In the latest example of Wall Street malfeasance, a 115-page lawsuit was filed in Manhattan federal court last month, claiming that the big banks that serve as the main counterparties to the public finance operations of the US Treasury and Federal Reserve, were abusing their positions as "primary dealers" by colluding to raise prices.
According to Bloomberg:
The plaintiffs built their case against the 22 primary dealers who serve as the backbone of Treasury trading -- including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley -- using data from Rosa Abrantes-Metz, an adjunct associate professor at New York University who has provided expert testimony in rigging cases. Her conclusion: More than two-thirds of a certain type of Treasury auction appear to have been rigged. She found issues with other auctions, too.
Treasury traders at some banks learn of customer demand hours before auctions, and were communicating with their counterparts at other firms via chat rooms as recently as last year, Bloomberg News reported earlier this year.
The U.S. Treasury initially sells securities to the primary dealers who in turn sell them to clients, creating a secondary market for trading. Sometimes, after auctioning off debt, the government later issues an identical batch of securities -- known as reissued Treasuries.
When the second set of Treasuries is issued, their prices and yields can be compared with the identical securities already trading in the secondary market. If there are pricing differences, that could be evidence of a problem. According to the plaintiffs, 69 percent of the auctions of reissued Treasuries from 2009 to 2015 appear to have been rigged, artificially boosting yields by 0.91 basis points.
The plaintiffs said there’s evidence of cheating from at least 2007 through earlier this year, when press reports revealed the Justice Department investigation into the auction process.For us MMTers that fully understand monetary operations, this latest scandal is especially egregious. We know full well that the primary dealers serve as middlemen between our government agencies and end users of Treasury securities, getting their cut by conducting essentially risk free trading. As if the enviable position of being a primary dealer was not enough, now we learn that these guys were concocting schemes to skim even more off top--all at the expense of the American people.
This latest scandal gives more momentum to the cause of cutting out these middlemen entirely. As Marriner Eccles put it, its a bunch of "hocus-pocus" anyway. Its high time we stop with the charade of long term treasury issuance all together, and stick to the short term bills that trade at or below the federal funds rate. There was never any good reason to pay people interest to hold idle fiat in the first place. Now that even the relatively banal primary dealer system has been corrupted by Wall Street crooks, its time to give them the boot (and maybe the finger, too!)
126 comments:
Justin according to Dan, these people dont even exist.... maybe they could try that defense?
"we dont even exist! ... govt sells to the public!!!! .... so how can we be guilty of something if we dont even exist?!?!" .... might work if the jury watches CNBC....
Wait, there's an argument that primary dealers don't exist?
Matt, you've got it completely backwards. As the report Justin cites says,
The U.S. Treasury initially sells securities to the primary dealers who in turn sell them to clients, creating a secondary market for trading.
That is the (blindingly obvious) position that I defended against your loopy claim that somehow these primary dealers just have these securities "issued" to them without having to purchase them.
Dan's position seems reasonable to me...
Yes Dan and we drink the rain water too....
OK, Matt, so then you disagree with the passage Justin quoted? The treasury doesn't sell securities to the primary dealers?
Through reserves at the central bank account. Reserves don't fund government spending, they just stay there rotting.
"Treasury traders at some banks learn of customer demand hours before auctions." That is sort of the entire point of being a primary dealer: To help the Treasury department market their securities. As a reward, they mark up the prices and get the orders lined up and ensure every single auction is over-subscribed, by law, they have to bid on every issue at every auction, win or lose. So they work hard to always make sure they more than enough customers to keep prices high.
Certainly there is a case to be made, as to whether or not the treasury needs help marketing their securities. But there is no question that the sales men that sell the treasuries are entitled to their bit of profit for selling to their clients. Less than a bp in spread and they are crying, get a life folks!
What is worse, there are entire WI markets that do nothing but show the entire world what demand exists for a treasury security before it is issued. Everyone knows the price and orders ahead of time. And the price between the WI and actual issue is always different. Is that evidence of a conspiracy also? Nooo
I'm sorry but the existence of orders and order books should never be considered private in a public market. The fact that traders share and disseminate the information is not only appropriate, but essential. The identity of counter parties is usually kept private until after an order is executed (but not always). But once your bond order executes, you are told who was on the other side, that too is appropriate. When you go into a stock market or futures market you can see the order book in real time. Everybody chatters about it, constantly. Where is the crime, here? The only crime would be lying about prices, or markups, or hiding orders and not disclosing that orders existed.
Bond markets are not like stock markets with fast liquid execution for a reason. HFT guys that provide those market making services to ensure facebook and spy shares are always available are leveraged to the gills making trillions of dollars worth of trades per day with only millions in capital, no central bank backing, but they make sure that every market price across all exchanges never have a pip of difference. That comes at a high price. If they make a mistake, the entire market blows up and the public is left on the hook, with stocks, who cares, it is just retirement savings for rich people anyhow. They feel entitled to speed and no one cares if they blow themselves up. Bond markets are run the old fashioned way, with real money, real clearing, by real banks and real people. You may get some arbitrage opportunities like the one found in this lawsuit, but that is a small price to pay to avoid the good old boys in Chicago that make trading fast and seamless but exceedingly dangerous in terms and risk blowing up the world.
You can call it "sell" for use by the j6p's, but a securities attorney (trained tech professional) or licensed BD (trained tech professional) would term it "issue" and the document is an "offering" and Dealers "bid" .... the transaction is "settled" with "balances" that the Fed provides to the "Dealers" in advance via "repo" for the expressed purpose of use in said "settlement", etc...
You are over simplifying.
Yes we understand the basic hydrologic cycle, but that doesnt mean that we "drink the rainwater" to the professionals that work in municipal water systems....
Sister Marie John in 3rd grade science put up a diagram of the hydrologic cycle and said "we drink the rain water children!"..... same as saying "the govt sells the bonds to the private sector!"
Its not even a sophomoric explanation of what all is going on....
Here:
https://en.wikipedia.org/wiki/Security_(finance)
"Public securities markets are either primary or secondary markets. In the primary market, the money for the securities is received by the issuer of the securities from investors, typically in an initial public offering (IPO). In the secondary market, the securities are simply assets held by one investor selling them to another investor, with the money going from one investor to the other."
"Primary market" hence "Primary Dealers"....
You can probably get a JD in securities law....
Dan-
You really dont seem to get this. The Fed repos the reserves that the PDs use to BUY the TSY CDs, which are then on-sold to the public as the TSY disperses reserves into the banking system which subsequently need to be absorbed in order to maintain the target rate (in a non-QE environment). Its all just a 3 party charade in order for the CB to provide reserves to the TSY. The PDs simply perform the role in this illusion that the bond markets are important and so everyone can make a nice profit in the process (PDs via fees and apparently rigging and everyone else via free interest subsidies via the TSY CDs themselves).
Yet somehow out of all this, you come to the conclusion that in reality Govt IOUs really do come from the private sector and not the Govt itself. Its really strange.
Matt what a load of double-talk. An offer is an offer for sale. A bid is a bid for purchase. What is settled is a sales transaction. The balances are balances in bank accounts. As a result of this transaction, the dealer ends up with fewer dollars in its transaction account and more dollars in its securities account; and the treasury ends up with more dollars in its general fund account. It's an exchange; the dealer gets a new security and the treasury gets dollars.
The term "repo" is an abbreviation for "repurchase agreement." So when the Fed "provides" the dealer with funds via a repo, what it is doing is buying a security from the dealer with an agreement to sell it back the following day.
That passage you quote makes my case, not yours.
I have no idea what your rain metaphor is designed to show.
A securities lawyer who went to law school and got his license would not consider it "double talk"...
If you went to get your law license and the examiner said "explain the process of securities issuance" and all you wrote was "govt just sells bonds to the public!" I dont think you would pass....
Its all just a 3 party charade in order for the CB to provide reserves to the TSY.
Indeed. Although it's also part of the process of adjusting the private sector ratio of cash assets to securities assets.
But the central bank doesn't just "provide" reserves to the treasury. It exchanges those reserves for a treasury IOU. The amount of those IOUs reduces the amount that is disbursed to the Treasury from Fed profits on its portfolio of private sector assets.
Yet somehow out of all this, you come to the conclusion that in reality Govt IOUs really do come from the private sector and not the Govt itself. Its really strange.
No, they come from the government itself. And in the case of the kinds of government IOUs that can actually be spend, they come from the central bank, not the treasury. The treasury depends on taxes and sales of securities in order to acquire those dollars. We could have a different system; but we don't. The current system was intentionally designed to deny the treasury dollar-issuing powers, put those powers in the hands of an unelected central bank, and force the spending side of government and its treasury to tax and/or sell debt to acquire dollars. Those latter two operations drain dollars from the private sector.
"If you went to get your law license and the examiner said "explain the process of securities issuance" and all you wrote was "govt just sells bonds to the public!" I dont think you would pass...."
I wouldn't. I would have to provide more detail.
But if I told the examiner "the government doesn't sell bonds to the public; it just provides them", I also wouldn't pass. Because all of the details just amount to a detailed description of the way the government sells securities to the public.
"The current system was intentionally designed to deny the treasury dollar-issuing powers, put those powers in the hands of an unelected central bank, and force the spending side of government and its treasury to tax and/or sell debt to acquire dollars. "
Except of course with nobody who can say 'no' it doesn't.
Basic control theory...
IMO these Primary Dealers are scummy. Even last year when the Fed began expanding its Reverse Repo Facility so it could make trades with a larger variety of financial counterparties, the Primary Dealers made a big stink and had one of their Senators question Janet Yellen about it.These people are just overpaid government officials, no reason Treasury couldn't just hire a few dozen people to run the whole thing...but if they tried that I'm sure the same Senator would yell at Jack Lew...
Well Dan what happens when the Treasury says to the Dealers that they are going to issue $50B in an upcoming auction, and then the Dealers come back to them and say "we don't have enough balances for settlement." ?
Then the govt GIVES them the balances for settlement in advance via repo (which I think you realize this...) .... so I dont see how you then get back to "govt borrows from private sector".... the balances used for the specific settlement never existed before they had their meeting and agreed to coordinate and do the repo....
Justin, Lew is probably applying for the job.... ;)
Well Dan what happens when the Treasury says to the Dealers that they are going to issue $50B in an upcoming auction, and then the Dealers come back to them and say "we don't have enough balances for settlement." ?
Well, that never seems to happen. There seem to be plenty of people out there willing to buy $50 billion in government securities. Depending on the way the CB is conducting policy, if the treasury can't sell enough debt at a given yield, it has to offer a higher yield. That's what happened before the recent years of permanent low yield, and the CB is preparing to allow yields to go up soon - although they just delayed the increase again.
Then the govt GIVES them the balances for settlement in advance via repo (which I think you realize this...).
A repo is not is not "giving" Matt. If the dealers need more dollar liquidity to buy the government issue, then the Fed will buy securities from the dealers that the dealers already possess. That's what a repo is. The government buys the securities from the dealers, with an advance agreement from the dealers to buy them back the next day. The dealers can then use the cash advance to buy the new treasury issue; then sell that treasury issue in the secondary market, and then use the proceeds from that sale to buy back the repo-ed securities. The repo operation is effectively a loan. It's profitable for the dealers because they profit from their markup of the treasury securities to the secondary market.
Nobody is being "given" anything. The Fed is basically acting in that case as similar to a kind of pay-day lender for the dealers.
ok then not "gives" but "provides".... ? the govt "provides" the balances via the repo... how about that?
I still dont see how you then get back to "govt borrows from the private sector!".... I dont see how you can understand these procedures as well as you seem to do but then still say "the govt is borrowin' money from the private sector!" like Ron Paul or something.... (pardon the libertarian jab...)
All salesmen are scummy, and most banks are run by guys that rose to the top because they were good salesmen. The treasury primary dealer system is a relic of a past era, when the gold standard existed and the primary dealers had deep connections and connected salesmen that could really twist arms and get people to leave their money and gold in the US when the government needed it.
MMT doesn't value it because it makes assumptions about perfect liquidity in the Forex market to bring about a Balance of Payments that we know aren't at all realistic outside the G-10 and were not realistic in our own financial history. They have a little equation that tells how banks will always buy bonds and boom, problem solved. But, it is silly, bonds have never been about funding government and all about the balance of payments for the nation as a whole. They are issued so you can buy your Iphone and Mercedes Benz as much as anything else.
Issuing sovereign bonds, even today, is one way for countries to compensate foreigners to take interest rate risk, foreign exchange risk, market risk and liquidity risk to improve financial conditions for their domestic citizens. In the US too, they play an important role in the financial system that isn't perfectly understood, and are almost completely ignored in simplistic models like MMT because they've always existed since the ideas were developed. I strongly suspect that Apple, Home Depot, Walmart, GE, Disney and all these companies could not succeed with their complex supply chains in 100+ countries if the US financial system was unable to provide excellent, excellent risk management. The deep liquidity in our bond markets allow them to bring imported labor and supplies across the border in mind boggling quantities with almost zero financial cost, nearly just-in-time, are remarkably little volatility. Financial infrastructure that makes it possible. Stable reliable, Government bond supplies and markets, are the cornerstone collateral that makes it easy to conduct business and manage risk internationally and have enabled the development of multinationals as we know them today, for better or worse.
That is the (blindingly obvious) position that I defended against your loopy claim that somehow these primary dealers just have these securities "issued" to them without having to purchase them.
Mat didn't say that.
For the record, here is how the operations work according to a Fed official.
The range of bidders at these auctions includes primary dealers, foreign governments, mutual funds, life insurance companies, pension funds and many other types of investors. Bidders at these auctions have arrangements in place to pay for the securities that they have been awarded at auction.
…primary dealers are never overdrawn at the Federal Reserve-they do not have reserve accounts with the Federal Reserve that can be overdrawn.…
Typically, the “settlement” of a Treasury auction occurs a few days after the auction is held; at settlement, new Treasury securities are transferred to the securities accounts of the winning bidders. These securities accounts are maintained in the so-called “national book-entry system” that records the ownership of Treasury securities outstanding. In many cases, Treasury securities purchased by a final investor—-a mutual fund for example—are held in a book-entry securities account maintained through its correspondent bank. The Federal Reserve, acting as fiscal agent for the Treasury, processes the instructions that result in payments flowing to the U.S. Treasury associated with new debt issues. The Federal Reserve debits the reserve accounts of the correspondent banks of the investors that have purchased new securities, and there is a correspondent credit to the reserve account of the U.S. Treasury at the Federal Reserve. The correspondent banks that have received a debit to their reserve account at the Federal Reserve then pass a corresponding debit to the deposit accounts of their customers that have purchased new Treasury securities. Finally, the Treasury effectively pays down the temporarily elevated balance in its reserve account at the Federal Reserve to cover the excess of expenditures over receipts. At the end of this process, reserves held by the banking system are unchanged and the Treasury has issued more debt to the general public to finance the deficit.
It bears emphasizing that at no point in the Treasury auction process does the Federal Reserve temporarily purchase or sell Treasury securities to facilitate settlement on behalf of private investors nor does it provide credit temporarily to facilitate their purchases of Treasury securities.
What this means is that the Fed ensures that the payments system clears by providing liquidity as needed. Treasury auctions are settled through correspondent banks who therefore always have the liquidity to settle since they have access to the Fed's payment system.
This is fine point but it means that the Fed can truthfully claim that the auctions as the primary market are entirely private sector. However, they are different from the secondary market or after-market in that the aftermarket involves settlement among entities in the private sector rather than with government as in the primary market.
I dont see how you can understand these procedures as well as you seem to do but then still say "the govt is borrowin' money from the private sector!"
Because that's what it is, Matt. After all these transactions, the end result is that the government has higher dollar balances at the Fed and someone in the private sector has an IOU from the government. The government got some money from someone in exchange for an obligation to pay that amount of money, plus interest, at a future date. That's borrowing.
Dan, where did the settlement balances (Fed liabilities) at the Fed to settle the primary auctions come from? There is only one place, either through Treasury spending that creates balances at the Fed in banks' accounts there, or else from Fed operations. Non-government cannot settle in the payments system operated by the Fed otherwise.
Issuance of government liabilities is logically prior to using them for settlement.
There is no infinite regress or beginningless circle involved. Those liabilities are created on someone's books and that spreadsheet is owned and operated by the Fed as the government's bank.
The government cannot get its liabilities form nongovernment without first creating them for nongovernment. TINA.
Govts have to spend or lend currency before they tax it. Citizens get money before they pay tax.
"The government got some money from someone in exchange for an obligation to pay that amount of money, plus interest, at a future date. That's borrowing."
What is so hard about this Dan. Come on man.
That's one way of looking at it. But there are other ways to look at it. Try to put on your rose tinted glasses and think about it for a couple of money.
Is it? It could be. Or is it saving?
What about a bond that has zero interest?
The key point is that - MONEY is DEBT. It's an IOU.
We all swap debts with each other and use them to pay other debts we owe.
Cash is a non interest bearing govt IOU.
There are also Reserves (interest bearing currently) and Treasuries, interest bearing IOUs.
We are swapping one liability for another.
If the government spent and there was NO spending in the saving chain it gets ALL its money back as tax even with 0.5% tax rates.
It's never about money. It's about STUFF.
What about the interest? Will the govt face a treadmill of debt? No. When it is spent, it generates tax. And the govt can "print money" and payoff its debt any time.
Couple of money :o
Freudian slip :)
The government doesn't need to create currency before they tax because they accept payment in foreign currency or bank reserves, the law itself says if you don't have currency to pay, the tax collector is authorized to accept anything you offer financial assets, real assets, art, crops, commodities, anything pretty much. Go read the US Code. It isn't debatable or hard to understand. That is the law.
MMT has taken all sorts of liberty to illustrate points, which is fine. It helps. But the facts become confused with mythology. The old line about government shredding money they take in taxes, is a lie. The myth about having to print first tax later, it is an idea used for illustration purposes only to make a point, tell a story, teach a lesson. A point of logic. It isn't a legal necessity. The Federal reserve prints dollars, not treasury for one. If someone gets a bank loan... they can create the dollars for tax payments. And you can go into any branch of JP Morgan and make a tax payment from your own bank account and they transfer "money" electronically to the US Treasury account. Read the law.
Before someone hits me over the head with a chicken-egg Where did the bank get the reserves? They took your mortgage note down to the Fed and pledged it for collateral and the Fed credited their account out of thin air. And how did I get a mortgage? I pledged my house and my accounts receivable (future income). I created the money with my blood, sweat and tears. This government is the only source thing needs to end. Government is the score keeper. They control the balance sheet but any of us can create double entries on the balance sheet. The only one that can create single entries, is government, but they don't.
Dan read this:
http://www.3spoken.co.uk/2011/01/how-governments-super-platinum-credit.html?m=1
"The myth about having to print first tax later, it is an idea used for illustration purposes only to make a point, tell a story, teach a lesson."
In the UK we have some small "printed money" at the start of the day - the Cash Buffer of the Consolidated Loan Fund. Although it never said in the MSM.
The reserves are only on an intraday basis as the DMO is shuffling them with Gilts.
So "print" does come first.
As to cash, it depends. If your notes are like the fancy Canadian ones they are probably reused ;)
We in the UK have full access to Central Bank Money at all times via the Ways and Means Account, although ideology stops it being used.
See:
http://www.3spoken.co.uk/2013/06/the-bank-of-england-balance-sheet-five.html?m=1
"because they accept payment in foreign currency or bank reserves, "
Central bank reserves.
So bank reserves are not "money"? Money is reserves, bonds and cash.
Cash is just a receipt for central bank reserves.
Double Entries:
I pledge my house get a mortgage, and bank-deposit
Jp morgan gets a bank-deposit and mortgage
Jp morgan pledges mortage to get central-bank-loan and gets central-bank-deposit
I instruct JP Morgan to pay my tax liability from my bank account and jpmorgan transfers central-bank-deposit to Treasury account and reduces bank-deposit.
Nothing ever came from US Government. Chicken-Egg solved.
If you call bank liabilities: bank-deposits and central bank liabilities: central-bank-deposits and central bank assets: central-bank-loans it eliminates much of the ambiguity that leads to arguments. Money is a lot of things to alot of people. Best to be specific where possible, otherwise semantic games come into play.
If the banking system or government has a non-zero current account and the markets for whatever reason can not bring a balance of payments with the rest of the world (because of a peg, liquidity risk, convertibility, panic, investment flows, whatever), the government (Treasury or the fed) is always going to have to issue/redeem treasury bonds or buy/sell reserves with foreigners to resolve the crisis -- or wait until markets can clear which could be a very, very long time. A currency collapse isn't imaginary, ask Russia or Norway or Nigeria or Mexico or Brazil or Ukraine. And that is just this year. Ultimately the government is responsible for all of us. There is no escaping their backstop function. That is the real purpose of bonds and how they should be viewed. They are borrowing and their attractiveness to foreigners is important under various circumstances to bring a balance of payments with the rest of the world and keep import price inflation at the policy rate, the central bank can lose control of the treasury rate unless they are willing to allow the currency to spiral out of control. We see it all the time around the world: with failed auctions, governments wind up borrowing in foreign currencies, and saving in foreign currencies as reserves to insulate themselves from BoP crises. It is why the IMF and World bank exist despite their bad-economic-management. It is not necessarily borrowing to fund government. In theory a government could have to issue bonds even if it were running a surplus because the private sector had large foreign investment that was reversing or large amounts of foreign debt being repaid, more than the banking system could clear through private markets.
In the US specifically, congress made it so bonds must be issued to fund government before spending occurs because of our frequent financial and BoP problems in 18th and 19th and 20th centuries related to the gold standard, wars, European trade and investment flows and all that jazz. The idea that governments could issue all short term debt at or near the central bank policy rate is pie-in-the-sky stuff that can only happen in special circumstances--when trade and investment flows are supportive.
Tom what is interesting is imo Dan wont accept the technocratic solution/path...
(not saying "He's wrong!"...)
This is like the difference between Bernie saying "we're just not going to buy them" vs. Trump threatening a 35% tariff (enforcement mechanism)...
Its interesting the other day Dan said "that's just a mechanism!"... in one of these conversations.. which to me is like a blasphemy!.... (Dan! JUST a mechanism????? c'mon man! are you kidding? ???)
iow, to me (technocrat) mechanisms are most important... I look at Trumps mechanism and I say "Yeah! f them! hit those mfers with a 35% tariff!" .....but Dan's point might be "it shouldnt have to come to that in the first place!".... Dan might say you have bigger problems than auto jobs because you are basically living with a bunch of people who dont give a flying F......
It looks like Dan just doesnt think the best solution here is via the technocratic path imo... whereas I think it is and perhaps many others....
Dan, where did the settlement balances (Fed liabilities) at the Fed to settle the primary auctions come from?
From Fed open market operations (whether ordinary operations, or extraordinary QE in recent times). That's where augmentations to bank reserve balances come from. Banks use their existing balances to buy securities, and the Fed buys some of them from the banks. The banks in the aggregate make a profit on these transactions. If there were no open market operations of any kind, and no discount window lending, reserve balances couldn't grow. (One exception noted below.) Banks could buy treasuries, but to pay off those treasuries, the treasury has to tax or sell more treasuries, both of which drain dollars from reserves which are then used to pay off the previous debts.
The government cannot get its liabilities form nongovernment without first creating them for nongovernment.
That is correct, as long as we recognize the Fed as part of government. The Fed is the part of government issuing almost all of the dollars through its balance sheet operations. When treasury spends, that does not augment or diminish the total number of dollars held in Fed accounts. It just results in dollars moving from the treasury account at the Fed to banks' accounts at the Fed. The US treasury is a depositor at the Fed, just like the banks. It does not manufacture the liabilities in its own account. It acquires them via taxation and debt sales. The MMT mental model of the treasury "creating" new private sector deposits by "spending them into" the private sector is utterly mistaken. The treasury has to acquire those dollars in the private sector first by collecting taxes or selling bonds. Only the Fed creates dollars, which it does through its balance sheet operations.
The only exception to above, which I noted, is seigniorage on new coinage. That's a way for the Treasury to add dollars directly to its account by selling the Fed coins at face values that exceed the minting costs. But new coinage is a drop in the bucket in our economy, compared to the trillions that are on bank reserve balance sheets.
In no market I know of do auctioneers make offers. They take bids and award the sale to the highest bidder. Their function is to get the highest bid for the seller. In the case of tsys, the seller is the Treasury that issues the securities.
The interest rate is determined using the policy rate and expectations about the policy as a benchmark rate. Other rates are extrapolations of the policy rate based on current conditions and expectations about future conditions.
The Treasury issues tsys, which the Fed auctions in the primary market to bidders, for all practical purposes, primary dealers. The dealers settle in the payments system using a correspondent bank. The Fed ensures that the payment system always has enough liquidity to clear using monetary operations (OMO). The primary dealers settle with the correspondent banks in using their accounts with the corespondent banks. There is no issue of the affordability with the PD's since they ave line of credit with their banks.
What has happened when the shell game is over is that settlement balance in a deposit account at the Fed get shifted to a securities account at the Fed and this is reflected in nongovernment in nongovernment books between the banks and the owners of the new issue. At first this is the primary dealers, and then ownership is shifted to the purchasers of tsys from the PD's in the aftermarket.
So as Warren has said, the upshot is that banks' demand deposits at the Fed get shifted to securities accounts there, and the TGA is credited for spending, which increases the money stock. Note that the Fed crediting the TGA does not affect the money stock since settlement balances in the TGA aren't counted in any measure of the money stock.The effect is that net financial assets created by spending are "drained" into securities. The composition of the $NFA changes while the amount remains the same.
"The government got some money from someone in exchange for an obligation to pay that amount of money, plus interest, at a future date. That's borrowing."
All purely financial transactions, that is, transactions that don't involve the exchange of something non-financial involve crediting an accounts with financial assets and corresponding account with financial liabilities. Exchanges involving a real asset from a financial asset involve crediting accounts with real assets and debiting accounts with financial liabilities. This is basic to the credit theory of money holding that money is debt, that is, someone's IOU as a financial liability.
I instruct JP Morgan to pay my tax liability from my bank account and jpmorgan transfers central-bank-deposit to Treasury account and reduces bank-deposit.
Nothing ever came from US Government. Chicken-Egg solved.
When a customer of JPM sends a check to the Treasury, ultimately the transaction is settled in settlement balances in the JPM account at the Fed. The customer has reduced his or her financial assets held in a JPM deposit account and JPM has reduced its liability to the customer. The credit may go initially into a TT$L account at JPM, but eventually the TT&L accounts is drawn down as the Fed debits JPM's settlement balance account at the Fed, reducing JPM assets, and the Fed credits the TGA for spending. There is no way to get funding to the TGA without going through the Fed, since the TGA is on the Fed's spreadsheet as a deposit of the Treasury. When the Treasury directs the Fed to credit accounts, the Fed debits the TGA and credits the appropriate bank account at the Fed. The bank credits its own books with the asset and credits the customer's account with a deposit, e.g., a SS payment, or an invoice for an F-35.
There are the government's books and banks' books. Banks can only create its own liabilities. In dealing with government its has to settle in the government's liabilities, which only the government can issue. This is the hierarchy of money with government liabilities at the apex in a floating rate system.
This is the Current Primary Dealer List: Who at the Fed said that the large commercial banks don't have Fed accounts?
Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies LLC
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. LLC
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
SG Americas Securities, LLC
TD Securities (USA) LLC
UBS Securities LLC.
A Deputy Director, Division of Monetary Affairs at the Fed in a letter to an inquiry.
It would appear to me that the PD's are subsidiaries that settle through the parent as correspondent bank but that is only my assumption. This would appear to be in place to avoid the perception that the Fed is lending to the PD's in order to fund auctions.
In no market I know of do auctioneers make offers. They take bids and award the sale to the highest bidder. Their function is to get the highest bid for the seller. In the case of tsys, the seller is the Treasury that issues the securities.
Of course. The offer is is what the Treasury is offering for sale: a certain quantity of securities. And obviously they want to get the most they can for them. The point is that it is a sale. The buyer gets a treasury security and the treasury gets dollars.
What has happened when the shell game is over is that settlement balance in a deposit account at the Fed get shifted to a securities account at the Fed and this is reflected in nongovernment in nongovernment books between the banks and the owners of the new issue.
Another thing that has happened is that the Treasury now has more money in its general fund. So its cash assets have increased, as well as its liabilities.
Bank Customers can send Fed-Wires directly to the Treasury account.
Those Fed-Wires reduce the balance in a Bank's Fed account and increase the balance in TGA.
If any commercial bank doesn't have enough (central-bank-deposits) to do that, they can always use collateral to obtain a loan from the fed. When the commercial bank takes a loan at the fed, they create a liability to the fed (central-bank-loan), and an asset (central-bank-deposit).
The US Government Treasury account is a fed account just like the commercial banks. It holds assets of the US Govt. (central-bank-deposits), except the Government can not borrow from the Fed directly.
So when I instruct JP Morgan to make a tax payment, they reduce their liability to me, and they decrease their asset at the Fed (send a FedWire To The TGA Acct). If they don't have enough central-bank-deposits, they borrow more.
So the take away is that the Fed created, with credit, out of thin air, the ability to pay taxes BEFORE the government/fiscal/treasury ever spent any money out of the treasury general account at the Fed. As a point of logic, it is clear that the Government need not spend FIRST, BEFORE collecting taxes in any credit money system.
The private sector can always fund the Fiscal authority fully so that it can provision itself with taxes from the private sector so long as the central bank provides credit to the private sector.
If the Treasury had the power to issue currency directly, or to direct the Fed to do so on its behalf without securities issuance, the affect would simply be that the settlement balances created in banks' deposit accounts would increase the monetary base instead of being drained into securities.
The difference is virtually non-existent other than the interest payment that the securities involve.
The government cannot spend other than as directed by the fiscal authority, which in the US is the US Congress with presidential approval unless the president's veto is overridden.
How the government deals with money emission is irrelevant in a floating rate system, other than the interest paid if the Treasury issues securities to fund spending or the Fed pays IOR.
The government doesn't obtain its own liabilities from nongovernment, ever. That means never. It's not possible.
Spending and transfers increase the monetary base, which is part of the money stock. Taxation decrease the monetary base and therefore the money stock. MMT says that crediting bank accounts at the Fed creates money (adds to the money stock) and taxation destroys money (reduces the money stock) , just as bank loans increase M1 by increasing bank deposits, hence adding to the money stock, and repayment of loans destroys money by decreasing bank deposits and subtracting from M1.
Government just keeps score in its own books. It neither has nor doesn't have money. It issues credits, notes and securities that affect nongovernment aggregate net financial assets, that is, cases in which the asset is in nongovernment and the corresponding liability lies with government.
Government creates and destroys its own liabilities through the political process determined by Article 1, section 8 as determined by the courts, and subsidiary legislation and regulation pursuant to that. Government agencies carry out the institutional arrangements as directed.
If Congress wants to spend and the president agrees or a veto is overridden, Congress doesn't need to tax for the purpose, Nor must it issue securities. Government can choose politically to offset particular programs with taxes, giving the impression that the beneficiaries of the program are paying for the program whereas money is being withdrawn specifically instead of generally, e.g., through an income tax, which makes it appear that everyone is paying. FDR used this ploy wrt funding Social Security with a levy on those standing to benefit. It was sold politically as insurance rather than welfare, even though the later is actually the case.
On the other hand, government could choose instead to withdraw money (reduce the money stock) by a VAT or a transactions tax, etc. — anything designed to reduce spending power. Or it could just tax away economic rent, which would pretty much eliminate the need for other taxes to control inflation, and it would be highly progressive, as well as address negative externality significantly since negative externality results in economic rent.
Government doesn't need to tax at all other than to control spending power to keep demand within the bounds of the economy to meet it by expanding output.
I personally think that appropriate tax policy primarily needs to address economic rent, which means "taxing the rich" as the primary beneficiaries of economic rent. But that has nothing to do with government needing revenue to conduct fiscal operations. It's too control inflation and address negative externality. But this is not about soaking the rich to pay for stuff for others, which is a nonsense.
The private sector can always fund the Fiscal authority fully so that it can provision itself with taxes from the private sector so long as the central bank provides credit to the private sector.
Right. All government zero maturity liabilities come from either Treasury spending or Fed lending. TINA.
Government is always able to clear using its own liabilities.
Actually individuals can purchase tsys through Treasury Direct. However, the Treasury no longer deals in cash. To participate in Treasury Direct, one needs a bank account to settle and the bank settles using its settlement balances, which are Fed liabilities. The only Fed liabilities that bank customers have available consist of currency in circulation (part of M1). So now the customer would have to deposit cash in a bank and write a check or direct the bank to make an electronic payment to Treasury Direct, which the bank does in settlement balances, which is a debit to its account at the Fed, and the bank debits the customer's deposit account of the amount of the purchase. this reduces the money stock by reducing both the monetary base and also M1, while increasing the bank's securities account at the Fed, which is held by the bank for the customer purchasing the tsys.
The laws simply need changed to reflect the reality that taxes aren't needed to fund government. As more and more people understand econ and the monetary system, they will direct their politicians to fix the system. It is surprising how fast democrats have embraced MMT. I think bonds will be necessary, forex markets will struggle otherwise. The entire premise of MMT is that the currency basically becomes the entire buffer for the economy rather than the labor force. That puts a magnitude larger strain and hugely more volatility on forex markets.
Those Zero Percent Certificates of Indebtedness from Treasury direct are a small business person's best friend when there is a financial crisis! Most small businesses have more than the FDIC cap in working capital and those are 100% guaranteed not to go bankrupt, unlike a small state or community bank or credit union.
I think bonds will be necessary, forex markets will struggle otherwise. The entire premise of MMT is that the currency basically becomes the entire buffer for the economy rather than the labor force. That puts a magnitude larger strain and hugely more volatility on forex markets.
Warren Mosler recommends limiting securities issuance to T-bills, while setting the overnight rate to zero. That would mean that T-bills would be essentially cash-equivalents.
Since there is no operational need for them a case needs to be made for how they serve public purpose.
If a case can be made for longer terms bonds, I would suggest issuing perpetual consoles at a constant interest rate based on the historical real rate.
"Nothing ever came from US Government. Chicken-Egg solved"
The Fed is part of the US government - de facto. It is their job to do what Treasury tells them to do as Bernanke confirmed.
The problem is this idea that the central bank is separate from government.
Plus of course you can't get 100% liquidation of assets at the Fed. You only get a margin. When you aggregate that up, the system runs out of the right kind of money *unless* there is prior action by the Treasury half of the government to inject funds
"I think bonds will be necessary, forex markets will struggle otherwise"
Forex markets are supposed to struggle. That's the point of it. It is the capital control on the economy - self limiting.
There is no need to reward anybody for holding your currency. You actually want them to spend it, and if they hold it you want it to rot in place to reduce any future real return to them.
Always remember that the idea is to get more real resources from somebody than you have to give to them.
The currency cannot spiral out of control unless you have a patsy in the marketplace - because the system naturally runs out of liquidity causing a bear squeeze.
The patsy is a central bank being stupid and buying its own liabilities with foreign reserves. That is the wrong approach. The correct approach should be clearance of last resort, i.e. bring me your foreign currency denominated invoice and if it falls into the category of 'required' (not a foreign currency loan) you will get central reserves to clear it. Otherwise you have to default on it - which may mean bankruptcy and administration.
The policy reason is simply - foreign currency is dangerous and if there is a squeeze it should be the foreigners that lose out - and local entities that decided to trust another currency zone over your own. The approach is, effectively, an assertion of sovereignty.
Pretty much all the forex problems can be laid at the door of lending for speculation, and adopting 'free market' policies. You don't want a free market in your currency. It's a monopoly for a reason.
That's the theory at least. In reality people need medicines, food, fuel and other imports at stable prices. The Ayn Rand survival of the fittest attitude toward market clearing is all fine and good until it is your child that needs food. Markets are efficient, they are not humane or fair, quite the opposite. The rich can always afford to be patient and wait for good prices. Everyone else needs to buy groceries, now.
Ryan that is what inventories (system buffers) are for...
My experience is that prices only get unstable due to govt bidding up the price for things in purchasing competition with the non-govt...
Back in '03 and '04 they came into my area ((mid-Atlantic) and bought up all the plywood they could get to send to Iraq... up to $50 per sheet! You can get it now for $13 with Iraq over...
Even this lawsuit here that Justin posted up, I have a suspicion that part of the perceived criminal activity is due to Fed policy of QE.... iow, the clue they use is HIGHER rates here:
"Treasuries from 2009 to 2015 appear to have been rigged, artificially boosting yields by 0.91 basis points. "
That is the f-ing Fed's QE era.... the Fed is in there "trying to get a good deal for the taxpayers" which you can read in the NY Times... which means paying LESS for the bonds which means rates are HIGHER than otherwise...
I think I could get these people off these charges by showing how the Fed itself is causing the higher rates by acting as the largest scale down buyer of all time in the UST market over this time period... and hence the higher rates are not a product of collusion but rather just PDs accommodating the Fed's scale-down desires for lower prices of the bonds...
Both sides in this lawsuit are morons.
Dan,
Go to law school and when you take the tests on securities law sections, everywhere the correct answer is "bond" or "security" you instead write "IOU".... see if you pass....
that would be like when I was in school, if the correct answer was 300 mA, I would have written "a bunch of some electrical current thingies!".... I wouldnt have passed...
Prediction: if the Fed were to stop the QE cold turkey on Monday, the 10 yr yield goes to 1% and mortgage rates drop by at least 0.5%....
Government doesn't need to tax at all other than to control spending power to keep demand within the bounds of the economy to meet it by expanding output.
Yes, the government overall generally wants to run a low-inflationary monetary policy.
Under the current system, government deficits, no matter how high, don't in themselves add dollars to the private sector, because the fiscal branch automatically absorbs from the private sector, through bond sales, whatever additional dollars they need over and above the dollars they have taxed. The private sector ends up with more bonds but fewer dollars. Those bonds might be "liquid" in the sense that other purchasers for them can usually be found, but they can't be spent. If a private sector bond-holder wants to sell the bonds to someone else in the private sector to get dollar liquidity for spending, they can no doubt do so, but that means someone else ends up with fewer dollars. The dollars just move around, but aren't augmented or diminished.
It is only the fact that the Fed is routinely buying up at least some of these treasury bonds as part of its monetary policy that determines whether, and by how much, deficit spending adds dollars to the private sector. The Fed's monetary policy also plays a role in determining how much of a yield those treasury securities deliver to the people who buy them. In times of lessening private demand for government securities relative the the government's rate of issuing them, yields will rise unless the Fed increases its purchases in the secondary market.
During times of weak private sector spending and low (or negative) output growth, increased deficits can be accompanied by easy monetary policy and low yields, which is no problem. But during times of more robust growth, the central bank will probably tighten its bond purchases if deficits exceed the growth rate, leading to higher yields and more profit for the bond-holding class.
So I think this is the issue the Jacobin should be focused on. If the structural deficit exceeds the long-term average growth rate, then over any given time you have to choose between higher than expected inflation or increasing yields to bond-holders. And since over the long-haul those bonds have to be redeemed with more bond sales, the problem perpetuates itself. Since central banks are "independent" and generally choose to protect creditor wealth by maintaining low inflation, then overly high deficits are leading to a net upward shift of wealth toward bond-holders. On the other hand, lower deficits with an active government mean higher taxes and, if the taxes are progressively structured, a redistribution of wealth from the wealthy toward the broader public.
Bonds and securities are juts different forms of IOUs Matt.
Warren Mosler even calls dollar bills government IOUs. I don't see you ragging him for it.
I did a CTRL-F on this file and didnt find the character string 'iou '
https://en.wikipedia.org/wiki/Security_(finance)
or here:
https://en.wikipedia.org/wiki/Bond_(finance)
Not showing up... lets not be dumbing it down we're smarter than that...
You know Dan this whole thing is that you see a proper understanding of current govt spending authority under our current non-convertible system as somehow obscuring other policies that would lead to greater economic equality (in your opinion btw) .... there is no law that dictates equality.... that whole Picketty thing is outside of the law...
We do have laws mandating full employment and maximum employment with stable prices... nothing about equality or redistribution of income...
So when some would say 'taxation for revenue is obsolete' it is not outside of the law it is merely trying to point out the obsolescence of the technical belief that current taxation is functioning to generate govt spending capability in the current system operating within the law...
saying 'taxation is for redistribution of income' is outside of the law... it would never pass if you tried to put a law through like that...
For now all we have is "full employment" and "maximum employment with stable prices"... MMT is just trying to point out how to operate the current system to comply with those laws to the fullest extent...
If you want to pass a law to redistribute income, that would not be fleshed out in a technical discussion it is an ideological discussion that might lead to new legislation...
Trying to obscure or cover over a legitimate lawful technical discussion by trying to convert the discussion to a ideological one is not the best way to proceed...
The problem isn't that your description is wrong, it is spot-on dead right, Dan. The problem is that MMT describes fundamentally how money works now and what an "optimal" system of laws should do to take full advantage. People have imagined that different, ideal system and want the system to work differently where taxes don't fund government. You are raining on the parade.
Never the less we are stuck with the system of laws that what we have got. For now people should understand what is possible with our current monetary system, but also understand what we have on the books.
The changes required to the US code to allow social security and treasury to function in an ideal MMT way, would only require 3 or 4 sentences. The changes required to raise taxes, increase spending would take mountains of legislation, lots of heady debate and all sorts of ideology that would divide the electorate efficiently. Politicians will always opt for the latter because it gets votes.
Under the current system, government deficits, no matter how high, don't in themselves add dollars to the private sector, because the fiscal branch automatically absorbs from the private sector, through bond sales, whatever additional dollars they need over and above the dollars they have taxed. The private sector ends up with more bonds but fewer dollars. Those bonds might be "liquid" in the sense that other purchasers for them can usually be found, but they can't be spent. If a private sector bond-holder wants to sell the bonds to someone else in the private sector to get dollar liquidity for spending, they can no doubt do so, but that means someone else ends up with fewer dollars. The dollars just move around, but aren't augmented or diminished.
1. Bonds don't need to be sold. The are at the apex of the hierarchy of collateral.
2. Debt issuance doesn't sterilize deficit spending as most believe erroneously, since the Fed uses tsys to conduct monetary policy, adjusting the size of the MB to clear at the targeted
That debt issuance reduces spending power from government emission of money through spending is a myth. Central banks have an interest in promoting this myth since monetary policy is based on it. Look at Mark Carney's bogus charge that Corbynomics would be disastrously inflationary..
Actually, securities issuance is more inflationary than money emission because of the interest payment, which is fiscal and adds to the money stock without sterilizing the emission.
The way to control inflation is not taxations primarily but regulating the asset side of banks' balance sheets through tight regulation of credit, especially lending against collateral. Bank lending chiefly serves the purpose of liquifying collateral as well as drawing forward income.
The other obvious way to limit inflation is to reduce economic rent by regulating rent-seeking and taxing away rents that slip through the legal filter.
Bonds and securities are juts different forms of IOUs Matt.
Warren Mosler even calls dollar bills government IOUs. I don't see you ragging him for it.
Right according to MMT, government liabilities, which includes Treasury and Fed liabilities, that are held by nongovernment are tax credits. that is IOUs of government that the government commits to accept in payment of obligations it imposes on nongovernment.
Some of these IOUs are zero maturity and some are non-zero maturity. Regardless, they are all credits that have not yet been used to meet nongovernment obligations to government.
They are net financial assets for nongovernment since the liability is on the side of government rather than a nongovernment counterparty.
BTW, taxing away economic rent should be an easy sell policy-wise because it is basic to neoclassical economics, which assumes equilibrium under the perfect markets (no rents), as well as some other ideal conditions that are not met in the real world.
But the perfect competition assumption is one that most people likely think is not only achievable but should be a policy priority. So it should not be too difficult to get agreement that regulation is needed to reduce rent-seeking behavior and that economic rent be taxed away as a negative externality that is parasitical on circular flow.
Of course, the devil is in the details since the way the system is set up economic rent is widely spread and reducing it would affect not just the wealthy but also the middle class, that is, the non-poor.
The ironic thing is that presently the charge is that the poor are collecting economic rent through welfare distributions while the pile of economic rent goes untouched and unnoticed institutionally.
The problem isn't that your description is wrong, it is spot-on dead right, Dan. The problem is that MMT describes fundamentally how money works now and what an "optimal" system of laws should do to take full advantage. People have imagined that different, ideal system and want the system to work differently where taxes don't fund government. You are raining on the parade.
Oh my, someone else that doesn't get MMT. This is going to be a really hard sell politically.
Of course, through of us who think that capitalism itself is the problem are already pretty much convinced that the only way it will be changed is if the US goes the way of the USSR and implodes. That can happen is a variety of ways and the most probable is a devastating war.
But climate change could do it, too.
When government spends, it adds directly to demand in most cases. Interest payments might be an exception since they may be saved. but the bulk of government spending is actual spending or transfers that lead to spending. These flows drive circular flow.
It's top line spending that is significant in driving flow. Neither taxation nor securities issuance affect that.
Overly focusing on the deficit instead of looking at top line spending is misleading,
It would be entirely possible for a government to dominate an economy with spending funded by taxes, especially by taxing negative externality. There would be only circular flow at full use of available resources, I,.e,, true full employment, and low inflation, more equal distribution, and low parasitism. No boom-bust cycle due to over-expansion of credit.
Of course, there would just be a lot less opportunity to "get rich" but that would be a feature rather than a bug. But there would no zero chance of falling through the cracks either.
In my view, this is what we should be aiming for. But it is not "capitalism."
This whole confusion boils down to Dan (and all non-MMters) thinking that one type of Govt IOU (reserves) are "money" and another type of Govt IOU (securities) are not money. Once you accept that both types of Govt IOUs are "money" then all the rest of the reserve operations become meaningless.
Govt IOUs can only come from the Govt
How can you borrow your own IOUs? You cant, its impossible. Once the Govt possesses its own IOUs (reserves in the TGA or TSY CDs held by the Fed) they may as well cease to exist. So when those reserves come out of the TGA and go into some private sector banks' reserve account at the Fed, they are adding to the total supply of dollar deposits held by the NON-Govt. So it is absolutely correct to say that TSY spending is literally creating money, because its creating Govt IOUs.
This whole confusion boils down to Dan (and all non-MMters) thinking that one type of Govt IOU (reserves) are "money" and another type of Govt IOU (securities) are not money. Once you accept that both types of Govt IOUs are "money" then all the rest of the reserve operations become meaningless.
Govt IOUs can only come from the Govt
How can you borrow your own IOUs? You cant, its impossible. Once the Govt possesses its own IOUs (reserves in the TGA or TSY CDs held by the Fed) they may as well cease to exist. So when those reserves come out of the TGA and go into some private sector banks' reserve account at the Fed, they are adding to the total supply of dollar deposits held by the NON-Govt. So it is absolutely correct to say that TSY spending is literally creating money, because its creating Govt IOUs.
Right. A modern economy runs chiefly on government IOUs and banks' IOUs that the banks are obligated to convert to government IOUs on demand.
Government uses and accepts only its own IOUs in transactions involving government, which are conducted through the Treasury and central bank, where these IOUS get created by emission and destroyed by remission.
All of the emission exists chiefly as accounting entries. Some has corresponding tokens, such as currency in circulation and paper securities.
The trend is away from tokens, which is a good thing because it breaks the non-existent link between money and money-things.
Much of the confusion about money results from confusing money with money-things, which are tokens representing money as accounting units.
And another thing Dan. In no way is the Fed independent, at least in any way that matters to anything. The Fed cant do anything the Congress doesnt allow it to do and the Fed is in no position ever to say no to the Congress (As Neil always correctly points out). So this entire construct of yours is wrong:
"Since central banks are "independent" and generally choose to protect creditor wealth by maintaining low inflation, then overly high deficits are leading to a net upward shift of wealth toward bond-holders. On the other hand, lower deficits with an active government mean higher taxes and, if the taxes are progressively structured, a redistribution of wealth from the wealthy toward the broader public."
Issuing longer term TSY Cds is a TSY decision and has nothing to do with the Fed, and increasing interest rates (shifting upward wealth towards bondholders via higher interest spending) is a political and ideological decision that has nothing to do with inflation. Inflation has averaged 3.5% for the entirety of the Fed's existence, through all possible rate maintenance mechanisms, world wars, recessions, banking crises, the neo-liberal era, the worker era, everything, and to believe that all of these non-inflation decades are all attributable to one interest rate out of hundreds (the FFR) is nothing more than a religious belief. So no, there is no economic law that says the Govt must subsidize the private sector with higher interest spending. If the Fed increases interest rates causing TSY interest spending to increase beyond what Congress deems appropriate, Congress can smack the Fed back into its place any time it wants. Get your Authorities in the right order.
A Deputy Director, Division of Monetary Affairs at the Fed in a letter to an inquiry.
Tom, that sounds like an interesting read. Full text available online?
There is no direct link to it. It is in the comments thread here .
The problem is this idea that the central bank is separate from government (Neil Wilson)
Unfortunately, in the ECB's case the central bank is really separate from government.
It can even crush on purpose one nation's banking system (Greece) and thus force it into submission to austerity.
When government spends, it adds directly to demand in most cases.
Yes, that's true. But it is also true that when Apple spends, it adds directly to demand; when the Walton family spends it adds to demand.
Once you accept that both types of Govt IOUs are "money" then all the rest of the reserve operations become meaningless.
They aren't both money. You can't spend t-bills to buy an office building. To buy the office building you have to first swap your t-bills for dollars. And in that case someone else ends up with fewer dollars. There is a fundamental difference in the economy between the circulation and velocity of dollars and the circulation of t-bills. Dollars are involved in transactions for goods and services.
"The Fed cant do anything the Congress doesn't allow it to do and the Fed is in no position ever to say no to the Congress"
The Fed could get away with an awful lot before political pressure would reach the point where the Fed would face serious political pressure from Congress to change its policies, or Congress would face serious political pressure from the public to change the operational structure of the Fed and the US monetary system. The isolation of the Fed from the political process is the way the financial elite wants it, and Congress is mostly going to go along with the will of that elite, since the elite calls the tune. I'm not saying greater Congressional assertiveness over monetary policy isn't possible. But for now the Fed enjoys great independence from politics.
"Issuing longer term TSY Cds is a TSY decision and has nothing to do with the Fed"
Treasury can decide it wants to sell the Cds, but the Fed decides what yields they will have and how much market demand there will be for them by deciding how active a role to play in the secondary market for those securities.
Dan-
So are you saying that CD accounts at Chase or Bank of America arent money? You'd better tell the Fed and all the economists since they include all those term deposits in the M2 money supply count. If you are going to be honest and objective, you either have to say that Cd accounts at commercial banks aren't money (since you cant spend your 12 mo Cd at the grocery store) or that TSY Cds are money because Chase Cds are money.
So which is it?
Dan-
When Apple spends money, its not creating anything new for the private sector. If you want the comparison between Apple and the Federal Govt, then you'd have to use Apple shares or bonds. Yes, when apple issues its own IOUs, the number of financial assets (but not net worth) in the private sector increases. So you're wrong about yet another thing.
When Apple spends money, its not creating anything new for the private sector.
It's adding to demand, which is all I said Auburn. Demand is just spending. The more spending, the more demand. When either the government or Apple spends, they add to demand.
I'm not what "creating anything new for the private sector" means specifically. But if you are talking about "net financial assets", where is the evidence that the net financial assets of the private sector have any consistent relationship to demand?
On the CD issue, there is a good reason for treating CD accounts as money and Treasury bonds as not money. You can't redeem your treasury bonds for money before maturity. You can only sell them.
"It's adding to demand, which is all I said Auburn. Demand is just spending. The more spending, the more demand. When either the government or Apple spends, they add to demand."
Fine, thats obviously true.
" But if you are talking about "net financial assets", where is the evidence that the net financial assets of the private sector have any consistent relationship to demand?"
All deficit spending creates NFA, and as you said all spending increases demand, therefore issuing NFAs increases demand. Deficits increase demand by definition either via purchases DIRECTLY or via increased NON-govt spending as a multiplier effect via increased transfers or tax cuts.
"On the CD issue, there is a good reason for treating CD accounts as money and Treasury bonds as not money. You can't redeem your treasury bonds for money before maturity. You can only sell them."
This is a dumb comment. You can always sell TSY Cds thanks to market makers, and you can even do so for a profit, something that can never happen with private bank Cds as you always pay a penalty for cashing out early. So if thats the hill you want to fight on, then TSY CDs are even more money like because you have a chance of making even more money and w\ private bank CDs you can only lose money. But thats not the argument you made originally. You said that TSY cds arent money because you cant buy anything with them, its only when I pointed out the obvious fact that you cant buy anything with private bank CDs either that you've changed your rationale. Which I also have just shown to be wrong. I wonder what you will turn to next.
So let me ask again, why is a 12-mo CD at Chase considered "money" and a 12-mo CD at the Fed\Tsy considered "debt"?
There is no direct link to it. It is in the comments thread here .
Thanks Tom, that was helpful.
You can always sell TSY Cds thanks to market makers, and you can even do so for a profit, something that can never happen with private bank Cds as you always pay a penalty for cashing out early.
AP, interestingly... markets for everything, even private bank CDs where brokers will provide liquidity in a secondary market. Which to me just strengthens the idea that it's all "money".
"All deficit spending creates NFA, and as you said all spending increases demand, therefore issuing NFAs increases demand."
That's a logical fallacy Auburn. The spending is the demand. The fact that it is adding to "net financial assets" is not the relevant aspect. There are ways of adding to NFAs without adding to spending and their are ways of spending that do not add to NFA's.
This is MMT's peculiar version of montarism: the idea that there is some important systematic connection between the quantity of NFAs and the level of demand and employment. But there is no empirical evidence for it.
"You can always sell TSY Cds thanks to market makers, and you can even do so for a profit, something that can never happen with private bank Cds as you always pay a penalty for cashing out early."
That may be, but again you can redeem the CDs and not Treasury bonds. The situation would be parallel if they only way you could cash in your non-mature CD was to sell it to another bank depositor. In that case, your own demand deposits couldn't go up when you liquidate a non-mature CD without some other depositors demand deposits going down. So term CDs, like treasuries, would make no net addition to liquidity. But in fact, you can liquidate them at a penalty at the bank without affecting the deposit balances of other depositors. So the CD's represent a net addition to payment liquidity.
There is no meaningful difference jn the liquidity of bank cds and try cds. The net effect in bank deposits in the accounting is irrelevant to this discussion and you can't buy anything with either type of cd. So again i ask you why is a bank cd money and a try cd not money?
nfa s can only be created via deficit spending by the govt and all deficit spending is stimulative. Therefore adding nfas is stimulative
Corporate "cssh" is cash balances and T-bills. Mostly T-bills. This is why Warren is willing to allow T-bill issuance in a no bonds system. T-bills are essentially cash equivalents that pay a bit of interest and carry no default risk, as large bank deposits do.
Banks lend out excess reserves overnight to make a bit of interest with virtually no risk. This is very similar to the use of T-bills by large institutions.
This is just how business and finance function. This is why financial people roll their eyes when people talk about going to no government securities issuance. They see it as risk=inducing, hence, naive. From their point of view the purpose of government securities is the security of the financial system and the stability of the economic system.
All money is saved by someone after it is created, either by governments or banks, because there are two sides to every transaction. Depending on how long a party wishes to save and how much risk the party is willing to accept, different saving vehicles are chosen from cash and bank-deposits to long term bonds.
The difference between financial savings and financial investments is liquidity. Saving is highly liquid while financial investment is less so.
Pursuant to the above the CFO's job involves cash flow management. The aim is to have just enough liquidity on hand to meed needs and have the rest of the funds working. So a firm will only have enough in demand accounts to meet daily requirements. The funds to meet the next days needs are in T-bills. When large sums are involved no default risk and a bit of interest is preferred over greater risk and less reward. Now with spreadsheets and electronic payments, the task is greatly simplified and can be automated.
Treasury can decide it wants to sell the Cds, but the Fed decides what yields they will have and how much market demand there will be for them by deciding how active a role to play in the secondary market for those securities.
I have read that the Fed and Treasury consult on this but don't recall a source. Is there a source for the above assertion?
@ geerussell
I would have copied and reposted here, but it is a communication between private parties and I don't have permission.
Sorry to have to make you dig for it, but there is no way on that blog to link to specific comments.
Sorry to have to make you dig for it, but there is no way on that blog to link to specific comments.
No problem. Useful tip for future reference though, the time stamp on a comment is often presented as an anchor link (here at MNE, also over there as examples) which can be used as a direct link to the comment.
Also worth highlighting is the piece linked at the end of that letter which forms some of the basis for it as well as venturing off into lots of other interesting (if you're into that sort of thing) details:
The Treasury Auction Process: Objectives, Structure, and Recent Adaptations
@ geerussell
Tried that. When I click on the time stamp, I just get the link to the post and no comment #.
How did you come up with the comment #?
Tom, I right click on the time stamp and choose "copy link address". That gives me the link with the #comment number anchor at the end.
Tom, can't you just have unlimited deposit insurance?
I know Coppola has argued against that in the past, but her point escaped me. Warren favors removing the FDIC cap and I really can't see why not.
@Ryan Harris
"I instruct JP Morgan to pay my tax liability from my bank account and jpmorgan transfers central-bank-deposit to Treasury account and reduces bank-deposit."
Not technically accurate.
When you pay your tax liability with a cheque, presumably, on your JP Morgan account, Let say $1000.
JP Morgan doesn't transfer anything.
The Federal Reserve removes $1000 from JP Morgan's reserve account at the district Federal Reserve bank. The money is effectively destroyed. JP Morgan doesn't handle the nation's payment system. The Federal Reserve does.
JP Morgan just marks your bank account down $1000. That's all.
@Dan Kervick,
This is completely wrong. You are confused about it. Auburn parks has it right, but I’ll break it down.
===========================
"The Fed is the part of government issuing almost all of the dollars through its balance sheet operations. When treasury spends, that does not augment or diminish the total number of dollars held in Fed accounts. It just results in dollars moving from the treasury account at the Fed to banks' accounts at the Fed. The US treasury is a depositor at the Fed, just like the banks. It does not manufacture the liabilities in its own account. It acquires them via taxation and debt sales. The MMT mental model of the treasury "creating" new private sector deposits by "spending them into" the private sector is utterly mistaken. The treasury has to acquire those dollars in the private sector first by collecting taxes or selling bonds. Only the Fed creates dollars, which it does through its balance sheet operations."
===========================
I’ll take them one at a time, and separate the posts to make them easier to read.
The Fed is the part of government issuing almost all of the dollars through its balance sheet operations.
The US Treasury issues the dollars. In fiscal year 2014, the US Treasury issued $69.8 trillion. See Table III-A of the Daily Treasury Statement for September 30, 2014 (end of fiscal year). The Daily Treasury Statement is the government’s checkbook.
https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=a&fname=14093000.pdf [Please note that all figures listed are in millions.]
The Bureau of Printing and Engraving, a division of the US Treasury, issues all physical dollars. Currently, only Federal Reserve Notes are issued. Originally, the 1913 act authorizing these notes limited the amount that could be issued as a percentage of the gold held by the different Federal Reserve Banks.
In 1932, the collateral used for issuance was expanded to include United States securities. Over time, the range of things that can used as collateral has expanded. At this time, a Federal Reserve Bank must hold collateral equal to the amount of notes (physical dollars) it issues, and this collateral amount put up by the commercial bank requesting them is confirmed daily to the Bureau of Printing and Engraving by the government’s 'Federal Reserve Agent' present at each district bank. This is spelled out in 12 USC 412: http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title12-section412&num=0&edition=prelim
@Dan Kervick…2
When treasury spends, that does not augment or diminish the total number of dollars held in Fed accounts. It just results in dollars moving from the treasury account at the Fed to banks' accounts at the Fed.
First, you are confusing the vertical and the horizontal aspects of US money. The vertical is government-issued money; only the federal government can issue new (interest-free to the public) money. This money is both physical dollars and government securities. Only 11-12% of all US money is physical dollars. The rest are United States securities (bills, notes, and bonds, depending on their time limit), both marketable and non-marketable. Horizontal money is the non-federal government use of money, by and large credit money: commercial banks, businesses, households, foreign banks, governments, and investors, etc. The Federal Reserve manages both as part of its mandate to manage the national payment system. Don’t conflate the two.
Second, the US Treasury does not spend. Only Congress can authorize spending in the US system. It “appropriates." Whatever Congress appropriates becomes legal, which the US Treasury can then act upon. Ongoing payments such as Social Security payments, for example, were mandated by law 80 years and do not have to be approved by Congress annually, unless Congress approves an increase. That is why FICA taxes do not pay for Social Security; Social Security payments are mandated by law.
You can see the Congressionally approved payments number—which includes any automatic payments Congress has approved since 1791 if still applicable, such as approval to pay for federal salaries, buildings, pensions, government costs, etc--in the "Government Account Series” number in Table III-A at the link above. In fiscal year 2014, that amount was $62.5 trillion. (And yes, the US Treasury makes them up 'out of thin air'.)
Third, when Congress spends, the US Treasury authorizes the Federal Reserve to pay the vendors approved by Congress through the US Treasury’s General Account at the Fed, whether or not there are sufficient funds in the General Account to pay them. The Federal Reserve marks up the reserve accounts at the vendor’s bank for onward-forwarding to the vendor.
Fourth, this increases the money supply in the real economy. Let’s say Congress approved $100 billion in new spending. So there is $100 billion in new money sloshing around in the real economy. This does increase the total number of dollars held in Fed accounts because commercial banks have reserve accounts at the Fed. This is known at the Fed as “Reserve Add."
Fifth, under our system, Congress decided during the gold-standard era that the US Treasury could not have a negative balance in its General Account at the Fed. Agree with it or not, c’est la vie. The law remains.
Dan-
Does Chase bank have to acquire its deposit liabilities before it can use its computer to create them?
Does Apple have to acquire Apple stock from the public before the company can issue shares?
Why is it that you believe the Govt must receive its own IOUs before the Govt can issue them?
Your entire framework is utterly confused. What does it mean to possess your own IOUs? it means that those IOUs effectively cease to exist. No one cares what you say you owe yourself. The entire edifice is a mirage to confuse the rubes that Govt IOUs dont in fact come from the Govt but instead they come from the private sector (which of course cant create create US Govt IOUs or they go to jail for counterfeiting).
Contd....2
Sixth, so the US Treasury THEN issues securities in the amount of the Congressionally approved spending. (In actual fact, the US Treasury can futz around using other funds to meet this spending amount 'requirement' but it’s all accounting sleight-of-hand that is not germane to the overriding principle, which is that the US Treasury creates United States securities to match Congressional spending AFTER Congress approves the spending amount. How else is the US Treasury to know the amount?)
Seventh, these marketable United States securities are THEN sold to the public. This is known at the Fed as “Reserve Drain” because people exchange their savings for US treasury securities. The money moves from the commercial bank’s reserve account at the Fed to the commercial bank’s securities account at the Fed. Since the FDIC limit at commercial banks is limited to $250,000, companies that have government contracts in excess of that amount buy them to protect their funds for the duration of the contract, ditto pension funds and university trusts etc, in addition to all the others worldwide who participate in the $750 billion/day market in US treasury securities.
Eighth, the money supply increased by Congressional spending is restored to balance. No Federal Reserve involved; the US Treasury does it all based on legal Congressional directives. The Fed takes over from here managing it.
That's why the Fed economists working in the bowels say, Reserve Add before Reserve Drain."
@Dan Kervick...3
The US treasury is a depositor at the Fed, just like the banks. It does not manufacture the liabilities in its own account. It acquires them via taxation and debt sales.
It absolutely manufactures the liabilities in its own account. See the detailed description above. Also see TABLE III-A in the Daily Treasury Statement. Right there in black and white.
Taxation is de minimus. For example, the US Treasury, as I said, created (issued) $69.8 trillion in fiscal year 2014. It taxed $2.6 trillion. Peanuts. See Table IV in the link I gave above. Federal taxes pay for zip.
The marketable securities issued for fiscal 2014 were $7.2 trillion. (See Table III-A at link above.) It sold (redeemed) $6.5 trillion.
That’s a grand total of $9.1 trillion (taxes and marketable securities sold).
$9.1 trillion doesn’t begin to pay for the operation of the US federal government, which btw would amount to a cost of about $29Gs per person.
On the other hand the US Treasury redeemed $68.7 trillion of the United States securities it issued in fiscal 2014 to pay for all congressionally-mandated payments currently on the books.
@Dan Kervick...4
The MMT mental model of the treasury "creating" new private sector deposits by "spending them into" the private sector is utterly mistaken. The treasury has to acquire those dollars in the private sector first by collecting taxes or selling bonds. Only the Fed creates dollars, which it does through its balance sheet operations.
100% wrong. Read Freedom From National Debt by Frank N Newman. He was Deputy Secretary of the Treasury. He describes the process and the logic of how the US Treasury works.
If this were true: "The treasury has to acquire those dollars in the private sector first by collecting taxes or selling bonds,” then where does the private sector get those dollars to begin with? From some factory in downtown China manufacturing counterfeit $100 bills?
Tom, can't you just have unlimited deposit insurance?
Of course. Warren suggests doing that.
Just a query: the above conversation is a jigsaw puzzle to me and I am not entirely sure where all of the pieces fit. I have seen this conversation pop up over and over again among commentators of MMT, since I heard about the theory in 2007. I searched this web-page and could not find the words horizontal or vertical.
Isn’t the idea in MMT that all $modern horizontal circulation of IOU’s are (given current human nature) conditional, and can never result in full employment: - orbit generally around self-interest. I think the last time we had full employment was way back in the subsistence living days?
And all $Govt. vertical circulation of IOU’s, because they are (theoretically at least) unconditional - mesh with the horizontal flow, and have the potential to completely steer that horizontal circulation under certain conditions. So the unconditional makes its interface conditional in order to mesh with a lower potential. The horizontal wheel sees IOU’s flowing in and out of every household on the planet, driven by individual need. The vertical wheel sees IOU’s being diverted to collective need or public purpose. These flows are reflected in the use and application of real resources; courtesy of the skin of the earth, human ingenuity and values. So, I have to ask myself: ‘if this is true, what else do I need to understand?’
The only worthwhile reason people would universally accept this interface, is to minister to human need. That’s what I think actually drives the whole system: - recognition and acceptance of human need - manifest as a tiny little element of sacrifice. The broad mass of people gives up something for the greater good (of course I know they wouldn’t do it voluntarily, but they acquiesce). Maybe a few need a gun pointed at the head, but most of those belong in the 1%. The rest of the gun pointing is done by those at the top at others. And they don’t sacrifice anything. There is nothing noble or human in that.
My understanding is, everyone agrees the vertical and horizontal circulations interact – it’s just the potential outcomes of the interactions under different operational modes that are discussed. But in doing so, people lose sight of the human purpose of the whole thing. Caught up in details, they do not discuss the meaning and significance of the two wheels. Is that not the job of the visionaries and philosophically inclined?
MMT theory is established loosely as a school of thought – the details are there to check (although not readily available in one library) for anyone who knows how to keep the mind open (like a parachute because of the implications). So I wonder why the potential outcomes are not explored and expressed more fully, instead of ‘rolling the operational rock’ up and down the hill forever. That would make MMT much more interesting; engaging for a broader audience. I mean, the philosophical implications are human, and that means they can be expressed simply, in such a way that any human being can understand. We are all alive, and such philosophical implications affect us all directly. There is a great power in that.
Both wheels are incredibly interesting when approached and expressed as real human potential. But maybe everyone enjoys arguing far more (?) The near-sighted political class certainly do, but they are followers (of the people) – not leaders.
Sorry MRW - just noticed you mentioned h. & v. Phew!!
International Day of Peace 21 Sept. 2015 | Partnerships for Peace - Dignity For All
"I call on all warring parties to lay down their weapons and observe a global ceasefire. To them I say: stop the killings and the destruction, and create space for lasting peace."
[UN Secretary-General Ban Ki-moon]
Your Secret Weapon
If this were true: "The treasury has to acquire those dollars in the private sector first by collecting taxes or selling bonds,” then where does the private sector get those dollars to begin with? From some factory in downtown China manufacturing counterfeit $100 bills?
In our system the banking system, with the central bank at the apex of the system, is responsible for growth and diminution of the money supply via balance sheet expansion and contraction.
Almost all money in our system consists of central bank liabilities. What the treasury spends are central bank liabilities that it acquired via taxation or sales of securities. Those securities are government IOUs for those very same central bank liabilities, and so to redeem the securities the treasury needs to acquire more of those central bank liabilities. Private sector agents do not possess central bank liabilities in the first place because the treasury spent them into the economy. That's getting things backward. They possess central bank liabilities because the central bank issued them.
And Dan was SO close to "So we really do have to pay off the National Debt and Gov't finances REALLY ARE just like household finances and Rick Santorum is right. So it's austerity and BBA, beyatches."
Why is it that you believe the Govt must receive its own IOUs before the Govt can issue them?
As I said before, the government can and does certainly issue dollars. That's because the government includes the central bank. The treasury is not the whole of government. The government issues various kinds of IOUs. But the government IOUs we call dollars - the IOUs that can be exchanged for goods and services in our economy - are all issued by the Fed. The treasury has to acquire some of those Fed IOUs in order to carry out spending. And it does so via taxes and sales or treasury securities. Those securities are a different kind of government IOU, but they are not dollars.
MMTers used to be fairly careful about recognizing that the full-blown MMT picture only made sense if "government" was understood in a consolidated sense to include both the treasury and the central bank. But it seems people have reverted back to the dumbed down and inaccurate picture Mosler presented in Seven deadly Innocent Frauds.
It absolutely manufactures the liabilities in its own account. See the detailed description above. Also see TABLE III-A in the Daily Treasury Statement. Right there in black and white.
That table shows the daily total of securities sales. I hope you are not under the impression that the Treasury gives its IOUs away.
And Dan was SO close to "So we really do have to pay off the National Debt and Gov't finances REALLY ARE just like household finances and Rick Santorum is right. So it's austerity and BBA, beyatches."
Nope. The government does have to pay its debt if its doesn't want a voluntarily default. But it is a pretty safe bet that it will always do so. The Fed will almost certainly always create a secondary market for enough government debt to roll over the existing debt, even if the government doesn't tax as much as the Fed thinks it should - and thus even if it thinks the debt purchases are inflationary.
Of course, the crazy Republicans might decide to default voluntarily at some point.
"Second, the US Treasury does not spend. Only Congress can authorize spending in the US system."
A strange way of putting it. The Congress authorizes spending and appropriates the funds, and then the executive branch of government spends the appropriated funds out of the treasury.
This money is both physical dollars and government securities. Only 11-12% of all US money is physical dollars. The rest are United States securities (bills, notes, and bonds, depending on their time limit), both marketable and non-marketable.
A total mish-mash The majority of the money issued by government is not physical currency, but reserve balances in deposits held at the central bank. Those central bank liabilities are not the bills, notes and bonds issued by the treasury. Those latter kinds of government IOUs are not money.
The Fed still wears the pants, Tom - although some would like more cooperation between the Fed and Treasury on public debt management:
http://www.reuters.com/article/2014/09/30/us-usa-fed-powell-idUSKCN0HP1LV20140930
The present system was deliberately created to give the Fed a free hand in monetary policy. If the Fed doesn't like the fiscal policy of the political branches, it can let the yields on treasuries rise.
The "we" was non-government, ie, JQ Public emptying out their accounts, fishing out the dollars from under the mattress, the tin cans buried in the back yard, offshore, all of it and lobbing it back at the Treasury. Like the "The Can Kicks Back"/"Fix The Debt" crowd would have us believe. Well, non-gov except for the corporations, of course.
So what do you think about what Lerner says wrt corp taxes:
http://digitalcommons.bard.edu/cgi/viewcontent.cgi?article=1303&context=hm_archive
My admittedly dark POV views the tax code wrt Corps usually had them thinking "Ah, now we understand. They don't want us to rape and pillage THIS way, they want us to rape and pillage THAT way. OK, now we get it. Haha, sorry for the confusion".
The way the process works is a budget is approved appropriating funds for the various departments of government, some funds earmarked and some allowing discretion. Funding for pre-approved payments like interest on the public debt is automatic
The department heads allocate the use of the funds in their departments and the process of bidding and placing orders commences. When orders are filled, the government pays the invoice within the specified period, which can be up 180 days credit free, with vendors financing the government for that period, which they are OK with since the orders are so large and TINA. If one won't, others will.
The departments send the invoices Treasury for payment and Treasury directs the Fed to credit bank accounts. The Fed debits the Fed account and the Treasury and Fed consult on use of TT&L funds, etc., so that when the Fed is not setting the rate to zero and not paying IOR, it can hit its target with less OMO.
In debiting the Treasury account, the Fed debit up to the level of credits from tax receipts in the TGA and as that it is reached confers with Treasury on securities issuance along the curve.
This is all pretty routine and automatic, just crediting and debiting various accounts to keep everything in balance within the fiscal directives of Congress.
The Treasury is the fiscal department of the government and the Fed is the Treasury's fiscal agent. The only thing that the Fed does independently is conduct monetary policy, which chiefly involves setting the policy rate and maintaining the overnight rate within the band it targets using monetary operations.
Other than monetary policy, the Treasury and Fed have practically no discretionary powers, since the fiscal affairs of the Government fall to Congress and decision about spending are made in the various other departments that receive the allocations.
There is never an issue of markets clearing, including the government meeting its financial obligations.
The only issue that the US faces in this regard is the debt ceiling, since Congress in its infinite wisdom has decided to restrict the Treasury from meeting the government's already committed obligations, risking default. This is beyond stupid. It has zero to do with the Treasury or Fed and everything to do with political grandstanding by politicians who are in way over their heads and don't know what they are doing. But they say that a country gets the government it deserves.
(continued)
(continuation)
The important distinction to be aware of is that the amount of the budget and the amount of the fiscal balance at the end of the budgetary period are generally on the same. Moreover, while the budget is discretionary, the fiscal balance is not owing to changes in interest rates, with tax receipts and automatic stabilizers also being cyclically determined.
This makes no difference to the Treasury or Fed which are solely involved in crediting and debiting accounts. The Treasury directs the Fed to credit accounts and the Fed does so, debiting the TGA. As credits in the TGA from taxes are reduced, then the Treasury issues securities as the means of funding. Again, this is just crediting and debiting accounts when all is said and done.
All those debits and credits take place on the Fed's spreadsheet in settlement balances in deposit accounts or in securities accounts at the Fed. Commercial bank credits and debits exist on the books of commercial banks. Those are separate systems and different sets of books. The similarity lies in the accounting all being in the same unit of account, the USD.
No one but the US government is allowed to create USD pursuant to the US Constitutions, Article 1, Section 8. Even US states can't pursuant to Article 1, Section 10.
Taxes, fees and fines imposed by the US government as payable only in Fed liabilities, that is settlement balances in banks' reserve (deposit) accounts at the Fed. When Treasury receives a payment it directs the Fed to debit the reserve account of the payee and the bank debits the payees deposit account. Of course, this has all been automated and computers do it automatically as checks are received and scanned, or electronic deposits recorded digitally.
The upshot is that the US government issues its currency to provision itself and to carry out public purpose in accordance with the political process and institutional arrangements. The US government issues its own liabilities to do and these are assets for nongovernment. Their chief purpose is as tax credits. The government creates more tax credits that it collects and cancels in any period and that is the fiscal deficit. That amount is the used tax credits in that period, and the public debt is the total accumulated tax credit not yet collected.
What this means is that balance of taxation and securities issuance in government funding determines the amount of tax credits in nongovernment that are not yet used. The amount of tax credits that are unused, that is, saved, makes an economic difference since even though the amount saved is only changed by future taxation and redemption of securities (without rollover), the negotiable securities are highly liquid and can influence velocity.
So there needs to be a balance maintained between taxes and securities issuance in the fiscal balance to achieve price stability and also to accommodate changing saving desire based on sectoral balances. So the government fiscal stance needs to be adjusted (loosened and tightened) wrt changing conditions. Ideally that is accomplished by taxation being pro-cyclical and automatic stabilization being counter-cyclical.
The present system was deliberately created to give the Fed a free hand in monetary policy. If the Fed doesn't like the fiscal policy of the political branches, it can let the yields on treasuries rise.
This is true, as Paul Volcker demonstrated by jacking the policy rate up and choking the economy to curtail inflation that the fiscal authority as unable to handle.
At the same time, Congress created and the Fed and writes the rules, which it can change at any time, so the Fed's independence is not absolute and Fed chairs generally realize this. They act to protect their independence and not to jeopardize it.
The again in its infinite wisdom the US Congress has created a technocracy to put it leash on itself because it doesn't trust itself to manage the affairs of the country. This is a reason that some say democracy is a waste of time. Why not just institute technocracy and be done with it. But look at all the entertainment the public would miss without these celebrity fests that are called campaigns and elections.
I'm going to sideline Volker and say it was oil/nat gas that was the big influence:
http://realmoney.thestreet.com/articles/07/15/2013/second-look-paul-volckers-legacy
As far as I have seen, the Fed only pops bubbles that it started.
@Dan Kervick, September 20, 2015 at 10:57 PM
From Newman, Frank N. (2013-04-22). Freedom from National Debt (Kindle Locations 255-271). Two Harbors Press. Kindle Edition.
When the Treasury distributes funds, the nation’s deposits are initially increased. Where can the bank money go? Let’s look at an example, excluding the portion covered by taxes. Typically, before the Treasury issues $ 20 billion of securities, the government has distributed $ 20 billion to the public from its account at the Fed: redeeming maturing Treasuries, paying companies that provide goods and services for the government, for payments to individuals, etc. Many investors simply “roll over” their Treasury securities, replacing maturing ones with newly issued ones, and taking just the interest. For example, perhaps $10 billion of the $20 billion issue might be in that category. The Treasury pays out the other $10 billion to the private sector. At that point, a set of participants in the U.S. financial system will have the extra $10 billion in their bank accounts and will look to place those funds.
The money supply has been increased by $10 billion, and the new dollars move around within the overall US financial system. All the Treasuries previously available are already owned by investors, and prior auctions had demand that exceeded the amount offered. As the new Treasuries are auctioned, the demand is filled by exactly the $10 billion offered, and the money supply returns to its prior level. In the whole of the U.S. financial system, the only place to put the money is into the new Treasuries that are being auctioned— or otherwise just leave the funds in banks. If some investors choose to buy other financial assets with those new funds, such as corporate bonds or stocks, then someone else— the sellers of those assets— will end up with the bank deposits, and will be looking for a place to invest them. There are no other USD financial assets to invest in that are not already owned by someone. And the dollars cannot go to another country; an individual investor can choose to invest some dollars in assets in another country, but then the foreigners who sold those assets would just own the same dollars in U.S. banks. The aggregate of all investors have, in the end, two choices: leaving the extra $10 billion of cash in bank deposits, which earn very little, if any, interest, and are not guaranteed by the government beyond $250,000; or exchanging some of their bank money for the new Treasuries, which pay interest and have the “full faith and credit” of the United States.
The Treasury issues treasury securities, not the central bank. Treasury securities were paper created by the Bureau of Printing and Engraving until a couple of years ago. Now they are electronic. The central bank doesn’t issue them. The Treasury issues the Government Account Series to run the government and pay for past congressional mandates, not the central bank. Government Account Series, the majority issued, are not marketable. The US Treasury redeems them as an accounting mechanism to pay for mandated programs.
You wrote: "the central bank at the apex of the system is responsible for growth and diminution of the money supply via balance sheet expansion and contraction.”
Congress and the US Treasury are at the apex of the system. The Federal Reserve is an agent of the Treasury, and must do what Congress wants. For example, the Fed distributed $29 trillion to banks between September 2008 and some time in early 2010. Congress shut that down in 2010.
When Treasury receives a payment it directs the Fed to debit the reserve account of the payee and the bank debits the payees deposit account.
I think it would be more accurate to say that the payee directs the Fed to pay the Treasury. More specifically, the payee directs its bank to pay the Treasury, which the bank does by directing the Fed to debit the bank's account and credit Treasury's account.
The upshot is that the US government issues its currency to provision itself and to carry out public purpose in accordance with the political process and institutional arrangements.
I think that is a contorted way of viewing it. The currency is all issued by the central bank in the conduct of its monetary policy. It's monetary policy is guided by various interest rate targets, some of which it controls directly and some of which it may seek to influence indirectly. In maintaining those targets, the Fed is responding to the changing currency needs of households and businesses, and also attempting to achieve macroeconomic goals. The government then provisions itself by acquiring that currency from businesses and householders via taxation and the sale of securities. We could (and should) do things differently; but this is the way we do it now.
The government creates more tax credits that it collects and cancels in any period and that is the fiscal deficit.
Not necessarily. The additional tax credits emitted by the Fed might not equal the total deficit. Whether it does or not depends on the Fed's monetary policies, including it's open market policies. Treasury sales of securities extract some of those tax credits from the private sector and replace them with treasury securities. Whether the Fed then fully replenishes the extracted tax credits depends on how many government securities and other assets it buys.
What this means is that balance of taxation and securities issuance in government funding determines the amount of tax credits in nongovernment that are not yet used. The amount of tax credits that are unused, that is, saved, makes an economic difference since even though the amount saved is only changed by future taxation and redemption of securities (without rollover), the negotiable securities are highly liquid and can influence velocity.
Tom, I don't know what you mean by "not yet used". Do you just mean "not yet used to pay taxes"? Or do you mean "not used for any purpose"? Clearly currency that has not yet been taxed out of the private sector is being used. I think it is misleading to associate this quantity with any economically important notion of saving.
Congress and the US Treasury are at the apex of the system. The Federal Reserve is an agent of the Treasury, and must do what Congress wants.
That's true at the end of the day. But what Congress has chosen to do is separate its fiscal and monetary authorities institutionally and delegate the monetary authority to the Fed, which operates as an agency that is "independent within the government". It is very easy to imagine various kinds of Mexican standoffs between Congress and the Fed. The Fed might decide it strongly disapproves of the current fiscal policies of Congress, and might seek to enforce discipline by pushing up Treasury rates, or by running a tight monetary policy. This would put Congress in the position of either knuckling under or acting legislatively to issue directives to the Fed, change the rules under which it operates, or even replace it with a different kind of institution. Congress can do all of these things, of course, but they would all be seen as "radical" steps, especially by the financial elites who call the real political shots, both here and abroad, and by the media elites and politicians they own. These people are in a position to exert a great deal of political pressure and go to the wall to defend the Fed's operational independence from Congress. Once any kind of authority is delegated, it can't always be clawed back just as easily.
Different POV's are different possible spaces. Ptolemaic astronomy is from an Earth-centric POV and Copernican from a heliocentric. One is a map of what an observer sees and the other what an observer would see from the position of the sun, which is, of course, impossible experientially but can be approximated by a model. Why is the Copernican POV dominant to the degree of being exclusionary if both are correct in terms of their own POVs? This is a rhetorical question.
A lot of argument about finance is relative to POVs. It is possible to take a POV from the perspective of the Treasury, the Fed, the consolidated government and the banking system.
Presently, the POV of the banking system, which Dan is expressing is dominant and the task of MMT is to change that to the consolidated government POV. It's rather simple to see why the POV of the banking system is dominant since it is the neoliberal POV and neoliberalism rules. The consolidated government POV is considered to be socialistic, and presently not in conformity with facts so that a socialistic program, which MMT is painted as being, would replace the present institutional arrangements.
The reality is that both POVs are sustainable based on the accounting, sort of. Until one inquires who it is who is in charge. Then the Constitution, laws that elaborate the powers utilized, e.g., the Federal Reserve Act, judicial precedent, and agency regulations show that the federal government operating iaw the laws of the land is in charge.
One can argue that the US government has abdicated much of its power to the private sector and technocracy with government, which is true.
So the issue is between a POV that reflects legal issues and another POV that that the position of the corruption of those institutional arrangements.
As Matt would say, "Libertarianism." I would say instead corruption, which the signature of neoliberalism rather that genuine liberalism, which it hates because firms abhor actual competition, which reduces profit share, and political liberalism because "the tyranny of the masses" that would demand a greater distributional share if permitted to do so.
Nothing needs to change other than government being cleansed of corruption and the new government taking back its power. This is to say that everything needs to be changed because corruption is so endemic in US society based on neoliberalism.
Do you just mean "not yet used to pay taxes"?
To paraphrase Warren, government securities are accumulated tax credits held by nongovernment not yet used to pay taxes.
Government can reduce the amount of that accumulation by tightening its fiscal stance and redeeming government securities as they mature without replacing them, so that the total amount of tex credits not yet used by nongovernment declines. This is what reducing the national debt actually means.
Those who call for reducing the national debt are calling for a tighter fiscal stance that implies the use of more of the tax credits that have accumulated and not yet been used.
That's true at the end of the day. But what Congress has chosen to do is separate its fiscal and monetary authorities institutionally and delegate the monetary authority to the Fed, which operates as an agency that is "independent within the government". It is very easy to imagine various kinds of Mexican standoffs between Congress and the Fed….
Sounds like Scott Sumner, where the Treasury and Fed have an adversarial relationship, with the Fed offsetting fiscal policy with monetary policy as a rule.
This is a POV and it is not necessarily wrong, either. One reason that the Fed is politically independent is that TPTB have realized that the Congress is clueless about finance and the country needs technocratic controls to fix the mistakes of democratic control.
Two wheels: one of self-interest; one of human interest (public purpose in the political-economic sphere). Turning one way, predators follow the herd. Turning the other, peace dignity and prosperity is possible, for the whole human species. The pivot is choice.
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