Paul Krugman has a new post that explains why the debate over money- vs. bond-financing of government deficits is really much ado about nothing. In it, he essentially echoes longstanding MMT-core principles, as we will show below.
New Economic Perspectives
Krugman, Helicopters, and Consolidation
Scott Fullwiler and Stephanie Kelton
Krugman, Helicopters, and Consolidation
Scott Fullwiler and Stephanie Kelton
10 comments:
Good illustration why you need to consolidate the Fed and Treasury to do analysis, even if they are operationally distinct.
And I like their point that if the gov't pays interest on reserves, T-Bills are equivalent to (excess) reserves. If the mainstream economists actually paid attention to their own models, they would have found exactly the same thing.
B,
"if the gov't pays interest on reserves, T-Bills are equivalent to (excess) reserves."
I believe the Fed actually uses the portfolio income from the USTs they hold as a source of the balances they use to pay the IOR so it may not be 100% correct to to say "equivalent" but rather "the source of"....
rsp,
Matt, I don't think there is any "source" for the IOR payments. The Fed just marks up reserve accounts by the required amount. Their commitment to do so is not contingent on the state of their SOMA income. Fed economists have already published studies predicting that during the QE unwinding/exit period, Fed net income might go negative for a period. But they also expect that IOR rates will actually increase during that period.
" Fed net income might go negative for a period."
Dan I hear you and technically agree... they could let a number "turn red" on an info system yes... no problems here...
But Dan think about what would happen then every libertarian would come crawling out of the woodwork including even Congress people imo and say "the Fed is bankrupt" and so forth and imo the Fed at the top levels will do everything in their power to prevent the accounting from turning out that way even if this means staying on zero for an indefinite period...
rsp,
Unless they can figure out a way to do both (pay ior AND present an accounting picture where they remain "profitable" so-called...) ... which looks possible.. I think they have to take it real slow and just use the redemption process where the short term Securities in the portfolio get redeemed and they dont keep buying more every month...
This should probably allow the longer term securities to keep yielding while they reduce the factors on the short end thru redemptions...
rsp,
Dan I could see the Congressional hearings where the Fed has always gone in a bragged about how much they have contributed to "deficit reduction" and then they wouldnt have any to "contribute" and Alan Grayson would ask them what happened and Yellen would say they are in "negative equity" and the whole room would erupt... rsp,
Matt, that's no different than when people scream about the debt-to-GDP ratio. It's a political and a policy question, not an operational requirement. If the Fed operated with negative annual "income", that is no different in principle than the Treasury running a budget deficit.
OK, I was too terse. I should have said that TBills and reserves are equivalent within their models (or from the point of view of investors). Sure, even for investors there are differences, but those are not something that will show up in a macro model.
The idea is that in a macro model, what happens in any "black box,", e.g., G, is irrelevant if the input and output is not affected. That's the point of consolidation for simplicity's sake. On that level understanding Fed and Treasury regs and ops is unnecessary. Only if the input/output would be affected would something within the box be relevant. Of course, what's in the black box could be relevant for other matters. But for simplicity and ease of understanding, conceptual consolidation is a huge convenience.
Dan, yes WE know this but these people aren't there yet imo... so imo this will effect policy going forward is all I am surmising here...
You are technically correct and I agree with your view of the realities here... and I also agree with Brian technically...
I am perhaps sloppily pointing out that this is NOT the way policymakers see it, and this misinformed view of the actual policymakers will effect policy going forward...
rsp
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