Monday, September 21, 2015
Warren Mosler — The Fed’s Sort of Right Move for the Wrong Reasons
Position piece on monetary policy. The Fed doesn't get how it works and, in fact, has it reversed, just as most conventional economics with the direction of causality.
The Center of the Universe
The Fed’s Sort of Right Move for the Wrong Reasons
Warren Mosler
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60 comments:
Warren doesn't talk about credit growth.
Generally more new loans are created than old loans repaid. This credit growth has a inflationary effect. Increasing rates may reduce credit growth.
I don't have the numbers (the reduction in credit growth may be trivial) but the effect of interest rate rise is a function of: increased interest income, increased loan payments, decreased credit growth and any currency effects.
I like Warren but I think it's a bit blasé to say they have it all ass backwards.
Warren talks about credit growth (more the lack of it these days) quite a bit on his blog.
Andrew imo he is correct on this one...
When you say here: "This credit growth has a inflationary effect." > this is pure quantity theory...
If govt allows lending at higher prices per unit the result of THAT is what economists then call "inflationary" (non-morons would simply call higher prices)
Govt (Fed) currently has about $1.7T of MBS if they let that run off, at perhaps 4.25% then that would result in about an increase of 70B/yr to savers... this would eliminate a lot of the current malaise in just this one action...
this is also a not well thought out statement:
"Paying more interest, however, does have distributional consequences, as the additional income paid to the economy goes to those holding government securities."
this is a ideological biased statement and not analyzed properly across the larger system... the interest ends up benefiting the incomes of many who do not directly hold the securities...
this is like thinking that the watershed flows into the reservoir and is therefore unavailable to drinking water systems because the reservoir is hoarding it...
Dan thinks "we drink the rain water!" (skipping over most of the intermediate system components) and Warren thinks "it stops at the reservoir!" (not including the remaining system components...)
Whether or not the "state" is a net payer of interest to the private sector is not very important macroeconomically, if its interest payments are offset by other payments to the state.
Suppose, as a thought experiment, that the central bank did not purchase any government securities at all. Then all government spending, including spending on interest payments on its existing debt, would come from taxes and additional securities sales. Nothing can go out of the general fund that doesn't come in first, and so these fiscal operations just recycle funds. This would be the case whether the rate of government debt is 1% or 15%. The higher rate just means that the redistribution of funds from present funding sources (taxpayers and new debt purchasers) to present interest recipients (old debt purchasers) goes faster.
This still holds even if the Fed were to continue to make government payments with insufficient funds in the general fund by allowing general fund overdrafts. An overdraft would just be central bank credit extended to the treasury, and (absent any changes to existing law) would reduce the Fed's net income and reduce the Fed's disbursements to the treasury by exactly the amount of the overdraft.
Whether money is increasing in the non-government sector or not, and by how much, depends on the combined lending operations of the banking system (commercial bank + shadow banks + central bank), and whether the liability side of bank balance sheets are growing or shrinking. This is where central bank asset purchases play a role in determining whether government debt issue is helping to increase or decrease the flow of funds into the non-government. It all depends on how the central bank responds.
Whether net financial assets are increasing or decreasing depends almost entirely on the balance sheet of the central bank. If central bank net capital is increasing, non-government net financial assets are decreasing; and if central bank net capital is decreasing, non-government net financial assets are increasing. The impact of the fiscal branch on these quantities is negligible over the long run, and depends solely in temporary and offsetting up and down flow-of-funds movements due to the timing of payments in and out of the treasury.
Note that if the treasury sold bills that yielded 15%, the central bank would have to spend much more to purchase that debt in the secondary market than it has to spend to purchase bills that yield 1%. Both the income from the bonds and the amount spent to purchase them would grow by the same amount, resulting in no net change in the disbursement to the treasury and no net change in either money or net financial assets flowing to the non-government sector. What would change is the rate of wealth redistribution to government debt purchasers.
There are excellent reasons for fiscal authorities to run countercyclical deficits: They convert present savings into needed spending, accelerating the pace of spending as needed and diverting it back into debt service when it is not needed.
There are also sometimes excellent reasons to increase the overall size of government: there are kinds of economic production and output than only government organizes well, and if more of these are needed, then ewe need more government.
But none of this has to do with the flawed MMT picture of the supposed monetary impact of the fiscal operations of government, Under the system as currently set up, the fiscal authorities exercise no significant monetary role.
Dan that is like saying whether or not we have clean drinking water to drink doesnt matter because we urinate it out anyways....
A lot happens between the time you drink the water and when eventually you have to urinate...
Body is composed of like 60% water at all times....
This is the way systems operate....
Matt, yes, if I understand your analogy, it does make a difference how much money is flowing into and out of the fiscal branches of government, and more importantly, it makes a difference how the money is flowing into and out of the fiscal branches of government. It makes a difference to what is bought, what is produced, how production is organized and how the nation's income is distributed.
But what I am disputing is the MMT picture of the fiscal branches of government as a net water fountain, where more comes out than is pissed in. It is only our big public-private banking partnership that, under current operational arrangements, influences the total water volume.
Dan K--
It seems to me you're overthinking this.
Government spending puts money into economy. Taxes withdraw money. Fiscal is everything.
The central bank just exchanges one form of assets for another.
Flows don't come from nowhere. No infinite regresses and no beginningless circles that operate as perpetual motion machines.
In monetary economies under a floating rate system in which the issuer doesn't assume financial obligations in a unit of account it doesn't issue or commit to exchange the unit of account for a non-financial "real" asset like gold, the starting point is a set of books.
That there can be net financial assets in aggregate in a modern monetary economy relative to one type of books shows that there is at least on another set of books that is a source of money creation, that is, adds units of account independently of the other type of books, Here the distinction is between the central government as currency issuer through the central bank and/or Treasury and currency users that cannot issue the currency.
The consolidated book of nongovernment cannot have net financial assets in aggregate, which means that net savers are offset by net borrowers as an accounting identity.
The consolidated book of the government provides net financial assets in aggregate for nongovernment so that nongovernment can net save without increasing net borrowing within the sector by that amount.
If the government accommodates the net saving desire of nongovernment, this enables circular flow of production, distribution and consumptions to stabilize at full employment (excluding other factors such as shortages of necessary non-substitutable resources like energy, for example).
Conversely in a monetary economy that desires to net save, the net borrowers find themselves periodically in a financially unstable condition and retrench in order to deleverage and this financial instability disrupts the circular flow, the economy contracts and unemployment rises as the economy idles potentially productive resources for lack of ability to pay financial obligations on the part of a large cohort of net borrowers. The economy lingers in a state of underperformance until deleveraging is complete enough for more net borrowing to take place.
Conversely, the net financial assets created in aggregate in nongovernment can stabilize the situation by accommodating deleveraging by net borrowers, smoothing out the cycle of financial instability that Minsky described.
Potentially, a government can provide sufficient net financial assets to accommodate saving desire of nongovernment and also direct funding for public purpose directed at the common good through political economy based on stock-flow consistent macro modeling using sectoral balances analysis and conduct fiscal policy using functional finance.
In a democratic society all that is required is the electorate understanding the potential of money creation as a public utility and electing representatives committed to using an operationally correct approach to public policy. There is no operational constraint on this being done other than availability of real resources.
The rest is interest politics.
Your comment is confused and laughable Dan. Deficit spending results in an increase in govt ious and no corresponding increase in non govt ious. It doesn't make any difference whether these govt ious are reserves or cds. Just like how it doesn't matter how many commercial bank ious are in checking or cd accounts. Central bank balance sheet expansion also increase govt ious however there is almost always a corresponding increase in non govt ious. Except in the case of ior .
What is confusing about this simple thing to you?
Why do you think govt ious come from the private sector?
Maybe we can make this simpler foe you Dan.
Do you possess anything of value when you possess your own ious?
You couldn't see it but i just created 1 billion auburn ious and now i am a billionaire. I owe myself 1 billion auburn ious that i pay off with my other type of auburn ious.
Do you see how stupid this is? Now insert govt for auburn and that's how the govt money works. Your obsession with reserve ious is silly and you are making yourself look bad.
"Flows don't come from nowhere. No infinite regresses and no beginningless circles that operate as perpetual motion machines."
Tom obviously you have not been introduced to the economic concept of "pump priming".... where all you have to do is prime the pump and then stop pumping and the water just magically continues to be drawn up from out of the aquifer.... springs and wells are the same thing: its just water that comes out of the ground! ;)
Auburn, I'm not going to respond to your comments, which combine sloppiness with pointless insults.
Tom obviously you have not been introduced to the economic concept of "pump priming"....
Keynesian multipliers.
Dan I think we should look more at flows than stocks.... the banks cant leverage income until there is income to leverage...
imo Dont get all wrapped around the axle refuting things that are missing the mark a bit at the expense of advancing our knowledge... 'sacrifice the good for the perfect, etc...'
imo you should know that everything the govt sector does is meaningful to the whole economy... including how they operate the monetary system itself... who gets the leading income, and for what, etc.. this is what matters not whether some M1 or M2 thing goes up or down...
rsp
Could I remind people that the subject of my post was whether or not the yields on treasuries determined the amount of "net interest income" injected into the economy?
They don't. The more interest the treasury is committed to pay out, the more debt it has to sell or taxes it has to collect to pay that interest.
The Fed doesn't get it off the hook. The Fed can indirectly buy government debt, but every dollar it spends on government debt reduces its net income by the same amount, dollar for dollar, and thus reduces its disbursements to the treasury by the same amount, dollar for dollar.
So, unless the central bank changes its monetary policy stance, increased treasury yields mean either
(i) the government later increases its tax haul or debt sales in the future (or reduces spending) to make the higher debt payments, which means that the dollar inflow to the government increases to match the dollar outflow,
or
(ii) some of the required increased inflow to the treasury comes from central bank purchases of government debt, in which case future disbursements to the treasury are reduced by the same amount.
There is no such operation in our government as "the treasury directing the Fed to pay the interest on its bonds." The Fed only acts as the treasury's banker, not its sugar daddy. But even if there were such an operation, it wouldn't matter if the Fed made no adjustments to its portfolio and balance sheet goals. Because then the expenditure of paying the treasury debt would, again, reduce Fed income and result in an offsetting reduction of disbursements to the Treasury to make up the difference.
Dan,
Tankless water heaters:
https://en.wikipedia.org/wiki/Tankless_water_heating
these can work too....
Dan what if they do a 30 day repo and the interest is paid within 15 days?
So the non-govt gets the interest income on the 15th which they use to buy bonds off the Dealers and then the repo is closed 2 weeks later...
rsp,
There is no such operation in our government as "the treasury directing the Fed to pay the interest on its bonds."
Interest payments are now automatic. No more coupon clipping for governments. The Fed credits the appropriate banks' security accounts and the banks credit the customer accounts.
There is no correlation between taxes and spending, even if Congress ties certain taxes to a program, like FICA and SS. It's an illusion.
The Fed credits accounts either as directed specifically by Treasury or automatically iaw with pre-approved recurrent payments like interest.
The TGA is kept topped up with debt issuance as tax receipts credited to the TGA or transferred fron TT&L accounts held by the Treasury at commercial banks don't provide the funding.
There is essentially no difference between this and the Treasury crediting accounts directly without any debt issuance.
The same amount of spending results in the same amount of nongovernment net financial assets in aggregate injected during a period (flow) and the same amount of total tax credits not yet used to pay taxes (stock).
The accounting is different and the interest the government pays is different. That's just part of the illusion.
The reality is that government injects net financial assets into nongovernment by spending and transfers and withdraws net financial assets from nongovernment using taxes, fees and fines.
On one hand, it's the net financial assets in aggregate that counts, since that is the offset for net saving desire of nongovernment not offset by net exports.
On the other, it's the distribution of the flow that targets different sectors and cohorts.
How this gets done "behind the veil" is largely irrelevant other than mistaken perceptions about it that allow misrepresentation about what's happening, usually made by interested people even if they are also ignorant operationally.
What's important is the amount of the $NFA injected and the initial distribution that determines the direction of flows and influences multipliers, e.g., through velocity. Increased velocity also results in more taxes extracted. Multipliers run both ways.
Dan we have income tax... iow first you have to get the income, then you get the tax...
What happens during the time between there is the economy...
You have to look at it in the time domain... rsp,
When I said that there is no essential difference between direct issuance and issuance of using securities, I meant wrt to inject of $NFA. Direct issuance with no default-free securities issuance may induce greater financial risk. Based on Minsky's analysis a greater % of public debt to private debt could be stabilizing. But that's something empirical that would need testing.
And obviously, from what I said above, central bank overt money financing aka helicopter money has exactly the same effect on $NFA and the CB could extract $NFA by imposition of fees, which are in the cb's power and have the same effect in withdrawal of $NFA as taxes.
Of course the difference is technocracy instead of democracy, unless the monetary authority (legislature) would create a system that was democratically understood and agreed upon by the electorate.
It is operationally feasible, and there is no reason it could not work. Not that I am advocating it.
Dan
You deserve the critical comments. For some strange reason you have regressed intellectually to the point where you think hat govt ious come fRom the private sector. When you make dumb comments like that, derision is warranted
... to the point where you think hat govt ious come fRom the private sector.
Not at all Auburn. It is clear everything I have said is sailing completely over your head. Let's review:
1. The treasury issues IOUs called "treasury securities". Clearly treasury securities don't come from the private sector.
2. The Fed issues IOUs called "dollars". Clearly these dollars don't come from the private sector.
3. The treasury doesn't spend the IOUs it issues. It spends dollars. How does it acquire these dollars? Two ways: it either taxes them from private sector entities that have already acquired them; or it trades the IOUs it does issue - treasury securities - to private sector entities for dollars that have already acquired them.
4. Dollars are the medium of exchange in our economy; treasuries are not.
5. The IOUs issued by the treasury - treasury securities - are not just IOUs for random stuff like beef, or grain or copper. They are IOUs for dollars. The treasury makes good on the obligations to the holders of these IOUs by making principle and interest payments in dollars.
6. Since the treasury does not issue dollars, then to meet those obligations for dollar payments, it has to acquire those dollars from other sources - as described above.
7. When you acquire some quantity of the medium of exchange from somebody by trading an obligation to give them that quantity of the medium of exchange in the future, plus some extra, that is called "borrowing."
8. So it follows that the treasury acquires dollars by taxing them from the private sector or borrowing them from the private sector.
9. So dollars come from the Fed; treasuries come from the treasury. Dollars aren't introduced into the economy in the first instance because the treasury spends them into the private sector. They are introduced into the economy because the Fed either loans them into the economy, or spends them into the economy. They do the latter in two ways: sometimes they spend them into the economy as interest payments on deposits at the Fed; and sometimes they spend them into the economy by purchasing assets of various other kinds from the private sector. Those other assets include treasuries.
10. Higher yields on treasuries by themselves lead to a net infusion of dollars into the private sector. Whether they do or not depends on what the central bank chooses to do in executing its monetary policy. If it doesn't change its monetary policy stance, then the higher yields just lead to both an increased net outflow of dollars from the treasury and an increased net inflow of dollars to the treasury.
All of these facts should have become abundantly clear to everyone during the various debt ceiling standoffs. If the treasury issued dollars, then the debt ceiling would be completely ineffective in causing any kind of standoff. The treasury would just issue the dollars it needs to make its previously authorized payments. But the debt ceiling threat was effective in generating a standoff, because the treasury doesn't issue dollars. It only issues debt.
Dan we have income tax... iow first you have to get the income, then you get the tax...
Matt, you really have to learn more about how the central bank works. You seem to be completely in the dark about it. That's where the dollars come from.
So the non-govt gets the interest income on the 15th which they use to buy bonds off the Dealers and then the repo is closed 2 weeks later...
Matt, the repo is "closed" when they buy back the security that they originally sold and agreed to repurchase. A repo is just a fancy way of borrowing money from the Fed, using some security as the collateral. It doesn't lead to a net injection of money.
Dollars come only form the United States government. British pounds come from the British government. Etc. They don't come from either the Treasury departments or the central banks. They come from the government. They are government IOUs.
It makes zero difference how the government wishes to structure the process of currency issuance internally. For all practical proposes the dollars pounds, yet, etc., and issued by their respective governments.
In the EZ the euros are even issued by the respective government. The euro notes bear the country codes. But the structure of the EMU is such that they countries are limited in currency issuance by EZ rules limiting currency sovereignty of individual nations.
The public debt is also issued by the US government in the US and by the British government in the UK. Etc.
Again how this is done internally is discretionary and different countries may adopt different procedures but the result is the same wrt currency and securities held by nongovernment as net financial assets in aggregate.
The US has created the illusion of a system that mimics the gold standard, but it is an illusion. The US government issues the dollar and it does so with no operational constraints. Any conditions that a government imposes politically while maintaining currency sovereignty in a floating rate system cannot change that fact.
The difference are simply in the bookkeeping, that is, using securities accounts along with deposit accounts at the central bank instead of only deposit accounts. The amount of nongovernment net financial assets remains the same no matter how it is issued just as it makes no difference whether nongovernment net financial assets are reduced by withdrawing then by taxes, fines or fees or any combination thereof.
This is a non-issue and a pseudo-problem.
A nation that is sovereign in its currency is the monopoly provider of the currency.
(continued)
(continuation)
All "dollars" are not currency. The dollars in a bank account are units of account on a spread sheet denominated in dollars. If a customer demand dollars at the window the bank has to obtain them from the only source of dollars, the US government, and it has to do so based on the way the US government has decided to handle this through its agencies. The same with required reserve balances and settlement balance used to clear in the government's payments system.
Let's hypothesize that the Ron Paulites are successful in abolishing the Fed and unsuccessful in changing the current floating rate system. Would anything change materially wrt issuance of dollars as the currency of the US. No. It would just be done by another agency delegated to do so and the sets of books within the government would change along with it.
What would be different is if the government delegated issuance of the currency to the private banking system so that government had to borrow its own currency from private banks. That is not likely to happen, although it is a possibility and something that all bankers probably dream of.
Is the US government presently funding itself with taxes paid in settlement balances and securities issued by the Treasury and sold for settlement balances to the private sector. Of course. That is how the accounting works in terms of sources and uses of funds. This is however an accounting fiction that doesn't imply that the government has to obtains the currency of which ti is the sole issuer from users of the currency. That's an illogical nonsense.
The reality is that the government injects its currency into nongovernment in a zero maturity form by spending and transfers and withdraws it in a zero maturity form by taxes, fines and fees. It may also make provision for balances in government accounts to be held in deposit accounts or securities accounts, which doesn't alter the amount of $NFA.
What happens internally in government agencies and accounting makes no material difference to nongovernment. The outcome in terms of adding and subtracting $NFA, and transforming its maturity, too, if the government provides that option. And even with transformation there are a number of options such as bond and consoles.
Is the UK materially different from the US in that it issues consoles and the US doesn't. Is the system in the US any different now that the greenbacks are no longer in circulation? No.
These differences are non-issues.
It makes zero difference how the government wishes to structure the process of currency issuance internally. For all practical proposes the dollars pounds, yet, etc., and issued by their respective governments.
It made a difference during the debt ceiling standoff, Tom. The laws that are in place and determine who can issue what play a large role in constraining the behavior of the different parts of the government. How government chooses to structure itself can make a huge difference to how it works.
The US has created the illusion of a system that mimics the gold standard, but it is an illusion. The US government issues the dollar and it does so with no operational constraints. Any conditions that a government imposes politically while maintaining currency sovereignty in a floating rate system cannot change that fact.
It's not an illusion, Tom. You might just well say that the fact that we aren't on the gold standard is an illusion; or the fact that we have a floating rate system instead of a fixed rate system is an illusion; or that currency sovereignty itself is an illusion. They are not illusions, and the mere fact that they could be changed does not make them illusions. The legal and institutional structure that has been put in place defines the architecture of the system, and governs and constrains the behavior of the actors who operationally animate that architecture.
By the way, the custom we have followed above of referring to dollars as "IOUs" is a bit misleading. While dollars are conventionally designated as liabilities for Fed "balance sheet" purposes, and thus treated as though they are a kind of debt obligation, in fact they are no such thing. If you have a government security, the government is obligated to pay you something. And if you don't, you have a case against them. If you possess a dollar, nobody is obligated to pay you anything. When the government issues a dollar, it hasn't increased its current obligations in any way.
t=0 repo initiated 11B
TGA 0
PD 11B RBS
Fed 11B USTs (from repo)
non-govt $
t=1 bonds 11B issued to PD
TGA 11B
PD 11B USTs
Fed 11B USTs (from repo)
non govt $
t=3 Treasury pays 10B Medicare
TGA 1 B
PD 11B USTs
Fed 11B USTs
nongovt $ + 10B
t=4 Interest paid 1B
TGA 0
PD 11B USTs
Fed 11B USTs
non govt $ + 11B
t=5 repo expires
TGA 0
PD 22B USTs
Fed 0
non govt $ + 11B
Non-govt has $ + 11B which now the PDs will try to deal some bonds to them... but if you look back at t=0 there was only $ + 22B on the table now at t=5 there is $ + 33B on the table...
Matt you are only looking at the flow of assets and not the incurring of liabilities. At t=1, when the treasury sells those $11 billion in bonds, it doesn't just end up with a new cash balance of $11 billion. It also has a new $11 billion liability, so the net change in the Treasury balance sheet is $0. After t=3, when it makes the medicare payment, the net balance sheet change is -$10 million. After t=4, when it makes the interest payment, the net balance sheet change is -$11 billion. The additional $11 billion that is on the non-government balance sheet at t=5 is matched by an additional negative $11 billion on the treasury balance sheet. To make good on its increased liabilities, the treasury will either have to collect more taxes or sell more bonds, which is what I said at the outset.
If the bonds paid twice the interest, then the non-government balance at t=5 would be $12 billion instead of $11 billion. But the treasury balance sheet would then be a negative $12 billion instead of negative $11 billion, which requires another billion in taxes or bond sales.
It made a difference during the debt ceiling standoff, Tom. The laws that are in place and determine who can issue what play a large role in constraining the behavior of the different parts of the government.
In my opinion and the opinion of some highly regarded legal experts that law is unconstitutional under Amendment 14. The president should just direct the Treasury security to instruct the Fed chair to pay already incurred obligations on time. Let the Congress to to the Supreme Court, where they will lose in a business-friendly environment, or try to impeach the president and take the consequences politically. In any case where laws conflict, the Constitution takes precedence and the president would be obligated to act in accordance with that principle.
Just more nonsense coming from the clowns.
Dan,
the illustration is Cash Basis .... not Accrual Basis
https://en.wikipedia.org/wiki/Basis_of_accounting
You and Ron Paul can accrue if you want to go ahead....
In the mean time, Cash Basis non-govt is $+11 and back in the real world healthcare providers have been reimbursed for medical care for our seniors and some savers have received interest on their savings for income... and Dealers have some new inventory of govt bonds to deal to clients who now have the balances to purchase them in the secondary market....
rinse and repeat...
Matt, all of that might be true, but it doesn't change the basic point with which I began: The US treasury is basically a bank account at the Fed containing dollar balances, and nothing can go out of that account that doesn't go into it first. Dollars do not exist in the private sector because they have been spent into the private sector in the first place as a result of treasury spending. The treasury can issue debt to finance spending, but it has to swap that debt in the private sector for dollars. And then to pay that debt it has to acquire more dollars from the private sector.
Does this mean that dollars originate in the private sector and not the government? No. Dollars come in different varieties. There are the ones that are issued by the central bank, which are conventionally classified as government liabilities, but are not really debt obligations of any kind, and there are the kind issued by commercial banks which are essentially genuine IOUs for the dollars issued by the central bank. The latter, of course, do originate in the private sector. But the former are more important, and do not. The originate in the central bank, which is part of the government. These dollars are the monetary basis for the US economy, and the central bank originates all of them.
Also, whether an entity uses cash basis accounting or accrual accounting only affects the timing of when revenues and expenses are recorded on the income statement and the balance sheet, but does not affect the fundamental nature of the obligations that generate income expenses.
In my view, this kerfuffle is over two misunderstandings lead to myths.
The first is that the central government is a currency user rather than the issuer of the currency. It is in the same position as states in the US having to obtain its currency from the private sector by taxing or borrowing like states do. Often it is represented that this is because the central bank issues the currency and is not part of the government but rather politically independent of it. Another bogus reason is that bank issue currency when the create deposits and these deposits are used in final settlement of obligations to the government denominated in the currency as the unit of account. Both are bogus.
The second is that the central bank lends the currency that the central government uses so that no financial assets are created when government spends since the asset credited to nongovernment accounts are offset by liabilities owed to the central bank. Wrong again.
The operational reason for having a central bank and default-free government securities accounts is so that the central bank can conduct monetary policy using a policy rate that it sets independently of political influence, which would not be the case were the Treasury or Congress to set the rate. In the former case the party in power would control the rate, and in the latter, the clowns would. So in its wisdom the financial sector has imposed its will on the political system to create a politically independent central bank.
Another option is to let the banks set the overnight rate themselves and we saw how that worked out with Libor.
Dan, do you agree that the private sector has to get dollars issued by the US government and not created by banks crediting deposit accounts to pay taxes and purchase tsys? I think you do from what you have written. If you don't you are wrong.
Now if the Treasury has get dollars from the private sector to fund itself since it cannot create them, then the only other place that the private sector can get dollars is from the central bank. The Fed doesn't issue currency into the private sector other than as interest it pays to financial institutions, which is minimal and would not be enough to fund government.
So it follows that nongovernment must then get the dollars to pay taxes and purchase government securities from the only other place they originate, Fed lending. Are you saying the government funds itself from banks' borrowing from the Fed. If so, the Bank must pledge collateral and that collateral is US tsys. Where do they get the tsys if they have to purchase them from the Fed with dollars that the Fed loans against tsys?
"The more interest the treasury is committed to pay out, the more debt it has to sell or taxes it has to collect to pay that interest."
Remember interest is spent. If there is no saving in the spending chain the govt will get all its money back.
It is conceivable some interest played earlier in the day flows back as tax later in the day.
Anyway, at the UK doesn't have this kind of problem. I wouldn't worry about it Dan. You can always count on the yanks to do the right thing - after everything else.
Also, does the US have the "platinum coin" option? Who authorises this Dan and Tom, treasury, president or congress?
Congress has created the space for it to occur according to some legal experts. The president would have to direct the Treasury secretary to strike it and then the Fed chair would have to accept it. Should the Fed chair refuse to accept in voluntarily, then the president could direct the Treasury secretary to instruct the Fed chair to do so and the Fed chair would have to do so involuntarily. At least, this is how it was explained by beowulf and elaborated by Joe Firestone.
But I think that the 14th Amendment is a clearer way to go legally, and it would be less gimmicky. Arguably, the president is obligated to do this since the Constitution is the law of the law and all other acts are subsidiary to it. Court precedent argue for this, too.
The fact is that the use of the debt ceiling as a political tool is clownish and makes the US look bad. Plus, the rating agencies should take note of a threat to default and downgrade US debt because of it if they are consistent. If they don't, it indicates that it is taken as a hollow threat — political grandstanding by blowhards.
Actually, I view both the passage of the debt ceiling and treat to use it politically not as fiscal conservatism as much as the work of a Confederate group that is trying to continue the Civil War by other means, refusing to accept that certain issues have been decided.
Actually the 14th Amendment was a piece of legislation produced out of just those circumstances and there is a cohort seeking its repeal. This dichotomy in the US arose at the time of the founding documents and their institutional interpretation subsequently. A the states' rights-state sovereignty cohort never accepted federalization and don't think that it is "original."
And of course there are the nut cases. Lots of them.
Utah Legalizes Gold, Silver Coins As Currency
Dan, do you agree that the private sector has to get dollars issued by the US government and not created by banks crediting deposit accounts to pay taxes and purchase tsys?
Yes. Those dollars come from the Fed. The general public doesn't necessarily need to get its hands directly on many of these USG dollars, since they mainly use their bank deposit balances - and will do so increasingly as cash becomes a thing of the past. But those banks can't meet their own payment obligations to those depositors without having the USG dollars they use to make those payments. So the banks need to get Fed dollars.
Now if the Treasury has get dollars from the private sector to fund itself since it cannot create them, then the only other place that the private sector can get dollars is from the central bank. The Fed doesn't issue currency into the private sector other than as interest it pays to financial institutions, which is minimal and would not be enough to fund government.
This is a partly erroneous picture Tom. As noted, the public doesn't need to handle that many Fed-issued dollars. They handle bank-issued dollars that are backed by Fed -issued dollars. But obviously they do handle some physical currency, and almost all of that comes from the Fed. And the commercial banks do in fact get all of their needed dollars from the central bank. They get them mainly by (i) buying assets from the treasury and then selling them back to the central bank for more than they paid for them; (ii) sometimes selling other kinds of privately generated assets to the banks; (iii) receiving interest payments on their reserve deposits, and (iv) taking massive loans from the Fed view repo operations.
They don't need to get that many of those Fed dollars. Total dollar holdings by banks are typically only a small percentage of their total assets and a small percentage of their deposit liabilities. To meet their interbank payment obligations on behalf of their depositors, they don't need to have reserve balances anywhere near the size of their depositors's balances.
What seems to be lacking in some of this discussion is an appreciation that dollars are created and extinguished by bank balance sheet operations, and an economy can remain well-supplied with plenty enough dollars to meet the demands of commerce apart from whether its net financial assets are increasing. An economy can grow robustly, and its money supply grow robustly along with it, even if the net financial asset position of the non-government sector doesn't change.
Suppose we lived in an economy in which there were no commercial banks, and all of the banking was done directly by households and firms at the central bank. Suppose in Year 1, there are $1 trillion in deposits at the central bank, and all of those depositors owe the central bank exactly $1 trillion dollars - i.e. the central bank holds as assets $1 trillion worth of depositor promissory notes. Let's suppose government runs a balanced budget, so nobody holds any government debt. The net financial asset position of the depositors is then $0.
Now suppose 10 years later the economy has doubled in size, and the central bank balance sheet has evolved step by step along with it. Everybody has twice as much annual income. There are now $2 trillion in deposits at the central bank, and all of those depositors owe the central bank exactly $2 trillion dollars - i.e. the central bank holds as assets $2 trillion worth of depositor promissory notes. Let's suppose government has still consistently run a balanced budget, so still nobody holds any government debt. The net financial asset position of the depositors is then still $0. Big deal. They are all richer in real terms.
Our actual system adds the extra layer of commercial banks. They are the ones issuing the deposits to, and accumulating the promissory notes of, households and non-financial businesses. In turn, they are borrowing money from the central bank and incurring liabilities to the central bank. Note that a $1 trillion expansion of commercial bank balance sheets typically requires (in normal times) only $100 billion expansion of the fed's balance sheet. And that expansion doesn't require that the commercial banks receive $100 billion in revenue from the Fed - only that they have $100 billion additional in balances - that may in fact all be borrowed. Typically, in addition to all of this massive borrowing and balance sheet expansion and contraction, the banks are receiving modest amounts of net income from the Fed. But the fact that that income is small does not impair the functioning of the system.
Dan, you are changing the subject. No one on the MMT side disputes the circuitist horizontal analysis. Of course, most $ as units of account are on the books of banks and non-banks in the private sector, and as a matter of accounting net to zero when the books are consolidated as nongovernment.
Netting enables final settlement of accounts without using the Federal payments system that operates only with settlement balances that are Fed liabilities and must be obtained by banks either through operations that increase their settlement balances or by borrowing in the interbank market, the money market, or from the Fed. The Fed prefers that banks borrow from each other in the overnight interbank market where the policy rate is targeted through monetary operations when the Fed doesn't choose to set the rate to zero or is paying IOR.
However, independently of netting Fedwire handles a substantial amount of final settlement in the payments system.
So bank credit generating much of the money through which nongovernment transactions are settled is not the issue.
The issues are:
1) Is the circuitist account complete. MMT says no. It needs to be supplemented with the chartalist view.
2) Does the government create net financial assets in aggregate for nongovernment. MMT says yes, when the financial asset is is owned in nongovernment and the liability is a government liability.
3. Are are financial obligations to the central government, like taxes and government securities purchases at auctions, finally settled using band credit. MMT says no. Bank credit is not a government liability and the central government only settles using its financial liabilities that it only creates.
4. Does the private sector only get government liabilities for final settlement with government by borrowing them from the central bank. MMT says no.
5. That means that the federal government must create some financial liabilities through its fiscal operations, since that is the only alternative to Fed lending.
All this has been discussed in detail and disputed by some circuitists, some of whom have changed their minds.
"The Clearing House Interbank Payments System (CHIPS) is a bank-owned, privately operated electronic payments system.
CHIPS is both a customer and a competitor of the Federal Reserve’s Fedwire service.
The average daily value of CHIPS transactions is about $1.2 trillion a day.…
The vast majority of CHIPS members are also Fedwire participants, and the daily value of CHIPS transfers is about 80 percent of Fedwire’s non-securities transfers."
FRBNY - Chips
Final settlement in the Federal payments system after interbank netting is substantial. The figure doesn't cover intra-bank netting.
Suppose we lived in an economy in which there were no commercial banks, and all of the banking was done directly by households and firms at the central bank. Suppose in Year 1, there are $1 trillion in deposits at the central bank, and all of those depositors owe the central bank exactly $1 trillion dollars - i.e. the central bank holds as assets $1 trillion worth of depositor promissory notes. Let's suppose government runs a balanced budget, so nobody holds any government debt. The net financial asset position of the depositors is then $0.
Now suppose 10 years later the economy has doubled in size, and the central bank balance sheet has evolved step by step along with it. Everybody has twice as much annual income. There are now $2 trillion in deposits at the central bank, and all of those depositors owe the central bank exactly $2 trillion dollars - i.e. the central bank holds as assets $2 trillion worth of depositor promissory notes. Let's suppose government has still consistently run a balanced budget, so still nobody holds any government debt. The net financial asset position of the depositors is then still $0. Big deal. They are all richer in real terms.
No one pays taxes? If they pay taxes, then the deposits at the cb are reduced by the amount taxed, while the liabilities to the cb remain the same. How long can that last unless the cb pays interest on the deposits offsetting taxes.
Tom, I know very well what "MMT says." Are you interested in thinking critically about which of the things it says are true and which are false? Or am I just going to get another chapter and verse recitation with no reasoning?
Does the government create net financial assets in aggregate for nongovernment. MMT says yes, when the financial asset is is owned in nongovernment and the liability is a government liability.
Yes Tom, that is a trivial logical consequence of accounting principles and the definitions of the term "government" and "non-government". If you divide any economy into two pieces, then it follows necessarily that if one of the pieces has net financial assets, the other piece must have net financial liabilities of exactly the same amount.
The financial actions of the government sector are responsible for any net accumulation of financial assets by the non-government sector. But by the same token, the financial actions of the Walmart sector are responsible for any net accumulation of financial assets by the non-Walmart sector; and the financial actions of the Dan Kervick sector are responsible for any net accumulation of financial assets by the non-Kervick sector. The question is whether any of these balances is a particularly important number to look at.
The private sector can successfully accumulate wealth and save whether or not its net financial asset position vis-a-vis the government goes up or down. Look at the balance sheet for a company like Home Depot. It has far more financial liabilities than financial assets. But it has a lot of real assets in the form of inventory, property, plant and equipment, so it is in the black. Other people and firms in the economy are able to hold more financial assets than liabilities because companies like Home Depot have more financial liabilities than assets. It doesn't matter whether the government is playing a role or not.
Of course, most $ as units of account are on the books of banks and non-banks in the private sector, and as a matter of accounting net to zero when the books are consolidated as nongovernment
Yes, but my point didn't depend on whether there is a commercial banking layer or not. The point is that the dollars are generated on the banking side of the system. It doesn't matter whether that banking side consists of a central bank alone (my hypothetical), or a central bank issuing base dollars overseeing a commercial banking sector issuing bank credit. The dollars are not coming from the treasury. Dollars do flow out of the treasury of course as the treasury spends. But every dollar that flows out had to flow in previously, either as a result of taxes or bond sales.
It needs to be supplemented with the chartalist view.
Chartalism is completely independent of any of the stuff we have been talking about. Chartalism is one account of why people are willing to accept certain instruments in exchange for goods and services. It's an account of what gives those instruments market value. It doesn't entail anything about which branch of the government those instruments come from. (It doesn't even entail they come from government. If the government suddenly decided to accept Apple iPad coupons in payment of taxes, then those coupons would begin to circle more widely as money, even though the government isn't issuing them. That's chartalism. But it's a separate issue.
Are financial obligations to the central government, like taxes and government securities purchases at auctions, finally settled using bank credit. MMT says no. Bank credit is not a government liability and the central government only settles using its financial liabilities that it only creates.
Yes, but this is completely independent of anything I have said in this thread. Tax bills are ultimately settled with government dollars. Those dollars come from the central bank. My main and repeated points in the above have been: (i) dollars originate with the central bank, not the treasury; (ii) an increase in interest yields on treasury securities does not in itself result in a net increase in USG dollars flowing to the private sector. That will only happen if the Fed issues more dollars. Otherwise the increased yields just redistribute more dollars to bond purchasers without adding any more to the system.
Does the private sector only get government liabilities for final settlement with government by borrowing them from the central bank. MMT says no.
Individual entities in the private sector certainly get dollars from the treasury, dollars they can use to settle their tax bills - wherever those dollars came from in the first place. If the treasury were running a perfectly balanced budget and the economy were in a steady state, it would be easy to understand this process. Everything that the the treasury spends out gets returned again as taxes, spent out again, returned again in a perfect circular flow with no net increase or decrease.
But if the economy is growing, along with the total tax bill to the government, then unless the central bank emits more dollars, the private sector as a whole cannot get a net increase in dollars in this way via treasury spending. This happens as a matter of course in a growing economy with a modern centralized banking system. The central bank is continually growing its balance sheet, which results in a continual increase in both central bank dollars and commercial bank dollars. The taxpayer makes a payment from his checking account to the government, which his bank settles through the central bank by making a payment from the commercial bank's reserve account to the treasury account.
Dollars that flow out of the treasury into private sector hands must flow into the treasury first either via bond sales or taxes. All net increases in dollars must come from the central bank.
No one pays taxes? If they pay taxes, then the deposits at the cb are reduced by the amount taxed, while the liabilities to the cb remain the same. How long can that last unless the cb pays interest on the deposits offsetting taxes.
Unless the Treasury is hoarding dollars, then the dollars paid into the treasury are spit right back out again by spending, making no net difference to the amount of dollars on the liability side of the central bank books. That's why I added to the hypothetical the stipulation that the treasury is running balanced budget
Are you interested in thinking critically about which of the things it says are true and which are false? Or am I just going to get another chapter and verse recitation with no reasoning?
This argument has been stated in numerous books, papers, lectures, blogs, etc by the MMT economists and their opponents. I see no need to repeat it.
You are welcome to make your case. A similar case has been made by circuitist economists and over at Monetary Realism, etc.
I could cite the sources, but you already know them, probably have read most of them, and disagree with them.
That's OK. Everyone is entitled to their own opinion but not to their own facts.
The problems arise when some of the facts are in dispute that is where people agree to disagree when they cannot agree.
Unless the Treasury is hoarding dollars, then the dollars paid into the treasury are spit right back out again by spending, making no net difference to the amount of dollars on the liability side of the central bank books. That's why I added to the hypothetical the stipulation that the treasury is running balanced budget
Where did the deposits at the cb comes from in the first place. If the Treasury has to get the $ from taxing those deposit accounts.
I assume that the cb doesn't just credit deposit account out of good will and certainly the depositors don't control making entires in their accounts
The deposits can only come from the cb spending or lending. But cb's,, like other banks, don't normally don't do fiscal. Like other banks cb's only lend against collateral and only first rate collateral at that. They only lend against financial collateral in the form of government securities. Where do the government securities come from if the all the funds are in deposit accounts at the cb, and nongovernment must use those deposits to purchase government securities. They must have been borrowed from the cb.
The cb can only expand its balance sheet under normal circumstances by buying government issued securities that are purchased with cb liabilities, which just transforms the deposits from securities account back to deposit accounts.
In this thought experiment there is a monetary circuit that begins and ends with cb lending its seems. If there is only a cb then all lending is done by the cb. If commercial banks also lend, as they actually do then some lending is done by them, too, which nets to zero in nongovernment and can be disregarded. If the rest of the lending that creates money is done by the cb, This implies that there are no nongovernment net financial assets in aggregate, since there is a nongovernment liability to the cb that corresponds to all financial assets net of nongovernment held by nongovernment. This is what some circuits hold and it is denied by MMT economists and others who hold that the government creates net financial assets through fiscal operations that the cb doesn't do.
The MMT view has already been explained above in this thread and there is ample documentation of it by MMT economists, so I don't need to repeat it again. I understand the position you are taking from having argued against it over at Monetary Realism over and with circuitists economists in threads in which you participated. They are available in the comment threads to JKH's posts there.
All interested parties can do is read the literature, study the relevant law, finance, accounting and economics and make up their own mind. Some are persuaded by the MMT view while others are not.
Where it matters practically is in policy and political economy-macro used in policy formulation. It makes a difference whether one believes that the government has to get its money to spend by taxing nongovernment and borrowing from a pool loanable funds owned by nongovernment, or whether government creates its own funding through the coordinated operations of its agencies iaw appropriations of the fiscal authority, the legislative branch.
BTW, I don't want to denigrate the work of Monetary Realism or the many threads there that some of us here participated in there. I learned a lot from them and was treated graciously there, even when I disagreed.
I hope we can act similarly here.
Chartalism is completely independent of any of the stuff we have been talking about.
Agree. What I mean was that the disagreement is chiefly between some circuitists and neo-chartalists and some other circuitists.
Dollars that flow out of the treasury into private sector hands must flow into the treasury first either via bond sales or taxes. All net increases in dollars must come from the central bank.
This is a point of contention. The view you present in the circuitist view.
MMT economists hold that the government neither has nor doesn't have money in a way similar to the way the score keeper of game neither has points nor doesn't have points. Only the teams have or don't have points depending on how they play the game.
When the government spends it creates net financial assets in nongovernment by increasing settlement balances, which are cb liabilities in the payments system, and banks credit accounts on their own books. The MB and M1 money stock are increased.
The reverse occurs when taxes are finally settled in the payments system. MB and M1 money stocks decrease.
MMT economists say therefore that fiscal spending creates money and and fiscal withdrawal destroys money.
There is no money in government itself. Credits in the TGA don't count to any measure of money in nongovernment money stock. Fed liabilities don't exist until the Fed issues them into the payments system and disappear from the payments system when they are used to meet government imposed or incurred obligations.
They would say that the problem comes from confusing money as a unit of account with money things. It's not as if the government taxes dollar bills and puts them in the Treasury for future spending. Its just marking books up and down for recording purposes.
The other way of thinking is illusory, they would say, in that it doesn't reflect operational reality.
Opponents disagree.
Where did the deposits at the cb comes from in the first place.
The central bank is a bank. It creates deposits by making loans and by buying assets generated by others. The main asset generated by others is treasury securities. These purchases increase the cash reserve holdings and decrease the securities holdings of the seller. If the central bank were not making loans and not purchasing these assets, then treasury spending, taxing and debt issuance would by itself have no net impact on MB. (In fact, MB would continually go down, as loans to the central bank were paid off and its balance sheet contracted.)
When the government spends it creates net financial assets in nongovernment by increasing settlement balances, which are cb liabilities in the payments system, and banks credit accounts on their own books. The MB and M1 money stock are increased.
The reverse occurs when taxes are finally settled in the payments system. MB and M1 money stocks decrease.
The reverse also occurs when the Treasury issues debt: The debt is purchased with those same MB and M1 dollars, so the private sector supply of government securities goes up while the stock of dollars goes down.
The central bank is a bank. It creates deposits by making loans and by buying assets generated by others. The main asset generated by others is treasury securities.
Central banks are not like other banks. They don't lend against real assets or non-government paper, although they do buy gold for their balance sheet. How do people get the deposits by borrowing from the cb before they can be used to pay taxes? Sell the gold to cb?
Oh, and did I mention that there are not tsys in your imaginary model because the government is running a fiscal balance of zero. so unless the cb is paying interest on deposits, there are no interest payments either.
BTW, as long as we are discussing this thought experiment. there could be one bank that does it all, lending against real collateral, for example, or even making loans that are not secured against specific assets just like commercial banks do now.
That single bank could be government owned. Bill Mitchell advises nationalizing the present banks, while Ellen Brown recommends replacing private banks with public banks. It's entirely possible. The tradeoff is that then the government controls allocation of capital, which is subject to corruption, not that private banking is not, of course.
The single bank could be private, which would give the owners effective control over the government. This was the intention with the private incorporation of the Bank of England, when the financiers felt that the king was abusing the system then in place. Eventually they managed to wrest control from the crown.
”The legal and institutional structure that has been put in place defines the architecture of the system, and governs and constrains the behaviour of the actors who operationally animate that architecture”. [DanK]
God I've heard that mantra so many times. Its like an oath of allegiance. The legal and institutional structure that has been put in place regarding issuance of $Govt. defines the stupidity of the system, and governs and constrains the behaviour of the actors who blindly animate that architecture.
There have been honest central bankers over the last few centuries who have noted that if people understood $Govt. there would be revolt in the streets. The $money system is perfectly set up so that predators can farm the herd; business exploit the poor; perpetuate competition, dominion, and submission. Then you die. If you can't build a pyramid to show your wealth, power and divine connections, then build a little pile of rocks to mark your grave (some pyramid workers who spent most of their human existence labouring, did this) – this is social conditioning. That is what you vote for even when you hope you are voting for something else. Illusion is when something pretends to be what it is not.
There is more poverty on the planet than ever before, and rich people don't feel rich. To paraphrase Prem Rawat: 'If they were rich, they would be generous, if they were strong, they would be kind; if they were powerful they would be gentle, if they were wise, they would be simple'. Excuse me – they are predators. Never lose sight of that fundamental point if you want to discuss the political-economy and its systems. I think of a herd with lions following at their leisure, because there is only one waterhole. $money.
First, comes the understanding to respect and value each human existence; because you realise that what is precious in them is also precious in you – what is inside of them is also inside of you, and is the only real wealth that we have. So you respect something inside of you; see it in others, and the respect widens, to include others. Nothing to do with social position or money. That takes consciousness and it takes know-how. Then, out of understanding, to minister to the sovereignty of real human physical emotional and mental need. Peace must come first – because only then can real human dignity, and real human prosperity follow. Peace exists in the heart of every human being – but it needs to be experienced. A better world needs human beings who are free enough and courageous enough, to better themselves. Is this possible?
The little I know of, that lies dormant in the human heart, makes this entirely possible. When the human heart is happy, all of this is possible – there is no limit to what is possible.
If everybody realised that every human being was royal, we could turn the palace into a soup kitchen and move the homeless in – whatever! Vision arises from the human heart; mind gets boggled without it. Taj Mahal : Take a giant step outside your mind ….
For peterc & magpie if you're in the neighbourhood (I just clicked 'I'm not a robot'): Taj Mahal: Take a giant step outside your mind
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