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Monday, June 11, 2018
Ellis Winningham — The Bond Market Doesn’t Control Anything; the Currency-Issuing National Government Does
So according to section ii (the "former era", when there was gold convertibility), the national gov could have resorted to non-sterilized printing if they wanted to. Did they ever do that? The article is speaking specifically to England's national gov, in which case, if it resorted to non-sterilized spending, who's currency "brand" was on the note? The bank of england's brand? Or the national gov of england's brand?
It's the difference between our notes in the US being a federal reserve note vs a lincoln greenback. Not a trivial difference.
Regarding section vi (in current era, how interest is set), it certainly makes sense that the central bank establishes rates on the short-end (though how that "competes" against other short term paper, like the 13 week treasury yield and commercial paper and libor would be very interesting to understand).
And it certainly is true that the central bank can buy up treasuries at different maturities which impacts their price (and therefore yield).
But this ignores what's been happening at the longer end since 1982, since the volcker regime, where their war on inflation was to reduce the 10Y yield. That had nothing to do with the central bank buying up 10Y issuance.
When people worry about treasuries, they worry about the 10Y yield. In particular, they worry about the interest going back up and therefore the national gov paying more of it's budget towards that interest. Which as far as I'm concerned is a non issue because the national gov is paying interest to entities that will simply plow it back into treasuries again as they have nothing better to do with their money in the first place. But I'm somewhat alone - most people think increasing 10Y yields are "unsustainable". And therefore, nothing should be done to upset the path that 10Y yields have been on since 1982. Of course even though that's independent of deficit spending, people will still conflate that in their heads and believe that the national gov should not have deficit spending. And if this means labor is perpetually on its heels and can't get back on its legs to capture increasing wages, then as far as they're concerned, so be it.
Anyways, I'm not well versed in MMT thinking. But from what I can tell, MMT does not have a story on this front.
Anyways, I'm not well versed in MMT thinking. But from what I can tell, MMT does not have a story on this front.
The ten year rate is a key economic indicator, since it is a benchmark for setting long term rate like the mortgage rate and the prime rate for the highest grade commercial customers. Long term interest rates are key in investment decisions since cost is a major factor. The mortgage rate determines who can afford the monthly nut based on income.
The ten year rate would ideally stay around 3% or less. MMT deals with this by taking cb setting the interest rate off the table by setting the overnight rate to zero permanently and providing liquidity to clear as needed, eliminating required reserves as well. In addition, the Treasury would only issue very short term securities that would be "cash equivalents."
This way monetary policy run as a technocratic command system under the cb would cease to exist, commercial rates would be set in the market, and the the elected legislature would use fiscal policy guided by MMT — SFC macro modeling and functional finance — in budgeting and appropriations including automatic stabilization.
Thanks for the followup. This is my first exposure to somebody spelling this out. If I wanted to dig deeper on this, is there a recommended ref? In particular, something that speaks to MMT positioning on longer term maturities in particular?
MMT deals with this by taking cb setting the interest rate off the table by setting the overnight rate to zero permanently Tom Hickey
Don't you mean ALLOWING the overnight rate to fall to zero?
Btw, haven't you ever thought it odd that an interest rate's natural value would be ZERO, Tom?
Actually, the overnight interest rate in fiat is quite UNNATURAL since the non-bank private sector is not even allowed to use fiat except for physical fiat, aka "cash."
and providing liquidity to clear as needed, Tom Hickey
Violating equal protection under the law since a cb should only create fiat for its monetary sovereign and also precluding the disciplining threat of a system wide bank run should that ever be otherwise feasible again.
In addition, the Treasury would only issue very short term securities that would be "cash equivalents." Tom Hickey
As a means for non-banks to acquire short maturity wait risk-free assets? Why not simply allow the non-bank-private sector to have inherently risk-free ZERO maturity wait demand accounts at the central bank itself same as the banks?
Oh, all that would be necessary is for the cb to lend overnight at 0% to banks. (Another violation of the principle that a cb should only create fiat for its monetary sovereign, btw)
Oh, all that would be necessary is for the cb to lend overnight at 0% to banks.
This is what "setting the interest rate (overnight rate) to zero and providing liquidity as needed" means. What did you think it meant?
(Another violation of the principle that a cb should only create fiat for its monetary sovereign, btw)
The cb has several functions delegated to it. The fist and most Important is to act as the fiscal agent of the currency issuer, that is, the government. The cb uses this delegated agency to provide the currency to its members, which are chiefly the banks but also other entities in the financial system, including foreign.
The second major function is to manage the payments (settlement) system, making sure that all transactions clear in a timely fashion.
The chair of the Fed board in the US is also tasked with acting as chief regulator of the financial system.
The second major function is to manage the payments (settlement) system, making sure that all transactions clear in a timely fashion. Tom Hickey
The single payment system we have must work through the banks; thus they hold the economy hostage thereby or "tanks in the street!"
Ethical reform would create an additional risk-free, always liquid payment system independent of the banks consisting of individual, business, State and local government, etc. debit/checking accounts at the Central Bank itself and the removal of privileges for the banks such as government-provided deposit insurance to remove disincentives to use those accounts.
Then whatever deposits remained at the commercial banks, etc. would be, by definition, VOLUNTARY, at-risk, not-necessarily-liquid deposits and thus the payment system that must work through the banks could be allowed to fail while financial wreckage is cleared.
The fist and most Important is to act as the fiscal agent of the currency issuer, that is, the government. The cb uses this delegated agency to provide the currency to its members, which are chiefly the banks but also other entities in the financial system, including foreign. Tom Hickey
Leaving the curious result, for example, that individual citizens may not even use their Nation's fiat except for paper bills and coins, i.e. petty use.
Whatever technical excuses for such a situation are long gone - assuming they ever existed which is somewhat doubtful since if a checking account has been a historic necessity for a citizen then the monetary sovereign could have readily provided risk-free accounts dealing in fiat for the same real cost to the economy as private banks could provide dealing in mere liabilities for fiat and with substantial risk of loss.
Cash would allow banks to escape negative interest on their reserves via vault cash while individual citizen accounts at the cb would allow individual citizens to be exempt from negative interest at the same time it were imposed on banks and other large users.
And there's no reason the informal economy could not or should not run on private money forms as long as taxes could not be evaded thereby. And the case can be made that taxes that can be evaded are not proper taxes anyway since they violate equal protection under the law in favor of tax cheats.
This is what "setting the interest rate (overnight rate) to zero and providing liquidity as needed" means. What did you think it meant? Tom Hickey
Good point. I missed your meaning because it is so shocking - that rather than reform a system that is inherently unjust BECAUSE of government privilege, some would INCREASE that privilege, as if the solution is to make injustice more stable!
This comment has been removed by the author.
ReplyDeleteRead it last night. Excellent. Got there via a link twitted by Steven Hail.
ReplyDelete(Steven Hail@StevenHailAus Economics teacher (MMT/Heterodox)
So according to section ii (the "former era", when there was gold convertibility), the national gov could have resorted to non-sterilized printing if they wanted to. Did they ever do that? The article is speaking specifically to England's national gov, in which case, if it resorted to non-sterilized spending, who's currency "brand" was on the note? The bank of england's brand? Or the national gov of england's brand?
ReplyDeleteIt's the difference between our notes in the US being a federal reserve note vs a lincoln greenback. Not a trivial difference.
Regarding section vi (in current era, how interest is set), it certainly makes sense that the central bank establishes rates on the short-end (though how that "competes" against other short term paper, like the 13 week treasury yield and commercial paper and libor would be very interesting to understand).
ReplyDeleteAnd it certainly is true that the central bank can buy up treasuries at different maturities which impacts their price (and therefore yield).
But this ignores what's been happening at the longer end since 1982, since the volcker regime, where their war on inflation was to reduce the 10Y yield. That had nothing to do with the central bank buying up 10Y issuance.
When people worry about treasuries, they worry about the 10Y yield. In particular, they worry about the interest going back up and therefore the national gov paying more of it's budget towards that interest. Which as far as I'm concerned is a non issue because the national gov is paying interest to entities that will simply plow it back into treasuries again as they have nothing better to do with their money in the first place. But I'm somewhat alone - most people think increasing 10Y yields are "unsustainable". And therefore, nothing should be done to upset the path that 10Y yields have been on since 1982. Of course even though that's independent of deficit spending, people will still conflate that in their heads and believe that the national gov should not have deficit spending. And if this means labor is perpetually on its heels and can't get back on its legs to capture increasing wages, then as far as they're concerned, so be it.
Anyways, I'm not well versed in MMT thinking. But from what I can tell, MMT does not have a story on this front.
Anyways, I'm not well versed in MMT thinking. But from what I can tell, MMT does not have a story on this front.
ReplyDeleteThe ten year rate is a key economic indicator, since it is a benchmark for setting long term rate like the mortgage rate and the prime rate for the highest grade commercial customers. Long term interest rates are key in investment decisions since cost is a major factor. The mortgage rate determines who can afford the monthly nut based on income.
The ten year rate would ideally stay around 3% or less. MMT deals with this by taking cb setting the interest rate off the table by setting the overnight rate to zero permanently and providing liquidity to clear as needed, eliminating required reserves as well. In addition, the Treasury would only issue very short term securities that would be "cash equivalents."
This way monetary policy run as a technocratic command system under the cb would cease to exist, commercial rates would be set in the market, and the the elected legislature would use fiscal policy guided by MMT — SFC macro modeling and functional finance — in budgeting and appropriations including automatic stabilization.
Hi Tom,
ReplyDeleteThanks for the followup. This is my first exposure to somebody spelling this out. If I wanted to dig deeper on this, is there a recommended ref? In particular, something that speaks to MMT positioning on longer term maturities in particular?
Thanks!
- David
MMT deals with this by taking cb setting the interest rate off the table by setting the overnight rate to zero permanently Tom Hickey
ReplyDeleteDon't you mean ALLOWING the overnight rate to fall to zero?
Btw, haven't you ever thought it odd that an interest rate's natural value would be ZERO, Tom?
Actually, the overnight interest rate in fiat is quite UNNATURAL since the non-bank private sector is not even allowed to use fiat except for physical fiat, aka "cash."
and providing liquidity to clear as needed, Tom Hickey
Violating equal protection under the law since a cb should only create fiat for its monetary sovereign and also precluding the disciplining threat of a system wide bank run should that ever be otherwise feasible again.
In addition, the Treasury would only issue very short term securities that would be "cash equivalents." Tom Hickey
As a means for non-banks to acquire short maturity wait risk-free assets? Why not simply allow the non-bank-private sector to have inherently risk-free ZERO maturity wait demand accounts at the central bank itself same as the banks?
Don't you mean ALLOWING the overnight rate to fall to zero?
ReplyDeleteNo. I said that at one point and one of the MMT economists corrected me. I can't recall the circumstances now.
Oh, all that would be necessary is for the cb to lend overnight at 0% to banks. (Another violation of the principle that a cb should only create fiat for its monetary sovereign, btw)
ReplyDeleteOh, all that would be necessary is for the cb to lend overnight at 0% to banks.
ReplyDeleteThis is what "setting the interest rate (overnight rate) to zero and providing liquidity as needed" means. What did you think it meant?
(Another violation of the principle that a cb should only create fiat for its monetary sovereign, btw)
The cb has several functions delegated to it. The fist and most Important is to act as the fiscal agent of the currency issuer, that is, the government. The cb uses this delegated agency to provide the currency to its members, which are chiefly the banks but also other entities in the financial system, including foreign.
The second major function is to manage the payments (settlement) system, making sure that all transactions clear in a timely fashion.
The chair of the Fed board in the US is also tasked with acting as chief regulator of the financial system.
The second major function is to manage the payments (settlement) system, making sure that all transactions clear in a timely fashion. Tom Hickey
ReplyDeleteThe single payment system we have must work through the banks; thus they hold the economy hostage thereby or "tanks in the street!"
Ethical reform would create an additional risk-free, always liquid payment system independent of the banks consisting of individual, business, State and local government, etc. debit/checking accounts at the Central Bank itself and the removal of privileges for the banks such as government-provided deposit insurance to remove disincentives to use those accounts.
Then whatever deposits remained at the commercial banks, etc. would be, by definition, VOLUNTARY, at-risk, not-necessarily-liquid deposits and thus the payment system that must work through the banks could be allowed to fail while financial wreckage is cleared.
The fist and most Important is to act as the fiscal agent of the currency issuer, that is, the government. The cb uses this delegated agency to provide the currency to its members, which are chiefly the banks but also other entities in the financial system, including foreign. Tom Hickey
ReplyDeleteLeaving the curious result, for example, that individual citizens may not even use their Nation's fiat except for paper bills and coins, i.e. petty use.
Whatever technical excuses for such a situation are long gone - assuming they ever existed which is somewhat doubtful since if a checking account has been a historic necessity for a citizen then the monetary sovereign could have readily provided risk-free accounts dealing in fiat for the same real cost to the economy as private banks could provide dealing in mere liabilities for fiat and with substantial risk of loss.
The entire underground economy is a cash system, and the informal economy is largely cash and promises to pay cash in the future.
ReplyDeleteThe underground economy in the US runs into billions of $, and the global informal economy into the trillions.
Cash settlement is still a big deal, which is a reason that "they" are working on eliminating it.
Cash would allow banks to escape negative interest on their reserves via vault cash while individual citizen accounts at the cb would allow individual citizens to be exempt from negative interest at the same time it were imposed on banks and other large users.
ReplyDeleteAnd there's no reason the informal economy could not or should not run on private money forms as long as taxes could not be evaded thereby. And the case can be made that taxes that can be evaded are not proper taxes anyway since they violate equal protection under the law in favor of tax cheats.
This is what "setting the interest rate (overnight rate) to zero and providing liquidity as needed" means. What did you think it meant? Tom Hickey
ReplyDeleteGood point. I missed your meaning because it is so shocking - that rather than reform a system that is inherently unjust BECAUSE of government privilege, some would INCREASE that privilege, as if the solution is to make injustice more stable!