Brian Romanchuk — Net Financial Assets And Equity

An old debate about "Net Financial Assets," a term used in by Modern Monetary Theory (MMT) was reopened by Steve Roth at Asymptosis.in the article "Where MMT Gets Its Accounting Wrong -- And Right." This generated a lot of comments, and a response by Steve Randy Waldman at interfluidity ("Translating Net Financial Assets"). This also generated discussion at Mike Norman Economics. I largely agree with Steve Waldman's view, but I just want to offer what I think is a more introductory version of what I understand to be the underlying issue. That is, does it make sense to "net out" equity?

All you really need to know in a few paragraphs.

In my view, the take away lies in the flows rather than the stocks. Is there is difference between an increase in nongovernment net financial assets in aggregate owing to deficit spending and an equal amount of increase in the stock of financial claims on equity. Look to the flows involved.

Government spending and transfers, as well as interest payments, increase the purchasing power of nongovernment in the currency zone. The difference between central government revenue and expenditure is the fiscal balance, whether in balance, in surplus, or in deficit. In the case of a deficit, the amount exceeding revenue is matched by issuance of government bonds. The flow is from spending to government securities, but indirectly.

The spending itself doesn't go toward purchase of the securities directly, since few recipients of the spending use it to purchase government securities. In fact, the securities are purchased from the existing money stock. This implies that deficit spending flows through the economy where its effect is multiplied by velocity, being spent many time before being taxed away or saved longer term.

Nothing of the sort occurs in an increase in the value of net equity. The marginal price changes in markets, which is reflected as fictitious gains (and losses) in portfolios. Book value does not change correspondingly. Actual gains and losses are not booked until realized.

In the aftermath of the recent crisis, the Fed conducted policy intended to drive asset values higher than they would be otherwise in order to increase spending through the "wealth effect." Didn't happen.

On the other hand, substantial government deficits did have a positive outcome in stimulating demand and accommodating deleveraging with the flow being multiplied.

Bond Economics
Net Financial Assets And Equity
Brian Romanchuk

Steve Randy Waldman — Tangles of pathology

Trilemmas are always fun. Let’s do one. You may pick two, but no more than two, of the following:

• Liberalism
• Inequality
• Nonpathology

By “liberalism”, I mean a social order in which people are free to do as they please and live as they wish, in which everyone is formally enfranchised by a political process justified in terms of consent of the governed and equality of opportunity.

By “inequality”, I mean high dispersion of economic outcomes between individuals over full lifetimes. [1]

By “nonpathology”, I mean the absence of a sizable underclass within which institutions of social cohesion — families (nuclear and extended), civic and religious organizations — function poorly or at best patchily, in which conflict and violence are frequent and economic outcomes are poor. From the inside, a pathologized underclass perceives itself as simultaneously dysfunctional and victimized. From the outside, it is viewed culturally and/or morally deficient, and perhaps inferior genetically. Whatever its causes and whomever is to blame, pathology itself is a real phenomenon, not just a matter of false perception by dominant groups.

This trilemma is not a logical necessity. It is possible to imagine a liberal society that is very unequal, in which rich and poor alike make the best of their circumstances without clumping into culturally distinct groupings, in which shared procedural norms render the society politically stable despite profound quality of life differences between winners and losers. But I think empirically, no such thing has existed in the world, and that no such thing ever will given how humans actually behave.

I would call it "tangles of asymmetry." The problem is reconciling social liberalism given asymmetry of status, political liberalism given asymmetry of power, and economic liberalism given asymmetry of wealth in a liberal society where individual freedom is a foundational principle. That foundational freedom leads to asymmetries that undermine liberalism is a paradox of liberalism. Or is it an inherent contradiction that cannot be overcome?

What SRW calls "pathology" is actually narrow self-interest and group-interest. The foundational freedom of liberalism is freedom to pursue self-interest as one sees fit within the law. But the law is determined by social, political and economic asymmetries that favor some over others. Are these others actually free, or is this just a justification of a human version of the law of the jungle manifesting as social Darwinism? Is governance just a euphemism for "civilizing" the law of the jungle by justifying institutionally the "law" of the stronger?

Interfluidity
Tangles of pathology
Steve Randy Waldman

Winterspeak — No Conspiracy Needed -- the debt ceiling is Sound Finance

As usual, Winterspeak lays out the MMT-functional finance position clearly.

No Conspiracy Needed -- the debt ceiling is Sound Finance
Winterspeak

Steve Randy Waldman lays out default scenario

Interesting take. Put the banks in cahoots with Treasury, taking care of the financial and corporate elites and taking out of the hides of everyone else. Pretty much what we have been seeing for the past four years: a planned confiscation of the 99%'s wealth. (Whatever remains of it, anyway.)

A delayed payments regime would amount to a regressive tax issued at two levels: first by the Federal government, and then by the financial industry. By delaying payments, the Federal government would tax recipients of government disbursements by forcing them to finance loans to the Treasury for free. Like all taxes, the actual incidence would be more complicated than the direct hit. Payees with bargaining power — say vendors of bespoke military systems or well-connected contractors — would find ways to add the finance cost to their bills, and largely escape the tax. Payees without bargaining power — your average social security recipient, for example — would have to simply accept the delayed payment and eat the interest cost that the government should be paying. A second regressive “tax” would be imposed by financial service providers. They would, as usual, compete to offer cost-efficient products to wealthier and more astute customers, while charging smaller, weaker, more desperate customers large fees. In the end, the Federal deficit would be reduced and bank profits would swell, primarily on the backs of the least-savvy, lowest-bargaining-power government payees.

Read the rest of his post here.

Steve Randy Waldman — Why Scott Sumner should love the debt ceiling

I think Scott Sumner is the Svengali behind all of Ted Cruz’s antics. He must be. It’s the only sensible explanation.

Interfuidity

Why Scott Sumner should love the debt ceiling

Steve Randy Waldman

See also evilsax, Scott Sumner on the GOP's Cunning Plan

First, Scott Sumner is an ideological economist that doesn't have a clue about business, finance, money and banking, central bank and Treasury operations, or how the world actually works. Like all Austrian-based ideologues including Paul Ryan and ted Cruz Scott Sumner lives in his own fantasy world. That anyone takes him seriously is a joke and shows the low level of collective consciousness. Read Mike Sax's post on this.

I am also surprised that SRW plays along with Sumner's proposal and comes up with a (remote possibility) of how a default could work. To some extent Peter Radford does too.

People don't seem to understand that there aren't thousands of gnome that write Treasury and the Fed by hand and can be directed how to prioritize payments. The payments system is automated and reconfiguring it would take time. In that time, some government obligations — interest payments, invoices that are due, and transfer payments — would not be made on time. That is a technical default. The bankers have already explained this. 

This is fooling around with the USD, the world's preferred reserve currency. Sixty-two percent of trade uses the USD. This has global implications that are not lost on US competitors. I was just listening to a Chinese newscaster on NPR yesterday explain how China is a very competitive nation and to them winning means that the opponent must fail. It's zero-sum as far as their way of thinking goes. Another article I read was about how the GOP is accomplishing what Osama bin Laden set out to do but could not.

Even the kerfuffle so far, after the same drill i 2011, is undermining confidence in the leadership of role of the United States and the US government as a functioning institution. There is already widespread sentiment in the world that the US is a rogue nation. Now the perception is rising that the US is also going crazy. US soft power is crumbling, which means that to reassert itself in the world, the US is likely to resort to hard power to prove a point. That will just prove the point that the US is rogue nation whose leadership is crazy.

Interfluidity: Borrowing is a feature, not a bug

SRW is a monetarist, and therefore believes that somehow, the quantity of reserves banks trade with one another to clear cheques, impacts the aggregate demand, but has never been clear on exactly how. Here is his mechanism -- lower interest rates generate the "ever greater inducement of ever less solvent households to borrow in order to sustain adequate demand" -- because how else can it work? And the biggest ticket item households can leverage against is real estate, so housing is the closest you can come to for a monetary mechanism.

There is a simpler way for the Government to stimulate aggregate demand: higher deficits through lower taxes of more spending, depending on your politics. When you are a currency issuer, you don't borrow to spend, you simply spend the currency into existence, and tax it into non-existance if you spend too much.

Winterspeak.com
Interfluidity: Borrowing is a feature, not a bug
Winterspeak

Scott Fullwiler — Understanding the Permanent Floor—An Important Inconsistency in Neoclassical Monetary Economics

I’ve written numerous times already about how a deficit “financed” by bonds vs. “money” doesn’t matter in terms of inflationary effect. Notwithstanding my views there (which are not discussed in this post), the point of this post will be to explore the neoclassical paradigm on this matter, since this is at the core of the recent debate between Steve Randy Waldman (seehere, here, and here) and Paul Krugman (see here and here) on the so-called “permanent floor.” (It might be of interest to some that I explained how a “permanent floor” would work back in 2004.)

Let’s consider a time at some point in the future at which the Fed has ceased its current near zero interest policy, IOR, and QE’s, and has completed whatever exit strategy was deemed necessary to drain the reserve balances that the various rounds of QE produced....

New Economic Perspectives
Understanding the Permanent Floor—An Important Inconsistency in Neoclassical Monetary Economics
Scott Fullwiler | James A. Leach Chair in Banking and Monetary Economics and is an Associate Professor of Economics at Wartburg College

Tim Duy — A Trap of My Own Making

Steve Waldman at interfluidity catches me in a trap of my own making.

Tim Duy's Fed Watch
A Trap of My Own Making
Tim Duy

See the comment I left there as tjfxh.

Steve Randy Waldman — Rebranding the “trillion-dollar coin”

A balanced approach that aims to transcend the ridiculous factor. Worth a read even if you are not following this closely. We are going to be hearing a lot more about it, it seems.

Interfluidity
Rebranding the “trillion-dollar coin”
Steve Randy Waldman

Interfluidity — Because the stakes are so small?

SRW would like to see market monetarists, mainstream saltwater economists, and Post Keynesians to tone down the debate, quit nipping at each other's ankles, and play nice. He is not suggesting that they can "work it out" so that they emerge with agreement on a common idea but rather suggests there is room for integration of useful tools.

Read it at Interfluidity
Because the stakes are so small?

by Steve Randy Waldman

JKH on the Recent MMR/MMT Debates

Read it at Modern Monetary Realism
JKH on the Recent MMR/MMT Debates
by JKH

Important. This is actually a paper rather than a blog post and can be downloaded in PDF.

JKH's contribution here constitutes a landmark iteration for MMR as a serous attempt to engage MMT and other interested economists and financial professionals in professional debate rather than more cursorily and informally in blog posts and comment repartee.

To my knowledge, this is the first time that JKH has posted anywhere instead of commenting, even though much of his commenting would have been a series of worthy posts if he had a blog.

JKH elucidates the debate to date by quoting from previous posts and comments and moves the ball significantly forward by expressing his ideas, which he has thought out carefully and worked up as a paper. Well played.

Steve Randy Waldman schools Matt Yglesias on unit labor costs

In an otherwise excellent post, Matt Yglesias commits one of the deadly sins of monetary policy:

Read it at Interfluidity
Restraining unit labor costs is a right-wing conspiracy

by Steve Randy Waldman

SRW flesh out my criticism of Yglesias in the comments here.

Winterspeak — "MMT is not Monetarism"

Interfluidity claims that monetarism shares more with MMT than we all think. 

[SRW] "I think MMTers, market monetarists, and Keynesians have almost everything in common other than tribe and affiliation." 

He then goes on to recommend a pro-cyclical inflation indexed government savings account. Crazy.

When seeing these hare-brained schemes, I always wonder just what problem SRW is trying to solve. There must be some policy reason I'm not seeing for complicated, rube-goldberg, counter-productive ideas.

Read it at Winterspeak.com
MMT is not Monetarism
by Winterspeak

Haitao Zhang’s macro stabilization proposal

I first “met” Haitao Zhang seven or eight ago, when we were both frequent commenters at Brad Setser’s remarkable blog. After I wrote about NGDP targeting, Zhang forwarded to me a paper he composed and sent around several years ago. He has graciously given me permission to republish it.

Read it at Interfluidity
Haitao Zhang’s macro stabilization proposal

by Steve Randy Waldman

Don't miss the comments.

Things are moving in the direction of fiscal rather than monetary in the face of the recent failure of even extreme monetary policy to address the fallout from the financial crisis and its contagion to the real economy, resulting in intractable high unemployment and a languid recovery.

Steve Randy Waldman — "Why is finance so complex?"

Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear. [emphasis added]

Interfluidity
Why is finance so complex?
by Steve Randy Waldman

The clear case was recently in the lead up to the financial crisis when complex products of "innovation in financial engineering" were given stamps of AAA approval by complicit rating agencies and foisted off as "reducing risk by spreading it" when in fact they were magnifying system risk. Private communication such as emails reveal that the originators knew of the actual situation when they were doing this. See the voluminous work of Prof. William K. Black on operation of financial institutions as "control frauds by their CEOs

We see much the same attitude and practice at the Federal Reserve. Powerful insiders in the financial sector are often not only informed in advance about policy decisions but also permitted to shape them behind the veil. Is this in the public interest. Should it be opaque even to Congress? Is this necessary for "political independence." When does "political independence" conflict with democratic principles. When does "political independence" serve privilege?

I think that we can compare opacity in finance with secrecy in government. As the release of the material collected by Wikileaks, including that provided by Bradley Manning, goes to show, much government opacity and secrecy are simply covers for what is illegal or would be embarrassing, rather than being vital not national security. Would the country be willing to bear the risks and costs of domestic and foreign policy if they knew the underlying truth? Secrecy and opacity are often simply a means of control.

SRW brings up some excellent points. I think he has put his finger on an essential issue that needs to be addressed. Here is my comment over at Interfluidity.

What I am chiefly concerned about in lack of transparency is not only implications fo risk and risk-taking, but also lack of trust in institutions. The “need” for lack of transparency, ranging from opacity resulting from complexification and to mandated secrecy, betray lack of trust in the basic institutions underlying the great themes our this era, liberal democracy and free market capitalism, neither of which can exist without transparency. So is “progress” a justifiable tradeoff, or do we have to admit that “liberal democracy” and “free market capitalism” are empty slogans and the stuff of children’s stories, which do not reflect reality? It seems to me that this is close to the basis of the upheaval of the developed world is now undergoing as its principle institutions are being called into question, not only the financial sector and the Federal Reserve, but “democratic” governments subject to elite capture, and, indeed, capitalism itself as the preferred life-support system. Indeed, the revelations subsequent to the invasion of Iraq on “fixed intelligence” and the more recently the Wikileaks material shows that a great of the lack of transparency in government was for expediency rather than national security requirements. It does not seem to me that Jesuitical argument really works in any of these cases, due to unintended consequences. While such consequences may be unintended, they are not unexpected. Once truth is suppressed, illusion and hypocrisy grow. Little while lies sprout into the Big Lie. (link)

Steve Randy Waldman on bank bailouts

Speaking of wealth redistribution (up), here is a good compliment to Randy Wray and J. Andrew Felkerson's post on the Fed bailouts.

I find it really depressing that I have to write this. But it seems I have to write it.

Substantially all of the TARP funds advanced to banks have been paid back, with interest and sometimes even with a profit from sales of warrants. Most of the (much larger) extraordinary liquidity facilities advanced by the Fed have also been wound down without credit losses. So there really was no bailout, right? The banks took loans and paid them back.

Bullshit.

Read the rest at Interfluidity

Yes, Virginia. The banks really were bailed out

by Steve Randy Waldman

See also

TARP To Cost The U.S. Nearly Double The Initial Estimates: CBO

at The Huffington Post

The government's bailout of banks may cost U.S. taxpayers nearly two times more than originally estimated, according to the Congressional Budget Office.

The Troubled Asset Released Program, better known as TARP, will cost the federal government $34 billion, the CBO reported on its director's blog. That's $15 billion higher than the agency's previous estimate in March. The increase in the estimate is mostly due to a drop in the market value of the government's investments in American International Group and General Motors.

Winterspeak responds to SRW

Comments on Interfluidity

Here is my favorite:

SRW: The internet is a fractious place. Many MMT-ers are civil and patient, and devote enormous energy to carefully and respectfully explaining their views. There’s no way to police other peoples’ manners. Still, even by the standards of the blogosphere, MMT-ers have a reputation as an unusually prickly bunch. That might not be helpful in terms of gaining broader acceptance of the ideas.

Winterspeak: What crap. It's like the Pope saying to Gallileo, "if you were only nicer about this whole earth revolving around the sun the Church would listen to you more". MMT is rejected because it is heretical.

Winterspeak's commentary is always excellent. Check out the rest.

UPDATE: Winterspeak also responds to Krugman

Kurgman [sic] says MMT again

FLASH: Steve Randy Waldman Engages MMT

Steve Randy Waldman adresses MMT at Interfluidity in MMT stabilization policy — some comments & critiques. This promises to be the mother of all MMT debates thus far, so expect the heavyweights to show up in force. This is a "big deal," so y'all mosey on over there. It's history in the making. Don't miss it.

SRW: "First, I want to make clear that the critiques I’ll offer below are not intended to discredit or dismiss MMT. As I’ve said before, I think MMT offers a coherent and important perspective on fiscal and monetary issues that ought to be understood, on its own terms rather than in dismissive caricature, by anyone serious about macroeconomics. MMT is not 'true', but then no theory is 'true'. We ultimately judge theories by how useful they are, both in making sense of 'the data' we already know and in offering guidance for policy going forward. In my opinion MMT is one of the most useful perspectives in thinking about fiscal and monetary questions.

"However, it is still just a perspective. Enthusiasts sometimes present MMT in a manner that’s too complete and hermetically sealed. While some MMT theorizing is based on 'double entry accounting' or 'obvious, unarguable facts', when MMT adherents offer non-trivial conclusions, they rely upon assumptions about human behavior that are in fact contestable. I continue to place non-zero weight on theories of government insolvency that MMT-ers have persuaded me are, in a sense, incoherent. Life is complicated, and even absurd prophesies can prove self-fulfilling.

"This will be a long post. I’ll discuss each of the seven points I outlined in my summary of MMT stabilization policy. Then I’ll offer some general comments. Before you continue, you should understand the point of view being examined. Please read my previous post first. Or much better yet, read Chapter 1 (Tymoigne and Wray)and Chapter 5 (Tcherneva) of A handbook of alternative monetary economics (ed. Arestis & Sawyer). These essays offer a polished, concise introduction to the MMT perspective. Then spend some time with the 'mandatory' or '101' readings on Warren Mosler and Bill Mitchell’s websites. [links provided in SRW's post]

"The summary points from my previous post are repeated below in bold. New comments then follow. I am critiquing my own distillation of MMT stabilization policy, so there is the danger I have set up straw men. If I have, I apologize and look forward to being set straight in the comments. As usual, almost nothing I say will be original. Many of the points I’ll make have been made better by others, for example, in the comments to the previous post, which are extraordinarily good. At a Kauffman Foundation blogger convention last week, I discussed MMT informally but at some length with David Beckworth, Megan McArdle, Mish, and Mark Thoma. My comments will undoubtedly be informed by those conversations."