat currencies, with floating exchange rates and no debts in currencies they do not issue, as well as MMT's analysis of Eurozone viability. But he goes on to say (p. 25):
“There is nothing or very little to be gained in arguing that government can spend by simply crediting a bank account; That government expenditures must precede tax collection; that the creation of high powered money requires government deficits in the long run; that central bank advances can be assimilated to a government expenditure; or that taxes and issues of securities do not finance government expenditures.”
So, Lavoie questions the wisdom of MMT economists and writers making certain counter-intuitive statements he perceives as certainly questionable, perhaps untrue, and also confusing to people, economists and decision makers trying to understand MMT writings. He considers these statements an important barrier to understanding, and he wants this 'baggage' to be discarded because he thinks it hurts MMT and post-keynesian efforts to get important new approaches to economics accepted.

Recently, Lavoie's work was used in a very vigorous and important discussion at Rodger Malcolm Mitchell's Monetary Sovereignty web site by a commenter named “Tom,” questioning some of Rodger's formulations and the statements of other commenters who defended theMMT and MS positions. I participated in the discussion, but also concluded that it would be more useful to write a more formal reply to answer Lavoie's question of what is gained by taking some of the positions MMT and MS writers often take. This is my reply.
Corrente
Lavoie's Critical Look at Modern Money Theory: A Reply
Joe Firestone

Cross-posted at New Economic Perspectives here.

99 comments:

  1. Here´s Lavoie on the question of "financing" of Government spending:

    "Any agent must have funds in a banking account. Before being able to spend, the Treasury must somehow replenish its deposit account at the central bank (or at private banks)."

    This seems to be a very matter-of-fact description of how the economic system works.

    The Treasury may "replenish" through either tax collection or borrowing.

    And while it's certainly conceivable, indeed desirable, that it might borrow from the central bank - instead of private sector agents, be they either (commercial) banks or non-banks - it´s certainly impossible to imagine a viable modern economy where the government would not raise any taxes and simply kept spending by issuing IOUs to its own central bank.

    Lavoie´s "Monetary and fiscal nexus of neo-chartalism" is a truly great paper. Among other gems, it presents a crystal clear description, with detailed T-accounts included, of the way deficit spending really operates in the U.S. and the eurozone.It should be mandatory reading for politicians on both sides of the Atlantic.

    IMO, MMTers are wasting time best spent on other fights by putting out "replies" to what is really a friendly yet rigorous criticism that vindicates Modern Money Theory on all matters of substance.

    ReplyDelete
  2. The mainstream representation of the monetary system is designed to bamboozle the general public and reinforce the power of elite private financial institutions.

    If Lavoie can't see why it's in our interest to represent the monetary system in a manner that empowers democratically elected institutions to act in the public good..... He's either part of the problem or a fecking egit.

    ReplyDelete

  3. "Any agent must have funds in a banking account. Before being able to spend, the Treasury must somehow replenish its deposit account at the central bank (or at private banks)."

    Not really. My account is always in the negative.
    It's not to hard to imagine allowing the treasury to operate with a negative balance and abandon all the pointless activity that puts money in the treasury's account.

    ReplyDelete
  4. "If Lavoie can't see why it's in our interest to represent the monetary system in a manner that empowers democratically elected institutions to a ct in the public good..... He's either part of the problem or a fecking egit."

    Aces Andrew....

    But imo the mainstream is part of the cohort that is 'bamboozled' along with the general public...

    rsp,

    ReplyDelete
  5. "Among other gems, it presents a crystal clear description, with detailed T-accounts included, of the way deficit spending really operates in the U.S."

    Actually it's how Lavoie *thinks* it works in the US. His example, of banks buying treasuries with overdrafts is just one of the ways in which it possibly *could* happen.

    What I find strange about the comments people sometimes come out with on this topic, is this idea that money must always originate with banks. Either commercial banks or central banks. As if banks are these strange mysterious things which have this strange mysterious ability to do something no one else can, i.e. create money.

    In this odd worldview, the only way a government can create money is by "borrowing from its central bank".

    ReplyDelete
  6. "it´s certainly impossible to imagine a viable modern economy where the government would not raise any taxes and simply kept spending by issuing IOUs to its own central bank."

    It already spends by issuing IOUs to its own central bank.

    Or did the sleight of hand under QE bamboozle you?

    Government funding is like watching a magician in action. By clever organisation of actual operational methods you can make something look completely different.

    *All* organisations use asynchronous funding and spending techniques tied together with a budgetary process.

    The government sector is just the biggest one.

    ReplyDelete
  7. The government spends G and - on the revenue side - either collects T or borrows (G - T).

    It may borrow from the private sector (banks or non-banks) or from its own central bank.

    I think we all agree that in an ideal world the government would borrow exclusively from its own central bank. Whenever it needed to spend more it would simply tell its central bank to replenish its deposits in the required amounts. The central bank would debit an asset account (loan to the government) and credit a liability account (government deposit).

    But we also agree (I think) that governments must also collect taxes - to destroy purchasing power in the private sector and transfer said power to the public sector, provider of public goods.

    The budgetary process must thus always conforms to the accounting rule:

    G = T + (G - T)

    This means that government expenditures are financed by either taxes or borrowing. Ideally, borrowing from the central bank instead of the private sector.

    The Lavoie paper describes these processes in a rigorous manner, T- accounts included. What's not to like about it?

    ReplyDelete
  8. "I think we all agree that in an ideal world the government would borrow exclusively from its own central bank"

    Why do you say things like this?

    What is it about banks that you think is special? Why do you think a government "has to borrow from its central bank"?

    It's really puzzling.

    ReplyDelete
  9. "It may borrow from the private sector (banks or non-banks) or from its own central bank."

    The government doesn't "borrow" from the private sector…it creates new net financial assets…bonds…out of thin air and swaps them for financial assets… that it previously created out of thin air.

    All creation was done by the government, not by the private sector. The private sector does not have the authority to create money.

    These bonds are more valuable than the dollars they replaced.

    When I borrow your lawnmower, you no longer have the use of it until I return it…bonds can always be used for their intended purpose…savings…and they increase the holders wealth over time.

    To call that "borrowing" is a perversion of the term.

    People that have a problem with this don't understand the Arrow of Time. It matters what happens first, in systems and in macro.

    ReplyDelete
  10. "G = T + (G - T)"

    This is a circular relationship so one has to find the beginning of the circle.

    The parameters are events in a time-space continuum.

    G occurs first, T later. T cannot occur until G occurs, therefore T cannot be the cause of G.

    The beginning of the circle is G.

    ReplyDelete
  11. y,

    Just look at the governments in periphery Europe who cannot borrow from their central bank.

    In fact, they do not even have a central bank, properly speaking.

    They thus became a type of corporation whose revenue is...tax receipts. And when collections plunge as per a recession, they're finished as a viable entity.

    A government that may borrow from its central bank is not dependent on the whims of the financial markets. I don't believe financial markets should be able to dictate government policies, by threatening to cut off funds to the government.

    Monetary sovereignty is a weapon for democratic control. For an economy where the FIRE sector serves society, instead of having society at her service.

    ReplyDelete
  12. The Fed describes itself as being "within the government".

    For some reason some people seem to think that "within the government" means "not part of the government".

    ReplyDelete
  13. Jose, I don't think you got my question.

    Why do you think a government needs to "borrow from its central bank"? Why do you ascribe a unique money-creating power to banks?

    Have you heard of United States notes, or coins, for example?

    ReplyDelete
  14. Paul,

    "The government doesn't "borrow" from the private sector"

    The Greeks might have a problem with that statement :)

    Also, I forgot to add the constraint that T > 0 always.

    Thanks.

    ReplyDelete
  15. Fed "within the government":

    http://www.federalreserve.gov/faqs/about_14986.htm

    ReplyDelete
  16. y,

    Notes and coins are usually deposited at banks.

    A modern economy cannot function if based only on notes and coins.

    ReplyDelete
  17. You can say that the Treasury is separate from the Federal Reserve, as these are distinct entities. But the 'United States government' is a specific legal entity which includes both the Treasury and the Federal Reserve. The Treasury and Federal Reserve are both 'within' the government. So it's simply a semantic error to say that "the government has to borrow from the Federal Reserve".

    ReplyDelete
  18. "A modern economy cannot function if based only on notes and coins".

    Whilst that's true, it's not particularly relevant to the point. The point being that there is no reason whatsoever to believe that banks have some strange unique ability to create money - which is what you keep implying every time you talk about the government having to "borrow from its central bank".

    ReplyDelete
  19. "The Greeks might have a problem with that statement :)" - Jose

    The Greeks are not sovereign in their own currency. They still don't borrow from their private sector, they borrow from the ECB through intermediaries.

    No one in their private sector can create Euro's.

    "Also, I forgot to add the constraint that T > 0 always."

    Time is relative. G always occurs before T on the arrow of time (even for the Greeks).

    ReplyDelete
  20. that banks have some strange unique ability to create money

    It´s not strange, it´s accounting.

    Loans create bank deposits and bank deposits are the main component of the money supply.

    So, yes - bank have a special power conferred by governments and not available to you, me the non-bank private sector etc.

    ReplyDelete
  21. G always occurs before T on the arrow of time

    That´s a bit like the chicken versus egg argument. What came first. Who knows? Who cares?

    What counts is that tax collection replenishes government deposits that are later spent into the real economy.

    These government expenditures were thus financed or funded by taxes.

    ReplyDelete
  22. "What came first. Who knows? Who cares?"

    Anyone that wants to understand how macro systems works cares.

    Waving away an important concept like timing of events is a childish approach to problem solving.

    It matters what occurs first in the analysis of systems, especially with respect to real mathematical constraints.

    If G doesn't occur, then T doesn't occur for income that results from spending of state issued currency.

    It's not a very useful exercise to tax nothing. If we don't have state-issued currency then we have an entirely different kind of system…not the one we're discussing here.

    Oh, and the chicken came first.

    ReplyDelete
  23. "To repeat: the funds to pay taxes, from inception, come from government spending (or lending). Where else can they come from?"

    (p.20 7DIF)

    "It also has to be true that the State must spend or lend its HPM into existence before banks, firms, or households can get hold of coins, paper notes, or bank reserves... not only must government spend or lend its HPM into existence before it can receive HPM in taxes, but logically government also must spend or lend HPM before government can borrow HPM"

    (p.3-4 MMT: A Response to Critics)

    Note that in both cases it is clear that the government has to spend *or* lend before it can tax or borrow its own currency.

    However, say the government never 'deficit spent', always ran a balanced budget, and provided currency to the private sector by lending it. What would happen? The private sector would become increasingly indebted to the government, borrowing from the government (or central bank, if you prefer) to repay the interest on previous loans from the government, ad infinitum.

    ReplyDelete
  24. "It´s not strange, it´s accounting".

    I agree that banks have a greater money-creation powers than either you or I. What I find strange is the way you suggest that governments (or their Treasuries, let's say), somehow don't have the ability to create money and must therefore "borrow from their central bank". For some reason you seem to think that only banks have the ability to create money.

    So we can clear this up, can you clarify whether you think governments or treasuries have the inherent ability to create money, and that as such there is no inherent reason why a government or treasury should have to "borrow from its central bank".

    ReplyDelete
  25. y,

    If I am the majority shareholder (or even the sole shareholder) of a commercial bank and the bank makes a loan to me, haven´t I borrowed from the bank?

    Same with Treasury versus central bank.

    Consolidated statements don´t exclude internal accounting. Double entry bookkeeping (debit loan, credit government deposit) still apllies at the central bank.

    All this is pure MMT, btw. There is a 1999 Stephanie Bell paper - quoted by Lavoie - making this clear (link www.levyinstitute.org/pubs/wp287.pdf ).

    She draws T-accounts describing government deficit spending by "allowing its monetary authority to credit the account of
    its fiscal authority". At the Treasury level by debiting a balance at the central bank and crediting a Tsy bond and at the central bank level by debiting a Tsy bond and crediting a liability (deposit) to the Treasury.

    The "bond" could be interest or non-interest bearing.

    This is thus the step number one of deficit spending - "the sale of a Government bond to the central bank".

    ReplyDelete
  26. This comment has been removed by the author.

    ReplyDelete
  27. "What counts is that tax collection replenishes government deposits that are later spent into the real economy. These government expenditures were thus financed or funded by taxes".

    In the US at least, those 'government deposits' are themselves liabilities of the government, so that's Logically Impossible.

    ReplyDelete
  28. y,

    Governments and treasuries have the ability to create money, subject to the real world constraints of inflation (meaning that part of what they spend must be financed or funded by taxes) and accounting rules (whereby the crediting of tsy accounts at the central bank will have corresponding entries on the asset side of the central bank's balance sheet as "loans" or "advances to the tsy").

    Agreed?

    ReplyDelete
  29. Jose,

    in that paper Stephanie Kelton says:

    "a government could create its own spendable balance by allowing its monetary authority to credit the account of its fiscal authority".

    "a government could create its own spendable balance"

    I agree that "consolidated statements don´t exclude internal accounting". However, in countries like the US it is an error to say that the government borrows from the central bank - as the central bank is part of the government.

    ReplyDelete
  30. Jose,

    what if there was no central bank, just a treasury? Would the government be able to create money then or is a central bank necessary?

    ReplyDelete
  31. This comment has been removed by the author.

    ReplyDelete
  32. Paul,

    Waving away an important concept like timing of events is a childish approach to problem solving

    I'd rather put it this way: if the timing of events that ocurred deep in the past is unobservable waving it away is an empirical (as opposed to metaphysical) approach to problem solving.

    For instance, no one really knows whether a true, pure barter society from which money based economies evolved ever existed. We can speculate about the subject, of course - but assuming it away to observe instead how present day economies function is certainly a much more productive endeavour.

    ReplyDelete
  33. The central bank in the US issues the non-maturing, non-interest bearing US government liabilities - i.e. dollars.

    The Treasury in the US issues the maturing, interest bearing US government liabilities. It issues these securities securities by selling them for dollars.

    There is no reason why the non-maturing, non-interest bearing liabilities cannot be issued by any other branch of the government. The current operational procedures and institutional responsibilities are only current legislative choices and are not written in stone, and so shouldn't be incorporated into fundamental economic theory.

    The decision to vest the dollar-issuing responsibilities in the central bank is based on the theory that for the sake of monetary stability, the money-issuing role should reside in an agency that is insulated from the fiscal process.

    Suggestions for reforming the current operational setup should be coupled with suggestions for alternative price stabilization mechanisms.

    ReplyDelete
  34. y,

    ...is a central bank necessary?

    I'd say it's necessary as a clearing and payments mechanism and also as a device for accounting control.

    I suppose a banana republic or monarchy could do away with all accounting rules for govt spending, but I hope our nearly perfect, wisely led western democracies are still one or two steps away from that stage of political evolution :)

    ReplyDelete
  35. Jose,

    What about Transfer Payments which are not in G?

    These balances are provided to the non-govt also...

    Ive looked into this and from what I can tell, T is not "Net Taxes" it is just "Taxes"... there is another term called "Net Taxes"...

    rsp,

    ReplyDelete
  36. y,

    I forgot to add, when mentioning "western democracies", that the eurozone is surely a special case.

    There we have a central bank, able to dictate monetary and - yes - fiscal policy to 17 (soon to become 18) countries, that is totally insulated from any form of democratic control. And insulated by virtue of a practically impossible-to-change intergovernmental Treaty.

    Whereas in the good old U.S.A. the Fed is still formally, as Ben Bernanke recently put it, an "agent of Congress".

    Let's hope it will stay that way.

    :)

    ReplyDelete
  37. Matt,

    Ive looked into this and from what I can tell, T is not "Net Taxes"

    Just look up a good macroeconomics manual - for instance, page 171 of the (superb) Canadian edition of the Baumol-Blinder textbook, edited by Lavoie and Seccareccia: "T represents taxes net of transfers or simply net taxes.

    ReplyDelete
  38. It's not a stupid chicken and egg argument.

    The reason it's important to establish spending comes before taxation is because of the intuitive fallacies of composition that arise from the opposing view. These fallacies of composition are reinforced by montonous right wing slogans to achieve the aims of the power elites.

    Thus the sheeple chant..."Our taxes fund Government spending"...."Government is wasteful".... "Government wastes our money". While secretly thinking to themselves..."if they spend less money, they will tax less and I will have more to spend...tee hee hee"

    Meanwhile as the smoke screen thickens, the financial sector kindly offers to put valuable public assets (Stuff we all owned like utilities, roads etc etc) into the perpetual ownership of private elites... for what...in exchange for private bank credits. Sheesh what a great deal.

    When the smoke clears... There are no public...assets we are all up to our eyeballs in debt and the Wallmart family owns our asses.... So YES it does matter.

    ReplyDelete
  39. It seems to me that the primary role for the central bank is to be exactly what it sounds like - the central bank. We have a centralized banking system in the US in which ordinary households and firms borrow from commercial banks and pay one another on the books of those banks using commercial bank liabilities, while the banks themselves borrow from the central bank and pay one another on the books of the central bank using central bank liabilities. Even if we reform the monetary and public finance systems in various ways, the centralized banking system is still a useful system of organization and allows (in principle) for systematic government regulation of the banking system.

    We need to get mainstream economists away from the idea that the central bank is the all-powerful "monetary authority" of economic textbooks. The textbook monetary authority can issue money and helicopter it into the economy at will. Actually existing central banks can't do that.

    ReplyDelete
  40. "I suppose a banana republic or monarchy could do away with all accounting rules for govt spending"

    Now why would having just a treasury and no central bank mean doing away with all accounting rules for government spending? Are you saying they wouldn't keep accounts? Your comment makes no sense.

    By the way there were periods in which the US had no central bank.

    "I'd say it's necessary as a clearing and payments mechanism and also as a device for accounting control".

    So what you're saying, in response to my question, is that a central bank is not necessary for the government or treasury to create money. So there is no sense in which a government or treasury necessarily has to "borrow from its central bank". Thanks for clarifying that.

    ReplyDelete
  41. Every competent government needs a sensible monetary policy. No matter how the currency is issued and how its issuance is operationally connected with spending, its always going to be the case that there has to be a sensible and stability-preserving connection between funds flowing into the private economy from government spending, interest payments on bonds, etc. and funds flowing out of the private economy via taxes, interest payments on discount borrowing, etc.

    During bad periods of private sector performance, the net inflow from government should be greater. During more successful periods for the private sector, the net government inflow can and should decline. If the net inflow is at the appropriate level, I don't think it matters all that much whether you think of the tax component of the flow as "funding" the government spending or just as "offsetting" the government spending so that the deficit is not excessive.

    ReplyDelete
  42. y,

    Any economic agent - including the govt - needs to have a bank account in order to spend. That's the way it works in the 21st century.

    Yes, a long time ago the U.S. diddn't have a central bank; well, it didn't have autos or airplanes either. That time is long gone - and hopefully forever.

    If you don't like the name "central bank" call it something else. Say, depositary department of the Tsy.

    But the govt will have a depository institution ("bank") in any case.

    ReplyDelete
  43. People get all hung up on the balance sheet but lets be honest, in the big scheme of things, that's pretty irrelevant when you are the currency issuer.

    I say.......It's all about the cash flow stupid.

    ReplyDelete
  44. "Any economic agent - including the govt - needs to have a bank account in order to spend"

    Not really. The government could send out cheques to people, and their banks could return them to the Treasury in return for cash or electronic credits in a Treasury accounting ledger.

    I'm not advocating this, I'm just saying that your idea that a government necessarily needs to "borrow from its central bank" to spend is flat out wrong. You've already acknowledged this but now you've apparently switched to arguing that a central bank is useful for making payments. Well yes, it is, but that doesn't change the fact that the government or treasury does not have to "borrow from the central bank".

    A simple example. The treasury prints a trillion dollar US note and deposits it at the Fed in return for an electronic balance, which it can then use to make quick and easy payments to other bank accounts. (It doesn't matter that it's not allowed to do this at present as that's not relevant to the point). As you can see the Treasury has not had to borrow any money from the central bank. It has simply created money and then deposited it into its account at the central bank.

    ReplyDelete
  45. Jose,

    No mention of T as being 'net of xfers' here:

    http://stats.areppim.com/glossaire/gdp_def.htm

    GDP can be measured in terms of the various uses to which income may be allocated:


    [ GDP = C + S + T ]

    C = private consumption
    S = private sector saving
    T = tax payments

    So if govt xfers $100 of interest on UST to a household, that is probably taxable income...

    Households can use these balances to either consume, save it, or pay the tax on this income with a portion of the interest payment itself...

    But if T is net of xfers then these interest payments would not be included in income no?

    But yet they are?

    So this is not clear to me....

    rsp,


    ReplyDelete
  46. But if T is net of xfers then these interest payments would not be included in income no?

    But yet they are?


    I think that what Matt is saying is where the reference in law/ regs since we know that economic textbooks are not primary references and are sometimes wrong.

    ReplyDelete
  47. Tom,

    Neil used the term 'asynchronous' this AM and that makes sense to me..

    Maybe what Jose is citing assumes the payment of Treasury Interest was in the previous measurement period and then the next period it can be counted as "Income" or something and used to pay taxes...

    Thus it is 'asynchronous' in timing...

    rsp,

    ReplyDelete
  48. Neil Wilson has a couple of posts up at this place, some of which I have linked to here, that explain the "asynchronous" nature of coordinated operations as well as Treasury-cb consolidation.

    ReplyDelete
  49. Matt,

    The basic identity is

    C + I + G + NX = C + S + T

    If G on the left side does not include transfer payments (because such payments are not for production of goods and services; a retiree, say, receives a transfer payment but isn't producing anything), it follows that T on the right side cannot include transfers.

    So G is (total govt expenditures minus transfers) and T is (total taxes minus transfers).

    Otherwise, transfers would be included in GDP - and they shouldn't be.

    ReplyDelete
  50. That time is long gone - and hopefully forever.

    The monetary sovereign SHOULD provide a risk-free fiat storage and transaction service for its citizens but that service should MAKE NO LOANS AND PAY NO INTEREST!

    ReplyDelete
  51. This comment has been removed by the author.

    ReplyDelete
  52. y,

    As you can see the Treasury has not had to borrow any money from the central bank

    Ok; but the central bank still has to keep a ledger, make accounting entries, etc. Again, we´re not talking about banana monarchies or republics.

    On the liability side it will enter "govt deposit" - on this we agree.

    On the left, asset side it has to enter something - otherwise the books won't balance.

    You may call that entry an "advance", a "security" a "non-interest bearing IOU", whatever. If you don't like the word loan, fine.
    But an asset, a claim of the central bank on another branch of the very same govt, will have to be entered. That's just the way accounting works.

    ReplyDelete
  53. well what does a bank write on the asset side of its balance sheet when someone deposits cash?

    they write 'cash'.

    ReplyDelete
  54. Jose,

    OK I follow you there... take out transfer payments from both sides and this doesnt change the equality...

    But Transfer payments do provide a lot of income in the economy so I wonder what we are looking at here if a pretty substantial income source (and becoming even more important every month as boomers retire) is taken out of this pretty widely followed economic measure (ie "GDP")...

    If we want to analyze what is really going on, seems like GDP and/or its derivatives wouldnt be a very good metric...

    rsp,

    ReplyDelete
  55. Matt,

    If you consider the numbers for GDP and the numbers for transfers you'll get an idea of how large a share of the pie is being grabbed by those among us who do not contribute to the production of goods and services.

    Please note that I'm just describing here. I'm making no value judgments on whether such transfer payments are or aren't "deserved" or "fair".

    Ultimately, everything has to be "taken from" GDP. If GDP fell to zero, then all those transfers would only correspond to idle, meaningless, unspendable balances somewhere inside the computers of the banking sector.

    :)

    ReplyDelete
  56. y,

    The Treasury does not want cash.

    If it gets some by mistake it will destroy it (W. Mosler) - remember?

    :)

    ReplyDelete
  57. Makes sense but I haven't seen any hard evidence that this is the way the accounting actually works at the govt level.

    How does the accounting get entered and how do economic reports get form there to G & T.

    I would like to know how it actually is figured in practice based on some refs if anyone has them. I doubt this issue will be settled without getting to primary sources.

    ReplyDelete
  58. Jose,

    I wasn't saying that the Treasury wants cash. I was saying that if the treasury deposited some newly-printed US notes at the Fed, the Fed might as well just write them down as 'cash' on the asset side of its balance sheet.

    No need for the Treasury to "borrow money from the central bank".

    I think the problem is you're not making a distinction between the sort of liability incurred by a currency user and that incurred by a currency issuer.

    The 'liability' of a currency issuing government like the US is simply to accept the currency in payment, basically.

    It's nothing like a loan. But for some reason you're not getting this and the only way you can conceptualise the 'liability' incurred by the currency issuer is to think of it as some sort of debt incurred as the result of a loan. Hence your idea that the Treasury necessarily has to "borrow from the central bank"

    Note, in addition, that these accounting terms are often quite arbitrary. For example, coins are not liabilities of the Treasury, according to standard US accounting definitions. Instead they're just 'assets' pure and simple.

    ReplyDelete
  59. Tom,

    From my (albeit limited) discussions with folks at Treasury & BEA, they dont do that at present...

    Like if you were President ( ;o ) and called your SECTREAS and asked, "Hey, how much have we spent in the last 2 weeks vs. how much have we taken in?"... your SECTREAS would have to say "Can I call you back with that by tomorrow sir?"...

    and a bunch of people would have to get out their departmental spreadsheets and start to add things up and call you back with the total in a few hours...

    This is apparently typical of govts these days... here is a brochure by a "data scraper" that got the contract in Brazil to integrate these IT systems by "scraping" if you can believe it (I dont know if I would trust that 100%):

    http://www.automationanywhere.com/customers/casestudies/BrazilTreasury.pdf

    In Brazil they 'scrape' a bunch of .pdf files to figure out a consolidated financial management position for the govt...

    Sounds archaic, but at least they do this... here in the US we dont even do this much, from my discussions with folks at the Cash Mgmt Division, they have a bunch of people there who run their own speadsheets and then they input the data manually to get the consolidated US position with a 24 hour delay (it takes them the next day to add it up...)

    So they dont really even know what is really going on in anywhere near real-time...

    Not good imo... rsp,

    ReplyDelete
  60. y,

    If you credit a liability account you must debit an asset account.

    You don´t like the word "loan"? OK, call it something else, like "govt security". But there is no way of escaping the world of double entry bookkeeping.

    ReplyDelete
  61. "You don´t like the word "loan"?"

    It's not that I don't like it, it's that it's inapplicable, and absurd.

    "OK, call it something else, like "govt security"

    In my Treasury-money-printing example, why not just call it "money"?

    You don't like the word "money"? Ok, call it something else, like "govt security".

    ReplyDelete
  62. Dan Kervick:The decision to vest the dollar-issuing responsibilities in the central bank is based on the theory that for the sake of monetary stability, the money-issuing role should reside in an agency that is insulated from the fiscal process.

    Suggestions for reforming the current operational setup should be coupled with suggestions for alternative price stabilization mechanisms.


    It seems like the main way in which the current system works in controlling inflation is by pretending to be something other than what it actually is. It pretends to be a household type system where the government has to go to the bank just like everyone else.

    But the independence of the central bank is an impotent independence. The central bank always supplies the money needed to keep interest rates within their target range. If they don't, or if they choose a target that is much different from the rate of inflation, then the system breaks down as Volcker learned. In practice, the U.S. Fed always follows the rate of inflation. There is a germ of truth in the myth of the bond vigilantes in that the central bank cannot necessarily halt inflation by raising interest rates.

    I'm in favor of either the employer of last resort or the variable payroll tax as more effective ways of stabilizing prices when necessary, as opposed to the current system which is based upon false ideas about the power of central banks...

    ReplyDelete
  63. "there is no way of escaping the world of double entry bookkeeping".

    Ah, the last bastion of truth in this degenerate post-modern age - Double Entry Book-keeping!

    here is some double entry book-keeping for a newly minted Coin deposited at the Fed by the Treasury:

    Fed:

    Asset: Coin
    Liability: deposit
    Equity: (?)

    Tsy:

    Asset: Deposit
    Liability: 0
    Equity: Deposit

    ReplyDelete
  64. Jose,

    Maybe you are not as sensitive to how the misperception of Treasury securities issuance as 'debt' effects the whole thing up here...

    If you read that brochure I linked to in the comment above, the Brazil folks sound more like they know they are in charge of what is really going on down there...

    Up here we have all of these idiots who think they are borrowing from the Chinese and are 'out of money'... its a pretty tough situation...

    rsp,

    ReplyDelete
  65. y,

    Here's my suggestion: call it "grant".

    I hope that word will deserve your approval by breaking the link with any notion of "borrowing".

    The central bank will henceforth credit a govt deposit and debit a "grant to the tsy".

    All this while staying safely within the bounds of accounting.

    ReplyDelete
  66. Jose,

    if, as in my example, the Treasury prints a Trillion Dollar United States Note and deposits it at the Federal Reserve, that is not a "grant " from the Fed to the Tsy. Sorry.

    ReplyDelete
  67. "staying safely within the bounds of accounting"

    What's wrong with my Coin example?

    ReplyDelete
  68. Why introduce physical objetcs whem you don't need them?

    Let's stick to computer entries.

    :)

    ReplyDelete
  69. Hey y,

    Are you getting the spooky feeling that Jose can't conceive of a world without a central bank to lend money into existence?

    ReplyDelete
  70. No, correction: Not equity-based money - Equity as money. Impossible?

    ReplyDelete
  71. The physicality of the coin is as irrelevant as the physicality of a paper note. You're dodging the question.

    Please, continue.

    http://www.youtube.com/watch?v=q_n8FRILoYE#t=1m18s

    ReplyDelete
  72. Good for you, y!

    These central bank lovers are slippery, no? But you're good at pinning them down.

    ReplyDelete
  73. y,

    Just take a look at the three accounting (horror!) tables in the S. (then) Bell paper at http://www.levyinstitute.org/pubs/wp/287.pdf

    Why do you think MMT founding fathers don´t refrain from using the word "security" or "IOU" on the left hand side of a central bank's balance sheet?

    Hint: the central is as much a part of govt as the Treasury.

    :)

    ReplyDelete
  74. The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.” The Rothschild brothers of London writing to associates in New York, 1863. from http://www.themoneymasters.com/the-money-masters/famous-quotations-on-banking/

    ReplyDelete
  75. I suspect some of the MMT folks just wish to keep the system going long enough for them to acquire THEIR fortunes.

    Never trust someone who believes their reward can only be on this earth?

    ReplyDelete
  76. Tom,

    Perhaps you'd like to take a look at page 22 (2-9) of this BEA publication on NIPA methods (link: http://www.bea.gov/national/pdf/methodology/ALLchapters.pdf ):

    "In the NIPAs, subsidies are shown as a subtraction from taxes...because they are transfers from government...and thus, in effect, represent a negative tax by government".

    ReplyDelete
  77. some of the MMT folks just wish to keep the system going long enough

    Or maybe they's just like to have a quite simple thing: a central bank under democratic control.

    That is, the very opposite of the formula presently (maybe eternally) imposed on the eurozone countries, with disastrous results.

    ReplyDelete
  78. The central bank always supplies the money needed to keep interest rates within their target range.

    Right Dan. But they can change the target rate. If they are concerned about growing inflationary pressure, that's what they would do.

    Seems to me that in a future system in which a combined monetary-fiscal policy is operated directly out of the Treasury, you need some alternative kind of policy regime to preserve stability. My guess is that we would want to target a specific size deficit that adjusts to macroeconomic conditions.

    ReplyDelete
  79. Jose,

    as I said, "accounting terms are often quite arbitrary", especially when it comes to government accounts.

    All the MMT people are quite clear that a government "IOU" simply means "a promise to accept in payment". It's not a "debt" in the way that the term applies to currency users like ourselves, or to commercial banks.

    By the way, Chris Cook has some interesting comments on this subject over at NEP:

    http://neweconomicperspectives.org/2013/06/lavoies-critical-look-at-modern-money-theory-a-reply.html#comment-185291

    Anyway, back to my question: what is wrong with my coin example?

    ReplyDelete
  80. Perhaps you'd like to take a look at page 22 (2-9) of this BEA publication on NIPA methods (link: http://www.bea.gov/national/pdf/methodology/ALLchapters.pdf ):

    "In the NIPAs, subsidies are shown as a subtraction from taxes...because they are transfers from government...and thus, in effect, represent a negative tax by government".


    Thanks, Jose. That's what I was looking for. Evernoted.

    ReplyDelete
  81. Or maybe they's just like to have a quite simple thing: a central bank under democratic control. Jose Guilherme

    According to Warren Mosler, the central bank MUST create new reserves as needed to insure that the check clearing system does not break down.

    Under democratic control, you say?

    Let the monetary sovereign ITSELF provide, as it should, a risk-free fiat storage and transaction service that makes no loans, pays no interest, is free up to normal household limits on account size and number of transactions and then abolish government deposit insurance, the legal tender lender of last resort, and sovereign borrowing.

    Then we can have democratic control of fiat creation without being blackmailed by the banking cartel.

    ReplyDelete
  82. y,

    The coin is alright - with just one (admittedly minor) quibble: we still have not totally overcome that problem with "debt".

    If the coin is an asset of the Central bank, it must be a liability of the Treasury.

    In the sense that, if the CB presents that coin for "payment" it will be entitled to get ... a similar coin from the Treasury.

    This minor (putative) cost with minting future coins may be eschewed by entering a "grant" on the asset side of the CB's balance sheet.

    Grants are costless items - just like "reserves" on banks' balance sheets.

    :)

    ReplyDelete
  83. Of course abolishing government deposit insurance and the lender of last resort would create a massive run on banks so it is important that all deposits be 100% covered by reserves first. That's where a universal bailout with new fiat comes in ...

    ReplyDelete
  84. Grants are costless items ... Jose G

    But without any dispute the lesser is blessed by the greater. Hebrews 7:7

    A "grant" from the Fed to the Treasury elevates the Fed over the Treasury. Is that what you want?

    ReplyDelete
  85. This comment has been removed by the author.

    ReplyDelete
  86. The central bank may well "grant" - provided it's the Executive (or an elective body, in general) who maintains the right to nominate, as well as fire, the chairman of the bank.

    An alternative, of course, could be to have direct elections for the post of central bank president.

    ReplyDelete
  87. An alternative, of course, could be to have direct elections for the post of central bank president. Jose G

    So the population gets to vote for the banking cartel's puppet? Who'll end up being blackmailed by the banks anyway? How sweet!

    Pass. Instead, we should just bailout the population with new fiat and abolish the central bank and other government backing for the counterfeiting cartel.

    ReplyDelete
  88. "If the coin is an asset of the Central bank, it must be a liability of the Treasury".

    Coins are not counted as liabilities of the Treasury.

    "if the CB presents that coin for "payment" it will be entitled to get ... a similar coin from the Treasury"

    If the CB presents the coin for "payment" it can get exactly the same same coin back "in payment".

    "This minor (putative) cost with minting future coins may be eschewed by entering a "grant" on the asset side of the CB's balance sheet".

    As I said, the Tsy wouldn't have to mint another coin, but you do raise the interesting question of how to "pay for" the original coin in the the first place. The answer is that, as I said, the physicality of the coin is of no importance. It can be an electronic coin or paper coin, it makes no difference. The only reason I use the coin as an example is to try and shake you out of the strange mindset you seem to be stuck in, in which only banks are strangely and mysteriously endowed with the ability to create money. You really need to lose that, super fast.

    ReplyDelete
  89. "If the coin is an asset of the Central bank, it must be a liability of the Treasury". Jose G

    Why could it not be Treasury Equity? People deposit their equity into banks all the time.

    ReplyDelete
  90. Since it would be about the sacred temple of money, any campaign (money) contributions would of course have to be abolished.

    And then Stephanie Kelton might just win it over Kenneth Rogoff.

    :)

    ReplyDelete
  91. The coin is "owned" by the CB so it must be "owed" by the Treasury.

    ReplyDelete
  92. "The coin is "owned" by the CB so it must be "owed" by the Treasury"

    Not according to standard US accounting practices.

    As Beard says, the coin is Treasury equity, which it deposits at the Fed.

    It becomes an asset of the Fed, offset on the Fed's books by a Fed liability to the Treasury (i.e. a Fed debt to the Treasury).

    That's monetary hierarchy in action.

    ReplyDelete
  93. y,

    Glad to know you approve some accounting practices, after all.

    :)

    ReplyDelete
  94. The dollar is pegged to oil
    and oil is pegged to dollar

    I'd say that the present cost of oil shows that the dollar has inflated along with oil

    Therefore ALL hype of the dollar being debased and lowered is complete and total nonsense.

    ReplyDelete
  95. "Glad to know you approve some accounting practices, after all"

    I haven't made any accounting errors that I'm aware of. On the other hand, you've repeatedly erred by claiming that 'the government' or treasury must necessarily "borrow from the central bank".

    I've tried to explain to you what a meaningless concept that is, and you've not really come up with any decent rebuttal other than to simply re-assert your unfounded belief that all money must originate with a bank loan.

    If you could at least explain why in some sort of satisfactory manner, that would at least be something.

    ReplyDelete
  96. Well, I'm sure there must be trillions in coins issued by the Treasury to finance its deficit spending - hidden somewhere inside the books of financial institutions.

    Since no one can see all those trillions, however, I have no doubt that our "I never err" accounting expert can provide a helping hand for such searches.

    That said - I'll leave the noble task for those who are ready to withstand the bad humour of the mentioned expert. Happily, I can count upon better company for different, less hopeless, adventures.

    May you all have a nice day.

    ReplyDelete
  97. This comment has been removed by the author.

    ReplyDelete
  98. @DanKervick == But setting a target interest rate doesn't work to control inflation. It has some short term effect, but not the permanent effect that is required to turn around fundamental inflationary or deflationary forces.

    This discussion reminds me of Paul Krugman's dismissal of MMT based upon the fact that raising interest rates (in the face of high fiscal deficits) would just lead to hyperinflation. He assumed (as do most people) that raising interest rates would be used to bring down inflation, then proceeded to demonstrate that this would not in fact work. Instead of questioning his assumption of how to fight inflation, he said that high fiscal deficits can cause hyperinflation. Krugman has since backed off this and noted that there are no empirical cases of high deficits causing hyperinflation in modern monetary economies.

    We need to learn the lesson that central banks are not effective in managing inflation by raising or lowering interest rates.

    I think we agree on the solution (fiscal triggers). The bar is very low in finding a solution better than monetary policy...

    ReplyDelete