So what now we have Art Degree MMT Economics people teaching rudimentary Finance and Accounting Science 101 like this is some big revelation or something? Big deal … 🤔
assets___________BANK________liabilities
— Dirk Ehnts (@DEhnts) April 15, 2024
+ reserves + bank deposits
What happened? 🧐
What is the correct vote?
ReplyDelete"Art Degree MMT Economics"? I guess we don't have to listen to Wynne Godley, Randy Wray and the like... Stock-flow consistent modelling is just pie in the sky...
ReplyDeleteCorrect Answer: Quantitative easing
ReplyDeletePrivate sectors get new bank account balances and banks get reserves.
Marion so Art Degree people finally get a half a clue to what science degree people do and we supposed to be all impressed or something?
ReplyDeleteBookkeeping isn’t even advanced Accounting …
Dom the Fed buys the USTs from the dealer bank…
ReplyDeleteMatt, some come from dealer bank own inventory, others from other private actors.
ReplyDeleteHowever, Matt you are right, Government Spending is the right answer.
ReplyDelete
ReplyDeleteCould also be allocation of budget to a government department, if the bank in question is NatWest in the UK.
Some systems have more than one type of 'reserves'.
;-)
QE adds nothing. It is just a change in the composition of financial assets.
ReplyDeleteWhen their Art Degree arguments are failing (which we can see is most of the time) every now and then they’ll refer to some abstract science illustration … which none of the Art Degree people they’re trying to convince of their thesis are trained to understand so it doesn’t help …
ReplyDeleteMike, when the Central Bank buys a bond from the (non bank) private sector during QE, the aggregate private bank balance sheet shown in the example increases both its reserves at the CB asset and its bank account liabilities. By the way, when a private bank lends money (money, or better say, credit creation) or buys a bond, it does so swapping assets as well (it exchanges your mortgage note or your bond for a bank balance).
ReplyDeleteQE is high base money creation simply because the government bond the Fed exchanges for reserves is not considered money, it is extremely liquid but is not money, after all Gold is extremely liquid as well but we do not say it's money do we?
Now the fact this base money creation does not affect the economy (or it does not affect in the way the QE proponents hope or think it does) it's a different story but, by formal definition QE is money creation.
Dom , money is a figure of speech … it’s a metonym…
ReplyDeleteTo think you can have a quantity of a figure of speech is a reifucation fallacy …
But you are correct that is the way Art Degree monetarists talk about it… “quantity of money!” etc
Matt I was going by the formal definition of money (banknotes + CB reserves + bank credit) meaning M0, M1, M2, etc...
ReplyDeleteThe M series are meaningless monetarist inventions. In a modern financial world it is trivial to spend a bond and save a deposit.
ReplyDeleteThere is no mechanism by which the medium of exchange and the store of value functions can be separated - as every crypto-bro concept discovers as soon as they deploy their system.
"What is the correct vote?"
ReplyDeleteAll of them.
A loan to the private sector from the central bank (e.g BoE Term Funding Scheme).
Central bank loan (bank transferring to this bank used the discount window)
Government Spending (obvs)
Quantitative easing (pension fund selling government bond has bank account at this bank)
Dom,
ReplyDeleteIf you have $10 million in cash (reserves) and I have $10 million in Treasuries, are you richer than me?
Neil,
ReplyDelete“The M series are meaningless monetarist inventions.”
That’s really not descriptive… if you are not believing monetarism…
They are theoretical constructs… iow they are not meaningless to them…
“What is the meaning of construct of theory?
Key constructs are the building blocks of any theory. They are simply the specialized terms used to label the elements in the theory. They are called “constructs” in order to emphasize that they are theoretical representations of real objects and processes.”
They think “money” (a figure of speech) is REAL… so they come up with “M2!” and BS like that as representative of “real money” which is a figure of speech…
It’s too dismissive simply say ““The M series are meaningless monetarist inventions.”…
It’s a very serious failure in cognition among these people…
Dom,
ReplyDelete“when the Central Bank buys a bond from the (non bank) private sector during QE”
You mean a PD that is not a bank like PIMCO or Blackrock or an institution like that?
iow a PD that is not a member of the Fed?
Matt, Primary Dealers sells only bond in their inventory, they do not sell on behalf of their private clients? I do not know much about PD operations and structures.
ReplyDeleteMike
ReplyDeleteThat is not the point if I'm richer with a 10 million in cash or 10 million in Treasuries. I know these two are equivalent in terms of wealth but Tsys are not directly money, you have to convert (sell them to get $$$) them to purchase stuff, no matter how easy and quick a conversion has to happen unless your counterpart agrees on accepting treasuries directly. You may write a check drawn on your Schwab account containing Tsys and the financial machinery behind it will do the conversion (sale) for you.
Another difference is that Tsys are not guaranteed to be exchanged at par during the life of the security before redemption, they can fluctuate in terms of nominal dollar value, you can lose money on them, a dollar bill will always be a dollar bill 7/24.
"no matter how easy and quick a conversion has to happen unless your counterpart agrees on accepting treasuries directly. "
ReplyDeletePaying a bill from a checking account for anybody of relevance costs money. If you pay it from a Treasury account then it may cost slightly more money, but it will still happen because that's what the finance industry gets paid to do.
All they do is discount the Treasury into money in the usual manner.
"Another difference is that Tsys are not guaranteed to be exchanged at par during the life of the security before redemption"
Neither is a dollar bill - anywhere outside the US currency zone, which is most of the rest of the world.
At the transaction levels that matter macro economically there is little difference between the two. That's why they are used intra day to provide all the liquidity the clearing system needs.
And, of course, the money changers in the financial temple that do all this spend the conversion fees into the system. You may lose out, but they gain.
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ReplyDeleteDom as I understand it the QE is exclusively thru Dealers which may or may not be part of a bank
ReplyDeleteNeil
ReplyDeleteGreat fan, I follow your work on your site. Sorry for the delay in replying.
I disagree that a dollar is not always a dollar outside of the US currency zone, it is always a nominal dollar, it never get discounted over its face value, it may simply worth less in physical stuff compared to other currencies in our free floating currency world. A treasury can lose its nominal face value before redemption, you will never run in a situation where someone is going to tell you "I'm going to give you 70 US cents over your dollar bill".
"I disagree that a dollar is not always a dollar outside of the US currency zone, it is always a nominal dollar, it never get discounted over its face value"
ReplyDeleteAn exchange rate *is* discounting over a face value. A dollar isn't worth a pound.
Interest rates and discounts are essentially the same thing.
Once you realise a Treasury is just another denomination, then it all fits together nicely. There is a floating exchange rate between Treasuries and dollars, just as there is between pounds and dollars.
I can't spend dollars I receive here. I have to go through a discounter and pay them a fee for the exchange. That discounter then spends the fee.
ReplyDelete"There is a floating exchange rate between Treasuries and dollars, just as there is between pounds and dollars."
So we can say that a Tsy is subjected to two exchange rate, between its nominal face value and its current value in its currency zone (where a dollar bill is not) and between its current value and a foreign currency.
The issue the monetarists suffer from is an aggregation issue. If you hold £100, nobody knows if you are saving that or intending to spend it.
ReplyDeleteWhat we really need is the amount of bank liabilities that have materially changed their ownership tag over a period of time. Then we would know what 'Vt' is.
But we don't have that, so monetarists try to guess - assuming all M is in motion if it fits in a particular
classification. Hence all the M1, M2 nonsense. Those categorisations are wrong. Plain and simple.
I don't have to spend a demand deposit. It can sit there for months. I don't even need to 'optimise' it, because unlike economists my life doesn't revolve around a belief in interest rates ruling everything. I just keep it there because I like the size of it, or I'm scared of the
future. Or a bit of both.
They can't work out what money is locked in place and which is in circulation because we now have interest payments on demand deposits and time deposits that can be cashed on demand.
The monetarists are stuck in the 1960s. Finance has evolved so that nothing is locked in place - which means you can't manipulate it to speed up and slow down the economy.
Instead we need to leave the market for money to private sector to sort out, much as we do the market for tomatoes, and shift the stabilisation policy to the market for labour - where we can do something to speed up and slow down the economy.
The Job Guarantee.
Monetarism is a busted flush due to financial liquidity innovation.
“ They can't work out what money is locked in place and which is in circulation”
ReplyDeleteYou’re reifying a figure of speech again..,
Nothing is “locked in place” and nothing is “in circulation “…,
Just make your same point without using figures of speech,,, if your point is valid you should be able to do it.,,
ReplyDeleteJust use literal language..,
@Matt Franko: I am not against that approach, but sometimes humans have to express themselves through analogy. Even a number is a representation of some other (Mathematical Platonism aside). Up and down are not precised concepts, but are useful
ReplyDeleteYes nothing wrong with the figurative if you understand the corresponding literal..
ReplyDeleteI correspond with UK people saying someone is “taking the piss” and I think everyone over there is urinating…