Scott's latest from NEP. Scott has not been blogging much lately although he occasionally comments are various places. So don't miss this one.
New Economic Perspectives
Drop It: You Can Call for Helicopter Money but Drop the Call for “Coordination”Scott Fullwiler | James A. Leach Chair in Banking and Monetary Economics and is an Associate Professor of Economics at Wartburg College
I posted this comment on Scott's blog:
ReplyDelete________
Just one suggestion: perhaps the Treasury doesn’t need the Fed’s blessing to execute a helicopter drop; but the Treasury doesn’t have the ability to carry out a helicopter drop on its own. Only Congress can do that. The Treasury just executes spending instructions that have been given to the executive branch by Congress.
That’s why the monetarist zombies in the blogosphere never die, and why people are so in love with the vacuous seductions of central bank run monetary policy. The Fed is effectively run by one man, and if enough hectoring bloggers and pundits lean hard enough on him, they can sometimes get him to do what they want – ineffective as it is.
But there is no point in hectoring, lecturing, berating or pleading with Jacob Lew, or his predecessor Geithner about helicopter drops or expansive fiscal policy – because they can’t do diddly on their own. Neither can the President.
Congress can do it, but they won’t. Right now, we can barely get Congress even to authorize the further debt issuance necessary to carry out their previously authorized spending instructions. So unless somebody has some bright ideas about how to get Congress to act, we might as well all go home and make the best we can out of the decade of stagnation and misery Congress has delivered to us.
The piece covers two possibilities: Tsy and Fed either coordinate with each other or ignore each other.
ReplyDeleteThere's a third possibility, though: an "independent" Fed might signal its antagonism towards the "helicopter drops". It might threaten to raise rates, e. g. - to fight a supposedly imminent inflationary threat.
In that case private investors would require ever higher yields to finance the "helicopter drops" setting in motion a dynamic similar to the one we've observed in the eurozone - where several governments have been brought to their knees by the private markets due to the
absence of a public debt supportive central bank.
If this is so, then the statement "there are no changes required to the existing monetary system or existing laws to carry out MMT-favored policy options right now" sounds a bit extreme. "MMT policies" seem to require as a bare minimum a central bank that isn't allowed to go against the grain of fiscal policy - ever.
That is, a truly independent Central Bank may undermine the government's capacity to implement its chosen fiscal policies. And the recent eurozone experience is a tragic illustration of the dangers inherent in "independent" central banking.
"But fiscal policy raises incomes first, so it enables more private sector spending out of increased income. And, remember, this is just accounting, not “theory.”"
ReplyDeleteGood point here.
According to BEA the Federal contribution to G is 1.2T .... but the total govt 'spending' is 4.2T so we could look at the other 3T of Federal 'spending' as a helicopter drop already, they are just "giving people money" to spend (or save). (Dan, shhh... dont tell Congress...)
So 75 cents out of every dollar of Federal spending is already in effect a helicopter drop as it is not spent on Federal consumption or investment... they are just like Scott says "enabling more private sector spending out of increased income" with 3/4 of their existing fiscal policy...
rsp,
Well said, Jose...
ReplyDelete" That is, there are no changes required to the existing monetary system or existing laws to carry out MMT-favored policy options right now."
ReplyDeleteCorrect.
The only change required: libertarians OUT, authoritarians IN....
rsp,
So 75 cents out of every dollar of Federal spending is already in effect a helicopter drop as it is not spent on Federal consumption or investment.
ReplyDeleteI don't think that follows Matt. The crucial question for the "helicopter drop" issue is what portion of Federal spending of all kinds is not offset by taxes.
Matt, do you really want to align yourself with "authoritarians"? It's one thing not to engage in a kneejerk repudiation of all forms of political authority. But it is another thing to embrace authoritarianism.
ReplyDeleteJose, I asked Scott a similar question:
ReplyDelete"Do you mean a Treasury deficit accompanied by T-bill issuance would be like a ‘helicopter drop’ in the current context, because the base interest rate is near zero, or that it would *always* be like a helicopter drop, even if the base interest rate was, say, 6%?"
Scott:
"Always.
Helicopter drop with “coordination” means interest on debt = IOR = Fed’s target rate
Helicopter drop w/o “coordination” means interest on debt = T-bill rate = roughly Fed’s target rate"
The point to consider is the following: could an independent, austerian-minded central bank undermine "helicopter drops" undertaken by the fiscal authorities?
ReplyDeleteThe Eurozone experience shows that it could.
Remember that throughout the European crisis the ECB's target rate was always below 1% whereas bond yields in many countries went into double-digit mode.
So the available data seem to tell us that no - coordination between fiscal and monetary authorities is not irrelevant; and that a pro-austerian and independent CB can wreak havoc on the financial and fiscal capacity of democratically elected governments.
"...setting in motion a dynamic similar to the one we've observed in the eurozone - where several governments have been brought to their knees by the private markets due to the absence of a public debt supportive central bank".
ReplyDeleteI think that has more to do with the fact that the eurozone countries are now part of a supra-national state in which they have relinquished their individual sovereignty. The Greek government, for example, is on a lower rung in the Eurozone superstate hierarchy than the ECB.
In contrast, the US Congress is clearly above the Fed in the hierarchy of power. And the US Congress has not surrendered its power to create money to a supra-national or foreign state.
The other point with the eurozone is that there are several different national treasuries but only one central bank. So it's easy for the yields on one government's bonds to rise very significantly above the base rate. This is because Euros can easily flow out of Greece and into Germany, for example. In the US, however, the dollars have nowhere else to go. There is only one treasury, and one central bank.
ex post Dan...
ReplyDeleteiow you wouldnt cut 25% of the dollar off with a scissors before you throw it out of the helicopter... they would throw out the whole dollar...
Once the dollars are thrown out of the helicopter, those who receive it on the ground MAY incur a tax liability... then again they may not...
Govt SPENDS FIRST and THEN collects the taxes...
Scott has it correct here imo: "it raises income FIRST..." but then he goes on to talk about "deficit spending" where the deficit is ex post and he mixes up the spending and the taxes 'at the same time' with this phrase if you can see what I mean...
Paul says "the arrow of time"...
There is an order of procedure here that can be missed when we say things like "deficit spending"...
imo we should just say "spending" and "taxation" as independent actions...
Authoritarianism: Looks like there is confusion around that word with "tyranny" or "caprice" or something... there may be a popular definition of 'authoritarian' that misses the true meaning of "authority" and hence "authoritarian"...
Or perhaps we have to find the 'happy medium' between these two...
libertaianism has gone too far when we think we are 'out of money' or 'borrowing from the Chinese'... at least the edge has tipped too far to the libertarian side right now imo...
(FD: I'm authoritarian... think GITMO is a 'good idea', etc... so I'm perhaps biased in this regard, but I still submit that what we have right now "ain't workin'" for sure, and I think it is being caused at core by out of control/rampant libertarianism....)
rsp,
Matt, I guess I don't see that a whole lot hangs on the "spends first" language here. The government is continuously spending and continuously taxing. The key question is how much it is doing of each. If the government raised total spending by %10, but increased taxes by 12%, nobody should say they have carried out a helicopter drop.
ReplyDeleteLibertarians are no less authoritarian than the present regime. It's just that they prefer the privatized variety of coercion. In the end there's still a master/subordinate dynamic.
ReplyDelete"a pro-austerian and independent CB can wreak havoc on the financial and fiscal capacity of democratically elected governments".
ReplyDeleteScott's written a good paper on "unsustainable monetary policy"
'Interest rates and fiscal sustainability'
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722986
Matt,
ReplyDelete"raises income first" was referring to the difference b/n fiscal and monetary policy, not the order of taxes vs. spending as you've interpreted. A govt deficit raises income, then the pvt sector can spend out of increased income. Monetary policy requires pvt sector to start the process by spending more relative to existing income before the process can start.
Jose,
ReplyDeleteOne of the things that is very important to me is clearly separating tactics from strategy. This is one of the real problems neoclassicals have--they can't talk purely about tactics, and instead blend the two leaving out details and potential policy options along the way.
My post was about tactics only. The reason for "coordination" as promoted currently is as a tactic to avoid bond vigilantes and also to accelerate the stimulative effect of govt deficits via "printing money" rather than leaving bonds in the pvt sector. I was showing that neither are true and w/o coordination it's actually the same.
You are instead talking about how a central bank instead would react strategically to a govt running a deficit without coordinating. I would argue you have set up a straw man--why would the central bank have been amenable to coordination in the first place if it would react strategically to a deficit as you argue? Obviously, a central bank that would raise interest rates at the sight of a deficit is a different case altogether that may require government action (or may not, actually).
That the Eurozone proves my point, actually. There, coordination at the tactical level was necessary because there really can be bond vigilantes for member state deficits. The only reason coordination occurred there, though, was because Draghi was strategically in favor in the first place.
y,
ReplyDeleteI guess it all depends on the scale of CB independence.
If a central bank is institutionally far removed from the elective bodies of the country or countries in question it can create a lot of problems for governments keen on "helicopter drops".
Until 2008, when markets believed the eurozone countries were implicitly "underwritten" by EU institutions, all euro governments had short term bond rates close to the ECB's refinancing rate.
Suddenly, as private investors stopped believing that the ECB was standing behind the governments they savagely punished the more indebted governments in terms of prohibitively high interest rates required for bonds at every point of the maturity curve.
So it appears to be a matter of degree. When CB independence reaches high levels there is the risk that a government may be unable to sustain its desired "helicopter drops" - even in the case of monetarily sovereign governments.
Scott, you should have a debate with Scott Sumner.
ReplyDeleteHe claims the financial/banking sector is irrelevant to the 'transmission' of market-monetarist style monetary policy.
From what I've read his idea is as follows:
1. Create lots of money to buy government bonds and other assets.
2. ???????????????????????????????????
3. NGDP is back on a stable and sustainable path determined by the central bank and everyone is happy.
Hi Y
ReplyDeleteNo debate with Sumner until he agrees that banks exist. No point otherwise.
"there is the risk that a government may be unable to sustain its desired "helicopter drops"
ReplyDeleteI think the risk is that if the central bank raises interest rates to a high and 'unsustainable' level, the government's debt repayments could spiral off into the stratosphere (if it has a very large debt).
This might cause inflation, currency depreciation, distribution of wealth issues, or political problems, etc. But in the US and other similar countries I can't see why it would lead to the government facing a 'sudden stop' or 'running out of money'. This is possible in the eurozone where euros can flow out of one country and into another. But with a single national currency on a floating exchange rate this isn't the case.
The point to consider is the following: could an independent, austerian-minded central bank undermine "helicopter drops" undertaken by the fiscal authorities?
ReplyDeleteThe Eurozone experience shows that it could.
Depends on the legal context and also laws can be changed as the context changes. In emergencies, the US president has virtual dictatorial powers and the Treasury sec whom the president directs trumps the Fed board.
But the point is otherwise well-taken. A politically independent cb has effective control over the economy if it wishes to exert it.
well the Fed, for example, isn't even allowed to make direct transfers to individuals without buying some sort of security from them. Basically all it can do is buy financial assets and make loans, and thereby control interest rates if it wants to. I don't think that amounts to "effective control over the economy". It also seems like laws would have to be changed for the Fed to do genuine "helicopter drops".
ReplyDeleteMatt, I guess I don't see that a whole lot hangs on the "spends first" language here. The government is continuously spending and continuously taxing. The key question is how much it is doing of each. If the government raised total spending by %10, but increased taxes by 12%, nobody should say they have carried out a helicopter drop.
ReplyDeleteNeil Wilson has recently shown at his place how these ops are asynchronous.
When MMT talks about spending preceding taxing, it is a point of logic wrt the arrow of time, not an operational claim about Treasury-cb coordination.
As Neil observes cb's allow Treasury overdrafts intraday and bond auctions don't fail because the system is arranged that way, .e.g, in the US with Primary Dealers taking the bonds and borrowing from the cb if needed with the cb later taking the bonds on its balance sheet. Complicated systems use buffering.
The upshot is that there are basic principles involved that are general in the context of the parameters of a monetary system, e.g., convertible v. non-convertible, fixed v. floating rate. There are also special cases depending on different local rules (legal and regulatory arrangements in various jurisdictions). Focusing on the micro loses the macro perspective. Focusing on tactics misses the strategy.
Libertarians are no less authoritarian than the present regime. It's just that they prefer the privatized variety of coercion. In the end there's still a master/subordinate dynamic.
ReplyDeleteHave's and have-not's are inevitable in any system based on ownership of private property due to the formation of power relationships that "liberal" economic analysis abstracts from.
When MMT talks about spending preceding taxing, it is a point of logic wrt the arrow of time...
ReplyDeleteI don't understand what that means Tom. If it is a point about some kind of logical priority, then it has nothing to do with the arrow of time.
The fact that central banks permit same day overdrafts by government treasuries doesn't imply anything one way or another about any kind of priority.
OF COURSE it depends on the scale of CB independence. If the govt isn't the sovereign currency issuer and instead the CB is, as in the EMU, then obviously explaining how a sovereign currency issuer works is irrelevant. But what's the point bringing that up as a critique of a post that was clearly referring to a govt (the US, in this case) that obviously is the sovereign currency issuer?
ReplyDeletewell the Fed, for example, isn't even allowed to make direct transfers to individuals without buying some sort of security from them. Basically all it can do is buy financial assets and make loans, and thereby control interest rates if it wants to. I don't think that amounts to "effective control over the economy". It also seems like laws would have to be changed for the Fed to do genuine "helicopter drops".
ReplyDeleteMaybe "influence" or "strongly influence" would be more suitable
The Fed by law cannot do helicopter drops outright in the sense of Friedman, so it is moot in the US. However, that may be true of other cb's. I believe it is true of the BoE, for instance.
On the other hand, the Fed did take dreck off the banks books and also granted considerable "regulatory forbearance." It''s also arguable that the extensive liquidity provision that UMKC has documented was at least quasi-fiscal in that it was effectively underwriting the banks. Were that not the case, it is likely that there would have been more Lehmans. As it was, investment banking was no more in the form it had been. Without close government coordination, including the Fed and largely the Fed, either there would habe been a financial meltdown or major banks would have been put into resolution, effectively nationalizing them as the govt did with the auto cos.
It can also be argued that the Fed (as chief regulator) was in large part involved in the decision to make the creditors whole by shifting the burden onto debtors, even though the contracts were void due to legal irregularity (Bill Black).
I think that the Fed exerted a lot more control than many realize.
And anyone alive at the time of Volker's jacking the interest rate into double digits sharply inverting the yield curve to control inflation by contracting the economy knows that the Fed has enormous power to control the economy. Volker just kept raising rates until the inflationary trend topped out, which meant tanking the economy and increasing the buffer of unemployed to control wage pressure, with unions strong at the time. Subsequently there was a political move to undercut labor and undermine its bargaining power.
But in the US, the Fed normal ability is only to contract the economy by increasing the cost of borrowing and not to expand it other than through lowering the cost of borrowing. On the other hand, according to Warren, the Fed in effect "taxes" by withdrawing interest and "spends" by increasing interest rates, which are quasi-fiscal.
A good example of a politically independent central bank exerting both economic and political control to a considerable degree is the Bank of England at its inception, which was explicitly to discipline the monarch's proclivity to overspend and debase the currency, e.g., by increasing seignorage after some events that aggravated financial interests.
I don't understand what that means Tom. If it is a point about some kind of logical priority, then it has nothing to do with the arrow of time.
ReplyDeleteThe fact that central banks permit same day overdrafts by government treasuries doesn't imply anything one way or another about any kind of priority.
Logically, govt injection of its currency must come before withdrawal of its currency. There is a time sequence in the logic.
However, operationally the events may be asynchronous due to buffering. An operational overdraft intraday is not actual lending in the sense of formalized borrowing, e.g., no interest is charged. It just a matter of waiting to enter keystrokes while accounts are balanced, so to speak. In other words, if I run an overdraft at my bank, I get charged interest for the time of the amount lent. Not so in the case of the Treasury and its fiscal agent. Similarly, it is arranged through the PD's that auctions clear even if the Fed has to supply the rb on a temporary basis.
Dan,
ReplyDeletewrt the 10% vs 12% yes I understand the math point you make there ex post...
But no rational person would drop $100 out of a helicopter and expect to go down and land and pick up $120... if you can see what I mean....
So it may be a good idea to move past these ex post analysis and continue to develop 'models' that depict the logical order of these operations for the benefit of those who continue to remain in the dark and cant seem to grasp logically/mathematically what is really going on....
Like Tom mentions Neil's "asynchronous" nature of these operations... like in time period 1 the govt spends, then in time period 2 they spend some more and also collect tax, then in time period 3 again they spend and also tax...etc...
This can all be "totaled up" yes ex post and analyzed for a given time period no one is arguing that...
But that is not describing what is going on in 'real time'....
With this ex post stuff we can add it up for them and say: "hey you idiots, look at what you JUST DID!"
And yes there is value in pointing that out to them...
But perhaps we should also be thinking about a way to describe what is happening "right now".... so we can tell them: "hey you idiots, look at what you ARE DOING!"...
Perhaps move past the SBE and GDP and other ex post measures of past bad policy... Come up with something that describes what is happening nearer to real time...
I'm not saying the ex post stuff has no value but it is nearer "accident investigation" rather than "accident prevention" if you can see what I mean...
rsp,
I should add that in a sense the taking away precedes the giving but not in time. First one has an obligation and then must obtain the needed to meet it. So taxing preceded spending in that it is the tax obligation that creates the demand for the currency that enables govt to use its currency in private markets to transfer goods to public use. That is, govt has to provide the token before it can take it back, coercively if need be.
ReplyDelete"the Fed did take dreck off the banks books"
ReplyDeleteyeah if people default on those loans, i.e. mortgages in the case of MBS, then it is a sort of 'helicopter drop'. I agree with your other comments too.
"As Neil observes cb's allow Treasury overdrafts intraday"
That's not the case in the US though, is it?
A side note: the Fed does actually buy treasury bonds directly at auction when it replaces maturing bonds held in its SOMA (system open market account). If you look at the Treasury auction results there's a SOMA category which shows the amount of bonds bought by the Fed at auction directly from the Treasury. I wonder whether there is some legal limit on how much the Fed can buy in that way?
See here: http://www.treasurydirect.gov/instit/annceresult/press/preanre/2010/R_20101228_2.pdf
SOMA: $1,754,353,300 worth of 5-year Notes (bought directly by the Fed at auction)
By the way, if the treasury were to borrow directly from the CB via an overdraft and then use that money to buy back bonds from the public (i.e. retire debt) would that count as 'deficit spending'?
An interest rate hike causes the federal budget deficit to grow and thus raises the net financial assets of the non-government sector. Therefore, an interest rate hike is a helicopter drop.
ReplyDeleteIs this correct?
"if the treasury were to borrow directly from the CB via an overdraft and then use that money to buy back bonds from the public (i.e. retire debt) would that count as 'deficit spending'?"
ReplyDeleteThat would change the composition of NFA, not the level…dollars would be exchanged for bonds.
Deficit spending increases the level.
"Deficit spending increases the level" = "spending that exceeds taxation during a given interval increases the level for that interval"...
ReplyDeleteEt tu Paul.... ;)
Can I get an "amen" here Paul ? ;)
(Maybe I'm 'splitting hairs')... rsp,
if the treasury has a surplus, for example, and uses the surplus to retire debt, then the surplus disappears and we're back to a balanced budget, correct? (I'm simplifying of course).
ReplyDeleteSo if the treasury is running a balanced budget, and then borrows from the CB, and uses that money to retire debt, doesn't that put the budget into deficit?
"(Maybe I'm 'splitting hairs')... rsp," - Matt
ReplyDeleteNot sure which hair you're splitting…I understand (I think) the argument you've been making. Your argument seems to me to be related to flows not levels.
Deficit spending inceases the level of NFA, not necessarily the level of spending.
"if the treasury is running a balanced budget, and then borrows from the CB, and uses that money to retire debt, doesn't that put the budget into deficit?" - y
After the operation, has the level of NFA (dollars plus bonds) in the non government been changed as a result?
paul,
ReplyDeletemight it be right to say that in my example the Tsy is in deficit but the government as a whole (including the Fed) is not?
"might it be right to say that in my example the Tsy is in deficit but the government as a whole (including the Fed) is not?"
ReplyDeleteMaybe...I don't think that is what is commonly meant when one says "deficit".
Matt provided the common definition. I think your question changes the context completely.
This looks like a perfect example of operations muddying the picture rather than adding any clarity.
Would it matter if the Treasury was in deficit while the government as a whole was not?
Why?
Ramanan presented it as a scenario in the comments to Joe's post at NEP ;)
ReplyDeleteDeficit is "G-T" where T is taxes net of xfers and G is govt spending in final goods and investment... if you listen to BEA or economists...
ReplyDeleteUnless you look at the Treasury's MTS where it is "receipts" vs. "outlays"....
Unless you look at the Treasury's DTS where it is "deposits" vs. "withdrawals"...
Unless.... ????
"Ramanan presented it as a scenario in the comments to Joe's post at NEP ;)"
ReplyDeletey, if Ramanan's argument is so compelling then you should have no problem answering the simple question I posed. :-)
Here's a few more questions
…How much HPM is recorded on balance sheets in the non-government? (Noting that banks have two sets of balance sheets, one with a foot (ledger) within the non-government and one without.)
…are reserves recorded as non-government NFA?
…how do reserves relate to spending?
"As Neil observes cb's allow Treasury overdrafts intraday"
ReplyDeleteThat's not the case in the US though, is it?
In conversation, Fed ops types have said that intraday overdrafts are used in balancing accounts. The rule is interpreted as no overnight overdrafts, and who is going to know about intraday overdrafts anyway? There is a lot of coordination going on between Treasury and Fed to manage accounts so that the Treasury as the reserves it needs for spending and the Fed can achieve its open market operations when it is not using IOR. This is fairly complicated considering how many balls are in the air at any time.
Tyler,
ReplyDeleteimo all "non-G" govt spending is like a 'helicopter drop'.... as govt is not purchasing final goods or making investment...
Interest on USTs is considered a
'transfer payment' so I would consider it like a 'helicopter drop'... the non-govt can either spend it, save it or pay tax with it...
rsp,
STF,
ReplyDeletewhat's the point bringing that up as a critique of a post that was clearly referring to a govt (the US, in this case) that obviously is the sovereign currency issuer?
Frankly, I think we should not lay to waste the opportunity presented by having reputable neoclassical economists calling for "coordination" among the fiscal authority Treasury the Fed.
Coordination means that Treasury (better said, the elected government) rules the roost and the Fed's mission consists in simply providing support along the way.
And I don´t think things are so obvious concerning the US government's status as the currency issuer.
CB independence can be analysed on a spectrum - say, from zero independence to a maximum scale of 10 for totally independent central banks.
"10" would be the case of the eurozone, where the ECB can dictate monetary, fiscal and yes "structural reform", supply side policies on all of the zone's members, thanks to an independence status that is consecrated by an intergovernmental treaty and can only be altered by an unanimous decision of all the member states.
But the Fed itself has not been immune to an insidious evolution that has slowly attributed to it a degree of "independence" that may one day threaten the leeway of the sovereign government.
Imagine this scenario: it's year 2015 and Fed Chairman Timmy criticizes publicly a decision by a born-again (as employment lover) President Obama to increase deficit spending. Timmy says he's scared of the consequences of said decision on an "unsustainable" debt level as well as on putative inflationary risks.
Do you think such a pronouncement would have no effect on Tsy bond yields? I doubt it.
In fact, the present-day Fed is likely much more independent than was the case during, say, the 1940s. Then it would perhaps rank 0 or 1 on the independence scale; today - even though, fortunately, not that independent by international standards - maybe it would get a 2 or 3.
And this evolution I don't see as a positive development. Tomorrow, by stealth, it could go to 5 or 6 on that same scale - and by then it might be too late for the American "sovereign".
That's the reason I think one should grab with both hands this opening provided by neoclassicals on the needed "coordination among Tsy and Fed". We should say to them - "welcome to our fold. You're right: the Fed should be the orchestra that plays the music dictated by the elected maestro and not - now, ever - the other way around".
Because, in the end, that's what democracy is about.
An interest rate hike causes the federal budget deficit to grow and thus raises the net financial assets of the non-government sector. Therefore, an interest rate hike is a helicopter drop. Is this correct?
ReplyDeleteI would not call it a "helicopter drop" in the sense that Friedman used the term. For him, a helicopter drop was an extraordinary fiscal add that increased the money stock without increasing production. So according to QTM it would cheapen the money. Same as Hume's argument, essentially.
An example of helicopter drop in this is sense would be Congress authorizing the the Fed to credit everyone with a fixed amount instead of going through Treasury as with the Bush per capita grant.
I think it would be clearer to stick with this meaning, in MMT terms, delegating the power to increase $NFA to the Fed as an extraordinary policy measure.
As beowulf has observed, the Fed already collects a "tax" through the fee it imposes on the use of Fedwire. Presumably it has the power to increase or decrease the fee, which has quasi-fiscal effects, since govt levies in the form of taxes, fees and fines affect $NFA.
Similarly I would say that the increasing or decreasing the interest rate has pass-along effects that make it quasi-fiscal.
I think that "helicopter drop" implies something different in that it is out of the ordinary operationally. This is what dropping money from helicopters is meant to convey.
"This is fairly complicated considering how many balls are in the air at any time." - Tom
ReplyDeleteYes, and I would say complexity that is irrelevant to 99.99% of the participants in the economy, whose main concern is whether someone else is spending or not, and more importantly, spending it on what they have on offer.
"an interest rate hike is a helicopter drop. Is this correct?"
ReplyDeleteMaybe, but it's a helicopter drop to oblivion. Dropping the money on the moon would be more useful…then people would be investing in trying to get to the moon to get it.
"if the treasury were to borrow directly from the CB via an overdraft and then use that money to buy back bonds from the public (i.e. retire debt) would that count as 'deficit spending'?" That would change the composition of NFA, not the level…dollars would be exchanged for bonds. Deficit spending increases the level.
ReplyDeleteFrom the consolidated govt POV it makes no difference whether the Treasury would do this or the Fed through OMO or QE.
When Treasury credits accounts it increases banks rb and the sale of bond changes the composition of $NFA without affecting the amount and drains rb into bonds. If the Treasury would buy the bonds this would in effect be early redemption and increase rb back to the level preceding the bond sale.
The point is that Treasury and Fed ops are coordinated to accomplish the goals of fiscal and monetary policy simultaneously, so the two agencies of govt dont' get in each others' way.
There isn't really much point in conceptualizing these ops independently of context. Doing so results in confusion and is a large part of the problem.
When we conceptualized govt as whole with its department and agencies coordinating then the context becomes clear. This involves seeing them as consolidated even though they keep different books. The books of the various agencies can be consolidated conceptually as "the govt."
As Neil Wilson observes, the consolidated govt book has to match with the disaggregated books of the agencies for accounting consistency. If they don't match up, its a signal that something is amiss in the logic.
That's a nice twist on Keynes's (sarcastic) idea of burying money in the ground for people to dig up. Dump it on the moon!
ReplyDeleteif the treasury has a surplus, for example, and uses the surplus to retire debt, then the surplus disappears and we're back to a balanced budget, correct? (I'm simplifying of course).
ReplyDeleteSo if the treasury is running a balanced budget, and then borrows from the CB, and uses that money to retire debt, doesn't that put the budget into deficit?
Bests to drop "balanced budget," since the budget is just a plan, and speak of the fiscal balance which is an accounting artifact.
At any point in time the fiscal balance is in balance, surplus or deficit and the next point of time it may change depending on the direction of flow. The actual fiscal balance is generally reported in terms of a period like a quarter or year, and this changes over a period depending on discretionary and non-discretionary factors.
So one can say, for example, if the fiscal balance is in balance and the next flow entry is such and such, how does this additional flow affect the balance. And that is affected by the next flow and the next, and so on.
"In conversation, Fed ops types have said that intraday overdrafts are used in balancing accounts".
ReplyDeleteReally? Where did you get that info? Sounds pretty important to me.
IIRC, STF reported it in a comment somewhere. Unfortunately I don't seem to have clipped it. But, yes, important.
ReplyDeleteMaybe Scott will clarify if he sees this.
"At any point in time the fiscal balance is in balance, surplus or deficit and the next point of time it may change depending on the direction of flow".
ReplyDeleteWhat would you suggest reading to get a really detailed understanding of all of this, i.e. Treasury operations and accounts?
Thanks, guys.
ReplyDeleteAn interest rate hike strikes me as a great way to increase federal spending, especially when the current Congress is guaranteed to block any new spending bill.
HPM = "monetary base (also base money, money base,high-powered money, reserve money, or, in the UK, narrow money) is defined as the sum of currency circulating in the public andcommercial banks' reserves (rb + vault cash) with the central bank."
ReplyDelete$NFA = total financial assets owned by non-govt where the liability lies with govt.
Some HPM is $NFA, and the rest is bank borrowing from the cb. Bank borrowing from the cb nets to aero for the bank, which has a corresponding liability to the Fed for the Fed liability (rb) it is borrowing.
The bank also has a liability for interest on the loan, which is a govt fee that extracts financial assets from non-govt.
What would you suggest reading to get a really detailed understanding of all of this, i.e. Treasury operations and accounts?
ReplyDeleteMatt is probably the one to answer this, since this is his field of interest. I only know about the outlines and not the details.
Jose @312pm
ReplyDeleteThat's all fine, but it has nothing to do with my post or coordination, which is a TACTIC. You are talking about STRATEGY as in a strategic response by the Fed to a deficit. I agree with you on STRATEGY. But in terms of TACTICS--which is how EVERYONE right now is discussing coordination--coordination is unnecessary and distracts people from (a) how monetary operations and thus transmission mechanisms work, and (b) the abilities already at the fingertips of the government without altering any laws or "customs" in terms of the Fed's current level of independence. As I said, a CB that has the strategic response to a deficit that you are concerned with also would not be willing to undergo coordination anyway. Your entire point is thereby off topic here, though not unimportant overall.
Here's a few more questions
ReplyDelete(1) How much HPM is recorded on balance sheets in the non-government?
(2) are reserves recorded as non-government NFA?
(3) how do reserves relate to spending?
Let's try to answer, just for the fun of it.
(1) All the following 3 items: Cash in the hands of the public, cash held in bank's vaults and commercial bank deposits at the central bank
(2) yes, as (short-term) assets on the commercial banks' balance sheets
(3)More government deficit spending -> more bank reserves
An interest rate hike strikes me as a great way to increase federal spending, especially when the current Congress is guaranteed to block any new spending bill.
ReplyDeleteWarren's point is QE is deflationary through the interest channel, so ending QE might be a good move. However it is almost certain to crash equities is done quickly. The Fed just mentioning ending QE sometime in the future elicited a tantrum from the equity and bond markets. I interpret it as a very early signal that current policy is not eternal, ie. as preparation well in advance of shifting policy.
The interest rate is another thing altogether since monetary policy operates largely through the housing channel, as Mike Sankowski has observed. So raising rates raises mortgage rates and just the market tantrum after the Fed mention that someday things would normalize sent mortgage rates up, threatening the housing recovery.
The advantage of a true helicopter drop is a fiscal add that does not increase the deficit. since it is booked to the Fed rather than Treasury. Interest on tsys is booked to Treasury even when the cb buys the bonds and eventually remits the interest to the Treasury. So interest cannot be a true helicopter drop as a cb fiscal op.
hey Scott, any more detailed info on these mysterious Fed-Treasury intraday loans?
ReplyDelete*sorry, I mean intraday overdafts.
ReplyDeletemysterious Fed-Treasury intraday loans?
ReplyDeleteI would not call very temporary overdrafts "loans," which implies a non-existent formality. They are asynchronous accounting. In other words, the Fed as govt fiscal agent will clear govt checks and find the funding before the day ends, normally within an hour or two. It's basically a matter of managing accounts and in common practice that is not necessarily synchronous, as the accounting might lead one to think.
In fact, it used to be that even personal and small firm banking was carried on this way. If there was an overdraft, the bank would cover it for a good customer without charge, knowing that the customer would cover it ASAP when notified.
"(3)More government deficit spending -> more bank reserves"
ReplyDeleteYou missed the point…
Which causes which? Does an increase in bank reserves automatically result in increased deficit spending?
Or is it the reverse?
You missed the point on (2) also, but I don't want to go there.
Can you not sever the two systems…government and non-government, and look at them independently of each other?
Tom
ReplyDeleteBrad Delong suggested something like that goes on, and he worked at the treasury.
"Unless the Treasury is constrained by the debt limit, if it "overdraws" its account at the Fed it simply says "my bad", prints up a bond, and sends that bond over to the Federal Reserve Bank of New York acting as its fiscal agent, and the Fed credits the Treasury's cash account with the amount of the bond. The Federal Reserve can then either hang onto that bond or sell it, as it wishes, but there is no sense in which the Treasury is constrained to spend only the cash it previously collected in taxes--unless it or the Congress decide that it is so constrained..."
http://delong.typepad.com/sdj/2013/03/bill-black-is-justifiably-irate-monday-hoisted-from-comments-weblogging.html#comment-6a00e551f080038834017c37e9810b970b
Does an increase in bank reserves automatically result in increased deficit spending?
ReplyDeleteNo.
For instance, if non bank investors sell back bonds to the Fed during QE nothing has happened to the deficit, yet reserves have increased.
y,
ReplyDeleteMasterful quote from Delong.
Sometimes, in moments of inspiration when unconstrained by political correctism, he does state some hard truths hardly to be found inside other mainstream blogs.
Jose, a masterful quote by Delong except for the part where he says that the Treasury spends the "cash" it collects in taxes. I don't pay my taxes in cash, nor does anyone else I know.
ReplyDelete"Jose, a masterful quote by Delong except for the part where he says that the Treasury spends the "cash" it collects in taxes. I don't pay my taxes in cash, nor does anyone else I know."
ReplyDeleteSome of us think of cash as liquidity, not physical currency.
Roger Malcom Mitchell has said that currency is not the real thing™…it is a physical representation of the real thing™ which is a number on a balance sheet.
I agree with that characterization.
Geoff,
ReplyDeleteI think Delong was likely meaning "revenue" when he wrote the more colloquial "cash".
I think Delong was likely meaning "revenue" when he wrote the more colloquial "cash".
ReplyDeleteMaybe. But DeLong is a careful guy that points this kind of error out in others on a regular basis. See his recent stalking of David Graeber, for instance, which many found creepy. So I would not rush to give him the benefit of the doubt.