tag:blogger.com,1999:blog-2761684730989137546.post7504566707900678056..comments2024-03-18T19:09:18.510-04:00Comments on Mike Norman Economics: Why can't the Treasury borrow directly from the Fedmike normanhttp://www.blogger.com/profile/03296006882513340747noreply@blogger.comBlogger208125tag:blogger.com,1999:blog-2761684730989137546.post-49445922683481127772012-06-29T22:57:27.726-04:002012-06-29T22:57:27.726-04:00Vimothy,
"It is still financing its deficit ...Vimothy,<br /><br />"It is still financing its deficit by issuing interest bearing liabilities. The difference is that these liabilities are at a much shorter average maturity and the nominal interest payments on them move one-to-one with the target rate."<br /><br />There's a difference between a government debt and a government liability in the form of reserves or cash.<br /><br />If the government takes on a debt (issues a bond) it is making a promise to pay the creditor a certain quantity of money by a certain date.<br /><br />If the government issues a liability in the form of reserves or cash, it is making a promise to subsequently accept that same liability in the payment of taxes, fees or loans owed to the government.<br /><br />That's quite a difference.ynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-67496317230603800892012-06-29T22:51:21.465-04:002012-06-29T22:51:21.465-04:00Vimothy,
"If the government finances its def...Vimothy,<br /><br />"If the government finances its deficit by creating reserves, which it then pays the banking system to hold, then it is only financing by money creation in a very narrow, semantic sense." <br /><br />The government does not need to pay the banking system to "hold" the reserves. <br /><br />The reserves will simply sit in the banking system unless they are withdrawn as cash, or taxed or borrowed away by the government (or as loan repayments to the fed). <br /><br />Why would the banks want to withdraw the reserves as cash?<br /><br />The banking system will hold those reserves whether the central bank pays interest on them or not. <br /><br />Interest is a bonus.<br /><br />Again, my understanding. Please correct if wrong, Cheers.ynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-217954099009498072012-06-29T22:45:52.921-04:002012-06-29T22:45:52.921-04:00This comment has been removed by a blog administrator.ynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-43670662940580937172012-06-29T22:42:46.775-04:002012-06-29T22:42:46.775-04:00Vimothy,
"No one is disputing the ability of...Vimothy,<br /><br />"No one is disputing the ability of the Fed to peg a rate above the equilibrium rate."<br /><br />If the fed pays interest on reserves that interest rate is not "above" the equilibrium rate, it IS the equilibrium rate. <br /><br />In this situation banks will "demand" whatever quantity of reserves the government/central bank supplies, and the interest rate will not change (unless the fed decides to change it).<br /><br />So, in the model mentioned above, the demand curve shifts to the right as reserves are added (net) and shifts to the left as reserves are subtracted (net). The interest rate will not change (unless the fed decides to change it).ynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-44828319114761358802012-06-29T22:28:24.353-04:002012-06-29T22:28:24.353-04:00This comment has been removed by a blog administrator.ynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-4690266072947811142012-06-29T18:17:32.140-04:002012-06-29T18:17:32.140-04:00vimothy, what do you think is happening wrt Fed op...vimothy, what do you think is happening wrt Fed ops and monetary policy that is different from what I said, or what MMT economists say?Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-64550173533291354462012-06-29T15:19:47.134-04:002012-06-29T15:19:47.134-04:00Like operations, here's a time and place for p...Like operations, here's a time and place for polemics, but there's only so far that approach can take you. <br /><br />You talk now about a macro theory, but that doesn't seem much in evidence here. <br /><br />Why not read some mainstream economics sometime? You might discover that not everyone is as badly informed as you've been lead to believe.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-57064217715068168872012-06-29T14:31:33.690-04:002012-06-29T14:31:33.690-04:00vimothy, at one time the Fed thought that the cont...vimothy, at one time the Fed thought that the control stick ever was quantity. Then they thought it was price. Now they are finding that it is neither. <br /><br />The lever is effective demand and employment, just as JMK had said in the General Theory. <br /><br />MMT shows why in terms of a macro theory built on operational description of the monetary system, general and specific.<br /><br />Rather than relying on gratuitous assumptions descriptive of an imaginary world that doesn't approximate the real one we live in.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-47616763023295438342012-06-29T13:39:24.077-04:002012-06-29T13:39:24.077-04:00Tom,
There’s nothing wrong with being interested ...Tom,<br /><br />There’s nothing wrong with being interested in operations. They’re not the whole story though. <br /><br />The Fed always acts in response to events in the broader economy, with the intention of influencing those events in some direction. It thinks about ultimate goals and it thinks about proximate or intermediate goals that might help bring those ultimate goals about. It acts and conceives of itself acting across a (relatively) long time horizon.<br /><br />If you know some details about a particular instrument, that’s cool, but on their own they can’t explain Fed activities as the Fed itself thinks of them, or as a significant factor influencing the behaviour of the macroeconomy.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-17821237461930659042012-06-29T11:48:44.149-04:002012-06-29T11:48:44.149-04:00Vimothy, quantity of reserves has zero effect on t...Vimothy, quantity of reserves has zero effect on the "wider economy." Price does.<br /><br />Understand the operations show that Δrb is an ex-post facto accounting record, which is an effect of "deposits create reserves."<br /><br />The mainstream understanding fails because they have the causality reversed.<br /><br />The direction from from demand for credit by creditwothy borrowers > Loans (bank asset, borrower liability) create deposits (bank liability, borrower asset). These are accounting records entered by keystroke on the banks internal ledge. This generates corresponding credit and debt in the Fed's spreadsheet for the bank's reserve account. Owing to LLT, the quantity of reserves is not fixed but endogenously determined by bank credit activity. If the Tsy and cb are using the cb reserve issuance-Tsy security issuance and the cb wants to set a rate target greater than zero and not pay IOR, then the cb uses OMO through repo and reverse repo that involves tsys and reserves.<br /><br />There is zero theory here. It is description, Where the wider economy is involved, causality comes in and therefore theoretical hypotheses about predictable effects is with respect to price, that is, the interest rate.<br /><br />The descriptively, change in quantity of reserves is an accounting effect of credit extension — "loans create deposits, and deposits create (generate) reserves" — Warren Mosler. Thus the quantity of reserves is an <br />accounting residual."<br /><br />On the other hand, the interest rate is predicted to have certain effects on the wider economy BECAUSE it is the benchmark rate that is used by those who extend credit in the wider economy. What those effects are is controversial, as well as the role of expectations regarding changes in the interest rate at the discretion of the cb.<br /><br />Changes in quantity of reserves has no causal effect on the wider economy, nor does it have any effect on either the ability of the banks to extend credit or on their actual procedure and decision-making in doing so. The price of reserves affects the spread they charge.<br /><br />What is so difficult to get about this? It is basic to MMT and it is one of the chief differences between MMT and the monetarist mainstream, where "monetarist" means anyone who imputes non-existent causation or constraint to the quantity of reserves in a cb-based system running LLR.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-5956739794627809882012-06-29T11:21:38.419-04:002012-06-29T11:21:38.419-04:00As such we can see that it's quite possible fo...<i>As such we can see that it's quite possible for the Fed to maintain its current practice of altering the interest rate in response to changing conditions, even if the government finances all of its deficit spending through new money creation rather than by borrowing.</i> <br /><br />No one is disputing the ability of the Fed to peg a rate above the equilibrium rate.<br /><br />If the government finances its deficit by creating reserves, which it then pays the banking system to hold, then it is only financing by money creation in a very narrow, semantic sense. <br /><br />It is still financing its deficit by issuing interest bearing liabilities. The difference is that these liabilities are at a much shorter average maturity and the nominal interest payments on them move one-to-one with the target rate.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-27953979268323633392012-06-29T10:43:17.869-04:002012-06-29T10:43:17.869-04:00Sorry, just had a quick look at Krugman's post...Sorry, just had a quick look at Krugman's post. Yeah, that's the sort of thing I was thinking of.<br /><br />The last two paragraphs are a bit contentious, though. I'd take them with a pinch of salt.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-53484938643939917152012-06-29T10:30:04.726-04:002012-06-29T10:30:04.726-04:00Y,
I was thinking of supply and demand in the res...Y,<br /><br />I was thinking of supply and demand in the reserve market. <br /><br />This sort of thing:<br /><br />http://libertystreeteconomics.typepad.com/.a/6a01348793456c970c01630227fb52970d-500wi<br /><br />To make sense of Fed operations, you need a model like this. That's necessary, but not sufficient--to think about their effect on the wider economy, you're going to need something more.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-30394450963762545832012-06-29T09:38:36.143-04:002012-06-29T09:38:36.143-04:00Vimothy,
I believe this the model you're refe...Vimothy,<br /><br />I believe this the model you're referring to:<br /><br />http://krugman.blogs.nytimes.com/2012/04/02/a-teachable-money-moment/<br /><br />In the above model, if we have a system in which the government spends by simply crediting reserve accounts without issuing bonds (i.e. it finances its deficit spending with new money creation), then the demand curve 'A' will shift to the right when reserves are added (by spending, or by Fed lending), and will shift to the left when reserves are subtracted (by taxes or loan repayments to the Fed). <br /><br />The interest rate (r*) will be whatever the Fed decides, regardless of the quantity of reserves (B*). <br /><br />If it decides to pay interest on reserves, then that will be the interest rate (r*). Changes to B* will not effect (r*), given that changes in B* entail a shift of A. <br /><br />As such we can see that it's quite possible for the Fed to maintain its current practice of altering the interest rate in response to changing conditions, even if the government finances all of its deficit spending through new money creation rather than by borrowing. <br /><br />So, some questions: Does the interest rate really need to be altered up and down in order to control inflation? Is this really a good and effective policy tool? Does it even work as expected? Are there possibly other, better ways of controlling inflation?ynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-48236996169550538942012-06-29T08:15:34.711-04:002012-06-29T08:15:34.711-04:00The partial equilibrium model of supply and demand...The partial equilibrium model of supply and demand comes from basic micro. It’s not “operational”. You don’t observe supply and demand. It’s <i>theory</i>. <br /><br />Supply and demand explain the relationship between price and quantity in the reserve market. That’s why floors and corridors are necessary. Too much supply and the equilibrium price collapses to zero. Too little supply and the equilibrium price explodes.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-2863896637078199422012-06-28T19:48:38.641-04:002012-06-28T19:48:38.641-04:00That's correct, y.
And if the cb sets the rat...That's correct, y.<br /><br />And if the cb sets the rates to zero quantity doesn't matter.<br /><br />Banks lend based on demand by credit worthy customers, and under LLR the cb makes rb available as needed.<br /><br />The quantity of rb does not affect lending propensity or capacity under LLR.<br /><br />The price of rb may influence demand for credit by affecting the spread the bank charges, but what the influence of rb price may be is influenced by other conditions wrt specific cases. <br /><br />There is no hard and fast relationship that can be determined by a function relating a dependent variable to an independent variable in any empirical research I know of, e.g., Δquantity of rb to either Δprice level or Δcredit extension.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-3036189861251069922012-06-28T19:32:02.879-04:002012-06-28T19:32:02.879-04:00Vimothy,
"Why is there a relationship betwee...Vimothy,<br /><br />"Why is there a relationship between the quantity of reserves and the interest rate? What defines the (partial) equilibrium in this market?"<br /><br />There isn't necessarily a relationship between the quantity of reserves and the interest rate. <br /><br />If the banks have 'excess' reserves and the central bank pays interest on reserves, then IOR rate will be the interest rate regardless of how many excess reserves the banks have.<br /><br />I think you are perhaps assuming that there is necessarily a relationship between the quantity of reserves and the interest rate because you (appear) to take Tsy issuance as a given, as 'normal'. <br /><br />If you take Tsy issuance out of the picture and replace Tsys with 'excess' reserves, then the interest rate will be that paid by the central bank on those reserves, regardless of how many 'excess' reserves they have.<br /><br />Is this wrong?ynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-54924699553803179712012-06-28T18:12:58.255-04:002012-06-28T18:12:58.255-04:00vimothy, :You need a model of the market--at the v...vimothy, :<i>You need a model of the market--at the very least--to make sense of it. A description is not enough. Why is there a relationship between the quantity of reserves and the interest rate? What defines the (partial) equilibrium in this market?</i><br /><br />Again, operational. It is bids (demand) and offers (supply) in the interbank market for rb by banks in order to get reserves for settlement and to meet RR without incuring the penalty rate.<br /><br />Very straight forward. And observable in terms of market action as it takes place among banks in the IB market for rb. Thus the cb can step in with OMO for fine-tuning at any time the market is open. <br /><br />Which is actually want happens, although the necessity for OMO is reduced by the banks' realization that the cb has the power to do this. So they just fall in line. (Fullwiler)<br /><br />It's one of the most straightforward matters in monetary economics. <br /><br />Unlike hypotheses about the causal effect of the interest on S and I.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-11101405492360138142012-06-28T18:04:24.659-04:002012-06-28T18:04:24.659-04:00vimothy: Before you answer, you might like to cons...vimothy: <i>Before you answer, you might like to consider where MMT economists got their knowledge of Fed operations in the first place.</i><br /><br />As I understand it from MTT economists, from Fed SOP manuals, talking to people at Fed and Tsy actually involved in day-today ops, and looking at accounting data published by Fed and Tsy.<br /><br />IN contrast, most economists just make stuff up, and the senior level at the Fed and Tsy aren't involved in actual ops.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-44933143584771448982012-06-28T17:31:59.513-04:002012-06-28T17:31:59.513-04:00Argument from authority. One of the informal falla...<i>Argument from authority. One of the informal fallacies.</i><br /><br />An appeal to authority need not be fallacious. It might be entirely appropriate. And in fact, you frequently make appeals to authority on this blog.<br /><br /><i>And the last time I checked the Fed's intro book for the public featured the discredited money multiplier. A paper published by BIS economists set the record straight on the money multiplier. So I don't take the Fed as an authority on this, when their literature has it wrong.</i><br /><br />I don't see what this has to do with anything. We were talking about operations. <br /><br />Let's take the US as an example. Is it your contention that MMT economists better understand Fed operations than the Fed itself?<br /><br />Before you answer, you might like to consider where MMT economists got their knowledge of Fed operations in the first place.<br /><br /><i>Yes, but if you get the so-called trivial stuff wrong, it is important.</i><br /><br />It certainly might be in some contexts.<br /><br /><i>The description shows that the cb can set price by letting the quantity float and how this is actually done in practice.</i><br /><br />You need a model of the market--at the very least--to make sense of it. A description is not enough. Why is there a relationship between the quantity of reserves and the interest rate? What defines the (partial) equilibrium in this market?<br /><br />Without this sort of knowledge, being able to carry out this operation is not something that is any use to the authorities.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-85635058527500775032012-06-28T17:06:55.623-04:002012-06-28T17:06:55.623-04:00vimothy: "But I think that it's certainly...vimothy: "<i>But I think that it's certainly not the case that the handful of working MMT academics are better at describing or more knowledgeable about monetary operations than the world's central banking community.</i>"<br /> <br />Argument from authority. One of the informal fallacies.<br /><br />And the last time I checked the Fed's intro book for the public featured the discredited money multiplier. A paper published by BIS economists set the record straight on the money multiplier. So I don't take the Fed as an authority on this, when their literature has it wrong.<br /><br /><i>Being familiar with operations is actually the most trivial aspect of monetary economics. </i><br /><br />Yes, but if you get the so-called trivial stuff wrong, it is important.<br /><br /><i>By themselves, operations mean nothing, explain nothing, and imply nothing. You need theory--the true pons asinorum of the discipline--to make sense of operations and to make use of them.</i><br /><br />The description shows that the cb can set price by letting the quantity float and how this is actually done in practice.<br /><br />The price of reserves, changes in the price, and expectations about amount and direction of future change, as well as plausible rate of change or reversal of policy have causal implications in that the the rate (price) set by the cb is THE benchmark rate that influences virtually all other rates and yields in the currency zone, as well as being a factor influencing the fx rate and current/capital accounts.<br /><br />Quantity is constantly shifts under LLR, and no causal implications flow from it.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-89572178162284812202012-06-28T16:46:58.031-04:002012-06-28T16:46:58.031-04:00Tom,
I don't really know anything about monet...Tom,<br /><br />I don't really know anything about monetarism. But I think that it's certainly not the case that the handful of working MMT academics are better at describing or more knowledgeable about monetary operations than the world's central banking community. <br /><br />Being familiar with operations is actually the most trivial aspect of monetary economics. By themselves, operations mean nothing, explain nothing, and imply nothing. You need theory--the true <i>pons asinorum</i> of the discipline--to make sense of operations and to make use of them.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-70274082003455382482012-06-28T16:31:09.399-04:002012-06-28T16:31:09.399-04:00vimothy, to get to a hypothesis involving a causal...vimothy, to get to a hypothesis involving a causal nexus one must first get the description of the context correctly and precisely define terms, etc. so that the hypothesis can be checked against the facts.<br /><br /> MMT draws no hypotheses involving causal inferences from the general description about. It does conclude that monetarism is wrong because they don't describe the operations correctly and construct hypotheses that involve causal inferences based on false premises.<br /><br />This explains why monetarism is a failed theory and approach, as events go to show.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-15329330595256264042012-06-28T16:20:27.980-04:002012-06-28T16:20:27.980-04:00This is not a hypothesis. It is a… description.
R...<i>This is not a hypothesis. It is a… description.</i><br /><br />Right. You’ve described something but you haven’t explained it. There’s no theory here.<br /><br />In general, my observation is that you guys don’t really seem to ever talk about theory. It’s just operations this and operations that. That’s why you can suggest that the government should do things that are prima facie crazy, like permanently setting rates to zero / money financing govt spending, without any fuss. In an operational sense, these things are certainly possible, so why not?vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-26151595345584150532012-06-28T15:52:59.199-04:002012-06-28T15:52:59.199-04:00y: "So, the government could spend by simply ...y: "<i>So, the government could spend by simply crediting reserve accounts, and then pay interest on those reserves to stop the ON rate from falling to zero (<b>assuming the treasury and fed were combined</b>)</i>."<br /><br />No need for cb and Tsy to be combined? Not sure what you are thinking of here.Tom Hickeyhttps://www.blogger.com/profile/08454222098667643650noreply@blogger.com