Eric Tymoigne — Money and Banking – Part 6

This post concludes our study of central banking matters (there would be a lot more to cover…maybe another time). The post studies how the Fed is involved in fiscal operations and how the U.S. Treasury is involved in monetary-policy operations. The extensive interaction between these two branches of the U.S. government is necessary for fiscal and monetary policies to work properly.…

I am taking a 3-week break to take care of other things with upcoming deadlines. Next is private banks, followed by financial crises, inflation and growth, and finally issues surrounding the nature and history of money. There is probably another six/seven posts worth of material.

New Economic Perspectives
Money and Banking – Part 6
Eric Tymoigne | Associate Professor of Economics at Lewis and Clark College, Portland, Oregon; and Research Associate at the Levy Economics Institute of Bard College

Early Treasury data not encouraging for economy, stocks, dollar

We're only six statement days into the new fiscal year, however, Treasury data is not encouraging. Employment tax deposits collected by Treasury are 5.5% below where they were at the same time last October and total withdrawals (spending) is 9.1% below last year. Short dollar. Stock market upside limited from here as I said.

Fiscal snapshot: April ends with $373 billion in spending. Not bad, but some dark clouds are gathering.

Okay, so here's the end of April fiscal snapshot. It's not great news. It's not a disaster (yet), but it's not great in my opinion.

For the month of April the Federal Government spent $373 billion. That surpassed last April by $3 billion. Year-over-year Federal spending is up by $91 billion. That's the good news. We're on track at this pace to hit, almost, $4.3 trillion in total top-line spending for the fiscal year. That would be the first real increase since 2009.

That's good.

Here's the problem: Spending is stalling. Just about a month ago we were $110 billion over last year. The pace of spending over FY 2014 is slowing. This is not surprising because since mid-March Treasury has been running under  the debt ceiling constraint. These idiots in Congress still have not done anything  on the debt ceiling or the budget and who knows what kinds of measures, if any, Lew is using to pay the bills and that may not be able to last forever.

Furthermore, both CBO and OMB were predicting closer to $200 billion in spending above last year. We're coming in nowhere near that. I'm sure the morons over at Fix the Debt are elated. Jerks.

Now for the bad news (if you listen to other MMT economists). The deficit through the fiscal year so far is a paltry $252 billion. That's only 1.4% of GDP. The freakin' budget is almost in balance. The White House should be popping champagne corks, but they're too stupid to realize and also too stupid to understand that this is unequivocally NOT a good thing. Morons as well.

The top-line stall in spending is worrisome, at least to  me. Without a concomitant increase in non-government indebtedness, then it could mean trouble for the economy/stocks. Furthermore, higher private sector debt accumulation is not anything to cheer about, except maybe if you're a banker. It's just that we can go a while before debt service levels reach the tipping point, like where they were in 2007.

All data from the Daily Treasury Statement, of course. Remember, I teach a course on this, so if you want to learn how to do all this analysis and be able to read that Daily Treasury Statement then sign up for my course. It's well worth it. There's one coming up this Saturday. It's online. If you want to enroll please go to the link below.

Daily Treasury Statement course, Saturday, May 9.

JP Hochbaum — T Accounts of monetary operations

Put together by Nathan Cedric Tankus

FYI.

Heretical Druthers
T Accounts of monetary operations
JP Hochbaum

And so it begins...Treasury tapping Federal worker retirement funds in order to pay bills

So here it begins once again. The Treasury is raiding money from Federal employees' retirement funds so that the gov't can pay its bills because these assholes in Congress still want to play around with the debt ceiling.

(Read it and weep here.)

The president has a few easy ways around this, i.e. the 14th amendment and the platinum coin, but he's shown himself to be too timid or, preferring spending cuts that hurt the economy and especially, the middle class and poor.

The debt ceiling is relic of the gold standard that is inapplicable under today's monetary system of free floating non-convertible currency. But it remains in place out of ignorance and political expeiency.

Bill Mitchell — Direct central bank purchases of government debt

There was a recently published Federal Reserve Bank of New York Staff Report – Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks – by Kenneth D. Garbade, which recounts the way the central bank in the US could purchase unlimited amounts of treasury debt by creating funds out of thin air and how that capacity was eventually constrained. The Report is an understated account of the way in which the conservative ideological forces eventually prohibited this capacity and forced the US government to only issue debt to the private sector. He shows that between 1917 and 1935, this capacity was used often “without incident” but as the conservative antagonism grew it was limited (in 1935) and then abandoned altogether in the early 1980s. The Report demonstrates there were no intrinsic financial reasons for abandoning this capacity.

Bill Mitchell – billy blog
Direct central bank purchases of government debtBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, Northern Territory, Australia

Breaking: U.S. tells China their currency is not rising fast enough

Jack Lew at Treasury has apparently been given orders from the White House to do something to create "manufacturing jobs," so now he's telling China that their currency is not rising fast enough.

This policy is not only incredibly ignorant, as it reduces America's real terms of trade, but it is spiteful, vindictive and shows the Obama Administration's utter contempt for working class and poor Americans.

The reason being, it is functionally a tax that hits middle and low income people the worst as it makes the cost of Chinese made goods--which were once highly affordable--more expensive.

And the cruel lie behind this policy is that it will not create any jobs.

Obama Administration = DUMB!!!

Brian Romanchuk — What Is A Government Bond?

This article is an introduction to some core concepts of Modern Monetary Theory (MMT). Although I associate this explanation with MMT, it is clear that it was foreshadowed by earlier economists, such as Abba Lerner. I am currently not in a position to say who was the first to do this mode of analysis.

MMT versus loanable funds explained with respect to bonds, interest rate, and yields.

Bond Economics
What Is A Government Bond?
Brian Romanchuk

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.

Randy Wray — Krugman Rediscovers the Wheel: Commercial Banks As Creators of Money

I hope Paul Krugman will move on to a 21st century understanding of banking. 

Economonitor — Great Leap Forward
Krugman Rediscovers the Wheel: Commercial Banks As Creators of Money
L. Randall Wray | Professor of Economics, UMKC

Neil Wilson — Bernanke - We are the agent of the Treasury

For the file along with Alan Greenspan's testimony that the US can never become insolvent.

3spoken
Bernanke - We are the agent of the Treasury

Neil Wilson

Neil Wilson — The Consolidated Government Sector

The key analytic technique that MMT uses that sets it apart from most others, is that it uses a consolidated government sector in its analysis (although apparently the mainstream is slowly catching on). This allows it to cut through the obfuscating political constructions between the various government departments and institutions and concentrate on the essence of what is happening

This is entirely consistent with accepted accounting practice, using a technique known as group accounting - which produces consolidated financial statements (income, balance and cash) amongst a related group of entities. The international accounting standard for that is IFRS 10 'Consolidated Financial Statements' which requires that entities under common control present a consolidated set of accounts so that external users can obtain a 'true and fair view' of the actual underlying economic transactions.

The Central Bank in all sovereign jurisdictions falls under the definition of control by the Treasury - often de facto by the operation of law (Bernanke: "Our job is to do what Treasury tells us to do"), but also de jure, e.g in the Sterling area HM Treasury actually owns the entire shareholding of the Bank of England. The control model in IFRS 10 is elaborate to try and catch all those little tricks that entities use to avoid having to consolidate accounts and is worth studying to see the various 'Wizard of Oz' methods that control can be imparted even though the public face is supposedly independent.

Given the control relationship, consolidated financial statements are entirely appropriate and correct accounting which reveals the essence of the underlying transactions. Therefore in your model you should be able to swap out the detailed entities and replace them with the consolidated entity and nothing about the response should change. If it does then it is likely your model is wrong.

3spoken
The Consolidated Government Sector
Neil Wilson

Andrew Lainton — Government Debts and Treasury Bonds – Neither Keynesian or Inflationary

This matters because treasury bonds are exactly like corporate bonds, these are in the first instance transfer payments between balance sheets of the existing monetary stock, unlike bank (including central bank) money which involves money creation through crediting of accounts.

This is the key because a ‘Central Bank bond’ adds to monetary base and so the net credit induced demand {change in debt – change in saving)(this is a simplification as any increase in bank lending may require additional capital which requires saving which must then be leveraged) whereas a treasury bond is simply a transfer payment, there is no net increase in money or effective demand. There is no net change in the monetary base – the increase in debt is exactly offset by the increase in saving to purchase the bond.

He mistakes the function of the monetary base and tsys as a reserve drain having to do with central bank interest rate setting and doesn't take into account the difference between consolidated non-government net financial assets in aggregate and endogenous credit-debt relationships in non-government, which necessarily net to zero.

Decisions, Decisions, Decisions,
Government Debts and Treasury Bonds – Neither Keynesian or Inflationary
Andrew Lainton

Joshua Wojnilower — The Dangers of Misunderstanding "Helicopter Money" and Higher Inflation Targets

Woj analyzes Ashwin Parameshwaran's Helicopter Money Is Not Dangerous, All Macroeconomic Policy Is Dangerous in terms of the real interest rate and the real wage, showing why a monetary approach is too blunt an instrument, so that a targeted fiscal approach is needed.

Bubbles and Busts
The Dangers of Misunderstanding "Helicopter Money" and Higher Inflation Targets
Joshua Wojnilower

A break of the 1491 level on the S&P 500 would indicate that a market correction is starting

Matt Franko and I have been detailing the last two months' net spending by the Treasury while under the debt ceiling constraint and the numbers haven't been good. A total of only $9 bln of $NFA's have been created where the normal "need" to ensure system stability is around $90 bln.

Sharp reductions in $NFA creation in the past have led to "liquidation events" like we saw in July-August 2011. I believe another one could occur soon. A technician friend of mine told me to watch the 1491 level on the S&P 500 Index. A break below that would be the first sign that the market is turning on its heels.

Laurence Kotlikoff — The Treasury Has Already Minted Two Trillion Dollar Coins

...substitute a $2 trillion piece of paper called a Treasury bond for the platinum coin. Suppose the Treasury prints up such a piece of paper and hands it to the Fed and the Fed puts $2 trillion into its account. No difference right, except for the lack of platinum.

Next suppose the Treasury doesn’t hand the $2 trillion bond to the Fed directly, but hands it to John Q. Public who gives the Treasury $2 trillion and then hands the bond to the Fed in exchange for $2 trillion. What’s the result? It’s the same. The Treasury has $2 trillion to spend. John Q. Public has his original $2 trillion. And the Fed is holding the piece of paper labeled U.S. Treasury bond.

Finally, suppose the Treasury does this operation in smaller steps and over five years, specifically between 2007 and today. It sells, i.e., hands to John Q. in exchange for money, smaller denomination bonds, which Johns Q. sells to the Fed, i.e., hands to the Fed in exchange for money. Further, suppose the sum total of all these bond sales to the public and Fed purchases of the bonds from the public equals $2 trillion. Voila, you’ve got U.S. monetary policy since 2007.

In 2007, the monetary base – the amount of money our government printed in its 231 years of existence totaled $800 billion. Today it totals $2.8 trillion. And it increased by this amount via the process just described – the Treasury’s effective minting out of thin air two $1 trillion platinum coins.

Yahoo! Finance | The Exchange
The Treasury Has Already Minted Two Trillion Dollar Coins
Laurence Kotlikoff | economist at Boston University, co-author of The Clash of Generations, and President of Economic Security Planning, Inc.
(h/t Clonal Antibody in the comments at Monetary Realism)

Props to Laurence Kotlikoff for pointing out that coin issuance and bond issuance are essentially the same in outcome operationally, that is, they provide the Treasury with reserves to settle deposits it creates in non-government accounts through expenditures and transfers. Note that Treasury only "spends" what has already been approved through the appropriations process and commitments made through the various agencies. The Treasury is not authorized to add to spending itself.

Except that in issuing interest-bearing securities the Treasury is providing safe assets to the private sector, which it pays the private sector a premium to hold. Since this premium is not required operationally, it constitutes a special interest subsidy that is unnecessary. Enquiring minds wonder why it exists at all, since the high liquidity of Treasury securities does not reduce the propensity to spend, i.e., "sterlize" the bank reserves created by Treasury expenditure.

Issuing Treasury securities made sense under a convertible fixed rate monetary system such as the gold standard, but it is no longer needed under modern monetary system that uses non-convertible flexible rate sovereign currencies. It is now an obstacle that limits policy space and a subsidy with dubious justification wrt to public purpose. It should be excised with Ockham's razor and replace with direct issuance of Treasury notes in sufficient amount to offset changing saving desire of consolidated non-government in aggregate but no greater at full employment, in order to harmonize growth, employment and price stability.

Considering the growing size of the interest payments to the rest of the budget, the question arises, Is this politically mandated subsidy serving public purpose, or is it catering to interest groups that profit from it inordinately due to their privileged position in society — as landowners, generally the monarchy and aristocracy, did from land rent in the agricultural era under feudalism?

Note: After showing how the coin and bond issuance accomplish the same goal in the government's self-funding, Kotlikoff goes off the rails in claiming that this is "inflationary,"

Now what happens when the Treasury spends its freebee money? It raises prices of the goods and services we buy or keeps them from falling as much as would otherwise be the case. Either way, the money we have in our pockets or in the bank or coming to us over time as, for example, interest plus principal on bonds we’ve bought in the past – all this money loses purchasing power. So we are effectively taxed $2 trillion.

Someone needs to explain to him what inflation is defined as economically, namely, a continuous rise in the price level, and how it occurs, that is when effective demand increases faster than the economy can expand to meet it. One wonders whether a professional economist is unaware of this obvious fact, or he has a political agenda.

Reading the rests of the article, the conclusion seems to be that it is political in that it has no basis in fact, unless Kotlikoff just doesn't know what he is taking about. The proof. He even throws in Zimbabwe! ROFL. He thinks that seigniorage is a sin.

Winterspeak — Why the Whitehouse was right to reject the platinum coin

Another take on TPC rejection. It was the agencies.

Winterspeak.com
Why the Whitehouse was right to reject the platinum coin
Winterspeak

J. P. Koning — The final draft on Fed-Treasury overdrafts

History of Fed financing the Treasury directly.

Moneyness
The final draft on Fed-Treasury overdrafts
J. P. Konig
(h/t Winterspeak at Winterspeak.com)

Breaking— Treasury: We won’t mint a platinum coin to sidestep the debt ceiling

The Treasury Department will not mint a trillion-dollar platinum coin to get around the debt ceiling. If they did, the Federal Reserve would not accept it.

That’s the bottom line of the statement that Anthony Coley, a spokesman for the Treasury Department, gave me today. “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,” he said.

The inclusion of the Federal Reserve is significant. For the platinum coin idea to work, the Federal Reserve would have to treat it as a legal way for the Treasury Department to create currency. If they don’t believe it’s legal and would not credit the Treasury Department’s deposit, the platinum coin would be worthless.

The Washington Post | Wonkblog
Treasury: We won’t mint a platinum coin to sidestep the debt ceiling
Ezra Klein
(h/t Kevin Fathi via email)

What I don't understand is how a Treasury official could say this on his own since it would be a decision of the secretary, and the secretary would not act on his own when the White House has seemingly kept the option on the table by the WH spokesman refusing to deny it in a press conference. Anyone have any insight into this?

The Economist — Platinomics

Must-read. The cat is out of the bag. TPC has done its job. The explanation is now in the mainstream. No economist or financial professional can read this and not get it. This is a really succinct and clever account that cuts to the chase. The last mile is really closing fast.

The Economist | Free Exchange
Platinomics
G. I. | Washington
(h/t y in the comments)