With fixed fx/convertible currency ‘base money’ doesn’t include govt secs as those obligations are claims on govt reserves (gold, fx, etc.), which are part of ‘national savings’ as defined.
However, with today’s floating fx/non convertible currency tsy secs (held outside of govt) are logically additions to ‘base money’, as the notion of a reduction of govt reserves (again, gold, fx, etc) is inapplicable to non convertible currency.
That is, with today’s floating fx, I define base money as currency in circulation + $ balances in Fed accounts. And $ balances in Fed accounts include both member bank ‘reserve accounts’ and ‘securities accounts’ (tsy secs). And to me, it’s also not wrong to include any other govt guaranteed debt as well, including agency paper, etc.
That is, with floating fx, ‘base money’ can logically be defined as the total net financial assets of the non govt sectors.
(Note, for example, that this means QE does not alter base money as thus defined, which further fits the observation that QE in today’s context is nothing more than a tax that removes interest income from the economy.)
And deficit reduction is the reduction in the addition of base money to the economy, with the predictable slowing effects as observed.
The point of this post is to ‘reframe’ govt deficit spending away from ‘going into debt’ as it would be with fixed fx, to ‘adding to base money’ as is the case with floating fx where net govt spending increase the economy’s holdings of govt liabilities, aka ‘tax credits’.
Feel free to distribute!The Center of the Universe
Defining “Base Money” with floating fx- The Great Reframation
Warren Mosler
Synchronicity. I was just thinking about this recently and about to ask.
27 comments:
Mosler: "That is, with today’s floating fx, I define base money as currency in circulation + $ balances in Fed accounts. And $ balances in Fed accounts include both member bank ‘reserve accounts’ and ‘securities accounts’ (tsy secs). And to me, it’s also not wrong to include any other govt guaranteed debt as well, including agency paper, etc."
I am not sure whether he wants to reinvent terminologies ... or what?
Currency in circulation has a specific meaning.
He includes debt instruments in defining $-balances in Fed accounts of the member banks but forgets to add such a thing for the non-bank private sector.
Going by his definitions, base money is not the net financial assets of the private sector because he doesn't count government bonds held by the non-bank private sector but he claims that is the case.
For that he needs to redefine "currency in circulation" to include the bonds but that is strange.
Ramanan, as I read it, "currency in circulation" remains the same, i.e., cash (notes and coin).
Currency in circulation has a specific meaning.
He includes debt instruments in defining $-balances in Fed accounts of the member banks but forgets to add such a thing for the non-bank private sector.
The non-bank private sector can hold nothing in Fed accounts, to which only depository institution have access to as public-private partnerships.
We could quibble over Tsy certificates like EE bonds held by the public outside both the Fed and banks, but that is pretty minimal.
MMT also needs to reframe entitlement spending. When someone spends in the traditional sense they receive a good or service in return. We also know that when the govt spends it does not need revenue, it just creates the money and credits the account of the entity that surrendered the good or service. But with entitlement spending no good or service is consumed by the govt. It is really a case of the govt creating money and giving it to someone we as a society determines is entitled to money. It is the entitled private sector citizen that gets to enjoy the good or service. So if MMT reframed "entitlement spending" to "money creation" and reframed "govt spending" to govt consumption", govt spending would be a much smaller percent of GDP (take that republicans!).
Ramanan,
"he doesn't count government bonds held by the non-bank private sector"
Yes he does. He refers to Treasury securities as 'securities accounts' held at the Fed.
Scott Fullwiler on the subject:
"An appropriate analogy is of Treasury securities as time deposits held by the non- government sector in Fed accounts, much as reserve balances are deposit balances held in Fed accounts (Mitchell and Mosler, 2005). The time deposit/demand deposit analogy is all the more relevant given that since the mid-1960s Treasuries exist only as balance sheet entries and change ownership only via the Fed’s electronic transfer system (Garbade, 2004)."
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722986
Tom and Y,
He includes securities accounts but only for member banks.
So if currency in circulation is cash, then his definition doesn't add to NFA of the private sector.
If he defines currency in circulation which "y" claims to include bonds held by the non-bank private sector that contradicts with Tom Hickey. But he doesn't define so, whatever the relevance of Scott Fullwiler's quote is.
Look it is simple accounting and Mosler's accounting doesn't add.
"He includes securities accounts but only for member banks"
No he doesn't.
"I define base money as currency in circulation + $ balances in Fed accounts. And $ balances in Fed accounts include both member bank ‘reserve accounts’
and‘securities accounts’ (tsy secs)."
He refers to Treasury securities as 'securities accounts' held at the Fed, i.e. 'Fed securities accounts'. Even Treasury securities held by the non-bank private sector are 'securities accounts held at the Fed'.
Fullwiler's quote explains why.
Or alternatively, if bonds are to be included, why use "Fed accounts", simply use government accounts because the securities are not held at "Fed accounts". The Fed is the agent not principal.
The same of course can be said for member bank assets as well.
Overall point being why change standard terminology with ill defined ones?
Yeah I think Tom has misunderstood what Warren means actually.
y,
Ever heard of the hairy ball theorem?
Plus there are more complications. The private sector can be indebted to the central bank or the government. More hair combing on a sphere.
"the securities are not held at "Fed accounts"
where are they held?
"Acting as fiscal agents for the government, the Reserve Banks sell, service and redeem Treasury securities".
http://www.newyorkfed.org/aboutthefed/whatwedo.html
"Treasuries exist only as balance sheet entries and change ownership only via the Fed’s electronic transfer system"
"Treasuries exist only as balance sheet entries and change ownership only via the Fed’s electronic transfer system"
Yeah but they are the Federal Government's liabilities. Fed account means Fed's liability just like a bank account mean bank's liability.
They are not "$ balances in Fed accounts"
"Acting as fiscal agents for the government, the Reserve Banks sell, service and redeem Treasury securities".
Yes agent not the principal.
Underlying message is that changing definitions is not the way.
One example: in your definition of base money, if the Treasury buys student loans, it increases base money but it doesn't increase the private sector's net stock of financial assets.
Warren Mosler:
"what you see before you is a forest"
Ramanan:
"I can't see the forest, all I see are some trees. You're wrong."
"if the Treasury buys student loans, it increases base money but it doesn't increase the private sector's net stock of financial assets".
that's true, and I doubt Warren would disagree with you on that.
"They are not "$ balances in Fed accounts"
I don't know the inner workings of the Fed, but I assume that given that the Fed sells, services and redeems treasury securities, and that treasuries can only be exchanged via the Fed's electronic transfer system, the Fed must keep accounts somewhere which indicate who has what and what is owed to whom. And when they sell treasuries they presumably mark up those securities accounts, and when they redeem treasuries they presumably mark down those securities accounts.
If he defines currency in circulation which "y" claims to include bonds held by the non-bank private sector that contradicts with Tom Hickey.
No, what I meant was what y said about Scott's quote, if that was not clear from what I said.
Warren is talking about base money. It's defined as reserves held by depository institutions as rb and vault cash plus currency in circulation.
What Warren is saying is that tsys and rb are interchangeable without changing amount of $NFA held by non-government in aggregate, so these accounts at the Fed should be included along with rb.
What is so complicated about that?
Another way of saying it is wrt the hierarchy of money (Wray, Mehrling), where in a convertible fixed rate system gold is at the top and HPM second. In a convertible floating rate system, HPM is at the top. Warren is saying that not only rb at the Fed should be counted but also other accts held by depository institutions. Small banks that are not Fed members are affiliated with members for access to the Fed's spreadsheet. All HPM other than cash held in bank vaults and by the public is held on the Fed's spreadsheet in reserve accounts and securities accounts. Those accounts are interchangeable among parties with out changing the total amount of $NFA, which the way the Fed does OMO and POMO. When it buys securities it marks up bank's reserve accounts with reserves and marks down securities accounts and when it sells securities, it does the opposite. No change in total amount of $NFA.
"What is so complicated about that?"
See Hairy Ball Theorem.
He tries to come up with a scheme of definitions so that it is clear QE doesn't increase NFA at the time of purchase of Treasuries. But it doesn't work elsewhere.
First he has to define base money to include non-banks' Treasuries which it is not clear he does. Then he calls "Treasuries" as "$ balances in Fed accounts".
But ...
Treasury buys student loans and base money increases but it doesn't increase NFA. Fed buys MBS and it increases base money but not NFA.
Treasury capitalizes banks and this increases base money and not NFA.
His new definition doesn't work.
"I can't see the forest, all I see are some trees. You're wrong."
Good try at mock.
But I can see the forest and it doesn't help using another word for forest.
"which it is not clear he does"
yes it is clear that he does.
"Treasury buys student loans and base money increases but it doesn't increase NFA"
Agreed on this point.
Warren's definition:
total net financial assets of the non govt sectors is "base money".
However as you point out, Warren's "base money" isn't necessarily equal to 'total NFA of the non govt sectors'.
"yes it is clear that he does."
Given Tom Hickey first interpreted it like mine and different from you, it is not clear actually.
Also Treasuries are called Treasuries or Treasury securities, not Fed securities. You could do better if you define them as government securities rather than Fed securities or accounts.
Even more importantly - if you see that definition - he includes government guaranteed debt. In 2008 there was a program in which financials could issue debt guaranteed by the FDIC. Obviously you include these in base money things won't be consistent. Plus the obvious - deposits guaranteed by the FDIC.
My point Y is that Mosler attempts to redefine things for the purpose of QE. It doesn't work for QE itself and generally complicates for others.
regarding treasuries, I was the one that called them 'Fed securities accounts', my mistake.
Warren refers to them as 'securities accounts'. Obviously they are liabilities of the treasury, but the securities are actually accounts that are 'held at the Fed' as far as I'm aware. They exist on the Fed's system, the Fed sells them, services them and redeems them, they have no physical existence outside of the Fed (they're not pieces of paper that get passed around outside of the Fed, as in the past. They're just electronic entries on the Fed's database). When the Fed sells them, it debits one account and credits another, and when it redeems them it does the opposite.
Yes 'government securities' is another term that might be better or more accurate, but personally I think Warren's description is ok because I know what he means. Bear in mind that Warren doesn't consider the separation of Fed and Treasury to be a significant distinction, given that he asserts that 'Treasury checks don't bounce' - i.e. that all payments will be made as a matter of course.
Scott Fullwiler describes it as an analogy:
"An appropriate analogy is of Treasury securities as time deposits held by the non- government sector in Fed accounts"
the question then is whether you think it's a useful or accurate analogy or not. Warren argues that definitions serve 'further purpose'. So the purpose in this case of defining treasuries as 'Fed accounts' is that it clarifies, from Warren's perspective, what actually goes on, namely that treasury bond sales and bond redemptions simply involve the Fed crediting and debiting different accounts - 'demand deposit accounts' held at the Fed, and 'securities accounts' held at the Fed.
I'm not sure how the 'hairy ball theorem' is that relevant..
"Warren argues that definitions serve 'further purpose'."
Provided it is successful.
Fed buys MBS in QE. Show with above definitions that it doesn't increase base money (the base money in new definition) because that is the purpose - to show QE doesn't add to base money.
It won't work because there is nothing in the above definitional scheme which says private indebtedness to the government sector has to be taken care of.
You can try to modify but in the end you will only rediscover SNA.
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