Marshall’s latest
Posted by WARREN MOSLER on May 14th, 2010
REPEAT AFTER ME: THE USA DOES NOT HAVE A ‘GREECE PROBLEM’
By Marshall Auerback
To paraphrase Shakespeare, things are indeed rotten in the State of Denmark (and Germany, France, Italy, Greece, Spain, Portugal, and almost everywhere else in the euro zone). An entire continent appears determined to commit collective hara kiri (link), whilst the rest of the world is encouraged to draw precisely the wrong kinds of lessons from Europe’s self-imposed economic meltdown. So-called respectable policy makers continue to legitimize the continent’s fully-fledged embrace of austerity on the allegedly respectable grounds of “fiscal sustainability”.
The latest to pronounce on this matter is the Governor of the Bank of England, Mervyn King. This is a particularly sad, as the BOE – the Old Lady of Threadneedle Street – has actually played a uniquely constructive role amongst central banks in the area of financial services reform proposals. King, and his associate, Andrew Haldane, Executive Director for Financial Stability at the Bank of England, have been outspoken critics of “too big to fail” banks (link), and the asymmetric nature of banker compensation (“heads I win, tails the taxpayer loses”). This stands in marked contrast to America’s feckless triumvirate of Tim Geithner, Lawrence Summers, and Ben Bernanke, none of whom appears to have encountered a banker’s bonus that they didn’t like.
But when it comes to matters of “fiscal sustainability” King sounds no better than a court jester (or, at the very least, a member of President Obama’s National Commission on Fiscal Responsibility and Reform). In an interview with The Telegraph (link), the Bank of England Governor suggests that the US and UK – both sovereign issuers of their own currency – must deal with the challenges posed by their own fiscal deficits, lest a Greece scenario be far behind:
“It is absolutely vital, absolutely vital, for governments to get on top of this problem. We cannot afford to allow concerns about sovereign debt to spread into a wider crisis dealing with sovereign debt. Dealing with a banking crisis was bad enough. This would be worse.”
“A wider crisis dealing with sovereign debt”? Anybody’s internal BS detector ought to be flashing red when a policy maker makes sweeping statements like this. The Bank of England Governor substantially undermines his own credibility by failing to make 3 key distinctions:
1. There is a fundamental difference between debt held by the government and debt held in the non-government sector. All debt is not created equal. Private debt has to be serviced using the currency that the state issues.
2. Likewise, deficit critics, such as King, obfuscate reality when they fail to highlight the differences between the monetary arrangements of sovereign and non-sovereign nations, the latter facing a constraint comparable to private debt.
3. Related to point 2, there is a fundamental difference between public debt held in the currency of the sovereign government holding the debt and public debt held in a foreign currency. A government can never go insolvent in its own currency. If it is insolvent as a consequence of holdings of foreign debt then it should default and renegotiate the debt in its own currency. In those cases, the debtor has the power not the creditor.
Functionally, the euro dilemma is somewhat akin to the Latin American dilemma, such as countries like Argentina regularly experienced. The nations of the European Monetary Union have given up their monetary sovereignty by giving up their national currencies, and adopting a supranational one. By divorcing fiscal and monetary authorities, they have relinquished their public sector’s capacity to provide high levels of employment and output. Non-sovereign countries are limited in their ability to spend by taxation and bond revenues and this applies perfectly well to Greece, Portugal and even countries like Germany and France. Deficit spending in effect requires borrowing in a “foreign currency”, according to the dictates of private markets and the nation states are externally constrained.
King implicitly recognizes this fact, as he acknowledges the central design flaw at the heart of the European Monetary Union – “within the Euro Area it’s become very clear that there is a need for a fiscal union to make the Monetary Union work.”
This is undoubtedly correct: To eliminate this structural problem, the countries of the EMU must either leave the euro zone, or establish a supranational fiscal entity which can fulfill the role of a sovereign government to deficit spend and fill a declining private sector output gap. Otherwise, the euro zone nations remain trapped – forced to forgo spending to repay debt and service their interest payments via a market based system of finance.
But King then inexplicably extrapolates the problems of the euro zone which stem from this uniquely Euro design flaw and exploits it to support a neo-liberal philosophy fundamentally antithetical to fiscal freedom and full employment.
The Bank of England Governor – and others of his ilk – are misguided and disingenuous when they seek to draw broader conclusions from this uniquely euro zone related crisis. Think about Japan – they have had years of deflationary environments with rising public debt obligations and relatively large deficits to GDP. Have they defaulted? Have they even once struggled to pay the interest and settlement on maturity? Of course not, even when they experienced debt downgrades from the major ratings agencies throughout the 1990s.
Retaining the current bifurcated monetary/fiscal structure of the euro zone does leave the individual countries within the EMU in the death throes of debt deflation, barring a relaxation of the self-imposed fiscal constraints, or a substantial fall in the value of the euro (which will facilitate growth via the export sector, at the cost of significantly damaging America’s own export sector). This week’s €750bn rescue package will buy time, but will not address the insolvency at the core of the problem, and may well exacerbate it, given that the funding is predicated on the maintenance of a harsh austerity regime.
José Luis Rodríguez Zapatero, Spain’s Socialist prime minister, angered his trade union allies but cheered financial markets on Wednesday when he announced a surprise 5 per cent cut in civil service pay to accelerate cuts to the budget deficit.
The austerity drive – echoing moves by Ireland and Greece – followed intense pressure from Spain’s European neighbors, the International Monetary Fund on the spurious grounds that such cuts would establish “credibility” with the markets. Well, that wasn’t exactly a winning formula for success when tried before in East Asia during the 1997/98 financial crisis, and it is unlikely to be so again this time.
Indeed, in the current context, the European authorities are simply trying to localize the income deflation in the “PIIGS” through strong orchestrated IMF-style fiscal austerity, while seeking to prevent a strong downward spiral of the euro. But the contradiction in this policy is that a deflation in the “PIIGS” will simply spread to the other members of the euro zone with an effect essentially analogous to that of a competitive devaluation internationally.
The European Union is the largest economic bloc in the world right now. This is why it is so critical that Europeans get out of the EMU straightjacket and allow government deficit spending to do its job. Anything else will entail a deflationary trap, no matter how the euro zone’s policy makers initially try to localize the deflation. And the deflation is almost certain to spread outward, if sovereign states such as the US or UK absorb the wrong lessons from Greece, as Mr., King and his fellow deficit-phobes in the US are aggressively advocating.
There are two direct contagion vectors off the fiscal retrenchment being imposed on the periphery countries of the euro zone.
First, to the banking systems of the periphery and the core nations, as private loan defaults spread on domestic private income deflation induced by the fiscal retrenchment. Second, to the core nations that export to the PIIGS and run export led growth strategies. So 30-40% of Germany’s exports go to Greece, Italy, Ireland, Portugal and Spain directly, another 30% to the rest of Europe.
These are far from trivial feedback loops, and of course, the third contagion vector is to rest of world growth as domestic private income deflation combined with a maxi euro devaluation means exporters to the euro zone, and competitors with euro zone firms in global tradable product markets, are going to see top line revenue growth dry up before year end.
Let’s repeat this for the 100th time: the US government, the Japanese Government, or the UK government, amongst others, do NOT face a Greek style constraint – they can just credit bank accounts for interest and repayment in the same fashion as if they were buying some helmets for the military or some pencils for a government school. True, individual American states do face a fiscal crisis (much like the EMU nations) as users of the dollar, which is why some 48 out of 50 now face fiscal crises (a problem that could easily be alleviated were the US Federal Government to undertake a comprehensive system of revenue sharing on a per capita basis with the various individual states). But, if any “lesson” is to be learned from Greece, Ireland, or any other euro zone nation, it is not the one that Mr. King is seeking to impart. Rather, it is the futility of imposing arbitrary limits on fiscal policy devoid of economic context. Unfortunately, few are recognizing the latter point. The prevailing “lesson” being drawn from the Greek experience, therefore, will almost certainly lead the US, and the UK, to the same miserable economic outcome along with higher deficits in the process. As they say in Europe, “Finanzkapital uber alles”.
May 14th, 2010 at 12:18 pm
Marshall,
Your essay recapitulates well the arguments made by individuals—including Warren—who frequent this site. In fact, I think most, if not all of us, ‘get’ the differentiation between public and private debt, as well as the nuanced issues created by the Euro (a unified currency in a non-unified quasi-state).
But in one respect, “you guys” miss the boat. You refuse to accept—and I base this statement upon your contemptuous and stunned tone—that the people ‘in charge’ may understand OPERATIONALLY exactly what you’re saying, but to give voice to such opinions is political suicide, at best! You say:
“…But King then inexplicably extrapolates the problems of the euro zone which stem from this uniquely Euro design flaw and exploits it to support a neo-liberal philosophy fundamentally antithetical to fiscal freedom and full employment….”
IT IS NOT INEXPLICABLE! In fact, the explanation for such a statement is quite clear. King may grok the operational principles about which you muse, but he also knows that making statements about massive increases in public expenditure—during a time when populist sentiments are reaching a crescendo, there is fighting in the streets, and ANYONE who voices support for increased spending after decades of government fraud and complicity with a corrupt financial sector is likely to be tarred-and-feathered!!!—is in the least self-defeating, and at worst damned suicidal.
DW
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May 14th, 2010 at 12:34 pm
RE: “… But, if any “lesson” is to be learned from Greece, Ireland, or any other euro zone nation, it is not the one that Mr. King is seeking to impart. Rather, it is the futility of imposing arbitrary limits on fiscal policy devoid of economic context…”
But Marshall, you and others who agree with you (and let me repeat…I get it. I understand, from a purely operational standpoint, that the limits being placed on spending seem to reflect a lack of clarity about the operational truths existent in a true fiat, floating currency system) appear to possess a fatal blind spot—a blind spot that taints your overall analyses.
You say that “…it is the futility of imposing arbitrary limits on fiscal policy devoid of economic context…” that is the real lesson here. NO. The REAL lesson to be learned from these events is that decades of cheating and fraud have created an ethos of mistrust—mistrust of government and mistrust of finance—that runs SO DEEP, that operational realities be damned. The POLITICAL implications of decades of fraud and abuse (of fiat money) has made your claim that we are ignorant of operational realities a non-starter.
It’s too late, really. The world would rather suffer the perils of deflation and austerity than “admit” that, for the public good, it is OK to expand public debt and run high deficits and allow government-controlled fiscal policy the opportunity to create full-employment, etc.
Your incredulity on an accounting front is belied by your apparent blindness to the far-more-powerful force of global contempt for the world’s governments and financial leaders.
DW
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May 14th, 2010 at 1:05 pm
Dan
We “get it,” too. We get that “The world would rather suffer the perils of deflation and austerity than “admit” that, for the public good, it is OK to expand public debt and run high deficits and allow government-controlled fiscal policy the opportunity to create full-employment, etc.”
But realize that many, including the economists advising policymakers and educating the public via textbooks and mainstream media, actually believe the austerity will “work” or that at least this will be better than any alternatives. Someone needs to point that out, and try to get people to think more carefully about the alternatives (which have actually been tried successfully in the recent past). Yes, it’s a very hard sell–anyone who thinks we don’t realize what a tough sell it is sells us very short.
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May 14th, 2010 at 1:43 pm
@ Scott,
“…Someone needs to point that out, and try to get people to think more carefully about the alternatives (which have actually been tried successfully in the recent past). Yes, it’s a very hard sell–anyone who thinks we don’t realize what a tough sell it is sells us very short…”
A hard “sell” indeed. But Marshall’s TONE (I’m not saying he IS these things….just his blogging tone) is not that of a salesperson; it is that of a self-righteous and angry man who belittles folks who may not understand, or who may be recalcitrant to acknowledging, the nuanced differences that exist in the post-1971 world of floating currencies.
I have only recently engaged Warren in this conversation, and have found his ideas—and those of MMT—quite compelling. Yes I have major concerns (mostly having to do with whose in charge and issues of regulation), but I do understand the operational realities pointed out by Warren and Tom, etc.
If you want to sell people on this stuff, you’re going to have to stop divorcing it from the political and social climate in which these policy debates must take place. AND, “you’re’ going to have to do so in a way that does not alienate folks who are smart and angry and perceptive and full of suspicion and contempt for ANYTHING that comes across as so counterintuitive.
DW
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jcmccutcheon Reply:
May 14th, 2010 at 2:07 pm
Dan,
Forget the operational side for a minute and take Warren’s proposals and the only one I think is a hard sale is the ELR proposal(b/c is sounds like socialism) and perhaps his health-care proposal. Do you think blowing up Wall Street and creating the biggest tax cut in American history (which Warren proposes) are tough political sales?
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Tom Hickey Reply:
May 14th, 2010 at 3:07 pm
Dan:If you want to sell people on this stuff, you’re going to have to stop divorcing it from the political and social climate in which these policy debates must take place. AND, “you’re’ going to have to do so in a way that does not alienate folks who are smart and angry and perceptive and full of suspicion and contempt for ANYTHING that comes across as so counterintuitive.
Agreed. As conditions worsen, and they will, the temperature is headed up, and everyone involves needs to realize that cool heads and diplomacy are needed in debate. Otherwise, we are going to end up shouting at each other and cursing while the world burns.
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May 14th, 2010 at 2:27 pm
@ JCM,
I see your point. Taken on face value, Warren’s proposal on taxes would appear quite salient to those who believe that taxation is the #1 issue in these considerations.
However, the general sense one gets when reading Warren’s materials is that, generally, MORE spending and less concern with public debt and with deficits is the way to go.
But opposition to that train left the station a while ago, and it ain’t coming back. The entire populous “movement” (loosely speaking) opposes government spending and decries public debt as the leading precipitant of economic collapse and social chaos. Even those on the LEFT are increasingly convinced that moral hazard and corruption guide spending practices in Washington—NOT spending that truly is for the public good.
I’m not sure if this is part of Warren’s platform, but I think that his ideas might gain more traction if they were accompanied by vocal calls for Congressional Term Limits, an IMMEDIATE audit of the Federal Reserve, AND an audit of all members of Congress (To present to the public some tangible sense that Warren understands how fraud and corruption have tainted a system that CAN work).
DW
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Tom Hickey Reply:
May 14th, 2010 at 3:12 pm
http://moslereconomics.com/2009/12/24/fixing-the-economy/
http://moslereconomics.com/2009/12/26/fixing-the-small-banks/
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Greg Reply:
May 14th, 2010 at 5:56 pm
“But opposition to that train left the station a while ago, and it ain’t coming back. The entire populous “movement” (loosely speaking) opposes government spending and decries public debt as the leading precipitant of economic collapse and social chaos.”
I disagree. What people decry is govt spending on SOMEONE ELSE!!!
Scotts point is that if people truly understood that debt is NEVER a problem to pay off, never has to be issued in order to spend and will not blow up our economy, the political will to adopt MMT would emerge.
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Min Reply:
May 17th, 2010 at 2:03 pm
Greg: “What people decry is govt spending on SOMEONE ELSE!!!”
Largely they decry spending their money, i. e., their taxes, on somebody else, especially somebody who does not deserve it.
Greg: “Scotts point is that if people truly understood that debt is NEVER a problem to pay off, never has to be issued in order to spend and will not blow up our economy, the political will to adopt MMT would emerge”
Indeed. Conservatives and libertarians would understand that it’s not their money to start with, except insofar as it is every voter’s right and duty to decide what the gov’t will spend money on, and how much to spend. Liberals would understand that spending on social programs is only politically constrained. The political battles would still rage, but in a more informed and intelligent manner.
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Greg Reply:
May 17th, 2010 at 5:12 pm
“Conservatives and libertarians would understand that it’s not their money to start with, except insofar as it is every voter’s right and duty to decide what the gov’t will spend money on, and how much to spend. Liberals would understand that spending on social programs is only politically constrained. The political battles would still rage, but in a more informed and intelligent manner”
Well phrased.
zanon Reply:
May 17th, 2010 at 7:14 pm
but where would that leave the monetarists like greg mankiw and paul krugman with their nobel prize winners, prestigeous positions, and million dollar textbooks?
please please tell me what is in MMT for academics who tout the nonsense we see politicians repeat!
May 14th, 2010 at 2:41 pm
“…but to give voice to such opinions is political suicide, at best!”
Yes, but why is it suicide? Mr. Auerback and his colleagues are not naifs. They are aware of political realities. They choose to speak the truth anyway, and frankly, a little contempt or disdain for the other side is not unmerited. The reason the appropriate measures have little chance of being put in place is that what is happening is a global transfer of wealth, a vast concentration of it in the hands of the financial powers and their corporations. The media will sing the deficit terrorism librettos they are supposed to sing, therefore the public is “deficit terrified.” If they started to sing MMT librettos with the appropriate salesmanship and the support of media stars, the public, largely passive, would soon be persuaded. The problem with the truth these days is that “in the fatness of these pursy times, virtue itself of vice must pardon beg.”
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May 14th, 2010 at 2:44 pm
@ Sandy,
Totally agree w/you. I am just making observations in light of Warren’s political aspirations and in light of the recent conference in D.C. whose aim (I think) was to promote MMT (et al) into a more mainstream place in the dialog.
DW
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May 14th, 2010 at 2:46 pm
ALSO…
It is important FOR ME to find ways to give voice to good and meritorious ideas in a way that can be heard. Warren’s ideas are dismissed out-of-hand by many, and I am always curious as to how we detoxify the dialog so as to allow minds to be open enough to consider new ideas.
DW
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kenM Reply:
May 22nd, 2010 at 2:51 am
Why not take out full page segments in newspapers with warrens “Seven Deadly Innocent Frauds” so more of the public has information to write their Senators and Congresscritters.
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May 14th, 2010 at 2:49 pm
Marshall has indeed picked up on the “sustainabilty” word that European policymakers seem to have picked up straight from the Peterson folks here in the US and is now common in their vocabulary over the last couple of weeks. This was in the press release from the ECB justifying their bond purchases coming out of Europe from 2 weeks ago:
This could be looked upon as perhaps a small victory for the MMT “battlers” out there. I think once upon a time (tho not too long ago)you could not imagine that they would purchase govt bonds, they would have said ‘never!’. They now are. They are rationalizing it when they use the word “sustainability”. ie They have to an extent crossed a line from a point where they would like us to think they would never consider it, to one now that they are doing it, but to paraphrase, “its okay because we see a future where there is “sustainability” in the fiscal.
Score one for “the good guys and gals!” I think., Resp
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May 14th, 2010 at 3:03 pm
Mervyn King is much wiser than Marshall Aurbach gives him credit for.
King has an inflation target to meet. If he fails to do so, he must write a letter of explanation to the Chancellor. The FX markets scent blood from the UK fiscal deficit, sterling is falling which will raise import prices, feeding to higher inflation. I am not sure that MMT recognizes the psychological/expectational dimension: if markets think its a problem, it is a problem, regardless of accounting correctness.
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May 14th, 2010 at 3:09 pm
Auerback and the others are increasingly being heard. The key is the internet. More blogging, more guest blogging, more articles in the popular venues, youtube interviews, viral marketing, etc.
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Tom Hickey Reply:
May 14th, 2010 at 3:15 pm
Agreed. It’s starting to have a perceptible effect, in my view.
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jimbo Reply:
May 14th, 2010 at 3:36 pm
Yes – I am starting to see MMT ideas pop up in odd little corners of Cyberspace, written by people I don’t know. For many years, I would be all alone in responding to the usual deficit terrorism, and would mostly be ignored as a kook. Now, just as I’m getting ready to post a reply, I find someone else has done it already.
Just remember the first rule of politics:
If you want to get an idea across to the masses, first craft a simple, easily understood message with emotional appeal and get it out on some communications medium.
Then, repeat it.
And repeat it.
And repeat it.
And repeat it.
And repeat it.
And repeat it.
And repeat it.
And repeat it.
And repeat it, etc. etc. etc.
And just when you have grown hoarse, when you think that people are utterly sick of hearing about it, the people you are trying to reach are hearing it for the first time.
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May 14th, 2010 at 4:13 pm
Marshall,
This will never take hold in Europe. The creators of the euro want to build a post-Westphalian order. They want to destroy the nation state. Here’s a quote from Tommaso Padoa-Schioppa, that appeared in the FT yesterday under the heading “Euro remains on the right side of history”.
http://bit.ly/bVi4G2
The attackers will return. The outcome will, for sure, be decided by the rivals’ relative strength, but also by the nobility of the cause they fight for. The army is formidable but it bets on the wrong cause: a return to the old world of flexible exchange rates, where each country deludes itself that it can be insulated from its neighbours and tries to foster growth through competitive devaluations, reneging on debts when it sees fit. This can only produce economic misery, conflict and dangers for global security. The citadel fights for the good cause (saving Europe’s monetary union), but its persistent credo, which has for too long kept it disarmed, still hinders it from going all the way with the necessary reform. At stake in this struggle, ultimately, is the ideology of the omnipotent nation-state.
Doesn’t that just read of arrogance.
They want to separate the nation from its currency, and I’ve no doubt that that is what the financiers want in the US too. They don’t want the government using the currency for the common good. This is what your up against, so be good people and stop the FED from issuing swaps and get rid of the euro, so this place will crash. It will give the people something to do like building a gallows and hanging these fuckers.
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Greg Reply:
May 14th, 2010 at 6:00 pm
Yes and its interesting that Europe gets painted as a bunch of raving leftists by so many misinformed Americans.
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RSJ Reply:
May 14th, 2010 at 11:12 pm
And they said, Go to, let us build us a city and a tower, whose top may reach unto heaven; and let us make us a name..
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BFG Reply:
May 15th, 2010 at 10:16 am
Yes, pride comes before a fall.
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Min Reply:
May 17th, 2010 at 2:07 pm
“Pride cometh before destruction.”
May 14th, 2010 at 4:19 pm
This is what you’re up against
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May 14th, 2010 at 6:40 pm
Greeks, Germans and Bankers
The Return of the Ancien Régime
By T. P. WILKINSON
Düsseldorf.
The German press is saturated with reports intended to verify the myth of the slovenly, lazy and corrupt Southern European countries which virtuous and hard-working northern European countries mistakenly admitted to the European Union. The role of the most felonious corporation on the planet today is trivialized since the harmless fraud investigations in the US against the “mother of all racketeers“ (along with JP Morgan) are never reported in connection with their advisory and trading “services“ in Greece or throughout Europe. Yet there are numerous strands to the fabric of confusion being woven in the Greek dilemma. The criminals are at large and their business continues.
Let us recall some significant facts without which the Greek condition cannot be properly understood. When the Second World War ended, Britain and the US intervened with overt and covert military “aid“ to suppress the anti-fascist resistance in Greece, largely but by no means exclusively composed of Greek communists. This became known as the Truman Doctrine, analogous to the Monroe Doctrine. What it meant in effect was that the US claimed the right to supplant civilian democratic institutions with military dictatorships in Europe to protect its corporate interests however defined.
The rest at:
http://counterpunch.org/wilkinson05142010.html
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May 14th, 2010 at 6:49 pm
I think Dan makes a sound point. You have to take people as they are. As missionaries have long known, its easier to adapt their existing customs and imagery than to insist they undergo a full mental reboot. For example. the Hawaiian Pidgin edition of the Bible is amusing to read, but it effectively translate the Shakespearean– perhaps literally– language of the King James Bible into a message that its audience can relate to (“Da Boss Above, he take care me, Jalike da sheep farma take care his sheeps. He goin give me everyting I need.” Psalms 23:1).
http://pidginbible.org/
In economic terms, David Colander has summed up what’s required in the the title of his journal article, “Integrating Sound FInance with Functional Finance”. Deficits don’t matter, I know it, you know, Dick Cheney knows it. However, Da Boss Above knows the rest of the country think they matter very much. Perhaps the first step is to demand that the US never again raise its debt ceiling. As Randy Wray has pointed out, paying interest on reserves (which don’t count against the debt limit) can drain reserves in lieu of ever issuing new (or rolling over old) Treasuries. What’s more, since IOR payment would be miniscule compared to the equivalent debt service payments (and nonexistent if the interest rate is allowed to drop to zero), the $500 billion+ a year in projected debt service payments suddenly disappears and with it the perceived necessity to raise taxes and cut spending. It’d be amusing to watch the CBO try to explain exactly how that happened.
Break the fever of deficit hysteria first and then it becomes politically tenable to increase aggregate demand. I still think Nixon’s “Full Employment Budget” concept was brilliant, if we spend as much revenue today as would be collected in a full employment economy, it becomes a self-fulfilling prophecy.
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vipul Reply:
May 14th, 2010 at 7:36 pm
I don’t know, they might think that means that as soon as we hit the debt ceiling we’ll default. And if we tried to change the rules to make it clear we would not default, they’d call it printing money.
I was thinking the first steps would be to stop issuing long term treasury bonds. No security of longer than 1 month duration, and then assuming the Fed has people who now understand MMT, just set interest rates to near 0 and leave them there. That way the fiction of needing to sell debt is still there, but the fact of debt service payments is eliminated. I think once people get use to that it would simple to then just stop issuing new debt altogether.
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beowulf Reply:
May 15th, 2010 at 3:48 pm
Vipul,
Thanks for your comments. Those are good points, however the debt ceiling votes are used to bang the drum for deficit hysteria and, like it or not, they seem to occur on a suspiciously frequently basis. I’m suggesting, a pro-MTTaCongressman or Senator could hijack this train by framing monetary reform as a way to eliminate the need to ever increase the federal debt limit. And so my distinguished colleagues, like an alcoholic working the 12 steps, this Congress need to swear off ever taking another drink of federal debt. :o)
Of course the Government can still create money at any time without selling Treasuries, sovereign credit instead of sovereign debt. As Thomas Edison put it, “If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good.”
http://www.prosperityuk.com/prosperity/articles/edison.html
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vipul Reply:
May 15th, 2010 at 4:13 pm
Beowulf,
You’re right that every time they vote for the debt ceiling they use it to stoke the deficit hysteria. I’d be willing to try any route of course.
But I wanted to thank you for that link. I actually just sent it to a friend who I’ve been trying to convince that government don’t need to “borrow” their own money. It helps to have someone like Edison or Ford as a spokesman.
Min Reply:
May 21st, 2010 at 10:58 pm
Beowulf, thanks for the link to Edison. He makes sense in a way that regular people can relate to. For instance, if we issue money to pay for things, we pay less than half of what we pay if we issue bonds. (OC, that depends on interest rates, but it’s a good ballpark figure.) That’s a message people can relate to, and a strong refutation of the “printing money” charge. It gets lost, though, in the “just change some numbers” rhetoric.
Min Reply:
May 17th, 2010 at 2:11 pm
“And if we tried to change the rules to make it clear we would not default, they’d call it printing money.”
It is better to print just one dollar bill than to curse the deficit.
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May 15th, 2010 at 11:31 am
jcmccutcheon Reply:
May 14th, 2010 at 2:07 pm
“Dan, Forget the operational side for a minute and take Warren’s proposals and the only one I think is a hard sale is the ELR proposal(b/c is sounds like socialism) and perhaps his health-care proposal.”
As I understand it, ELR is supposed to solve the problem of structural unemployment, without causing inflation, which is different from the current deflationary trend, so I’ll assume the former.
Taxes need not increase as a result (gov. not revenue constrained) and neither does it put upward pressure on wages, as the job guarantee is offered at min wage. Correct? Plus, I assume, people won’t be given the choice of welfare (unless for disability/family planning etc.) OR a job guarantee, only the latter. So far, if things work as expected (has it been tried?) I don’t see that mainstream thinking would oppose it.
The problem, in practice, is that it may be turn out to be / be perceived as a veiled form of welfare. What is the incentive to perform, if the job is guaranteed? Why would an engineer work his a** off only to be paid min wage? That sort of thing.
How does it address the question of restoring a more balanced pay scale whereby a CEO does not make 500 times the minimum wage, but “only” 40, as used to be the case 50 years ago (the number may not be accurate, but you get the idea). Surely by redistributing income to the lower/middle class would gear the economy to more useful purposes (fewer yachts, more hospitals, say). Is redistributive taxation the complementary answer?
As for the hc proposal, it does use market incentives to restrain/allocate spending efficiently and remove bureaucracy. As I recall, anything above $5,000 would be covered by medicare. That’s probably the lion share of spending, though…
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Tom Hickey Reply:
May 15th, 2010 at 12:35 pm
The Job Guarantee in practice
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beowulf Reply:
May 15th, 2010 at 4:55 pm
Right, Warren’s healthcare proposal is similar to Elliott Richardson’s (Nixon’s Secretary of Health Education and Welfare) 1973 Mega proposal. I believe Richardson made the deductible a percentage of income (between 5% and 15%) before Uncle Sam picked up the tab. The Mega proposal was a great plan (and astonishingly broad– healthcare, student aid, state and local revenue sharing and a welfare reform combining a negative income tax with a job guarantee). Unfortunately, Nixon moved Richardson over to the Pentagon just as his proposal was released, and the new HEW Secretary (Cap Weinberger) scrapped it.
healthcare section of Mega on p. 23 of pdf (the guaranteed job section is p. 88)
http://www.eric.ed.gov/ERICWebPortal/recordDetail?accno=ED080148
CBO analysis (1977) of healthcare section on p. 40 of pdf
http://www.cbo.gov/doc.cfm?index=9171
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beowulf Reply:
May 15th, 2010 at 5:13 pm
Oh, forgot to mention… At the end of the Ford Administration, Treasury Secretary Bill Simon’s “Blueprint for Basic Tax Reform” proposed using the tax code to provide catastrophic coverage (by giving a refundable 100% tax credit for healthcare spending over a set percentage of income). Chapter 3, p. 91.
http://www.treasury.gov/offices/tax-policy/library/blueprints/
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May 15th, 2010 at 1:02 pm
Tom, thanks. Comprehensive, indeed.
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May 15th, 2010 at 1:47 pm
Nice to see ‘mainstream’ Mark Thoma link to Auerback’s article.
http://economistsview.typepad.com/economistsview/2010/05/links-for-2010-05-14.html
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May 15th, 2010 at 2:15 pm
This is a big deal. Not so long ago, Thomas refused an offer to participate in a debate with Bill Mitchell, because he didn’t think it worthwhile to engage with someone who rejects the money multiplier. That rather shocked me because I had thought Thoma to be pretty open. Maybe he is coming around. I suspect that Jamie Galbraith’s coming out strongly is going to have a ripple effect. Marshall is also doing a great job getting out there, and he is being picked up widely according to my Google alert. The “last mile” is closing.
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Mdm Reply:
May 19th, 2010 at 12:39 am
Tom or anyone else: could you please provide the link to what Mark Thoma said. I thought I saved the link but I mustn’t have. Need to show one of my lecturers.
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Tom Hickey Reply:
May 19th, 2010 at 12:57 am
MDM, I don’t have the Thomas ref, and I don’t recall the post name or date at his place. It was posted there by Greg and he reported the matter at Bill’s place here in the comments.
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May 15th, 2010 at 11:23 pm
“In fact, I think most, if not all of us, ‘get’ the differentiation between public and private debt”
I hope I do.
” as well as the nuanced issues created by the Euro”
I thought I did, but recently started doubting, sorry.
“True, individual American states do face a fiscal crisis (much like the EMU nations) as users of the dollar.”
Yes, this analogy is the one I remember being circulated a while ago. However,
1- A US state, I would assume, keeps an account at a private bank. Net spending is a horizontal transaction. Taxes, in this case, actually finance spending. They’re like a fee for the service provided (or a donation in the case of transfers).
2- The ECB is the fiscal agent of EMU members (that can be found in Euro legislation), which I interpret as : it has an account at the ECB.
Therefore, net spending translate into an increase of reserves in the banking system, that is usually offset by selling treasurys. It is a vertical transaction. Taxes don’t finance anything etc. No difference with the US Federal gov.
While I thank previous commentators for helping to clarify this issue in a previous thread, I’m afraid I’m getting conflicting info. Although I’m sure the actual technicalities involved blur the issue, from a pedagogical standpoint it would be preferable to present the matter in clean cut terms for non-specialists such as myself. Thanks in advance.
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May 16th, 2010 at 4:58 pm
like the US States, the euro govs will bounce checks if they don’t have sufficient funds in their accounts
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anon Reply:
May 16th, 2010 at 7:28 pm
What prevents US government checks from bouncing if it doesn’t have sufficient funds in its account at the Fed?
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warren mosler Reply:
May 19th, 2010 at 11:49 am
the fed can let the balance in the tsy account go negative with a nod from congress, which is the entity doing the spending.
in otherwords, congress clears its own checks
the greek gov doesn’t
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Min Reply:
May 20th, 2010 at 11:53 am
Warren, can you provide a reference to the legislation that allows that? Thanks. :)
Bx12 Reply:
May 22nd, 2010 at 1:58 pm
In response to
“Min Reply:
May 20th, 2010 at 11:53 am
Warren, can you provide a reference to the legislation that allows that? Thanks. :)”
For the Euro, I posted the legislation here,
http://moslereconomics.com/2010/02/15/question-for-mr-mosler-re-us-debt-to-china/#comment-16259
with an emphasis on the no overdraft facility, with precedents going back to 1973.
If you look at things from the standpoint of the Euro as whole, not its constituents, the no overdraft rule is self imposed, as in the US.
Besides, Greece can lobby the Euro parliament/comission, or market events may dictate that exemption, without Greece even having to beg for it.
The no overdraft rule is not a discriminating factor between fiat currency systems.
Bx12 Reply:
May 22nd, 2010 at 2:56 pm
NO OVERDRAFT AT AND FORBIDDANCE OF PURCHASE GOVERNMENT DEBT BY THE CENTRAL BANK, IN THE EURO-ZONE AND THE US.
————- Treaty on European Union ———-
Official Journal C 191, 29 July 1992 Article 21 Operations with public entities 21.1. In accordance with Article 104 of this Treaty,
[overdrafts or any other type of credit facility with the ECB][ in favour of central governments][shall be prohibited,] [as shall the purchase directly from them by the ECB or national central banks of debt instruments.]
Note : you would think that if debt purchase and overdraft are under the same article, and an exception was granted for the former, it’s not too far fetched too imagine an exemption to no overdraft as well. In fact, I don’t even recall an extraordinary parliamentary session was necessary to allow it.
————- USA ———-
Highlights of GAO-06-1007, a report to the Chairman, Committee on Ways and Means, House of Representatives
“Treasury cannot risk an overdraft because the Federal Reserve is not authorized to lend directly to Treasury, in part to preserve the Federal Reserve’s independence as the nation’s central bank.”
Bx12 Reply:
May 16th, 2010 at 7:36 pm
Warren, thanks for confirming this point:
“like the US States, the euro govs will bounce checks if they don’t have sufficient funds in their accounts”
Should I assume this is the ONLY commonality with a US state, and EVERYTHING ELSE is more like the US Federal gov?
Let me rethink my understanding, then:
For a US gov :
[Even if the markets don't buy the Tsy's upon issuance, the CB will ALWAYS clear the checks, if the gov net spends]
Bank reserves would inflate and the interbank rate will fall to zero. Alternatively, this can be avoided by setting the deposit rate to the target rate.
For a Euro gov:
Everything is similar to the US Federal gov (Taxes don’t finance anything, etc.), but
[If the markets don't buy the Tsy's upon issuance, and the gov net spends, its "net worth" will dwindle to zero, at which point the CB WILL NOT clear the checks.]
It seems to me the commonality with the US Federal gov far outweighs that with a US state.
In particular, net spending by the Euro govs does create net financial assets. It is a vertical transaction. Some other commentators, here, have assumed otherwise.
If that is the case, the solvency of the the Euro has been under-estimated because it would only require a decree/understanding to clear the checks, to be on par with the US Federal gov.
Neither Greece nor the US, then, would have a solvency problem.
Sorry for being a bit clingy on this topic, but it’s no small matter. It needs to be settled, if I may say.
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anon Reply:
May 16th, 2010 at 11:31 pm
“[Even if the markets don't buy the Tsy's upon issuance, the CB will ALWAYS clear the checks, if the gov net spends]”
That’s my question above. I don’t think so.
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anon Reply:
May 16th, 2010 at 11:38 pm
i.e. if the CB ALWAYS clears the checks, then the no overdraft rule is effectively meaningless.
I think the likelier and correct explanation is that the probability bond auctions fail in this way is near zero. And if bond auctions were to fail, then the CB would probably be forced politically to break the overdraft rule in order not to bounce the check. But the overdraft rule, if enforced when nobody buys bonds, effectively implies the checks must be bounced. That’s no different from the case for the individual states or for the individual Ezone governments.
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Tom Hickey Reply:
May 17th, 2010 at 12:01 am
Anon, the primary dealers are committed to taking the bonds at auction. If they should balk at any point for whatever reason, then the Fed would assure them privately that the Fed will just buy the bonds from them after the auction. The Fed is prohibited from participating int the auction, but it can buy bonds after they’ve been auctioned. In fact, if you look at the record, it seems that this is what happened during the crisis, at least that was the speculation at Zero Hedge at the time.
anon Reply:
May 17th, 2010 at 12:09 am
Interesting.
So (illegal/insolvent) operational overdrafts and bounced checks would be quite possible, unless in such cases collusion between the Fed and the dealers is assumed to prevent it?
anon Reply:
May 17th, 2010 at 12:12 am
My point being there is no effective difference between the US government, its states, or Euro govs UNLESS you assume such extraordinary evasive action in such circumstances. Because the actual rules make the situations all comparable.
anon Reply:
May 17th, 2010 at 12:20 am
It’s the probability that the CB will end up breaking the rules (monetizing debt) on behalf of its government if its government is backed into a corner that is different in the case of the US – not the operational capability of the government under the intended rules. The latter is very comparable to the States and the Euro governments.
beowulf Reply:
May 16th, 2010 at 11:46 pm
The EU owns the printing press for the Euro just as the US owns the printing press for the dollar, which means neither Greece nor California can print their own currency.
My understanding of the EU charter is that the ECB is handcuffed in ways that the Fed is not. The Fed has very broad powers that Congress can limit or extend at any time, I am curiouswhat it would take for a similar EU “decree/understanding” to be enacted.
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anon Reply:
May 16th, 2010 at 11:57 pm
It is not the Fed that is handcuffed. It is the US government that has “handcuffed itself”, effectively under the intended power of an independent Fed. The Fed prohibits the government from running operational overdrafts. That’s the way it works now, and it would take an act of Congress to change that power of the Fed. Until such time, the US government is operationally constrained, just like the States and the Europeans. The government must issue bonds first under the existing rules. It would have to change the law to change that.
Min Reply:
May 19th, 2010 at 4:23 pm
Is the prohibition on a Treasury overdraft at the Fed law? Or is it a rule that may, under exigent circumstances, be violated?
Ramanan Reply:
May 17th, 2010 at 1:29 am
Yeah as Tom Hickey says, in the US, the primary dealers purchase the debt at the auction financing it with repos doing with the Fed and the US will not have any issue with solvency in spite of having no overdraft at the Fed. Special arrangements are made so that in case of an emergency or unforeseen event such as 9/11, the Fed, Treasury and the primary dealers can participate in an auction conducted elsewhere.
However, in the case of the Euro Zone, there is no guarantee that it will happen.
In fact NCBs dont purchase government debt at all, for example for setting interest rates. The ECB/NCBs lend banks reserves to help them satify the reserve requirements and the fine tuning for reserve price setting through quantity adjustement happens by moving government deposits in and out of the banking system from/to the NCB accounts.
So unlike the Fed, the NCBs can’t purchase government debt. It constitues a violation of the spirit of the Treaty according to opionions of the ECB in their website, though there is no explicit rule. The recent announcement however allow the NCBs to purchase the debt.
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Ramanan Reply:
May 17th, 2010 at 1:50 am
The important thing is that even though the operations themselves are important to understand, there are more forces at play – there is no mechanism helping current account deficit countries to prevent their interest rates from increasing. The only way out is for the ECB to intervene at some point. This is because current account deficits lead to a loss of income. Its a distibutional issue. For the whole Euro Zone, deficits lead to an increase in networth by an equal amount, but not for each country.
If someone is interested in systematics – this is a nice paper. http://cje.oxfordjournals.org/cgi/content/abstract/31/1/1
A simple model of three economies with two currencies: the eurozone and the USA – Wynne Godley & Marc Lavoie (subs required)
anon Reply:
May 17th, 2010 at 1:53 am
NCBs provide repo financing just like the Fed
anon Reply:
May 17th, 2010 at 1:55 am
ca deficits are a different subject
Ramanan Reply:
May 17th, 2010 at 2:34 am
Anon,
In the case of the euro zone, the NCBs provide advances to banks to help them satisfy reserve requirements. Banks are indebted to the ECB/NCBs unlike the US where overdrafts are quickly gotten rid of. There is a difference in how anglo-saxon central banks operate and how other countries do. The weekly operations are about lending banks reserves. Do you see weekly “tenders” in the US ? The NCBs rarely call up “primary dealers” to do an “open market operation”. The confusing part is that the ECB calls the MROs “open market operations” whereas it is different than in the US.
The institutional setup of the EZ is a bit different from the US.
The NCBs cannot promise banks that they will purchase the government debt from them in the secondary markets.
CA deficits are not really a different subject because they are related to government deficits by an identity. Check out the weak countries’ current accounts and the better ones’ export/import data. The EZ crisis is not whether the sneaky operations exist or not – but about how various sectors of the economy work.
Ramanan Reply:
May 17th, 2010 at 7:14 am
Anon,
Point 1 here http://www.nakedcapitalism.com/2010/05/kregelparenteau-no-sidestepping-the-eurozone-implosion.html
anon Reply:
May 17th, 2010 at 7:32 am
thanks, but you keep changing the subject
my point is that the US can’t absolutely ensure no default without ensuring that it will break or stretch its own rules in some way
its easier for the US to break its own rules than the EZ – I accept that
the sector balances is a different subject – not operational
Ramanan Reply:
May 17th, 2010 at 8:23 am
Anon,
Didnt mean to change the topic. Yes I also think that the US cant ensure that there is no default without breaking the rules, though the MMTers will think otherwise.
However, in the case of the US, there is an underlying mechanism – a current account deficit leads to a lower income, but the rest of the world has a higher preference for the US Treasuries. So there is an automatic demand for the US Treas. However, I agree with you in general.
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Ramanan Reply:
May 17th, 2010 at 8:25 am
Also see Tom’s point above.
anon Reply:
May 17th, 2010 at 8:42 am
“Yes I also think that the US cant ensure that there is no default without breaking the rules, though the MMTers will think otherwise.”
interesting. why the departure for you?
(I saw Tom’s point, which relates to rule breaking or stretching. The rest of world preference for US treasuries is a structural advantage to be sure. But is off specific point relative to rules in place that in theory may have to be broken or stretched to avoid technical default under rules as stated. The US has more flexibility in terms of breaking its own rules, but the rules themselves are not dissimilar to Euro rules imposed at the supranational level. For MMT to suggest otherwise is inaccurate.)
Matt Franko Reply:
May 17th, 2010 at 8:45 am
Anon/Ramanan,
Ive found it referenced that interest on Treasuries has been an automatic appropriation since before 1850. So the interest on bonds will be paid for sure here, in fact, I believe that the govt would have to take some sort of new initiative to prevent it, ie they would have to actually legislate a default.
There is the other issue about raising the “debt” ceiling. Both houses of govt have to vote on raising this, but the President does not sign “it”, ie this implies that the debt ceiling does NOT have the “force of law” in the US (it is “non-binding”). I view the fact that the Executive branch will wait until the ceiling is rasied by Congress as just an “accomodation” by the Executive branch, perhaps to share the “blame” of “running up the debt” politically, lest the President be solely accused.
If the President wanted to, I believe he has all authority to task his Treasury to do whatever was necessary to operate the govt, once the appropriation bills were signed into actual LAW, ceiling or no ceiling. Resp,
anon Reply:
May 17th, 2010 at 8:57 am
I’ve seen something along those lines re interest.
It seems that no overdraft is the rule until it’s necessary to break the rule.
Again, it’s easier for the US to break its own rule than the ECB/EZ.
But the rule is generally the rule, and until it’s broken, the US gov is operationally constrained comparable to Greece and California.
I think that’s more accurate than simply saying the government is not revenue constrained.
anon Reply:
May 17th, 2010 at 9:01 am
And the MMT proposal is to do away with that rule.
Which is different than implying it is not in place.
Ramanan Reply:
May 17th, 2010 at 10:12 am
Anon,
Good/interesting points you make, have been making. The reason I keep bring other things such as current account etc is that there is a mechanism for the yields to stay stable, not move upward in one direction etc. So there is no crowding out in the sense neoclassicals say. So as the government spends, it creates more wealth and incomes go up as well and the income not consumed goes into wealth allocation and government bonds are an important part of the private sector portfolio. So there is a mechanism from the yields from spiking and keeping questions of default away from investors mind – you know what I mean ? I mean the world moves in complex ways but somewhere in that randomness there is some mechanism to create a demand for government securities. So the US is indeed different from Greece.
Also the US has its central bank. (The NCBs are nothing but puppets of the ECB.)
For example, the Fed can purchase government from secondary markets – I would imagine it has good forecasts of the spending, incoming taxes etc. The Fed cannot bid at auctions but there is an exception – it can bid for dollar amounts equal to maturing holdings. So it can purchase debt near expiry from the secondary markets and then bid more than it would have been able to. So there are workarounds, though I think they wouldn’t ever have gone so desperate.
The reason I have a different opinion from the MMTers is that I would put things in a different way – on things you have pointed out.
I found these two articles which have some good information about the Treasury’s cash management and issues which can happen when some extreme events can happen.
http://www.gao.gov/new.items/d071105.pdf
http://www.gao.gov/new.items/d061007.pdf
In other countries, there are accounts called “Ways and Means” where the Treasury does have an overdraft, though with some ceilings.
I am interested in the interest payments and rule related to that.
anon Reply:
May 17th, 2010 at 10:58 am
Interesting looking papers.
Reminds one of how dependent the MMT approach is on integrating treasury and the central bank – somewhat obscuring how interesting the existing arrangement is. e.g. page 7 chart in first paper makes it pretty clear that the government indeed “does or doesn’t have money” on a deconsolidated basis
zanon Reply:
May 17th, 2010 at 7:18 pm
anon:
i think these is difference between self-imposed constraint and externally-imposed constraint.
you are true, US would have to change its own mind in how it is run. it is simple rule change, but operationally easy. this is why MMT say no *operational* constraint.
Greece needs to change someone ELSES mind or needs to exit the system. It cannot cut its own bonds.
whether this is big deal or small deal, material or not, is up to beholder eye!
anon Reply:
May 17th, 2010 at 7:33 pm
It’s Greece’s choice to be or not to be a part of the EZone.
If it chooses to remain part of the EZone, the ECB constraint on it is a self-imposed constraint.
All constraints are self-imposed. It’s a meaningless qualifier.
Bx12 Reply:
May 17th, 2010 at 7:52 pm
About those GAO papers:
“The receipts Treasury uses to finance federal expenditures come primarily from two sources: (1) tax revenues from sources such as personal and corporate income taxes, payroll withholdings, or other fees the federal
government imposes; and (2) cash borrowed from the public through Treasury’s regular auctions of debt securities.”
How can the official language be so much at odds with MMT claims (Taxes don’t finance anything)? How do you reconcile them?
“Treasury cannot risk an overdraft because the Federal Reserve is not authorized to lend directly to Treasury, in part to preserve the Federal Reserve’s independence as the nation’s central bank.”
There you have it, I suppose.
” If Treasury’s TGA balance exceeds or falls short of its target, the Federal Reserve must neutralize its effect on bank reserves through open market operations.”
OK, fine.
zanon Reply:
May 17th, 2010 at 11:57 pm
As I say, it is in eye of the behold.
California could also secede from US and create arniedollar. or somehow issue arnie buck and take it for the state tax.
pebird Reply:
May 28th, 2010 at 3:16 pm
I think the whole point on the default question is that default becomes a POLITICAL act, not a function of the monetary structure itself.
You can verify this since there are two conflicting “rules” in place: 1) interest on bonds will be paid, 2) debt ceiling. Certainly we can imagine a circumstance in which refusing to raise the debt ceiling would result in an “inability” to pay bond interest. That inability is completely voluntary – it is a political choice dressed up as an operational constraint. This is a very important distinction.
Just because there are rules put in place to constrain certain actions, does not constitute “operational” – it is a political constraint – no different than laws that are put on the books due to political beliefs. Yes, the laws constrain, but operationally they can be changed.
May 17th, 2010 at 10:17 am
Alright, thank you all, I get it now:
REPEAT AFTER ME : THE US DOES HAVE A GREECE PROBLEM!
;-)
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Bx12 Reply:
May 17th, 2010 at 10:59 am
More seriously,
“For the whole Euro Zone, deficits lead to an increase in networth by an equal amount, but not for each country.”
OK, so I understand that as : aggregate gov. net spending is a vertical transaction i.e. it creates net financial assets.
When the Greek gov spends it does issue currency because the ECB credits bank accounts as in the case of the US gov. Conversely, a US state can only borrow from a private bank. I would use that as the acid test to declare whether an entity is issuer or user of the currency.
Based on the other comments, it seems that both in the case of the US and Greece, if they stop issuing debt, their net spending capacity is equal to their recorded “net worth”, before running into a problem : will the CB at that point allow an overdraft is subject to debate.
In both jurisdictions, too, that problem can be bypassed altogether by “debt monetization” with an arrangement between the CB and the banks, that the former will buy back Tsy’s from the latter soon after issuance. It seems to be, this is what the ECB calls its “nuclear option” and has already been in use.
The main conclusion I gather from this, is that Euro-members are issuers of the currency, so the solvency problem is ultimately a political one. Unlike what I previously assumed, net deficit spending generates net financial assets.
The main difference that I see, broadly, with respect to the US, is that spending, hence money issuance is not centralized, but distributed among member states.
Can this be agreed upon?
Wouldn’t it make sense that a centralized Euro government be the sole issuer of Tsy’s, as is the case for bills/coins, so that investors aren’t concerned with the weakest link (Greece, for now)? The proceeds/liabilities from Tsy’s would be allocated among member states internally. Am I fantasizing, here?
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warren mosler Reply:
May 19th, 2010 at 11:57 am
loans create deposits for any entity. hence the notion that banks ‘create money’
more broadly, borrowing is evidenced by liabilities. same thing.
the cb, however, can credit accounts/create deposits without prior borrowing.
greece has decided to borrow euro to spend, and can only do so if lent to.
using euro rather than drachma was a choice to borrow a foreign currency rather than fund in its currency of issue.
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Ramanan Reply:
May 17th, 2010 at 12:57 pm
Not really. There is a mechanism in the US for the yields to not blow up. There is a central bank which can purchase government debt. Remember what Alan Greenspan said “If you have a bazooka in your pocket and others know it, you don’t have to use it”.
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Bx12 Reply:
May 17th, 2010 at 2:48 pm
“There is a central bank which can purchase government debt. ”
That’s hardly a prerogative of the US gov.
“Not really. There is a mechanism in the US for the yields to not blow up. ”
The CB can control very short-term IR because it is the monopoly supplier of banking reserves. That is true both in the Euro and US.
For anything else, it’s control is much weaker, let alone when it has 12 markets to look after, not just one. If, as I hinted at previously, Tsy’s were issued by a centralized Euro gov, it would be on par with the US.
“Remember what Alan Greenspan said “If you have a bazooka in your pocket and others know it, you don’t have to use it”
Greenspan has a bazooka and Trichet a “nuclear option”. So they’re even.
Besides, since when do I have to believe anything Greenspan has said?
Greenspan is the one who in 2005, declared that we shouldn’t fear a sell off of US Tsy’s by foreign investors. That’s also an MMT claim.
Yet, the USD was severely tested in 1987, in the wake of the Louvre accord, and some have it that is thanks to the the BOJ that the US stopped from falling further and LT IR to rise.
That’s somewhat of another issue altogether, although it does relate to the claim that “There is a mechanism in the US for the yields to not blow up. “.
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Ramanan Reply:
May 17th, 2010 at 3:25 pm
Bx12,
I agree with you in general, though I guess your objections are a matter of emphasis. The world in front of us moves in extremely complex ways and its not so trivial to explain everything in a few words and you will agree with me on that I guess.
I am totally unsurprised by the Euro Zone not blowing apart – guess its the survival instincts at play. Yes Trichet has the nuclear option. If I were to bet, I would say that the Euzo Zone will come out the crisis, though in a suboptimal way. All rules have been broken and it is not surprising for me – because the world moves in complex ways.
In fact, in reply to Anon below, Germany is also in the Euro Zone and it is not facing the issues with Greece :).
Plus I do not really think that the foreigners (to the US) not purchasing debt is not an issue. It can an issue for me. What if foreign investors prefer equities ? However, the important thing is that the US Treasury has a good friend – the Fed and it can come to the rescue. In the Euro Zone, they have been rescued (though the markets still doesnt think so), but after imposing austerity measures on governments.
More importantly, I think it is dynamical problem. Plus I do not really think in terms of “currency” – I think of it more as balance sheets and flows. So I wouldnt really comment on the currency part. For me, the bailout has happened, and if the region manages to survive, then the effect of the government spending on the net worth of the non-government sector is the same.
I in fact, like to think of the US government borrowing in order to spend with the advantage of having a central bank with which it can coordinate and control the yield curve. (I do not mind using the word borrowing or financing).
Again, an important thing for me is always the sectoral balances and since the Euro Zone comprises many countries – the current account as well. There are other factors as well – the economies in crisis have a big parallel informal economy and this leads to the governments not being able to collect taxes. The operational constraints are important, but in my view there are other more important factors.
Bx12 Reply:
May 17th, 2010 at 3:44 pm
“Plus I do not really think in terms of “currency” – I think of it more as balance sheets and flows. So I wouldnt really comment on the currency part.”
I suppose you refer to Warren’s and my use of the expression “issuer of the currency”. That is crucial, but its implications can also be rephrased in balance sheet terms: the CB liabilities don’t matter, that’s why the gov is not financially constrained. Well, that’s how I understand it. But I’m only a consumer of MMT, not a theorizer.
“I guess your objections are a matter of emphasis.”
You will notice, there are no objections to MMT in my comments. On the contrary, I’m trying to stick to what I understand from MMT and derive implications from it.
“The world in front of us moves in extremely complex ways ”
At the very least, putting a precise definition on issuer of the currency, and explaining how it does not apply to Greece, should not depend on ongoing events, no matter how complex they are.
Thanks for your insights.
May 17th, 2010 at 12:23 pm
1. MMT’ers assert that under a nonconvertible flexiible rate regime, the government (including Treasury and CB functions) is not financially constrained. This is not an MMT principle. Everyone who understands the nature of fiat regime agrees with this assertion, even though they may oppose and want to change.
2. MMT’ers also agree that the US is operationally limited by law. They also correctly assert that the law can be changed anytime there is the political will, and this should be done ASAP to take advantage of the opportunity that functional finance presents to achieve full capacity utilization and full employment along with price stability. The US is unnecessarily pretending that it is financially limited when it is not, and the country is foregoing opportunity at a significant cost. This is where MMT as a theory comes into play relative to policymaking.
3. Practically speaking, the US will never default, because the Fed has been granted emergency powers that the Fed interprets at its discretion. This fact was demonstrated during the GFC when Bernanke did a number of things that lots of people were screaming were illegal and exceeded the Fed’s authority. That never went anywhere. The Fed will never ever let the Treasury’s checks bounce under any circumstances. They will just do what it takes and justify it later. That’s what lawyers and other experts are for. So get over it. As long as the Fed board is politically independent and largely chosen from finance, it is not going to let politicians crash the country through default, not matter how stupid they may get. Congress would either have to abolish the Fed, or get a much tighter leash on it than they now have, and neither of these things is likely to happen anytime soon if the bankers have any say in it, and they have a lot of say, as we see.
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anon Reply:
May 17th, 2010 at 12:53 pm
1. no difference between US gov and Greek gov in this sense – operational constraints are in place for both; otherwise they’d both be free to spend without borrowing back what they spent
2. the US is pretending relative to MMT policy; it’s not pretending relative to policy in place
3. Greece is no different if it didn’t have to borrow back what it spent.
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Ramanan Reply:
May 17th, 2010 at 1:03 pm
Not necessary to get carried away by operational constraints. The more important question is “Is there a demand for US Treasuries” and the answer is YES there is. Is there a demand for Greece bonds – No, because the current account deficit causes a demand drain.
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anon Reply:
May 17th, 2010 at 1:09 pm
that’s OK (maybe)
but not really MMT dependent as an explanation
Bx12 Reply:
May 17th, 2010 at 2:54 pm
“The more important question is “Is there a demand for US Treasuries” and the answer is YES there is.”
Please allow me to differ a bit on the order of priorities.
The claim has been made that Greece is like a US state, which borrows from private banks (net assets are not created).
My understanding, now, is that Greece spends by crediting bank accounts, resulting in an overall increase of reserves, just as the US gov would, resulting in a creation of net assets. Greece is in essence issuer, not user of the currency.
I’d love to see this claim confirmed or debunked as a lot of implications follow from it.
Bx12 Reply:
May 17th, 2010 at 2:58 pm
“but not really MMT dependent as an explanation”
Talk about an understatement. MMT is founded on central banking operations.
anon Reply:
May 17th, 2010 at 1:11 pm
(the Greek gov spends by crediting bank accounts in Euro)
Reply
Bx12 Reply:
May 17th, 2010 at 2:55 pm
I’ll count that as 2 votes (including mine) for the claim that Greece is issuer of the currency.
Bx12 Reply:
May 17th, 2010 at 3:24 pm
I just read Warren’s rebuttal of Krugman: We’re Not Greece
“For the same reason. We can manage our aggregate demand because our fiscal policy is not operationally constrained by revenue the way Greece is.”
I reassured that the question boils down to operational differences.
“Wrong reason- we are the issuer of our own currency, the dollar, while Greece is the user of the euro and not the issuer.”
This is in stark contradiction to what I speculated earlier:
“My understanding, now, is that Greece spends by crediting bank accounts, resulting in an overall increase of reserves, just as the US gov would, resulting in a creation of net assets. Greece is in essence issuer, not user of the currency.”
So given propositions
A = [ Greece spends by crediting bank accounts, resulting in an overall increase of reserves]
B = [Greece is issuer of the currency]
Either A does not imply B, or A is false.
Matt Franko Reply:
May 18th, 2010 at 7:55 am
bx12,
I may be in a sympathy of sorts with you on this (if I interpret your point correctly: greece is in a way a currency “issuer” when its CB credits a bank account on the behalf of the Greek Treasury). But remember, the sop is for the greek treasury has to sell govt bonds first, to obtain balances in the greek treasury account before it can spend.
A problem Im viewing (albeit from afar) is that the Greece Primary Dealer banks imo are not engaged/on board fully with the Greek Treasury operations in this regard. for some reason, the Greek dealer banks seem to be demanding higher interest rates from the govt bonds than they should be allowed to by the greek govt. If the greek banks were to change behavior to act as true agents of the greek govt, the situation there could improve almost on its own imo. Greek govt should either fire all the dealer banks and get a new set that will work in the govt interest or just nationalize all of them and take over the PD operations. , Resp
anon Reply:
May 18th, 2010 at 8:09 am
no operational difference between Greek gov and US gov
both spend by crediting bank accounts
both have constraints requiring spending from positive deposit balances with their central banks – no overdrafts allowed under the rules – so both require bond issuance before spending
both work under “self-imposed constraints”, according to rules of the EZ or rules of the USA
the only question is whether rules will be broken in either case
MMT wants to break the USA rules permanently
But the rules exist in both places right now
Bx12 Reply:
May 18th, 2010 at 8:40 am
Let me synthesize my views on this thread. Hopefully, it will motivate a rebuttal.
Here’s how I would frame the debate :
A = [ Greece spends by crediting bank accounts, resulting in an overall increase of banking reserves, because its account keeper is the ECB]
B = [Greece is issuer of the Euro currency]
Either i- A does equate B, or ii- A is false
ii- would be hard to be believe as the Euro legislation says clearly that ECB via the NCBs are fiscal agents of the govs. If i-, then “issuer of its own currency” is a misnomer.
The issue of whether an overdraft at the CB would be allowed if necessary, is separate. Legally, anyway, the US gov does not have that privilege either.
My interpretation is that currency issuance (as a result of deficit spending) in the Euro zone is distributed among member states, whereas it is centralized (Federal gov) in the US.
Both in the US and in the Euro-zone, however, central banking is decentralized : Branches in the former, NCBs in the latter. The operational realities are not fundamentally different.
However, whereas there is one market for US Tsy’s, each nation in the EZ issues its own Tsy’s, so that the markets are able to attack the weakest link (Greece).
If the Euro-members had a centralized bond issuing auction, as they have for coins and bills, the Euro and the US would on par in terms of credibility.
That’s not to say, in this new configuration, that either the US or Euro would not be tested by the markets, but such an event is less likely than it is for a small entity such as Greece. The downside, however, is that in this much less likely event, the consequences would be more dramatic.
Who would come to the rescue of the US/Euro? I guess the CB would eventually overrule the no-overdraft legislation to avoid a return to the bronze age. But if it gets to that, the Greek problem will look like pittance.
anon Reply:
May 18th, 2010 at 8:58 am
Mostly agree.
Both A and B are true.
The Greek gov is no less an issuer of Euro, than the US gov is of dollars.
The difference is that Greece is one of multiple, independent gov issuers.
It’s the multiple, independent issuers that creates policy inflexibility.
The solution is to leave to Euro or make the issuers more interdependent by policy.
anon Reply:
May 18th, 2010 at 9:01 am
The issue is not whether either gov spends by crediting bank accounts or whether either creates new reserves in doing so. Both do for both.
The issue is whether the gov spends by debiting its own deposit account or by drawing down credit from the CB. Both do the former.
ESM Reply:
May 18th, 2010 at 9:07 am
I posted this idea on another recent thread when this same discussion arose, but I’ll bring it up here again.
Cash is a hot potato. A holder of cash has only 3 options as to what to do with it: 1) sell it; 2) put it under a mattress; 3) invest it in an interest-bearing security issued by the government. Option 1 just gives the cash to somebody else. Option 2 earns zero interest. Option 3 earns interest.
As the US is the only game in town with respect to the dollar, close to all dollar cash is invested in US govt securities by the end of the day, each and every business day. Close to every dollar of deficit spending by the US gets recycled/reabsorbed by a Treasury security or Fed repo, and the remainder sits as cash or in an non-interest bearing acct at the Fed.
Greece, however, is not the only game in town for the holder of a Euro. Ultimately, a holder of a Euro can completely bypass Greece and its central bank and earn interest in, for example, a German government security or at the German central bank.
And the very fact that it is possible for a Euro owner to bypass Greece undermines Greece’s ability to fund itself and introduces additional credit risk, thus creating the potential for a downward spiral.
So in addition to the important theoretical difference (Greece cannot unilaterally create Euros, while the US govt can create dollars), there is the practical difference that dollar holders have to buy US govt bonds in order to earn interest, while nobody needs to buy Greek govt bonds.
anon Reply:
May 18th, 2010 at 9:34 am
Both US and Greek govs are subject to bond issuance constraints; they are both currency issuers in that sense (i.e. bond issuers).
ECB has same ability to create Euro as Fed has to create dollars; Greek CB has no independent policy freedom to do so.
Euro NCBs have similar bank run risk as US commercial banks, but are fully “insured” by ECB inter-NCB credit lines.
BFG Reply:
May 18th, 2010 at 9:57 am
ESM,
Richard Koo makes the same point you do, that Greece should announce an end to government bond sales to foreigners. Koo thinks that putting the onus on the Greek populace to buy it’s own bonds would reassure the nation’s creditors in the short term, and would make it politically easier for the government to reduce fiscal outlays.
Koo suggests that governments that elect to discontinue foreign bond sales should be exempt from the 3% rule, and this would in turn restore Greece’s fiscal flexibility during the downturn. So, if they do default it will only be the Greek people that will suffer.
Warren, is this similar to your idea, that Greek bonds can be used for tax purposes in the case of default.
ESM Reply:
May 18th, 2010 at 1:03 pm
BFG,
I think that is an interesting idea, and perhaps the Euro would have been better off if such a rule was in place from the start. But it is much too late. Until recently Greece was running a current account deficit of 12.5% of GDP. And unlike the current account deficit of the US (which is much smaller), it is being driven more by the desire of Greeks for imports than it is the desire of foreigners to invest in Greece.
Unless Germans are willing to subsidize Greeks forever, Greece has to start living within its means. The best way for that to happen is for Greece to default and exit the Euro. Any other solution is just prolonging and exacerbating the inevitable, as well as unfairly bailing out investors in Greek debt.
JCD Reply:
May 18th, 2010 at 5:55 pm
Well given Germany’s actions today, I’d put my money on ‘unfairly bailing out investors in Greek debt’.
Last call to sell all of your Greek government bonds!
Tom Hickey Reply:
May 17th, 2010 at 1:52 pm
Anon, the people in charge are fully aware of the fact that the US is not financially constrained. The operational constraints are in place to prevent Congress from “spending frivolously on social programs that expand the public sector at the expense of growth due to pressure from the left.” There is never a limit on spending on “necessities,” like the military, wars of choice, bailouts, corporate welfare, and the like. Then, “deficits don’t matter.” Operational constraints are removed selectively as needed by appeal to “emergency powers,” etc. Accounting rules in the way? Just have the FASB change them. Banks insolvent? Give them “stress tests,” and declare they passed. It’s just kabuki, and everyone knows it.
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beowulf Reply:
May 17th, 2010 at 10:51 pm
Of course Tom– just like how when Democrats take power, they feel compelled to cut spending and raise taxes so that when Republicans take power they, in turn, can be free to hike spending and cut taxes.
I understand what the GOP gets out of this, still not sure what’s in it for the Democrats. At some point… well I won’t even suggest they go on offense… but the Dems should just stop doing their opponents’ work for them.
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Tom Hickey Reply:
May 18th, 2010 at 12:12 am
Some people are starting think that this a version of 3 Card Monte. The people are getting suckered and the in-people of both parties who deal the game are laughing all the way to the bank.
beowulf Reply:
May 18th, 2010 at 2:54 am
Tom, thought you might find this post from 2006 interesting (explains why so many borrowers use Libor).
“Is the Prime Rate a Scam?”
http://www.interfluidity.com/posts/1160447599.shtml
Min Reply:
May 20th, 2010 at 12:15 pm
Tom Hickey: “MMT’ers also agree that the US is operationally limited by law.”
Well, the MMT line is that spending precedes borrowing. However, if the U. S. law mandates that borrowing precede lending, that is a point that needs to be addressed. I have not seen anybody meeting it head on. At best we have an agreement that the Fed has a no overdraft rule (rule, not law) for the Treasury, which can be broken or bent if necessary. That is too vague for me. :(
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Min Reply:
May 20th, 2010 at 12:17 pm
And the reason that it is too vague for me is that I want to spread the MMT word, and I do not know what to tell people. :(
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anon Reply:
May 20th, 2010 at 12:33 pm
The government’s account at the Fed has typically been around $ 5 billion in the past.
If spending actually preceded borrowing, deficit spending would be limited to $ 5 billion before borrowing became necessary. So for all practical purposes, borrowing precedes spending. It’s not a law. It’s a logical observation based on the legal requirement for a positive balance.
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Tom Hickey Reply:
May 20th, 2010 at 1:32 pm
Min, borrowing precedes spending in that the Congress appropriates all expenditure, but it must also approve increases in the debt limit before it is hit. Of course, Congress always does this, so it is pretty much a non-issue. After the GOP tried to shut down the government back in the ’90′s over the budget and got whacked at the polls, no one is going to try anything like that again anytime soon.
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Min Reply:
May 21st, 2010 at 4:32 am
Thanks, Tom. :)
I was more curious about the hypothetical overdraft question.
May 19th, 2010 at 12:03 pm
greece spends by first obtaining balances in its account at what is effectively an external clearing agent, the ECB/NCB combo, and then instructing that entity to debit its account and credit another account.
the Fed can simply credit other bank accounts on its books to spend without prior funding. the Fed is constrained politically by Congress which is the entity spending that controls the Fed.
Congress has no external constraints on its dollar spending. any nominal constraints are necessarily self imposed.
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Tom Hickey Reply:
May 19th, 2010 at 1:21 pm
Good point, Warren. BTW, you say in a comment #22 above,
“more broadly, borrowing is evidenced by liabilities. same thing.
the cb, however, can credit accounts/create deposits without prior borrowing.”
The CB creates reserves without borrowing. Reserves are CB’s liabilities. Therefore, not all financial liabilities involve “debt” in the sense of borrowing. So it seems that the oft heard claim that all money is debt is wrong. Rather, all money is someone’s liability.
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Bx12 Reply:
May 19th, 2010 at 4:48 pm
> Matt Franko Reply:
> May 18th, 2010 at 7:55 am
> I may be in a sympathy of sorts with you on this (if I
> interpret your point correctly: greece is in a way a
> currency “issuer” when its CB credits a bank account on the > behalf of the Greek Treasury)
Matt, Thanks. That’s indeed exactly the operational issue I am singling out. It seems that Anon (May 17th, 2010 at 12:53 pm) also shares this view:
> “both have constraints requiring spending from positive
> deposit balances with their central banks – no overdrafts
> allowed under the rules – so both require bond issuance
> before spending”
doesnt’ he?
My thanks to Warren (May 19th, 2010 at 11:57 am) for clarifying
> “using euro rather than drachma was a choice to borrow a
> foreign currency rather than fund in its currency of issue.”
Why would issuing Tsy be labeled a monetary operation under US system according to MMT proponents (to drain excess reserve), and a financing operation under EMU?! The Euro is the new currency of Greece. Spending is decentralized in the Eurosystem, centralized in the US, that’s the only operational difference I can see.
> Greece spends by first obtaining balances in its account at > what is effectively an external clearing agent, the ECB/NCB > combo, and then instructing that entity to debit its account > and credit another account.
Isn’t the end result the same for the US, except, perhaps, for short term shortfalls?
> Congress has no external constraints on its dollar spending.
Neither has the Eurosystem, as a whole. Not the IMF, not the World bank, only itself.
Let’s try to nail it down to operational differences
1. The Treasury sells $100 billion of treasury securities.
2. Paying for the new securities reduces member bank balances held at the Fed by $100 billion.
3. And our holdings of treasury securities increase by $100 billion.
4. The Treasury spends the $100 billion it got from selling us the $100 billion of new treasury securities.
5. This increases member bank balances at the Fed by $100 billion.
• Bank balances are back where they started from.
• Our holdings of treasury securities, which are financial assets and saving, have increased by $100 billion.
Conclusion : Government deficit spending of $100 billion necessarily increases savings of financial assets by $100 billion.
What step(s) exactly, in this sequence, do not apply to the Eurosystem?
> Tom Hickey Reply:
> May 19th, 2010 at 1:21 pm
> The CB creates reserves without borrowing.
> Reserves are CB’s liabilities.
Is anyone disputing it? Is not the ECB a CB?
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Bx12 Reply:
May 19th, 2010 at 8:19 pm
Split the USA into countries whose borders are delineated by the current federal reserve districts :
Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
That’s a total of 12.
- Keep the US dollar as the common currency, let Fed+12 branches keeps its tools and don’t change its inflation mandate.
- Instead of one Federal Treasury headquartered in Washington DC, allow each country to have its own treasury whose fiscal agent is, obviously, the federal reserve branch in the same country.
In particular,
- spending and tax collection are now decentralized.
- Each of the Boston, NY, Philadelphia, Cleveland etc. treasuries issue their own treasury bonds, and there is therefore a bond market for each.
I claim : this is a template for the EMU, except there are 12 countries, not 16.
If the US was solvent before the split (MMT claim for the US), why would it not be after the split?
Conversely, if it is not solvent after the split (MMT claim for the eurosystem), why then should it be solvent before the split?
————————————————————–
It is easier to rock a small boat (12 of them), and ultimately make it capsize, than it is for a big ship.
I claim : this is why Greece is being tested first, not the US.
That’s not to say Greece is not ultimately solvent, but it depends on the following:
Each boat/ship may have a special flotation device on board to prevent capsizing, but for obscure reasons, it’s use is strictly forbidden, and only the master captain has the code to unlock it, so what happens in case of emergency is a matter of … speculation.
I claim : this special flotation device is the overdraft at the Fed or the ECB, and the master captain are Bernanke and Trichet, respectively.
Matt Franko Reply:
May 19th, 2010 at 10:04 pm
bx,
There are some similarities but also some key differences. Ramanan is the expert here now, but from some of his posts I get the idea that due to the greek trade deficit, reserves may leave the greek system and the greek system is left short of what we in us would consider normal levels of reserves to conduct monetary operations/treasury issuance. reserves end up in say Germany due to their net exports to greece, now german investors have to buy the greek bonds, and they want higher interest rates from the greeks. also, the germans were accusing the greeks of “backdoor monetization” when the greek cb would do repos with the greek dealer banks who would then buy the greek bonds, that to me just sounds like normal CB operations but the germans were afraid of it for some reason.
also, for a while the ECB was threatening to make greek govt bonds unacceptable collateral for cb operations…imagine how well the US system would work if the Fed said it would no longer accept US treasury bonds as collateral in its operations?! The ECB has just recently tabled this “indefinitely” so that is now helping.
Rob Parenteau and Jan Kregel have posted this here excerpt:
“3. Ultimately, current account surpluses need to be recycled into chronic deficit nations in a sustainable fashion. Such a mechanism could be set up under the auspices of the European Investment Bank very quickly. Effective incentives to recycle current account surpluses via foreign direct investment or equity flows should be crafted at once.” This sounds like an excellent idea.
I think I see what you are driving at (Greece could be a “currency issuer”) but to get there the Greek govt would 1. have to just completely IGNORE the 3% fiscal deficit limits of the treaty and boldly run deficits at least to and perhps more than the greek current account deficit as permanent policy, 2. boldly nationalize at least the primary dealer operations of its banks (and probably re-capitialize them) to get full cooperation at its auctions for greek govt bonds, 3. wisely hire an elite team of MMTers (instead of Stiglitz) to help them press their case at the EU against this injustice.
Greece has too weak leadership to pull this type of thing off though.
Resp,
anon Reply:
May 20th, 2010 at 8:52 am
matt franko,
“reserves end up in say Germany due to their net exports to greece, now german investors have to buy the greek bonds, and they want higher interest rates from the greeks.”
Not necessarily.
The Bundesbank ends up with a credit balance (through the ECB), offset by Greece CB’s debit balance. The German banking system ends up with excess reserves and the Greek system with deficient reserves (compared to previously). Each NCB then does operational OMO to adjust their respective desired/required reserve levels for their own banking systems.
The CA imbalances are resolved in the first instance via the inter-ECB-NCB entries – not necessarily by issuing debt.
Not that dissimilar to the US, where China ends up with dollar balances first and then decides what to do with them. It could have left them all at the Fed without buying US bonds.
May 20th, 2010 at 7:49 am
“The Fed can simply credit other bank accounts on its books to spend without prior funding. The Fed is constrained politically by Congress which is the entity spending that controls the Fed. Congress has no external constraints on its dollar spending. Any nominal constraints are necessarily self imposed.”
No. The Fed can’t debit the government’s account on its books if doing so would create an overdraft. Therefore the government must do bond issues before spending the money. Congress must break the Fed’s rules to get around this constraint in any substantial way. The intended operation of the monetary system as it exists is that Fed independence not be compromised or destroyed by breaking this rule. It is your MMT policy proposal to break the back of Fed independence – not the design of the existing system.
Of course the constraint is self-imposed. That’s beside the point. They always are. Greece has a self-imposed constraint in that it chose to join the EZ and is subject to an ECB monetary authority which is comparable to the Fed. It also must issue bonds before spending. And to break that rule, it must appeal to the authority that imposed it – which is the EZ. It is beside the point that the authority is supranational rather than national. The point is that the rule of central bank independence must be broken the same way as for the case of the US – a rule that is intended to reflect the nature of the monetary system as it was intended – not as MMT prescribes.
The constraint by design is not meant to be broken in either case. You talk about the US as if breaking the constraint is an easy, self-evident inevitability. It’s not. It’s an MMT prescription. But it’s not the way things are intended to work. The US government, the EZ, and California are all intended to work the same way from an operational perspective.
Bx12 – excellent analyses in this thread. You’re thinking clearly and asking the right questions.
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Matt Franko Reply:
May 20th, 2010 at 8:45 am
Anon,
This is just ‘much ado about accounting’….everything you are talking about is just related to how we account for things. There is no sovereign entity above us that dictates ‘the Treasury cannot have an overdraft!’ from on high.
http://mikenormaneconomics.blogspot.com/2010/02/tale-of-two-accounting-numbers.html
We could do it a different way very easily, remove the self-imposed constraints and get people back to work and increase our quality of life in the process.
Our current arrangements were not “designed”. They are a mish-mash evolution of changes to laws and regs that went over almost 100 years now, 2 world wars, gold, bretton woods, information revolution, etc…youre right tho they should be designed (re-designed) from the ground up, thats what Warren and the MMTers are basically calling for here imo. Resp,
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anon Reply:
May 20th, 2010 at 9:04 am
It’s about accounting – and rules and intentions and policy.
The intention of the existing system of Fed independence is that the Fed be independent, and not “monetize” deficits in a material way, beyond currency issuance.
The MMT proposal is to “monetize” deficits in their entirety, with bank deposits and bank reserves.
The MMT proposal is easy enough to understand.
What’s hard to understand is why MMT adherents continually shoot themselves in the foot by describing the existing system as if it’s already been converted to their dream system. No wonder your detractors don’t “get it”. Your presentation is completely confused. Just look at how hard Bx12 is working to try and figure it out.
You should all “get over it” (as Tom likes to say about those who “don’t get it”), and starting describing the world clearly as it is, versus the world as you want it. It’s in your own best interests, in terms of generating support for your views. Stop conflating the world as it is with the world as your want it. You might make more progress that way.
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ESM Reply:
May 20th, 2010 at 9:37 am
Anon,
I believe I understand what you are saying, but you are not quite correct. There is no solvency issue even now for the Treasury, even without some changes to laws or constraints. The only self-imposed constraint that needs to be adjusted from time to time is the debt ceiling (which is almost automatically when it needs to be raised).
There is no solvency issue, even with the current rules, because US govt deficits provide the funds to buy Treasury bonds. Every dollar of deficit spending today ends up in somebody’s bank account, which means that every dollar ends up as a dollar in some bank’s reserve account at the Fed. That bank will want to invest that dollar in a Treasury bond or bill in order to earn interest (and some of those banks are primary dealers in the Treasury market which means they have an obligation to bid for Treasuries at auction). In addition, the Fed does have the ability to bid in Treasury auctions. It just must bid non-competitively (i.e., it is treated as though its bid was put in at the clearing bid).
I suppose in theory a Treasury auction could fail, but in practice it is highly unlikely, and in any case, the probability of failure is probably uncorrelated with the size of deficits or the size of outstanding debt. I would imagine it would only happen if the Treasury tried to issue a 30-yr bond in the midst of a panic about interest rates, and that the market just didn’t want to absorb that much duration risk at one time. Of course, there is no good reason for the Treasury to be issuing long-dated bonds. It can always just issue T-bills to roll over its debt.
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anon Reply:
May 20th, 2010 at 10:03 am
Yes, government spending creates bank deposits and bank reserves.
That’s the case whether the spending starts from a government credit balance or debit balance at the Fed.
The two characteristics are independent.
Your point demonstrates only that it’s very likely the government could flatten its deposit account as desired if it spent first from a debit balance and issued bonds second. No problem with that.
The likelihood of an auction failure is not the issue either.
Neither are the operational wrinkles like temporary dealer repo financing of deficits and the rest.
The point only is that the general constraint requiring spending from positive deposit balances is there for a reason – to prevent the type of mass debt “monetization” that is proposed by MMT.
I make no judgement on the policy objectives of MMT. Just that those objectives are intended to do away with the purpose of the system the way it’s designed now.
MMT blurs the description of current system operations with the MMT desired system.
ESM Reply:
May 20th, 2010 at 10:57 am
I agree with that. And to tell you the truth, the general operational constraint may be there specifically because there is some danger in everybody understanding that there are no financial constraints. I have this nagging worry that if MMT-ers were successful in getting people to understand that “deficits don’t matter,” we will quickly run into trouble with inflation. Because of course deficits DO matter, just not for the reasons most people believe.
This thread sort of started with exploring the differences between the US and Greece when it comes to solvency issues. That’s where my head was. And clearly Greece has real solvency issues. Greece would have defaulted this very month if other sovereign countries hadn’t made the political decision to intervene.
Tom Hickey Reply:
May 20th, 2010 at 11:02 am
“MMT blurs the description of current system operations with the MMT desired system”
This is true based on my experience. When I first discovered MMT, I rushed out to share it and got called out on this point.
Here is what I now see to be the case:
1. A monetarily sovereign government is not financially constrained under a fiat system. The only constraints are real and manifest through effects of employment and price stability.
2. The US government is operationally constrained by law. These operational rules mimic the convertible fixed rate system. MMT’ers recommend that these operational constraints, which are applied voluntarily (politically), be removed sin order to take advantages of the opportunities a fiat currency presents for fiscal policy to achieve full capacity utilization/full employment with price stability.
3. Practically speaking, these operational rules are not binding anyway. a) There are no penalties for breaking them. b) The executive branch is the rule enforcer and it has discretion over which rules to enforce and how to proceed, if at all. c) The government has a lot of loopholes available to it, such as emergency powers. So, in practice, the operational rules are applied selectively. The only recourse is through the courts — expensive and difficult to challenge the government — or the ballot box — a lengthy and complicated process of achieving change in a way that makes results uncertain.
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anon Reply:
May 20th, 2010 at 11:37 am
Here’s what I see:
There is no doubt MMT has a powerful message. It is apparent that its supporters are aware of the challenge in communicating that message effectively. With that challenge, you are probably getting stopped out by irrational counterarguments, in part because your own message is not as coherent as it should be.
My advice is to completely realign the order of the message. The old adage says:
a) tell ‘em what you’re going to tell ‘em
b) tell ‘em
c) and then tell ‘em what you told ‘em
You’re actually stuck on a). The reason you’re stuck is that you conflate the world you want with the world as it is. In part, it’s a very confused message about what is a constraint and what isn’t.
My suggestion:
Change a) so that you tell ‘em up front what your structural proposal is for changing the world.
Then in b) you tell ‘em why – which has to do with removing EXISTING constraints, because in your view they’re not necessary.
Mr. Mosler and others may think they’re doing this with concrete proposals for changing the Fed and everything else, but the reasoning is not coming through as clearly as it should be. That’s because the structural and organizational change you want is being diluted by confusion about the operational differences between the world as it is and the world you want, in large part due to frankly ineffective nostrums like “governments spend by crediting bank accounts”.
Get to the substance of the structural change right away and then delineate what that change is and why it makes sense in terms of the removal of unnecessary constraints.
E.g. eliminate bonds; existing (intended) operational constraint is that government spends from a positive bank balance. That’s not necessary. Here’s why, etc.
You really need to do that with the operational stuff in conjunction with the larger policy proposals such as JG.
Recognize there is an operational constraint now that needs to be removed – instead of denying that there is such operational constraint with somewhat ambiguous language like “fiat currency issuers are not financially constrained”. It’s confusing.
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anon Reply:
May 20th, 2010 at 11:47 am
And on the EZ, you simply say it’s a helluva lot tougher if not impossible to remove that type of constraint in the case of the member countries (given the current structure of the EZ), than is the case for the US. The US is a very simple case in terms of the ability to remove such an operational constraint.
Min Reply:
May 20th, 2010 at 1:14 pm
Anon: “Get to the substance of the structural change right away and then delineate what that change is and why it makes sense in terms of the removal of unnecessary constraints.
“E.g. eliminate bonds; existing (intended) operational constraint is that government spends from a positive bank balance. That’s not necessary.”
From what I have read, the MMT line is not to eliminate bonds, nor to change any existing constraint. The MMT line is to tell it like it is.
Bill Mitchell, I believe, would like to eliminate bonds, but he distinguishes that from his factual claims. And in Australia there is no operational overdraft constraint. He got the CB to admit that it would not bounce a gov’t check (in Australian dollars).
The Fed may have a no overdraft rule for the Treasury. But rules are not necessarily laws. Example: A friend of mine got a ticket for speeding at 4:30 a. m. However, he got off in court because the law mandates a safe speed, and explicitly states that a safe speed does not depend on the posted limit. (Usually that means that you can get a ticket for going less than the posted limit in bad conditions.) The judge bought the argument that my friend’s speed was safe at 4:30 a. m. because the streets were deserted. :)
Tom Hickey Reply:
May 20th, 2010 at 1:51 pm
Anon, agreed. Most people are interested in the policy implications, not the economics. They want a rationale that they can understand for proposed policy. This is the way to get MMT across. Otherwise, it gets lost in wonkiness, and a lot time is wasted arguing about irrelevant objections.
Keep it simple and practical, and close to how it affects people’s lives.
anon Reply:
May 20th, 2010 at 2:12 pm
min,
Both Mitchell and Mosler (as well as others favour) no bonds as an MMT proposal.
The argument in part is that governments don’t need to “borrow” back money their central bank has already issued as a liability.
It’s partly a question of materiality. Cleaning up a small water spill (overdraft) is a bit different than letting the entire ocean in (no bonds). But no bonds is in the spirit of “no financial constraints”.
Still, I’ll bet the Australian gov has never run an overdraft position.
Ramanan Reply:
May 20th, 2010 at 2:43 pm
Min,
Yep .. here it says http://www.rba.gov.au/monetary-policy/about.html – doesnt talk of any limit on the overdraft.
BFG Reply:
May 20th, 2010 at 11:54 am
anon,
No. The Fed can’t debit the government’s account on its books if doing so would create an overdraft. Therefore the government must do bond issues before spending the money.
Is not the purpose of bond sales to drain the excess reserves that were created initially by the government deficit spending? Does not the mere existance of the excess reserves tells you that the government has spent first?, yes/no? And the bond sales are issued after to drain the excess reserves so the FED can hit its overnight interest rate.
Would the FED refuse to supply the reserves and bounce the cheque back to the Treasury, or would it expand the FEDs balance sheet by increasing banks reserves as a liability and hold the treasury’s IOU as an asset, and provide the overdraft.
If the Treasury were to try to sell the bonds first, it would be draining required reserves rather than excess reserves. And then would have to supply the reserves again that it just drained.
Is this right or wrong?
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anon Reply:
May 20th, 2010 at 12:10 pm
“Is not the purpose of bond sales to drain the excess reserves that were created initially by the government deficit spending? Does not the mere existance of the excess reserves tells you that the government has spent first?, yes/no? And the bond sales are issued after to drain the excess reserves so the FED can hit its overnight interest rate.”
Again, that’s not actually how it works. It’s how it might work under MMT.
How it actually works is that government bond sales drain reserves first. The Fed then replenishes those reserves (as desired) temporarily via OMO. At the same time, government balances at the Fed have increased.
The government then spends from those positive balances. That increases reserves. The Fed then drains those reserves (as desired) through OMO.
Bonds first; spending second – that’s the actual order.
Spending first; bonds second (or no bonds) – that’s the MMT proposed order.
See the confusion I’m talking about between actual and proposed?
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Ramanan Reply:
May 20th, 2010 at 1:40 pm
Anon – appreciate your point. However, I think the proposed is already in place in Japan ?
Also, operationally, I may also imagine that the Fed doesn’t use the Treasury General account too much. It just uses the government deposits at the commercial banks.
(Of course in the operations related to the Treasury Supplementary Financing program, it would have decreased banks’ balances and increased the Treasury’s balances because the data says that)
The reason I am saying that is thats much smoother for the Fed Funds market.
Banks are supposed to be paid by the Fed in reserves. I would imagine that it does a simultaneous operation where it moves dollars from the government deposits at banks to the TGA. The two cancel each other and the TGA is unaffected. In some cases, the Fed may decide to reduce the TGA balance, though.
Ramanan Reply:
May 20th, 2010 at 1:43 pm
Anon … in the last para in the above comment of mine is a situation where the government issues a cheque and the banks’ reserves have to be increased.
Tom Hickey Reply:
May 20th, 2010 at 1:44 pm
Min, it is very difficult to tell what is being provided to reserve when, because the government uses various accounts, only moving funds into reserves are needed. The real version of the accounts is a lot more complicated that we idealize in talking about it.
The way it works is that there is a national debt limit set by Congress. Congress then appropriates funds for disbursement and levies taxes. The Treasury disburses funds as directed by the various agencies and the Fed provides the reserves as needed. If the budget balance is in deficit, then a $-4_$ debt offset is required, which the Fed manages through its auctions. This is on a macro level. The accounting has to come out right for a period. There is no specific tie of particular spending to a particular auction, i.e., corresponding transaction.
Under the gold standard it was somewhat different becomes the amount of funds available is tied to an external factor. That constraint does not exist in a fiat system. It’s just numbers that get moved around, and the constraint is the prior actions of Congress, which agencies then implement over time.
anon Reply:
May 20th, 2010 at 2:02 pm
Ramanan,
Japan still has JGB’s outstanding. That’s not full MMT.
Quantitative (Japan) and qualitative easing (Fed) are exceptions to the long run norm. The Fed plans to return to minimal reserves at some point, and in any event they’ve only taken about $ 300 billion of Treasuries beyond normal only their balance sheet.
Treasury’s commercial bank accounts are used primarily for tax collection, which is a one way flow into the general account. If Treasury has $ 1 trillion deficit, it obviously has to stop spending before issuing bonds at some stage – before it exhausts its existing balances in total – whatever the location of those balances.
Ramanan Reply:
May 20th, 2010 at 2:41 pm
Anon,
Of course, no disgreement. My thought process was somewhat tangential to the general theme.
You said
“The government then spends from those positive balances. That increases reserves. The Fed then drains those reserves (as desired) through OMO.”
What I am saying is that it is possible that government spending, taxing and bond issues (with exceptions such as the supplementary program and some minor fine tunes) has no effect on the reserves. The proceeds of bond sales can directly replenish the TT&L accounts without affecting total reserves. So no OMOs really needed when bond purchasers buy the bonds. (Except the case where the Fed directly does repos with primary dealers).
The Bank of Canada doesn’t do OMOs too often.
May 20th, 2010 at 10:21 am
Anon and everybody, where is the rule which says that Treasury can not go into overdraft? The only rule I saw was actually saying that if Treasury goes under 5bn on its account then Fed must absorb this money via OMO
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May 20th, 2010 at 12:51 pm
Esm: “I have this nagging worry that if MMT-ers were successful in getting people to understand that “deficits don’t matter,” we will quickly run into trouble with inflation. Because of course deficits DO matter, just not for the reasons most people believe.”
Yes, deficits do matter, and ours is too small right now. :(
As for rampant inflation once the politicians discover that the quantity of money is not constrained, the politicians (except for Clinton) have acted that way for thirty years! They have cut taxes and spent money like a drunken sailor. Yet we have not had trouble with inflation during that time, and now face the problem of deflation.
I do worry about inflation in the future, not because of cut-taxes-and-spend politicians, but because of our dependence upon oil. It is quite possible that oil production has already peaked. :(
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May 20th, 2010 at 1:50 pm
Thank you all for showing interest for my question and sharing your insights. It seems to me that claims about EZ vs US have not dissipated, perhaps because they weren’t sufficiently qualified when they were made.
Based on the very high standard that readers have been accustomed to here, at Billy’s blog etc., my wish is that the ambiguities that were brought forward will be taken up and elucidated in a spirit of full disclosure, sometime in the future.
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May 20th, 2010 at 1:52 pm
Type correction: It seems to me that [misunderstanding of the] claims about EZ vs US have not dissipated
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May 20th, 2010 at 2:25 pm
This notion of “checks bouncing” is also a spurious one.
The only reason a US gov check COULD bounce is if there were some cash management planning error at the Fed which it didn’t correct (extremely unlikely and virtually impossible), or if the Fed failed to come to the rescue somehow in the event of a failed bond auction (extremely unlikely and virtually impossible).
That does NOT mean that the US gov doesn’t normally cover its cash needs prior to cash disbursements to avoid overdrafts at all costs. It’s operational mode is NOT to spend before borrowing and to avoid such situations as a matter of policy.
The notion that a US gov check will never bounce, which is almost certainly true, at the same time tells you nothing about their normal mode of cash management operation, and certainly doesn’t suggest that it spends before borrowing.
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Bx12 Reply:
May 20th, 2010 at 3:08 pm
Anon, I’m getting the gist of what you are saying which is that there is some confusion between [actual] operating mode and a [desirable] one, which may be perceived as double talk. I’ve given up on hoping for a satisfactory consensus emerging from this thread, even as the best intentions are at play, because there’s a core ambiguity that needs to be addressed.
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anon Reply:
May 20th, 2010 at 3:18 pm
yes
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anon Reply:
May 20th, 2010 at 3:33 pm
I think unfortunately a fair bit of energy gets sucked out the MMT effort by focusing on the question of “how the monetary system works”.
This is at the expense of the far more important question of how big the deficit can/should be, which is where the critical issues of real economy constraints and net financial assets come into play.
The ambiguity problem you rightly identify pertains to the explanation of monetary operations – how they are versus how they might be.
And the only real reason understanding monetary operations is important to MMT is exposing the silliness of the question “where will the money come from?”
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Bx12 Reply:
May 20th, 2010 at 3:59 pm
“I think unfortunately a fair bit of energy gets sucked out the MMT effort by focusing on the question of “how the monetary system works”.
I’m going to have to stop short of fully endorsing this. Apparently there wasn’t enough energy put into understanding EZ/US distinction otherwise this discussion would have been resolved rapidly. It’s probably worthwhile, as previously unheard of arguments were brought to the fore.
anon Reply:
May 20th, 2010 at 4:24 pm
good point
I may have to remove it immediately from my own endorsement list
:)
(although to the degree much of the confusion might be due to the unnecessary ambiguity of poor framing, it does suck out energy)
May 20th, 2010 at 2:33 pm
Again, its easy to interpret the “self-imposed constraint” as something that, maybe among other things, is intended to be deliberately antithetical to the full blown notion of the MMT no bond proposal.
For that reason, the MMT proposal, full or in part, must be based on policy and economic rationales, and not because it is some “natural” way for operations to work.
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beowulf Reply:
May 20th, 2010 at 4:25 pm
More to the point, the MMT proposals don’t explain how to close the deal. Let’s say you’re a staffer for a US Senator… you’ve read all this, maybe Warren has sat down with your boss, and its agreed that this is a great idea. The next question is, what needs to happen to get this rolling?
Can the Fed make this happen by changing their internal rules? Can the President do it by executive order? If it requires a new law, fine… legislative counsel can draft a bill, what should be in it?
Would these reforms be easier to explain to Congress and the public if, instead of allowing Tsy overdrafts, Tsy simply resumed issuing United States Notes? As Randy Wray pointed out in his HR 1452 commentary, “In sum, it appears that it makes no difference whether the Treasury creates and issues new notes, writes “overdraft” checks, or borrows at zero interest from the Fed.”
http://www.cfeps.org/pubs/pn/pn0102.html
My own view is that reforming Treasury and Fed operations would require a new law.
http://moslereconomics.com/2010/05/17/krugman-we%E2%80%99re-not-greece/#comment-20294
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May 20th, 2010 at 4:43 pm
Here’s a 1966 series $100 United States Note (presumably Tsy could save some paper and issue them electronically). :o)
http://www.lemetropolecafe.com/img2009/Misc/Mitrosky0410_files/US_100_United_States_Note_1966.jpg
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May 20th, 2010 at 8:56 pm
Every now and then we have this debate about what the relevance is of the fact that the Tsy doesn’t get overdrafts from the Fed, so I’ll trot out what I’ve written previously here. The overarching point is (a) it is a self-imposed condition that prohibits the Fed from providing overdrafts (though, I and other MMT’ers have some reason to wonder how strictly this must actually be enforced–I’ve had some “interesting” email conversations with some at the Treasury on this point), and (b) it doesn’t really matter, because either way the rate on debt service is a policy variable. Don’t recall the exact date, I did save the text, which is copied below if anyone is interested.
“There are three separate issues here that don’t necessarily overlap, though they are often talked about as if they do. I plan to do a blog on this to elaborate further.” [Hasn't happened yet. Sorry. Working on a longer paper on the topic.]
“First, buying a Tsy today requires either a previous deficit or borrowing from the Fed. There’s no real way around it in the current system, and this is unrelated to whether the Tsy has to have a positive balance in its account before it spends or if there is a debt ceiling. It’s just how the accounting works.”
“Second, whether the Tsy gets an overdraft from the Fed or issues a security to the non-govt sector, the rate it pays is set by monetary policy, not the market (aside from expectations of monetary policy that drive lt securities), so there’s no real difference. Here, it doesn’t really matter if the Tsy is forbidden from Fed overdrafts.
That’s how Fed’s operations work . . . it [the Fed] would have to charge interest to the Tsy and pay interest on rbs [to banks]. Interest charged to the Tsy is returned to the Tsy as profits, reduced by interest on rbs.”
“Third, if the debt ceiling isn’t raised AND the Tsy can’t get overdrafts from the Fed, then there can be self-imposed default and all kinds of other problems, regardless of the first two points.”
I’ll just point out here that these ARE the real-world facts regarding accounting, operations, etc., and they ARE consistent with MMT.
Cheers,
Scott
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RSJ Reply:
May 20th, 2010 at 11:34 pm
OK, but the constitution is a self-imposed constraint, repayment of foreign creditors is a self-imposed constraint, issuing fiat or convertible currency is a self-imposed constraint.
Unless a nation is faced with the threat of foreign military occupation, then *all* constraints are self-imposed, and politically determined, right?
It seems that you are making a leap between how difficult it would be to achieve something operationally — i.e. how many steps or votes would need to be taken to bring the change about — and the “reality” of the constraint.
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Scott Fullwiler Reply:
May 21st, 2010 at 12:17 am
I completely disagree. We’re already achieving a world that runs operationally according to MMT. We have been for decades. We just don’t realize it. That was my point.
If you want to say that it’s too many steps or too many votes to apply these operational realities to reduce inequality or create full employment, then why are you wasting your time posting about these issues all the time on all these MMT blogs? It’ll never happen, according to you.
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RSJ Reply:
May 21st, 2010 at 12:31 am
I think you missed the point of my post.
We have not been achieving an MMT world “without realizing” it. To achieve an MMT world would require a political process. Saying that operationally it requires 3 steps now, whereas it was 10 steps 20 years ago is not making progress. Making progress requires a discussion and political agreement.
That discussion is important, and if you cloud it by saying “well, it is only 3 steps instead of 10″, then you are going to undermine your own goals. The reason you will undermine your goals is because you need to get people to agree on how best to manage the economy first, and once they agree then they will take 3 or 10 steps to get there. No one cares about CB operations — the disputes are what responsibilities and rights we have as members of this economic system, and what is the best way to manage that system. Once you can make a good case that a certain policy stance will provide the best outcomes, then you will not have trouble making the 3 or 10 operational steps needed to get there.
But as long as you keep telling people that we are already there, when we are not, then you will get caught in endless disputations as to whether overdrafts are allowed and to what degree, whereas you should be making the case that your preferred management of the economy will bring about higher living standards and more stable growth.
And I would not say that my own goals are identical to all of the MMT goals. I agree with the general goals of public purpose financing, ELR, and utility banking. I don’t support the artificially low bank costs, or other bank subsidies, and I also support raising income and capital taxes significantly back to 1950s levels (and cutting payroll taxes back to those levels as well).
As to why engage in discussions about these things, I guess it’s for the same reason people like to discuss the minutiae of ECB vs. NCB operations. They are Geeks who are interested in these things even though it serves no “public purpose” about advancing the economic management policy. It is more fun to have a dialogue with people who disagree with you re: implementation but share your goals.
RSJ Reply:
May 21st, 2010 at 12:40 am
And as an aside, I do think that we can get there. A financial crisis is the best time to articulate the case for a new social compact, and if I am right, we are not going to exit this crisis until something like this happens.
zanon Reply:
May 21st, 2010 at 10:04 am
totally disagree RSJ
you look at models that academics use, and therefore politicians act on, and they assume we are in gold standard world.
of course, theyw ill say we are in fiat! but in the model, it is all gold standard.
MMT ends up focusing on operation because we need to show that rules are for gold standard world. peoples just do not beleive it. the average person experience is in gold standard world, not fiat world. almost no one has personal experience of being currency issuer.
the strategy of some on this blog to “last mile” away and explain bank operation to man on the street i find hysterical. it is so wrong, and indicative of a world view so insane, that i laughs.
i know you say letting treasury run overdraft is “big deal”. i guess having nixon finally get us off gold standard was “big deal” and going off gold standard partially in 1930s was “big deal”. big deal seems to have been happening for 80 years now.
major failure of MMT is with no doubt its inability to make progress in Academy. Those morons continue to cling to money multiplier and would not know difference between capital and reserve if it came and did violence to them. that is last mile, first mile, and every mile in between problem
Tom Hickey Reply:
May 21st, 2010 at 10:39 am
RSJ: “A financial crisis is the best time to articulate the case for a new social compact, and if I am right, we are not going to exit this crisis until something like this happens.”
Zanon: “Those morons continue to cling to money multiplier and would not know difference between capital and reserve if it came and did violence to them. that is last mile, first mile, and every mile in between problem”
I think you are both correct here. The people holding on are doing so because of their “investment” in their position. Major academics find it nearly impossible to admit that they’ve been wrong for so long and they their mistakes crashed the economy. Moreover, the power structure is heavily invested financially in gold standard thinking. The economy is really going to have to crash and people become enraged, for a new paradigm to be accepted at the top. When that time comes, we have to make sure that the correct paradigm is lying around in plain view.
We could get lucky and there could be a reversal of paradigm without a horrendous breakdown, but so far major forces controlling the principal institutions are aligned against this and the norms of the universe of discourse dominating the present debate marginalize or ostracize challengers.
The good news is that the present regime is breaking down rather quickly, so we need to be getting the new paradigm out there.
Scott Fullwiler Reply:
May 21st, 2010 at 11:59 am
RSJ
You still missed my original point. I NEVER said there were 3 steps to realizing MMT operationally. There are NO steps for this. We’re already there, and have been for decades. We absolutely are SEVERAL steps from utilizing our operational/tactical realities fully in policymaking. Your comment at 11:34pm misuses the term “operational.” I’m using “operational” in the sense consistent with policy analysis literature, which is to distinguish between the policy/strategy/tactical levels. You are using “operational” to mean the policy level; but operational as used by MMT refers to the tactical level. The realities of the tactical level are already MMT-consistent, not the policy level, and obviously not the strategy level, either.
Best,
Scott
Tom Hickey Reply:
May 21st, 2010 at 12:48 pm
As a former operations officer, what I learned is that policy in a liberal democracy such as the US is separated from operations. Policy is political — given to the military command by the civilian arm through the president. The military command translates policy into operations through strategy (general officers), tactics (field officers), and logistics (supply and other support officers).
The military command (Joint Chiefs, general staff) assesses policy options and reports back to the civilian government on their operational feasibility, anticipated cost, etc, and politicians adjust their policy directives accordingly. The policy directive is ultimately issued by POTUS acting in the dual role of president and commander-in-chief.
In formulating policy options and directives, politician have to have some idea of operational reality, so there is an interface between policy and operations. It’s the politicians job to sell the outcome to the public, and the military’s responsibility to formulate and conduct operations to achieve policy goals and specific objectives.
This paradigm has been very successful in executing foreign policy (under civilian control) that involves military operations. So it was adapted in other fields, particularly business, which is populated with ex-military and retired military. For example, the board of directors (theoretically representing ownership) sets policy, which is executed operationally by the company officers under the leadership of the CEO. Civilian government operates on an analogous model, but both business and civilian government are less rigidly organized than the military, where responsibility and accountability are absolute, which requires clarity and precision of command and communication.
There is an overlap of economics and operations research, e.g., through game theory.
http://hercules.us.es/~mbilbao/econor.htm#top
May 21st, 2010 at 4:44 am
Thanks, Tom, for the more complete reply. Given that neither taxes nor spending can be predicted beforehand, you would think that the debt ceiling would require a cushion, and temporary imbalances would not be a big deal.
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May 21st, 2010 at 7:14 am
“First, buying a Tsy today requires either a previous deficit or borrowing from the Fed. There’s no real way around it in the current system, and this is unrelated to whether the Tsy has to have a positive balance in its account before it spends or if there is a debt ceiling. It’s just how the accounting works.”
That’s because government deficit spending in time period 1 precedes government borrowing in subsequent time period 2.
Borrowing does precede spending within a given time period.
(Define a time period to be the time between bond auctions.)
This relates directly to a positive treasury balance within the same time period – because borrowing corresponds to an equal amount of deficit spending for that period.
It’s not relevant across time periods because deficit spending in one time period doesn’t correspond to borrowing in a subsequent one.
(Regressing back to theoretical period 1, arguably at that initial stage the government starts up deficit spending and creates the central bank – including starting reserves, currency, and market bonds.)
“Second, whether the Tsy gets an overdraft from the Fed or issues a security to the non-govt sector, the rate it pays is set by monetary policy, not the market (aside from expectations of monetary policy that drive lt securities), so there’s no real difference. Here, it doesn’t really matter if the Tsy is forbidden from Fed overdrafts.”
It doesn’t matter if your interest is primarily pricing (although the pricing effect is debatable to a degree).
It does matter if you’re interested in other factors such as the effect on balance sheets.
“Third, if the debt ceiling isn’t raised AND the Tsy can’t get overdrafts from the Fed, then there can be self-imposed default and all kinds of other problems, regardless of the first two points.”
Yes.
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anon Reply:
May 21st, 2010 at 7:35 am
From Billy Blog:
“The point is that it is always assumed by mainstream macroeconomists who now operate within the neo-liberal tradition that the bond markets are the ultimate constraint on government net spending. The constraint is, of-course, voluntary. Sovereign governments could operate free of this constraint whenever they like subject to legislative or regulation reforms.”
Sounds like the MMT proposed system is different than the one we have.
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ESM Reply:
May 21st, 2010 at 10:50 am
Anon,
We do not require a change in the system at all — merely a better understanding of the system we have. Four years ago, we were running a deficit of about $400B/yr and a trade deficit of about $600B/yr.
Mainstream economists and financial analysts were calling those deficits unsustainable. But of course, they are perfectly sustainable, and, if anything. the budget deficit was too low (the trade deficit can take care of itself). Such misunderstandings often preclude productive government policies and even lead to counterproductive government policies like higher taxes, import tariffs, and export subsides.
If you had asked those mainstream analysts back in 2006 whether it was possible for the US govt to run a $1.5T deficit, you would have probably heard a lot of clucking about how private investment would be squeezed out, that the Chinese wouldn’t lend that kind of money to us, and that our credit rating would turn to junk.
Well, here we are, and MMT-ers have been proved correct that running $1.5T deficits is not a problem from a funding perspective. Perhaps if the mainstream had realized this back then, the government could have responded to the financial crisis earlier and more aggressively than it did and prevented a lot of the damage. Remember, there was a stimulus package in May 2007 of about $150B, which was ridiculously small (and even with that package, the deficit in fiscal 2007 was less than $200B). How would things have been different if that stimulus package was $1.5T instead?
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anon Reply:
May 21st, 2010 at 11:04 am
We’re starting to talk past each other. I agree more than disagree.
Min Reply:
May 21st, 2010 at 11:11 am
Bill Mitchell: “The point is that it is always assumed by mainstream macroeconomists who now operate within the neo-liberal tradition that the bond markets are the ultimate constraint on government net spending. The constraint is, of-course, voluntary. Sovereign governments could operate free of this constraint whenever they like subject to legislative or regulation reforms.”
Anon: “Sounds like the MMT proposed system is different than the one we have.”
As far as the U. S. goes, I think that the MMT system is what we have in that regard. That is, should the market not purchase a U. S. debt offering, procedures are in place to issue the debt, anyway.
If I am wrong about that, there are people here who can correct me. :)
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Tom Hickey Reply:
May 21st, 2010 at 11:13 am
No debt issuance is put forward as a possibility under MMT, not necessarily a policy proposal. MMT presents a number of options and proponents of MMT are not homogenous.
What MMT’ers agree on is removing the operational constraints on the present nonconvertible floating rate (fiat) system than attempt to perpetuate a convertible fixed rate (gold standard) regime. They also agree on instituting functional finance and adopting a stock-flow consistent macro that acknowledges the vertical-horizontal distinction and national accounting identities and sectoral balance.
MMT’ers agree with other PK’ers about the major errors of New Classicalism and New Keynesianism, uncertainty, the money supply being endogenous, debt-deflation, and financial instability. There are a number of papers on this, but so far, I don’t think that anyone has pulled it all together into a comprehensive overview accessible for non-economists. Randy Wray’s book is a great start, but it is not a comprehensive presentation of MMT. Probably the most comprehensive presentation is on billy blog, but being a blog it is not organized as a presentation.
What would be most helpful is a web site devoted to a brief, concise, precise and comprehensive presentation of MMT that would serve both as an introduction and a reference. There’s a bunch of material out there, but it needs to be organized.
In addition, most non-ecnonomists will be interested in MMT for what it has to say about options for economic policy. Here is can demonstrated how MMT principles can be applied to different policy proposals based on different political norms and preferences.
The principal point that many MMT’ers are making now is that, presently, much analysis and many policy proposals are based on an erroneous conception of the monetary system, with the result that policy is being advocated or attacked on false claims, which have neither empirical warrant nor operational necessity. This still needs to be the focus, ahead of explaining the details of MMT. But those details have to be readily available for reference rather than buried somewhere in the academic literature or in blogs/comments.
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anon Reply:
May 21st, 2010 at 12:42 pm
Well said.
But I’m puzzled by one thing, which is the following:
“What MMT’ers agree on is removing the operational constraints on the present nonconvertible floating rate (fiat) system that attempt to perpetuate a convertible fixed rate (gold standard) regime.”
What are the operational constraints they agree on removing?
If it isn’t the operational requirement for no overdrafts (no direct borrowing from the Fed), what is it?
I assume they agree that this is at least an operational constraint. I assume they agree it is an unnecessary constraint. Why wouldn’t they all agree it should be removed?
My suspicion is that it isn’t the elimination of operational constraints at all they agree upon. Otherwise, everybody would probably agree that bonds be eliminated. But some don’t apparently.
I suspect the agreement in fact has little to do with the actual operational constraints. It has more to do with the wider context, which is the misinterpretation of the fiat system as if it were similar to a gold standard system. The gold standard model definitely requires such an operational constraint. The fiat system doesn’t. But that doesn’t mean the fiat system can’t work quite well with the existing operational constraint still in place. Whether it should/can be left in place under MMT seems to be a split opinion.
Tom Hickey Reply:
May 21st, 2010 at 1:32 pm
Here is an analogy. A war is on. The military informs the president that the most effective and efficient option is to use a particular strategy. The president confers with his advisers and they decide that this is politically unpopular, so they direct the military to use a different strategy whose outcome is dubious at best but politically less noxious. That is a politically imposed operational constraint.
Congress is always fighting a war against price instability and unemployment. The most effective and efficient way to deal with this is fiscally, but that is politically unpopular. So Congress directs the Fed to target both price stability and employment using monetary policy (based on the money multiplier), which is inefficient and ineffective and requires redefining full employment so as to include a buffer stock of labor. That is a politically imposed operational constraint.
anon Reply:
May 21st, 2010 at 1:47 pm
OK.
I associate that more with policy constraint, but I get the drift.
ESM Reply:
May 21st, 2010 at 2:02 pm
That’s a good analogy Tom, but I would refine it by not focusing on what is politically unpopular, but rather what is considered to be bad strategy due to misconceptions. For example, bombing civilians is politically unpopular, but I think it’s reasonable to fight a war with constraints on civilian damage due to political considerations, even though it may make winning the war more difficult.
I would say that using a gold standard mindset in fiscal policy is akin to using fixed bayonet charges against entrenched machine guns during WWI. Modern weapons had changed the nature of warfare, and the failure of WWI generals (particular British ones) to adapt proved catastrophic.
Tom Hickey Reply:
May 21st, 2010 at 2:21 pm
Tom Hickey Reply:
May 21st, 2010 at 2:26 pm
Scott Adams nails it:
http://www.dilbert.com/strips/2010-05-21/
Matt Franko Reply:
May 21st, 2010 at 2:29 pm
Interesting discussion using military analogies to debate the form of a better public policy wrt fiscal.
While we are here using hypothetical military examples, the Chief Economist of the Concord Coalition is apparently lecturing the attendees of the Naval War College in Newport this week perhaps on why we as nation will not be able to “afford” to provide an adequate common defense due to “unsustainabilty” of entitlement programs.
Resp,
Tom Hickey Reply:
May 21st, 2010 at 2:47 pm
“I associate that more with policy constraint, but I get the drift.”
The MMT point is that a monetarily sovereign government issuing a fiat currency is not financially constrained. The only constraint is real. That means that operationally the government can use whatever means it chooses regarding monetary and fiscal policy within those real constraints. However, operational constraints can be imposed politically, that is, through policy directives affecting operations. But these are voluntary.
According to MMT, the policy goal should be integrating 1) serving public purpose, 2) economic growth that keeps pace with population growth, 3) full capacity utilization/full employment, and price stability, and 4) stable international economics and global finance (especially important for the US as issuer of the world’s reserve currency). The operational principles are given by functional finance and stock-flow consistent macro models.
Just as the president is involved in operations as commander-in-chief, so too, Congress and the president are involved in the economy operationally through fiscal policy that directs fiscal operations.
beowulf Reply:
May 21st, 2010 at 3:24 pm
Interesting discussion using military analogies to debate the form of a better public policy wrt fiscal.
If you have any interest at all in military affairs, I urge you to read John Kenneth Galbraith’s memoir’s A Life In Our Times. During World War II he served as the Deputy Director of the Office of Price Administration, where he proved that the economy can be run at maximum employment and inflation can be controlled without raising interest rate. At the end of the warn the US Strategic Survey studies of conquered Germany and Japan where he found that Allied strategic bombing was mostly a waste of effort. The chapters (8 through 15) about his wartime experiences are absolutely riveting.
Go read it this weekend–here, I’ll make it easy for you, type in your zip code at this link to see which libraries near you have it. :o)
http://www.worldcat.org/title/life-in-our-times-memoirs/oclc/7170813
May 21st, 2010 at 10:47 am
Anon: “I think unfortunately a fair bit of energy gets sucked out the MMT effort by focusing on the question of “how the monetary system works”.
As a “consumer” of MMT, I disagree. More below. :)
Anon: “And the only real reason understanding monetary operations is important to MMT is exposing the silliness of the question “where will the money come from?”
Leaving aside what is a “real reason”, the question of where the money will come from is not silly at all. It is being used to scare the bejeezus out of people and to hamstring efforts to reduce unemployment and continue economic stimulation. It is so effective in that that the President of the United States, the richest and most powerful nation on earth, says that the government is running out of money, and Congress only throws $15 billion at 10% unemployment. MMT is the only rationale that punctures that myth, right? And puncturing it is extremely important at this time.
As for the idea of issuing bills instead of bonds, that does not require MMT. Henry Ford proposed it when the U. S. was on the Gold Standard.
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anon Reply:
May 21st, 2010 at 11:01 am
I think I’m being misinterpreted there due to poor wording on my part. I agree more than disagree.
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Min Reply:
May 21st, 2010 at 11:17 am
Anon: “I agree more than disagree.”
I am glad to hear it. :)
For me the most important aspect of MMT is to combat the debt/deficit fear-mongering. I do think that creating money solely by issuing debt is not a good idea, but the U. S. has got along for a couple of centuries by issuing debt. It’s not an urgent problem.
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beowulf Reply:
May 21st, 2010 at 8:17 pm
Min, you’re 100% right (about deficit hysteria crippling the country). As for Henry Ford advocating the issuance US notes instead of bonds, Thomas Edison was also on board. And Abraham Lincoln took the welcomed additional step of actually enacting the policy when he was President. Its not all of MMT, but it could be the part of it the general public readily understands and supports, 1. direct issuance of notes is identical in effect to Tsy overdrafting (with Fed IOR used to drain reserves instead of Treasuries), 2. you can visualize a US Note– see $100 job above– you can also picture Ford, Edison and Lincoln. On the other hand, when I think of the word “overdraft”, I picture user fees and bounced checks.
If the idea is to sell a public policy change, you need a simple visual image or metaphor that any American could immediately grasp. The best example is when FDR used a fireside chat to seek public support for the still-neutral US to start giving (not selling) military aid to Britain. FDR compared his “Lend-Lease” program to loaning a garden hose to your neighbor if his house was on fire, you wouldn’t demand payment before giving it to him, you’d just want it back when he’s done. That’s the sort of imagery (and frankly, level of sophistication) that MMT needs to be pitched with to take on the deficit hawk crowd.
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Tom Hickey Reply:
May 21st, 2010 at 10:17 pm
Beowulf, people need to understand the difference between household finance and government finance to get this. When we use words like “spending,” “borrowing,” “overdraft,” etc. to refer to essentially different things, confusion results. People are well aware of what “borrowing” before spending and running an “overdraft” mean in their own case. But it doesn’t mean the same thing for a monetarily sovereign government issuing a nonconvertible floating rate currency. For households and firms the consequences of borrowing, overdrafts and managing cash flow are very real because they are revenue constrained and have to provision liquidity. For a government issuing a fiat currency, it is a matter of accounting entries that have no real significance because the government is not financially constrained in the first place, and having an overdraft to itself makes no sense other than in the accounting. It’s a pseudo-problem.
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May 21st, 2010 at 1:19 pm
“It doesn’t matter if your interest is primarily pricing (although the pricing effect is debatable to a degree).”
Pricing is the only issue, which is my overarching point.
Consider a govt that does not issue debt and only spends via rbs, receiving an overdraft from the cb. Either the cbs interest rate target is now effectively zero, or the cb pays interest on rbs to achieve a positive target rate. That interest on rbs reduces cb profits sent to the Tsy by the same amount, and so raises the deficit by the same amount.
Now consider a govt issuing only short-term debt. The rate on this debt will mostly arbitrage against the cbs target, even (like now) if the cbs target rate is essentially zero. The interest paid will then be essentially the same as that paid by the cb to banks if the Tsy gets an overdraft, and the overarching effect on the deficit will be effectively the same.
So, it doesn’t matter. In either case, the Tsy must pay interest at about the cb’s target. And in either case, the Tsy doesn’t pay more than this.
This is how it works (aside from a few changes if you issue long-term debt, but that’s a choice and in the US the Tsy hasn’t always done this), and this is how MMT says it works.
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Scott Fullwiler Reply:
May 21st, 2010 at 1:31 pm
I should add that the reason this is the most important point is that even orthodox literature on fiscal sustainability sees the interest on the national debt as the only relevant variable. What makes growth in debt “unsustainable” in that theory is unbounded increase in debt service relative to the economy’s capacity to produce goods and services. MMT demonstrates that this key variable is actually a policy variable.
So, adding this to my previous points, all this discussion about whether or not the Fed gives an overdraft, etc., in my mind isn’t relevant to the applicability or inapplicability of MMT. The core variable is interest on the debt, since this is unavoidable even with an overdraft at the cb and since it is also what drives “unsustainability.” MMT research in to the operations demonstrates that this variable is operationally under the control of policymakers. What they do with this control is another matter.
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Bx12 Reply:
May 21st, 2010 at 2:58 pm
Scott Fullwiler Reply: May 21st, 2010 at 1:31 pm
“What makes growth in debt “unsustainable” in that theory is unbounded increase in debt service relative to the economy’s capacity to produce goods and services. MMT demonstrates that this key variable is actually a policy variable.
So, adding this to my previous points, all this discussion about whether or not the Fed gives an overdraft, etc., in my mind isn’t relevant to the applicability or inapplicability of MMT… What they do with this control is another matter.”
Interesting, but not applicable to the current situation where debt is already not sustainable (since you have used this term, I should be allowed to use it too) , in some countries.
Regarding the operational side :
Let’s say the CB
a) sets the deposit rate to the target overnight rate, so it can buy/sell Tsys as much as desired in the interbank market
b) Due to market forces, has to continually buy 10 yrs bonds to maintain a given rate.
Wouldn’t the CB run into some other self imposed constraint by expanding its B/S indefinitely? The Asset/Liability mismatch may grow, relative to its capital (what does it mean in the case of CB?), resulting, possibly, in a loss that its capital could not cover. Wouldn’t that run into an operational constraint?
As an aside, if deposit rate < target overnight rate, how would the CB go about maintaining the ST and LT rates at their target levels, both the same time?
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Sergei Reply:
May 21st, 2010 at 7:21 pm
This means that CB will be nationalized due to negative capital and all cries about monetization and money printing will be over :)
Bx12 Reply:
May 21st, 2010 at 7:54 pm
Seriously, what happens when the ECB runs into negative capital? I don’t care if it’s BOJ, Fed or ECB. You have to make the assumption that it’s inconsequential, or else, the CB will not always be able to control the yield curve for sovereign debt. According to Scott, if you have the latter, overdraft at the ECB is (almost) irrelevant. Hence the importance of the question. It breaks down into operational/policy, as usual.
Bx12 Reply:
May 26th, 2010 at 2:08 pm
As a follow up to my question of what would happen if the CB’s B/S exploded, risking a A/L mismatch that would eat up its equity, here are quotes from 2001, which are only relevant in exposing the mainstream misconceptions, but it would still be nice to have an informed commentary about them.
http://bilbo.economicoutlook.net/blog/?p=9183&cpage=1#comment-6283
http://bilbo.economicoutlook.net/blog/?p=9183&cpage=1#comment-6284
anon Reply:
May 21st, 2010 at 7:58 pm
Negative capital doesn’t matter under the full blown version of MMT operational changes because it combines treasury and the central bank. Treasury is already in a negative capital position technically (liabilities exceed assets), so it doesn’t matter.
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Sergei Reply:
May 22nd, 2010 at 3:36 pm
Treasury does not have a balance sheet to have negative capital. Central Bank does have it
Bx12 Reply:
May 22nd, 2010 at 3:57 pm
Anon, Sergei, thanks for following up on CB’s capital.
“anon Reply:
May 21st, 2010 at 7:58 pm
Negative capital doesn’t matter under the full blown version of MMT operational changes because it combines treasury and the central bank. Treasury is already in a negative capital position technically (liabilities exceed assets), so it doesn’t matter.”
Scott says no overdraft can be bypassed by simply keeping rate of return on sovereign debt low, as not doing so is the main source of escalating debt. The full blown MMT version does not tell us much, because then there would be no restriction to bypass.
The thought process by which I arrived at the CB’s capital is if the CB had to continually keep buying 10 year US Tsy’s to keep the rate low at that maturity. The B/S would explode, and with it the likelihood of an asset/liability mismatch.
The question is topical : what happens if a CB runs into negative capital not in MMT land but today?
The question is also in-temporal : what is the economic meaning of a CB’s capital?
Finally, I’m unsure why Treasury is already in a negative capital position.
Thanks.
Bx12 Reply:
May 22nd, 2010 at 4:26 pm
“Scott Fullwiler Reply: May 21st, 2010 at 1:31 pm
The core variable is interest on the debt, since this is unavoidable even with an overdraft at the cb and since it is also what drives “unsustainability.” MMT research in to the operations demonstrates that this variable is operationally under the control of policymakers.”
So essentially, the gov could keep debt so low on gov debt that it would be sustainable, and overdraft would not be an issue.
Now, I’ve read, in number of instances at Billy, WM, that a deficit in the order of 5% is probably natural. So the only way this is compatible with your claim that debt won’t escalate, is if there is significant inflation to erase the debt burden. Low rates, significant inflation. Who will buy sovereign debt?! That leaves us with either reducing deficit (reminiscent of something, lately?)…or an overdraft at the Fed ;-)
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Scott Fullwiler Reply:
May 23rd, 2010 at 11:40 am
If a 5% deficit is called for to keep AD at full capacity, then so be it, though I personally would never suggest a fixed number like that. Escalating debt service can be avoided by low rate on the debt. If so, escalating debt doesn’t matter, as long as the deficit itself doesn’t outstrip capacity.
Bx12 Reply:
May 25th, 2010 at 6:59 pm
”
Scott Fullwiler Reply:
May 23rd, 2010 at 11:40 am
If a 5% deficit is called for to keep AD at full capacity, then so be it, though I personally would never suggest a fixed number like that. Escalating debt service can be avoided by low rate on the debt.”
Thanks for your reply, I actually missed it earlier.
OECD countries are structurally in DEFICIT. You have to make the assumption that this is necessary to keep GDP on a sustainable path.
Again, even under ZIRP, DEBT will escalate relative to GDP. That is the trend we are seeing in OECD, particularly Japan.
MMT says it does not matter. Ultimately, though, this debt service will hit a self imposed constraint, I think.
Scott Fullwiler Reply:
May 26th, 2010 at 12:23 am
Generally agree. MMT says it doesn’t necessarily matter, not that it doesn’t ever matter. Regarding debt service, I think where we are going is a world in which the perverse effects of CB interest rate targets can dominate (that is, higher rates mean more stimulus, and vice versa, within certain reasonable ranges–i.e., raising the rate to 50% obviously collapses the system). We may already be there, in Japan in particular, but Warren already argues that zero rate policy is deflationary.
Following up on an earlier discussion with you regarding EZ and operational vs. political constraint, you (and others) hit upon a point I made a few months ago privately with other MMT’ers. I argued then that EZ’s constraints were more political than operational (as you’ve noted, unlike US states). So, I’m with you there. Interestingly, this means that the solution to EZ problems are less difficult tactically/operationally though probably even now basically impossible politically.
Bx12 Reply:
May 26th, 2010 at 12:40 am
“So, I’m with you there. Interestingly, this means that the solution to EZ problems are less difficult tactically/operationally though probably even now basically impossible politically.”
Glad to see it presented that way.
anon Reply:
May 21st, 2010 at 1:38 pm
Pricing equivalence is easy to understand.
But if the MMT position is that pricing is the only issue, I believe you’re going to meet up with strong resistance forever.
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anon Reply:
May 21st, 2010 at 1:41 pm
missed your 1:31 before my comment, but unchanged
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May 21st, 2010 at 1:23 pm
“That’s because government deficit spending in time period 1 precedes government borrowing in subsequent time period 2.
Borrowing does precede spending within a given time period.
(Define a time period to be the time between bond auctions.)”
The MMT argument was never that “borrowing does not precede spending within a given time period.” We’ve only said repeatedly that deficits come first as a point of logic. You’re building a straw man here.
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anon Reply:
May 21st, 2010 at 1:50 pm
OK. That’s evident, and interesting, but I’d have to think about why it’s important to the ongoing operation of the monetary system.
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Scott Fullwiler Reply:
May 23rd, 2010 at 11:42 am
Right. That’s why I keep the issues separate. I don’t actually think this is the important issue operationally. It’s important in terms of rhetoric to many.
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Bx12 Reply:
May 21st, 2010 at 2:17 pm
Scott, May 20th, 8:56PM.
I think we can all agree on this :
“Third, if the debt ceiling isn’t raised AND the Tsy can’t get overdrafts from the Fed, then there can be self-imposed default and all kinds of other problems, regardless of the first two points.”
which in my view, in terms of importance, precedes the other two points that you raised.
We haven’t heard you opinion as to whether the EZ is like
- the US states,
- the USA broken down into 12 countries, whose borders are delineated by the current federal reserve districts and which now have their own treasuries, whose fiscal agent is the Fed, and share the same currency. May 19th, 2010 at 8:19 pm
If my analogy is correct,
1- Your first point, which is subject to debate between you and other participants, is not invalidated in EZ.
2- The second point is not invalidated in EZ at the short end of sovereign debt for sure. At the long end, it’s more difficult to control 12 markets than one, but the ECB buying Greek bonds in order to lower the rate, is feasible (already achieved?)
3- The third point remains too : it’s a self imposed constraint as opposed to an operational constraint.
In the case of US states, the Fed is not their fiscal agent, so 1- and 2- are out. More importantly, an overdraft with their private banker will only be tolerated so long. That is not a self imposed constraint but a functional one. So 3- is out.
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Scott Fullwiler Reply:
May 21st, 2010 at 2:48 pm
Hi BX12
Regarding your point 1, that depends on operational realities of payment settlement with national ECBs and national govt’s. I’m not an expert on that, so I’ll leave it to Ramadan or someone. Also, I haven’t actually seen anyone debate my first point regarding the US, if my first point is correctly interpreted to mean “deficits necessarily come first as a point of logic” and NOT “spending comes before taxes or Tsy bond sales within a period under current law.” I’ve never said the latter, and wouldn’t. My point is that it doesn’t matter whether the latter is true or not (and it isn’t).
Regarding 2, I have a hard time believing that if Greece tried to issue all its debt at the short-end and had to refinance the entire debt within the year that there wouldn’t be a premium added there above the ECB’s target, so I would argue it’s invalidated. We’ve seen money market spreads blow up before where there is default risk involved.
Regarding 3, that’s the Maastricht criteria, and it remains the case, as Warren and other MMT’ers have long argued, that there are ways out of this mess if Maastricth restrictions on the ECB are eliminated/altered. Fat chance politically and not necessarily the best route long-term, but operationally true.
Regarding the states, agree with you.
Best,
Scott
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Bx12 Reply:
May 21st, 2010 at 3:32 pm
Scott,
Many thanks for your input.
“Regarding your point 1, that depends on operational realities of payment settlement with national ECBs and national govt’s. I’m not an expert on that, so I’ll leave it to Ramadan or someone. ”
Fair enough.
“Regarding 2, I have a hard time believing that if Greece tried to issue all its debt at the short-end and had to refinance the entire debt within the year that there wouldn’t be a premium added there above the ECB’s target, so I would argue it’s invalidated. We’ve seen money market spreads blow up before where there is default risk involved.”
Is there any difference, conceptually, between selling 1yr buying 10 years US Tsy’s, to flatten the yield curve, and selling Bundesbonds to buy Greek bonds to eliminate their spread?
However, issuing bonds in a centralized fashion, and redistributing them (internally) among the Eurosystem treasuries would solve the problem. To be clear, a Greek Treasury bond or a Bundesbund would no longer trade, only a Euro-sovereign bond.
“Regarding 3, that’s the Maastricht criteria, and it remains the case.”
Still not a case for invalidation as the US also has overdraft restrictions.
“Regarding the states, agree with you.”
I do note that you include Greece in the context of my analogy, not the US states.
anon Reply:
May 21st, 2010 at 6:24 pm
“The MMT argument was never that “borrowing does not precede spending within a given time period.” We’ve only said repeatedly that deficits come first as a point of logic. You’re building a straw man here… Also, I haven’t actually seen anyone debate my first point regarding the US, if my first point is correctly interpreted to mean “deficits necessarily come first as a point of logic” and NOT “spending comes before taxes or Tsy bond sales within a period under current law.”
I assumed it meant roughly the same as my point:
“Regressing back to theoretical period 1, arguably at that initial stage the government starts up deficit spending and creates the central bank – including starting reserves, currency, and market bonds.”
If it’s roughly the same idea, which seems operational in theory at least, I wouldn’t debate it. If not, then I don’t know your meaning by “first as a point of logic”. I don’t see how “logic” can be divorced from operations.
Tom Hickey Reply:
May 21st, 2010 at 7:27 pm
“I don’t see how “logic” can be divorced from operations.”
Under a gold standard, debt issuance competes for loanable funds and crowds out private investment since creation of bank reserves is tied to gold supply. Under a fiat system, there is no external limiting factor on the creation of bank reserves.
Thus, under a fiat in which debt issuance corresponds to deficit spending, the spending adds the net financial assets that are “borrowed,” so there is no competition for loanable funds and no crowding out. Orthodox economists argue that debt issuance crowds out investment even in a fiat regime, in which the currency issuer is monetarily sovereign. MMT shows that is not the case.
Whether the debt issuance occurs temporally before, simultaneously with or after is pretty much irrelevant. Under a convertible fixed rate system,borrowing that takes funds out is needed prior to spending, so that the convertible fixed rate requirement is not exceeded without adding gold.
Under a convertible fixed rate system, what is borrowed is what is spent, and under a fiat system, what is spent is what is borrowed. That’s the logic.
anon Reply:
May 21st, 2010 at 7:48 pm
Interesting explanation, but I disagree.
Are you saying that government deficits don’t result in non government net financial assets under a gold standard? That can’t be true. The accounting facts don’t change just because there’s a gold reserve requirement. So that can’t be part of the logic.
And borrowing takes funds out prior to spending in the existing system at the operational level. Scott Fullwiler already agreed with me on that point – see period 1/period 2 discussion. So that can’t be part of the logic.
The constraint is in the size of bank reserves, and the size of the broader reservable money supply, as determined by the gold standard. I accept that. But it’s not in the other stuff you point. It only translates to that kind of constraint if you don’t issue bonds under fiat, allowing uncontrolled growth in reserves and reservable money, and that only happens with an MMT type change in the monetary system.
That’s my logic. Prove it wrong and I’ll be grateful.
Tom Hickey Reply:
May 21st, 2010 at 8:54 pm
Gold is the numeraire that determines the value of the currency. e.g., one dollar is equal to and convertible into so many grains of metal of a specified purity. In a fiat system there is no extra-monetary numeraire.
This creates a limit on currency issuance under a gold standard, but not under a fiat system. To deficit spend under a gold system, either more gold is required as backing or else actual borrowing must occur. That is not a financial constraint in a fiat system.
anon Reply:
May 21st, 2010 at 9:38 pm
That’s exactly what I said.
My point has been that in fact we don’t deficit spend in the existing fiat system. We borrow what we spend. That’s the whole point of the no overdraft arrangement.
I’ve never denied we can’t lift that constraint. But then we’re into the no bond MMT proposal. That’s a change from the existing system. That’s what I’ve said repeatedly.
We just going around in circles here.
anon Reply:
May 21st, 2010 at 9:42 pm
I meant we spend what we borrow in the existing system, according to the overdraft constraint.
Tom Hickey Reply:
May 21st, 2010 at 10:41 pm
The government could still issue bonds even though everyone would realize that it is not a financial requirement. There probably would be a push to do this, for example, on the ground that a benchmark interest rate is in the public interest. But people would realize that the cost of this is the interest that is needlessly paid on a risk-free parking place, since the debt issuance doesn’t finance anything. It just provides a risk-free savings vehicle for large denominations. Then we could have a debate on the merits, not on obsolete ideas that are being imposed as myths.
Curious Reply:
May 21st, 2010 at 10:05 pm
Scott said:
“We’ve only said repeatedly that deficits come first as a point of logic.”
Only the Fed can create dollars and the Treasury can’t borrow from the Fed.
How did the Treasury get the very first dollar to deficit spend?
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zanon Reply:
May 21st, 2010 at 10:18 pm
No, I think Treasury creates dollars (it marks accounts up and down). Fed changes term structure of dollars already in existance.
When Govt writes check it comes from Treasury, not Fed.
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Tom Hickey Reply:
May 21st, 2010 at 10:47 pm
Yes, but the Treasury can’t issue currency without reserves for clearing. It’s a “which came first, the chicken or the egg” situation.
We distinguish between the CB function from the Treasury function, but they are complementary functions of government. Couching them as apparently different institutions obscures this intrinsic relationship.
Curious Reply:
May 21st, 2010 at 10:58 pm
Zanon,
the Treasury has an account at the Fed and only the Fed can mark that up and down.
Tom,
it’s not chicken and egg question. If you think about it you’ll come up with an answer.
Tom Hickey Reply:
May 21st, 2010 at 11:38 pm
Curious, it is a chicken and egg situation in that the Treasury and CB could be a single agency performing two functions that are complementary. In fact, I am lobbying for it, in that CB “independence from political influence” is bad for democracy, since there is no effective accountability to voters.
anon Reply:
May 22nd, 2010 at 7:29 am
“We distinguish between the CB function from the Treasury function, but they are complementary functions of government. Couching them as apparently different institutions obscures this intrinsic relationship.”
That’s the MMT framing of it, which is totally biased.
The intention of the existing institutional relationship is to separate Treasury from the Fed. The fundamental reason is to prevent Treasury from using the central bank to monetize government debt as a matter of course.
To suggest this “obscures” an “intrinsic” relationship reflects ideological bias. Nothing is obscured if you understand how the accounting works and is intended to work. MMT flips this around and says because only MMT is smart enough to understand the accounting, it must be obscuring something.
The MMT agenda is full policy and operational consolidation of Treasury and the Fed. That’s fine. But don’t argue that it’s because something is “obscured” under the existing institutional separation. The separation is there for a reason, right or wrong. Disagree with the reason if you must, but don’t deny the fact, and don’t anoint MMT as something that is removing “obscurity”. It’s policy, one way or the other.
Tom Hickey Reply:
May 22nd, 2010 at 8:44 am
You are missing the point that the CB and Treasury are agencies that carry out the directives of Congress. It is Congress that and authorizes all government expenditure and debt issuance IAW the Constitution. The CB and Treasury just carry out the dictates they are given.
The CB is only independent in setting the interest rate. Otherwise, it must provide liquidity for authorized expenditure. In this sense the Treasury and CB are complementary functions of government. The CB is also authorized to provide liquidity in emergency situations that it does not ordinarily have, including monetizing debt, as it has been doing with QE.
May 21st, 2010 at 7:59 pm
PS to my message May 21st, 2010 at 2:58 pm, to be more clear I should have said:
b) Due to market forces, has to continually buy 10 yrs bonds to maintain a given rate [at the 10 year maturity].
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May 21st, 2010 at 11:04 pm
Zanon/Scott,
Whether it is three steps or zero steps is beside the point. Let me turn this around and try to describe why you are encountering opposition from the public.
At the core, The core objection is that they (rightly) do not trust the government to use these powers in a way that supports their own interests. Any manipulation of the currency base is assumed to be beneficial to bankers and the wealthy and harmful to them. This is the majority view, shared by liberals and conservatives alike.
As a result of this core belief, there is an economic misunderstanding — an exaggerated fear of inflation. But if you try to convince them that inflation is not a threat, it wont matter, because they will either ignore you or come up with some other objection. The fears of inflation are just manifestations of the core belief, that the government will not use its monetary powers to help them, but to hurt them. As a result, fewer people share each specific economic misunderstanding. I.e. some don’t believe that spending is inflationary, but fear an increase in interest rates that will make private sector financing more expensive, while others fear that it will hurt our terms of trade, and others may fear that it will discourage savings, etc. Depending on each person’s level of understanding, they will come up with some economic reason to oppose you, but because of the core belief that such an action must be harmful to their interests. They then use their level of economic understanding to come up with a mechanism for how that harm will come about. As a result, the specific economic objections are easier to overcome, but when they are overcome, they are replaced with other objections. I’ve experienced this dynamic multiple times when debating people, watching them bob and weave. And it is funny, because when you knock down argument A they switch to B, and when you knock down argument B, they come up with C, and when C dies, you find that A is resurrected again. Some MMT adherents are also guilty of this, but so is everyone else.
Lastly, there is a sense that it is not operationally feasible. The source of this belief is not an understanding of vertical transactions, as most people have difficulty identifying the United States on a map. But it comes from a sense that the operational constraints of any system must make it hard for harmful things to come about, otherwise they would have already come about. Therefore it must not be feasible. They then use their limited knowledge to express why it isn’t feasible — the checks will bounce, the debt ceiling will be breached, etc. Because this level is the farthest removed from the core belief, it is easiest to persuade people that their objections are wrong. But you can spend 100 years doing this, and still have them oppose you. They will come up with some other reason to oppose you.
The argument that MMT merely describes the various options available to a government but is agnostic as to what the government should do is a logically clean, yet impotent; it makes you irrelevant to the larger debates going on about how to handle the response to the crisis. It is like arguing that a ship’s destination should be changed based on hydrodynamics. You first convince them that they want to be in the new destination, then you convince them that they will have enough fuel to get there (real economic resources), and then you worry about the hydrodynamic feasibility, but in reality that is not in doubt. People do understand that we have a fiat issuing government, and this understanding will be unlocked as soon as they agree with your goals.
First define a plausible scenario that competes with the core belief, one in which there is a social compact that the government enforces, and this requires an emphasis on inequality and income distribution. Right now that only relevant thing that I am aware of is the ELR, and this is a far cry from a coherent vision to improve the welfare of the middle class. Then you need to sketch a reason of why this is economically viable, and finally the operational details are a footnote to this argument. It needs to be correct, but if it’s not correct, we can easily adopt new modes of operation to make it correct. From the point of view of making an argument for change, this is the least important detail. From the point of view of advancing an academic career and publishing papers, or having an enjoyable discussion, it is fun to talk about the hydrodynamics. But it wont make anyone better off, or cause anything to be different, even if we are zero steps away.
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Tom Hickey Reply:
May 21st, 2010 at 11:51 pm
I am in basic agreement with this. But I would add that it may take a deeper crisis to shock the public out of their strongly held presumptions, which all principal institutions are reinforcing.
We need to remember that FDR was not only able to end gold convertibility for individuals, but also to limit privately held gold ( Presidential Executive Order 6102 – 5 April, 1933). Moreover, this was during a depression when people were hoarding, showing that anything is possible — under the right circumstances.
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Ramanan Reply:
May 22nd, 2010 at 5:10 am
I too agree but not with RSJ’s other comments. Firstly there is nothing wrong with discussing geeky details. Some economics student may get here through Google search and find a huge body of work by great people – the MMTers. I too found out Billy Blog by typing some keywords, though I am not a student.
Plus MMTers like Scott would like to point many facts which are relevant to the issues. What Scott is trying to say here is that there are different institutional setups but that doesn’t change the nature of money. Of course the setup of EZ is too different and we have a problem there.
Plus there are people with similar aims and its good to get them involved but unfortunately most of those economists end up making the same neoclassical errors such as an exogenous fixed supply of money, yields going out of control and “running out of money”, “banks lending out the reserves” as if it were a commodity, wrong causalities etc.
Writing blogs and encouraging discussions is important to get more people involved especially students.
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Tom Hickey Reply:
May 22nd, 2010 at 9:49 am
Agreed. The blogs, academic papers, books, etc., are a necessary foundation for understanding MMT. But to present it to the public, what is needed is an approach that focuses on felt needs of the public, such as funding welfare programs such as SS, Medicare and Medicaid, investing in infrastructure, and other matters of public purpose that folks care about. This requires meeting common objections, e.g., based on the false household-government finance analogy. Warren’s 7 Deadly Frauds is a great primer here.
RSJ is correct about inflationary fears. This is the standard brush-off of functional finance in a fiat system. MMT’ers need to have a strong rebuttal that is concise, precise, and logically/factually compelling.
In addition, the so-called experts are also going to have to come along, too. So it is important to have a body of academic literature backing all this up.
The give-and-take in the blog comments is invaluable, and without it I could not have gained adequate understanding of and appreciation for MMT as both an economic theory and a policy tool. Thanks to the blog hosts and to all who participate and share their knowledge and view.
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Scott Fullwiler Reply:
May 22nd, 2010 at 10:08 am
Tom@@9:49, looks like you did this while I was typing mine above. I agree that, particularly in times like these where there is perhaps a window for altering perceptions, getting more and more involved is necessary to create a critical mass large enough to force a rethinking. And that requires a message that can be consumed by non-experts, quickly, and which is tailored to their concerns. I welcome comments by you, RSJ, Ramanan, etc., on that. Further, given this “window,” it is very fortunate that you are all willing to continue to help people understand MMT here and elsewhere.
Scott Fullwiler Reply:
May 22nd, 2010 at 9:56 am
Well said, Ramanan
RSJ . . . I agree with you regarding reasons why we are getting pushback. It wasn’t unexpected. I’m an academic whose been doing this since the late 1990s, and I’m quite aware of how the field of economics has been teaching these issues to the general public for decades. From an academic perspective, I would disagree with you regarding your approach. There is a policy approach in the field of economics (indeed, all policy sciences) that is based on a view of how things “work” operationally (i.e., context)–supply/demand for money, money multiplier, loanable funds mkt, crowding out, and so forth. None of those are applicable, but they are what drives the policy approach of the field in general. Change the understanding of the context, and the case ultimately can’t be made for the same policies that have been advocated.
And I think Zanon’s right–I don’t think, in the end, you get a real, sustainable “revolution” in policy unless you ultimately change the message coming from the experts who advise policymakers and sit in their ivory towers and “teach” the new young workers/leaders/citizens/voters how it “works.” It is absolutely a failure, as Zanon calls it, though I don’t know how much “blame” I would put on MMT yet–as an academic, there’s definitely a “power” structure in this field; as an analogy, I don’t blame Galileo for not being able to convince the Pope that the earth went around the sun.
Finally, YES, much more work needs to be done on various policy initiatives and theory. However, until recently we were but a handful of scholars, and there’s only so much that can humanly be done with such small numbers. That said we’ve done quite a bit (particularly given the research output people like Bill, Randy generate); furthermore, and again, from an academic perspective, those policy proposals need to be relevant to a context, and the operational context therefore needed to be detailed. The numbers are growing as UMKC has started graduating Ph.D’s this decade, but it’s not all going to happen at once.
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RSJ Reply:
May 23rd, 2010 at 1:39 am
Absolutely an academic assault is necessary, just like getting operational i’s dotted and t’s crossed is also necessary. The original point of contention was whether we were “already there” or whether most of the hard-work was still ahead of us.
But I wonder — are you engaging in the academic assault or creating your own parallel academic community.
The mainstream economists are going to demand models with reasonable micro-foundations and some sort of utility maximization. I think there is nothing wrong with them requiring this.
And is it so hard to write a DSGE model that dispenses with loanable funds? Honest question — I think you should be able to formalize all of your insights into a language that mainstream profession will accept. If this can’t be done, I’d be interested in knowing why.
Honestly, I’m not familiar with the literature that is coming out of UMKC, but I’ve read a sample of the Levy/CoFFEE papers and I don’t think they would be publishable in more of the mainstream journals, and not because of their content, but because of the analytical tools.
To be clear, I wasn’t challenging the validity of your own research program — institutional economics dealing focusing on the financial system, right? Just saying that in order to launch an assault on the mainstream, you will need to explain to them *why* loanable funds does not hold, in the language of profit maximizing agents, and what does hold in its place. I don’t think this is too difficult for a smart UMKC grad or one of your research associates.
All of these standard misconceptions are, at heart, aggregation fallacies in which certain options that people have are omitted (e.g. the ability to re-sell a claim in a secondary market, the ability to expand your balance sheet and borrow to buy a claim), and therefore the dynamics obtained from the model in which agents are forced to hold bonds to term do not reflect the dynamics that are observed when agents are able to operate in a complete market.
Someone ought to be able to point this out using all the accoutrements of utility functions and Hamiltonians, and launch an attack on the mainstream models.
zanon Reply:
May 23rd, 2010 at 9:34 am
RSJ: In the Academys, there is not so much difference between academic assault and creating parallel community.
The battle is over the grad students, who are little soldiers, and who go off and create more grad students etc.
Look at great shifts of past — Keynes of Austrian, Monetarist of Keynes, etc. and you will see:
1. New approach did not play by rules of old approach
2. New approach did not care about getting anything “right”
Aggregate fallacy are at heart of why macro with micro foundation today is the garbage. I have never seem good macro model come out of micro, and I include Austrian MORONS in that camp as wells.
In other academic disciplines, you grow new school by opening up a channel to generate many many papers. this was trick of post-modern, which has infected rest of academy, and of economics (micro) which consumed law and parts of sociology etc.
If math is keeping MMT out of papers, and it almost certainly is, then MMT needs math so it can create many many opportunity to publish (not matter what rubbish or no).
Still, academy of today is not what it was 50 years ago before the great takeover.
Scott Fullwiler Reply:
May 23rd, 2010 at 9:47 am
Yes, the analytical tools are the tails that wag the dog. That’s just bad science, actually, when it’s more about technique than anything else. And, yes, I do think it’s virtually impossible to do DSGE without including all or most of the things that are inapplicable. But there’s a lot of good quantitative stuff that would be applicable to the real world–Bill Mitchell’s done tons of it. Steve Keen, too. Jamie Galbraith’s work on inequality is very quantitative and innovative. There’s also a lot of work on complexity, system dynamics, etc. But almost none of that can actually get into the mainstream journals, either. So, it’s not about math, it’s about a particular type of modeling that doesn’t apply to the real world. At the same time, I DO think there are many “heterodox” economists that are quite happy, even determined to be, in a parallel world, no matter what. That’s not us (MMT), by any stretch.
Tom Hickey Reply:
May 23rd, 2010 at 12:37 pm
Zanon: “Aggregate fallacy are at heart of why macro with micro foundation today is the garbage. I have never seem good macro model come out of micro, and I include Austrian MORONS in that camp as wells.”
Agreed. Many mainstreamers hold that macro is scaled up micro. This involves two major problems, 1) fallacies of composition, and 2) assuming that the government is a an appendage, useless if not harmful economically.
“In other academic disciplines, you grow new school by opening up a channel to generate many many papers. this was trick of post-modern, which has infected rest of academy, and of economics (micro) which consumed law and parts of sociology etc.”
Yes, Abraham Maslow’s overthrowing B. F. Skinner dominance of academic psychology in the Sixties is a good example. Maslow’s victory was unthinkable initially, since his approach was conceptual not empirical.
“If math is keeping MMT out of papers, and it almost certainly is, then MMT needs math so it can create many many opportunity to publish (not matter what rubbish or no)”
As I see it from the outside, being overly focused on math IS the problem. Moreover, the math is ill-concieved since it does not take complexity into consideration through dynamical models that are very difficult to construct due to chaotic influences and effects, like predicting the weather. The current models have been shown to be woefully inadequate in alerting to the GFC and prescribing what to do about it. Time for a new approach is here.
MMT’s answer, as I understand it, lies in the direction of using the stock-flow consistent approach to macro modeling developed by Wynne Godley ( and separately James Tobin) in the Seventies. These are large complex models, too, but based on systemic relationship of economic data rather than theoretical assumptions.
zanon Reply:
May 23rd, 2010 at 12:57 pm
Scott:
Do you know of Japanese MMT?
If there is a country ready to embrace paradigm it is them.
Even most orthodox economist there has to feel stupid worry about debt and inflation at 300% and 30 years of ZIRP
RSJ Reply:
May 24th, 2010 at 7:04 pm
I agree that the science is bad, but I think it’s reasonable to demand micro-foundations and optimization. Moreover, the use of models is perfectly reasonable, and a requirement that someone be able to craft their main points into the language of models is also reasonable, IMO.
This is not to say that the quantitative stuff is not worthwhile or important — they are different areas of study. But at the end of the day, you need to be able to generate models to illustrate your paradigm if you are introducing a new paradigm. Then you pound away with econometrics to see whether the effects described by the models can be observed, and if not, try to explain why with different models. This isn’t bad science.
Moreover, I don’t see why this is impossible. If you can show how a large group of individuals attempting to maximize their own consumption and wealth can lead to depressions and contractions, then this would be a worthwhile goal in advancing your paradigm, and I don’t think it’s unreasonable that the mainstream economists set this requirement. That they continue to believe in models without empirical support is bad science, but there is nothing wrong with requiring micro-foundations. And if the micro-foundations are bad, then explain why and provide a plausible substitute — then build your model on the better micro-foundations.
Bx12 Reply:
May 24th, 2010 at 7:22 pm
“zanon Reply: May 23rd, 2010 at 12:57 pm
Scott:
Do you know of Japanese MMT?
If there is a country ready to embrace paradigm it is them.
Even most orthodox economist there has to feel stupid worry about debt and inflation at 300% and 30 years of ZIRP”
Yes, but the same economists would downplay it with the fact that 95% of Tsy’s are held within Japan (I think I read this number).
How do counter this, or why is it, after all, relevant?
I’d say that gov spending had to take place because of an increase in the desire to save, nothing incompatible with MMT. But beyond that?
zanon Reply:
May 24th, 2010 at 8:18 pm
Bx!2:
That is exactly why they say Japan’s HUGE debt and long history of ZIRP has not resulted in inflation. Goldman is actually pitching some trade saying that it is all coming to an end is Japanese savings is being used up!
i would call them MORONS but no doubt they will make billions on it even if it loss trillion.
I have just never encountered MMTer from Japan or who know much of Japan. it is country I am ignorant of, but i fear it could be future and would like to know what happened there and why, plus how it was reported by Official Press etc.
Bx12 Reply:
May 25th, 2010 at 1:20 pm
“zanon Reply:
May 24th, 2010 at 8:18 pm
Bx!2:
That is exactly why they say Japan’s HUGE debt and long history of ZIRP has not resulted in inflation”
Give me 2 quotes from 10 years or earlier ago from either of the big 3 rating agencies, warning about Japan’s impending collapse, and I’ll email it to CNBC together with a brief MMT explanation, to follow up on Nassim Taleb’s hyperinflation scarce tactics in his recent interview with them.
zanon Reply:
May 22nd, 2010 at 10:23 am
RSJ: I agree with your reason as to why public does not like this.
Unfortunately, fiat currency is inherently extension of sovereign power, and for various historical reasons people in 2010 are very suspicious of sovereign power. They have good reason to be as sovereign in 2010 is insane and there is nothing to stop it. It is like having paranoid schzophrenic mother and bipolar father with drinking problem. Good lucks.
but all your reasonings do not say why it is failed at academic level. they are still teaching sun revolves around earth. pathetic.
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Min Reply:
May 23rd, 2010 at 3:20 pm
RSJ: “At the core, The core objection is that they (rightly) do not trust the government to use these powers in a way that supports their own interests. Any manipulation of the currency base is assumed to be beneficial to bankers and the wealthy and harmful to them. This is the majority view, shared by liberals and conservatives alike.”
Well, if that is the case, why don’t they abolish the Fed? Do like Jackson did with the Bank of the U. S. and get rid of the central bank?
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RSJ Reply:
May 23rd, 2010 at 3:31 pm
How would that help address the concern?
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Min Reply:
May 24th, 2010 at 10:23 am
Because the Central Bank is, after all, a bank, and many of its actions can easily be seen as manipulations which benefit bankers. (Not that they do not achieve other things, but where do their loyalties lie?) In our current crisis the banks are doing well, while unemployment is high, with no prospect of coming down any time soon. This despite the fact that the Fed has a mandate for full employment. Also, the Fed was supposed to regulate banks wrt consumer protection, and obviously ignored that, probably because they side with bankers like themselves.
(I am talking about perception. Congressmen may be in the pockets of the rich — so what else is new? — but they can be voted out. Not so with the “independent” Fed.)
Tom Hickey Reply:
May 24th, 2010 at 11:15 am
Exactly. Which is why I suggest folding the CB function into the Treasury function. The so-called “independence” isn’t worth the big hit to democracy. It’s basically independence of the finance sector of government from political accountability. The supposed justification of this is keep politicians hands off the pie because they cannot be trusted. Bogus argument, in that it is a cop out for politicians and delegates too much authority to unelected officials beyond public accountability.
May 22nd, 2010 at 3:43 am
Anon: “That’s because government deficit spending in time period 1 precedes government borrowing in subsequent time period 2.
“Borrowing does precede spending within a given time period.
“(Define a time period to be the time between bond auctions.)”
We have a chicken/egg problem here. Which came first, the spending or the borrowing? Unlike chickens and eggs, we have a definite known history. The U. S. started out with debt, because it assumed the debts of the states. However, that debt did not create U. S. dollars. Spending came first. So if you want to define a time period, it should be one where spending precedes borrowing. :)
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anon Reply:
May 22nd, 2010 at 6:55 am
The question is not what came first at the beginning. Logically, it was spending, and I answered that here:
“Regressing back to theoretical period 1, arguably at that initial stage the government starts up deficit spending and creates the central bank – including starting reserves, currency, and market bonds.”
That’s called “initial conditions”.
The question is how it has worked since then. And despite the repeated denials of many on this blog, the government routinely borrows before it spends, and its because of the overdraft rule. That overdraft rule is far more important than people are admitting, because it is intended to prevent central bank monetization of government debt.
That overdraft rule has to be changed before the government can spend before it borrows. One way of changing it is to eliminate bonds entirely, and that’s one option under MMT.
I don’t know how MMT can argue its position effectively when it continues to deny the facts of how the system operates now and confuses that with how it might operate if such changes are made.
And to repeat, the purpose of the overdraft limit now is precisely to prevent government from spending before it borrows and to deny the government the ability to monetize its debt using the central bank. That’s what MMT is up against. The constraint now in place is intended to prevent deficit financing without bonds, or before bonds are issued. Removing that constraint is a major issue.
Bx12 seems to be the only person on this blog that understands this distinction.
BTW, the fact that the central bank provides required reserves is irrelevant to this particular issue. It provides required reserves whatever the flow of funds is that generates the requirement. The issue here is that the government operationally spends from its deposit account – not from a credit line. MMT describes everything as if the government spends from a credit line now. It doesn’t.
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Tom Hickey Reply:
May 22nd, 2010 at 8:37 am
Anon, the US has a credit line and that is the limit that Congress sets on the national debt. You are thinking that the Treasury spends and the Fed makes space with reserves. That is not actually what happens. Congress spends and offsets spending with debt. The Treasury and CB are just agency functions that carry out the operations in accordance with the instructions received from Congress through the various agencies of government. Congress and the president acting through the budgetary process are the legal constraint and they can alter policy through the legislative process as they wish.
The no overdraft rule prevents the CB/Treasury functions from acting on their own to exceed the debt limit Congress sets. Moreover, the fact is that the Fed can and does “monetize” debt by expanding its balance sheet, as many people are now complaining loudly it is doing through QE. In fact, the Fed has even been monetizing agency debt.
But you are correct that the present legal constraints attempt to mimic the gold standard by setting a legal limit (debt ceiling) on spending. That ceiling has turned out to be a fiction for a good reason. It is adjusted upward with increasing GDP, reflecting the need for more funds to handle the growing volume of transactions. Congress almost automatically grants itself an extension of its credit line from itself, for it is Congress that is in charge of currency issuance through the budgetary process (subject to presidential approval or veto override), IAW the Constitution.
MMT’ers are fully aware of this, of course.
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anon Reply:
May 22nd, 2010 at 9:08 am
The credit line I’m referring to is the government’s credit line with its bank – the Fed. It doesn’t have one. That’s the critical point. I agree the debt limit is irrelevant and haven’t said differently.
“You are thinking that the Treasury spends and the Fed makes space with reserves. That is not actually what happens. Congress spends and offsets spending with debt.”
Again, you’ve got what I’ve said and what actually happens backwards. I’ve said repeatedly the Treasury borrows and then spends, which is what actually happens.
“The no overdraft rule prevents the CB/Treasury functions from acting on their own to exceed the debt limit Congress sets.”
No. The no overdraft rule prevents them from monetizing the debt, period. The debt limit is an additional constraint beyond that, and which is far more malleable in political terms.
“Moreover, the fact is that the Fed can and does “monetize” debt by expanding its balance sheet, as many people are now complaining loudly it is doing through QE. In fact, the Fed has even been monetizing agency debt.”
You’re changing the subject. Those are specific programs targeted and associated with the credit crisis, announced and intended to be finite lived. And they’ve only monetized $ 300 billion additional in treasuries. The point is they’re not monetizing systematically through overdraft or through an ongoing credit line.
“But you are correct that the present legal constraints attempt to mimic the gold standard by setting a legal limit (debt ceiling) on spending.”
As well as no overdraft more importantly – no spending before borrowing – finally we almost agree on something. The debt limit is just a reality check on the growth in debt as far as I’m concerned. No problem with the fact they routinely increase it amidst political posturing, etc.
I don’t think MMT’ers are aware of the degree to which they unnecessarily obscure their own message by being oblique and indirect about the facts of current monetary operations due to the imposed constraints as they are (e.g. no overdraft).
anon Reply:
May 22nd, 2010 at 9:14 am
P.S.
The Fed does not provide reserves to buy new issue government bonds. It provides reserves to offset the general reserve drain associated with new issue bonds. Those additional reserves are provided to the entire system – not to the government. It is a system intervention. The Fed does not provide reserves specifically to those who are buying the bonds. And since it’s mostly non-banks that are buying the bonds, they are oblivious in any event to either the specific reserve setting of their own bank or the system reserve setting. Non-bank buyers of new bonds are entirely disinterested in reserve settings.
Apart from this aspect, in the actual system we have, it’s the Fed that’s calling the shots on the system reserve setting, not the government. And new issue bonds are just one case of reserve and money flows that the Fed must respond to.
And in any event, the Fed will withdraw the reserves when and as it desires, once the government starts spending the money it raised from bond issues AFTER it raised it.
The Fed controls the system reserve setting, whatever flows it must respond to in doing so. MMT suggesting that the Fed is specifically “financing” new bond issues with reserve injections is deliberately obscuring its more comprehensive role in setting reserve levels in all circumstances.
Matt Franko Reply:
May 22nd, 2010 at 9:20 am
Here’s an excerpt from the Federal Reserve Act 12 USC 461:
“1. Federal Reserve Banks as Depositaries and Fiscal Agents of United States
The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding national-bank notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.”
There probably is no ‘rule’ against overdraft specific to the Treasury. Since the Treasury apparently voluntarily chooses to use the Fed as its fiscal agent, this is just the way the Fed does things (like any bank they do not allow overdrafts in general, for anybody).
Once the appropriation bills are signed, the Treasury can proceed with the spending, it is law at that point/done deal. The rest here is just how TREASURY executes and accounts for it. THIS SECTION OF THE USC CLEARLY SHOWS HOW IT IS THAT THE FED WORKS FOR THE TREASURY, NOT VICE VERSA. The Treasury is clearly not “borrowing” by issuing Treasury Securities, they are just accomodating the process that their designated agent (the Fed) uses to keep the accounting straight. So whether you would want to change the central banking rules to only allow overdraft on the Treasury account or just keep doing what were doing with bond issuance w/some of the mods that Warren recommends…It really shouldnt matter.
We need competent people in Govt and in Zanon’s ‘Academy’ who can explain this to the j6p’s, tell the Peterson people to just STFU, and get on to the real issues we face. Resp,
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anon Reply:
May 22nd, 2010 at 9:33 am
“So whether you would want to change the central banking rules to only allow overdraft on the Treasury account or just keep doing what were doing with bond issuance w/some of the mods that Warren recommends…It really shouldnt matter.”
It matters. It’s equivalent to an open ended credit line with the central bank. An open ended credit line is equivalent to the MMT no bonds proposal (I know – it’s just one proposal). More importantly, it equates to the policy and operational integration of treasury and the central bank. Most MMT writing about “understanding” monetary operations implicitly assumes such integration. The problem I have is that you have to start getting more explicit about that assumption and the associated institutional, policy, and operational changes.
Tom Hickey Reply:
May 22nd, 2010 at 10:08 am
http://articles.latimes.com/1985-10-25/news/mn-14165_1
[Emphasis added]
anon Reply:
May 22nd, 2010 at 10:19 am
The relevant words are “inadvertent” and “small”.
The relevant fact is once in a hundred years, so far.
Any others?
(but thanks – interesting find)
anon Reply:
May 22nd, 2010 at 10:37 am
re your emphasis:
it’s clear the debt limit heel dragging problem caused the “inadvertent” overdraft
the more important operational constraint is the overdraft as a normal course constraint that is intended as a permanent feature – as opposed to any particular level for the debt limit, which increases naturally over time
Matt Franko Reply:
May 22nd, 2010 at 10:48 am
Anon,
The only “credit line/limit” that exists is the amount in the appropriation law (Tom, Im officially calling BS on the “debt ceiling” thing, its not law, its non-binding, the appropriation law has precedence over it). The Fed is employed by Treasury as fiscal agent for accounting purposes to assist the Treasury in (among other things) quantifying/documenting progress of the Govt expenditures; both to make sure the funds are spent and to make sure the limits of the appropriation are not exceeded. The Treasury accomodates certain Fed procedures by issuing Treasury securities so as to maintain a credit balance because I guess a bankers DNA will not allow them to type a “minus” sign in front of a numeral, or all the keyboards at the fed have that key missing, or the feds RGB compter monitors all have broken Red guns….the Treasury just puts up with these idiosyncracies because the Fed does a good job otherwise.
The world does not exist so we can have accounting, despite what the accountants think. Let’s remember: We dont work for the beancounters…the beancounters work for US! Resp,
anon Reply:
May 22nd, 2010 at 11:01 am
Matt,
Respectively, you are confusing the fiscal agent responsibilities of the Fed with its monetary policy responsibilities.
Yes, you are correct in that the Fed is the fiscal agent bean counter for Treasury’s banking arrangements with the Fed and its debt issuance bookkeeping.
But the Fed’s monetary policy responsibilities are entirely separate and independent from Treasury.
Fiscal agent is the bean counting function.
Monetary policy is the independent policy function.
The Fed has both in the existing system.
They are not in conflict because one is bookkeeping agent; the other is independent policy.
You are right that treasury has no credit line with the Fed; that’s the critical policy that prevents full implementation of MMT in the existing structure.
That’s the way it is in the existing system.
Tom Hickey Reply:
May 22nd, 2010 at 11:30 am
The article shows that 1) the Fed does not do overdrafts, and 2) there is a functional debt limit that apparently overrides appropriations. Funds were appropriated for which funding was not banked.
Under a gold reserve system the funds we can imagine that the funding was not available for the Fed to provide due to the financial constraint that a convertible fixed rate system imposes. Under a fiat system, funding (reserve provision) is no problem financially. The Fed is not financially limited in the amount of reserves it can create. Therefore, there is a voluntary constraint imposed politically. Only Congress can impose such restraints, since all agencies, including the Fed, are its creations. What Congress can do, it can also change. The reason I am harping on this is because what is political is accountable at the ballot box. The notion that the Fed is independent of politics is a chimera that allows Congress to shunt off some of its more onerous and contentious responsibilities onto an unelected and unaccountable oligarchy, rule by a de facto dictator, the Chairman. This is a travesty of democracy.
MMTers never asserted that the government cannot default. They have said that the government cannot default under a fiat system other than by political choice rather than financial necessity.
anon Reply:
May 22nd, 2010 at 11:38 am
“Only Congress can impose such restraints, since all agencies, including the Fed, are its creations. What Congress can do, it can also change.”
No problem with that.
But the argument that it must be changed because it can be changed is not an argument.
That’s what comes across too much as the argument.
Tom Hickey Reply:
May 22nd, 2010 at 12:05 pm
“The gov’t spends through the Treasury. The Fed creates money. But the Treasury cannot borrow from the Fed.”
The Treasury issues currency (through deposit accounts) by its disbursements.
The Fed creates reserves that stay in the interbank system for settlement, although banks can exchange reserves for FR notes IAW window demand.
Under the present system, the Treasury doesn’t “borrow” from anyone. The reserves created by deficit spending are simply transferred into Tsy’s. Deficit spending funds borrowing at the macro level. Nongovernment saves what the government has deficit spent, so logically, spending precedes borrowing.
Tom Hickey Reply:
May 22nd, 2010 at 12:10 pm
“But the argument that it must be changed because it can be changed is not an argument.”
Who is arguing that it must be changed. The argument is that it should be changed for good reason.
MMT’ers argue that the US is in an apparent bind that is not real because of misunderstanding/misrepresentation that has led to voluntary constraints that are crippling potential and resulting in concern over pseudo-problems.
anon Reply:
May 22nd, 2010 at 12:21 pm
“Under the present system, the Treasury doesn’t “borrow” from anyone. The reserves created by deficit spending are simply transferred into Tsy’s. Deficit spending funds borrowing at the macro level.”
It does borrow. It borrows before it spends. That’s the effect of the overdraft prohibition.
The reserve drain from borrowing is offset by Fed OMO when new issue bonds settle. The government then spends what it’s borrowed, which increases reserves, which the Fed then drains with OMO.
anon Reply:
May 22nd, 2010 at 12:28 pm
BTW, Treasury doesn’t need to spend before it borrows in order to debunk “loanable funds”. The two really have nothing to do with each other.
Tom Hickey Reply:
May 22nd, 2010 at 12:43 pm
“It does borrow. It borrows before it spends. That’s the effect of the overdraft prohibition.”
If you want to say that the government borrows back what it has already deficit spent, that’s OK, too. The point is that deficit spending funds government borrowing, not vice versa, unless you want to say that the government first borrows what it spends from itself.
Tom Hickey Reply:
May 22nd, 2010 at 12:56 pm
“BTW, Treasury doesn’t need to spend before it borrows in order to debunk “loanable funds”. The two really have nothing to do with each other.”
Again confusing logical and temporal priority. MMT is not particularly concerned with temporal priority, only logical priority (per Scott). I don’t recall MMT’ers ever talking about temporal priority. As far as I can see, it’s irrelevant.
For example, when in the above article it was reported that the Treasury had to resort to shuffling accounts to avoid bouncing its checks due to an overdraft, what happened next? Congress raised the debt limit. Did the Fed sell bonds in the AM and make the Treasury wait to spend until the PM when it could credit its reserve account? This kind of question makes no sense. The moment Congress extended its credit line by raising the debt limit, it was business as usual.
anon Reply:
May 22nd, 2010 at 1:03 pm
“If you want to say that the government borrows back what it has already deficit spent, that’s OK, too. The point is that deficit spending funds government borrowing, not vice versa, unless you want to say that the government first borrows what it spends from itself.”
No. The government first borrows, and then spends under the existing monetary system. That’s a fact. (I believe Scott Fullwiler acknowledged this) If you disagree with it, you are disagreeing with operational facts.
The additional fact that there’s a necessary balance between borrowing and some equivalent level of spending does not mean spending precedes borrowing or that the government is borrowing back what it has spent.
This is an example of the problem with MMT communication and positioning.
MMT is fine on the net financial assets paradigm, which is the core refutation of “loanable funds”. SFB at the core is a rearrangement of an accounting identity – combined with a focus on a saving interpretation rather than expenditure. This is very instructive in looking at the whole question of deficits.
On the other hand, I think the MMT presentation on operations is confused. The confusion is in the failure to distinguish clearly between current operations and what the possibilities are once you start adjusting/removing certain constraints (all constraints are self-imposed at some level of choice).
The MMT paradigm is presented as if the current system operates to constrain the core MMT counterfactual – which really is the no bonds counterfactual when you get right down to it – which is another problem, in terms of acknowledging the central importance of this particular counterfactual. In any event, this is backwards logic. It uses MMT’s counterfactual as the benchmark from which to “disprove” the legitimacy of the current system. MMT uses its own structural objective as the base case and argues that present arrangements are the “unnatural” intervention offsetting the “natural” counterfactual. The problem is that a lot of the generic MMT arguments invoke this counterfactual implicitly rather than explicitly, without really being aware of it.
anon Reply:
May 22nd, 2010 at 1:06 pm
“MMT is not particularly concerned with temporal priority, only logical priority (per Scott).”
“logical priority” in this case is a meaningless phrase to me, until somebody clarifies it
Tom Hickey Reply:
May 22nd, 2010 at 1:46 pm
The MMT point is that the government as currency issuer is not “borrowing” in the same sense that entities that are revenue constrained are borrowing. Entities that are revenue constrained either have to have the funds or borrow them from someone else before spending. The government always has the funds itself because it creates the currency.
There are accounting fictions set up that make it seem otherwise, but this is what is actually happening. In this sense, currency issuance logically precedes borrowing at the macro level, which is what MMT is concerned with. This is true now, without changing any of the current rules.
MMT would like to see the current rules changed to reflect the reality of a fiat currency for two reasons:
1. To unmask the pseudo-problems created by pretending that there is a convertible fixed rate system still in place when there isn’t.
2. to remove voluntary constraints that inhibit using the full potential of the fiat system.
No one disputes the temporal priority of borrowing-spending. It is just irrelevant in the government’s case under a fiat system unless Congress fails to act to raise the debt limit or to approve the budget.
THE problem of practical finance is always cash-flow. CFO’s are experts at shuffling accounts around to meet the next obligation coming due. Governments are no different. Imagining a rigid system is just not reflective of how things happens in practice.
Scott Fullwiler Reply:
May 22nd, 2010 at 10:15 pm
and how would that have any relevance whatsoever to the US Tsy today?
Scott Fullwiler Reply:
May 22nd, 2010 at 10:17 pm
Sorry, put that comment at 10:15pm in the wrong place. Please ignore.
Curious Reply:
May 22nd, 2010 at 11:40 am
Anon said:
“The question is not what came first at the beginning. Logically, it was spending…”
The gov’t spends through the Treasury. The Fed creates money. But the Treasury cannot borrow from the Fed.
How did the gov’t spend first then?
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anon Reply:
May 22nd, 2010 at 11:53 am
I tried to answer that in what you quoted. It amounts to what they did to set up the Fed in the beginning. The rules may be different for the initial set up. E.g. if the government had bonds outstanding, the Fed could simply buy them by writing a check, which creates bank reserves, and then issue currency and capital to absorb part of the reserves. Or, what I said was that in theory the government could have issued new bonds to the Fed – but just for the set up of the initial balance sheet. It really doesn’t matter what they did in the beginning. What matters are the rules now – which are that Treasury borrows before it spends.
anon Reply:
May 22nd, 2010 at 11:56 am
if you’re asking how the government spent before the Fed was created, I have no idea – but would guess it was the same borrow/spend relationship using commercial bank accounts instead of the Fed account
Curious Reply:
May 22nd, 2010 at 12:41 pm
“…if the government had bonds outstanding, the Fed could simply buy them by writing a check…or…the government could have issued new bonds to the Fed…”
Yes. Bonds have to be issued first, therefore borrowing is always first. Not spending.
anon Reply:
May 22nd, 2010 at 12:50 pm
Maybe right. I’m not clear on the starting conditions.
But it is clear that once the system is set up with the initial balance sheets, borrowing is always first. Not spending.
Curious Reply:
May 22nd, 2010 at 1:35 pm
Once the system is set up (I assume that means the Treasury having money in its account) you can always frame it so that you can claim either (spending first or borrowing first, because money is fungible).
But answering the question “how did the gov’t get the very first dollar to spend” clarifies, that it is really borrowing that must precede spending and not the other way around.
Scott Fullwiler Reply:
May 22nd, 2010 at 8:58 pm
“But answering the question “how did the gov’t get the very first dollar to spend” clarifies, that it is really borrowing that must precede spending and not the other way around.”
No it doesn’t. Sure, perhaps revenues/borrowing came first at the beginning of the Union given that the currency was fixed in gold (don’t recall for sure, but for the sake of argument, I’ll go with that). But, paying taxes and buying bonds TODAY requires that there was a previous deficit, since that’s the only way the reserve balances are put into circulation that settle tax liabilities and Tsy auctions. Noting that the Tsy must sell a bond or receive revenue today before it can spend tomorrow given that the Fed doesn’t provide overdrafts (which it actually might, as I’ve noted before) doesn’t change the fact that such transfers to the Tsy require a previous deficit.
In other words, that the Tsy first received a payment in gold 200+ years ago before it first spent (again, for the sake of argument–and note that it was originally the state even under those circumstances that was able to name the thing it would accept in payment) has nothing to do with what’s happening TODAY under a non-convertible, fiat currency. Today’s spending requires a previous deficit, no matter what happened 200+ years ago, or 100 years ago, or whatever. That’s all MMT is saying.
Scott Fullwiler Reply:
May 22nd, 2010 at 9:01 pm
“Today’s spending requires a previous deficit, no matter what happened 200+ years ago, or 100 years ago, or whatever. That’s all MMT is saying.”
Oops. Should be, today’s revenues or Tsy auction settlements require a previous deficit, no matter what happened 200+ years ago, or 100 years ago, or whatever.
Curious Reply:
May 22nd, 2010 at 9:24 pm
Scott,
remember Warren’s analogy of parents handing out cards to children?
Suppose the mother prints the cards and the father hands them out. But the father is prohibited from getting them directly from the mother.
How does the father get the first card to hand to the kids?
Scott Fullwiler Reply:
May 22nd, 2010 at 10:24 pm
Curious,
You’re missing the point, or, at least, my point. Yes, I’ve ALWAYS acknowledged the Tsy must have a positive balance to spend under current law, so it must issue a bond or have revenues if its account isn’t positive (I’ve noted it probably at least three times in this thread alone). But that’s not what I’m talking about. Regardless of that, for the non-govt sector to buy a Tsy or pay taxes to the Tsy, it must have reserve balances, and the only way it gets them is for their to have been a prior deficit, (or to go into debt with the Fed, which is usually collateralized via a Tsy security–previous deficit).
Regarding your analogy, then, my point isn’t about the father, it’s about the kids. They can’t pay their taxes and they can’t buy the father’s bonds unless the father has previous deficits outstanding (or by taking a loan out from mom (again, usually collateralized by dad’s previous debt)).
Best,
Scott
Curious Reply:
May 22nd, 2010 at 11:02 pm
“[the kids] can’t pay their taxes and they can’t buy the father’s bonds unless…taking a loan out from mom…”
Yes. The only way for the father to get the first card, is for the kids to get it from the mother and the father subsequently gets it from the kids.
That very first card that the kids borrow from mom cannot be collateralized by dad’s previous debt, because at that point there isn’t any dad’s debt yet.
So clearly, the father has to borrow first, before he can spend, no?
Min Reply:
May 24th, 2010 at 1:57 pm
Curious: “remember Warren’s analogy of parents handing out cards to children?
“Suppose the mother prints the cards and the father hands them out. But the father is prohibited from getting them directly from the mother.
“How does the father get the first card to hand to the kids?”
Assuming that only the mother prints the cards and only the father hands them out, the system does not work.
The Fed was created when there were already dollars in the system. And the current setup where the Fed does not directly buy gov’t debt came even later. The ultimate source for all of those dollars was the gov’t. (Private banks could print notes, but not dollars.) Congress delegated the creation of dollars to the Fed (and limited the creation of dollars by the Treasury.) Since the Fed is an agent of Congress, its creation of dollars is not under its ultimate control. Its independence is relative. In particular, it cannot deny money to Congress.
pebird Reply:
May 28th, 2010 at 4:13 pm
If the mother and father (issuer/printer) decided to not exchange cards directly – the family can never DIRECTLY increase the number of cards once such an agreement has been set.
However, mother and father might want to enter into a new arrangement where they can transform future to-be-printed cards into a different kind of medium. They decide to create “reserves” and “debt”. Mother and father would exchange reserves and debt, but they realize they still need a go between. So they would appoint their oldest child to be the “primary kid”, who acts as the agent between the parents and also the rest of the kids.
This primary kid would collect any excess cards from the other kids, do some accounting and let the parents know how many additional cards were needed – the parents would then print cards, create the appropriate amount of debt/reserves offset and the primary kid would handle the distribution.
Operationally, this method is needed because of the desire to issue more cards – e.g., increase spending.
Scott Fullwiler Reply:
May 23rd, 2010 at 12:01 am
Did you see the part where I said this?
“Yes, I’ve ALWAYS acknowledged the Tsy must have a positive balance to spend under current law, so it must issue a bond or have revenues if its account isn’t positive (I’ve noted it probably at least three times in this thread alone).”
As I’ve been explaining, though, throughout this thread, and I haven’t seen anyone provide a counterpoint, it’s irrelevant and it’s not my point and it’s not MMT’s point.
Reply
Min Reply:
May 23rd, 2010 at 4:07 pm
Anon: “The question is not what came first at the beginning. Logically, it was spending”
For your purposes, that may not be the question. However, it is a very important question for people who believe that the U. S. is at the mercy of the bond market. Behind that belief is the belief that the gov’t cannot spend without borrowing or taxing. Showing that spending came first punctures that underlying belief. :)
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May 22nd, 2010 at 9:48 am
The only fully consistent proposal I’ve seen from MMT is the no bonds proposal. That’s the one that’s completely consistent with the premise of MMT writings in general and the idea that there are “no financial constraints”. In particular, the “no overdraft” constraint is totally subsumed and done away with by the fact that there is effective policy and operational integration of treasury and the Fed. It is a clear case of the government being able to spend as per MMT general theory. I have no view pro or con on this proposal – except that it is well thought out and internally consistent from an operational perspective. It is a classic management case of structure following strategy.
Nothing else I’ve seen (as a structural proposal) strikes me as internally consistent with MMT writings in general.
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Scott Fullwiler Reply:
May 22nd, 2010 at 10:09 am
Which other proposals are your referring to?
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anon Reply:
May 22nd, 2010 at 10:30 am
I can’t think of any.
It’s the only internally consistent and comprehensive one I can think of, and maybe it’s the only one I can think of.
I’m not ridiculing any others that may exist that I haven’t considered. It’s just my impression.
I’d be interested in seeing one that was comprehensive and fundamentally different, if one exists, to see how it follows from MMT.
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anon Reply:
May 22nd, 2010 at 10:31 am
(I’m leaving JG aside from this.)
Scott Fullwiler Reply:
May 22nd, 2010 at 2:43 pm
“I’m not ridiculing any others that may exist that I haven’t considered. It’s just my impression.”
No worries at all. I can tell from the discussions here that you’re giving MMT an honest hearing.
Tom Hickey Reply:
May 22nd, 2010 at 10:49 am
Anon, the way I understand it, MMT’ers recommend getting rid of 1) budgetary constraints unnecessary under fiat (like pay-go), 2) the debt limitation, and 3) the $-4-$ debt/deficit offset requirement.
The no bond proposal is not integral to MMT and not all MMT’ers call for it. There could still be some bond issuance for various purposes, like setting benchmarks and providing a savings haven as a public service. That is not inconsistent with MMT.
Similarly with interest rate setting. Various degrees of control of compatible with MMT, and various MMT’ers have different views on this.
What MMT is chiefly asserting, as I understand it, is that the opportunity cost of voluntary (political) constraints on the present fiat system for the supposed benefit of fiscal discipline and independence far outweighs any real benefit, the exchange being a supposed control of inflation due to profligate spending for several percentage points of GDP and a failure to meet potential public purpose with real goods. So we are exchanging supposed nominal benefits for real benefits affecting society through foregone opportunity.
Basically, MMT proposes 1) using the full range of options that a fiat system provides for functional finance by removing voluntary constrains and 2) replacing orthodox economics with stock-flow consistent macro based on national accounting identities and sectoral balances, as well as 3) recognizing that the endogenous nature of the money supply requires attention to implications for financial instability and debt-deflation through governmental regulation and oversight of the financial system.
Some MMT’ers treat the CB and Treasury as functions rather than institutions because in their view, this is the way they in fact function on a day to day basis. However, this is not totally the case, as RSJ observes, and as shown by Chairman Bernanke’s refusal of Treasury Secretary Paulson’s (strongly expressed) request for the Fed to do TARP monetarily instead of insisting that it required a fiscal solution. So there is de facto operational separation as well as de jure institutional separation. MMT’ers (including me) would like to see it removed and the two functions combined at Treasury.
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anon Reply:
May 22nd, 2010 at 11:08 am
Might be an idea for somebody to attempt a matrix of potential constraint eliminations and a corresponding range of possible institutional changes under MMT
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anon Reply:
May 22nd, 2010 at 11:13 am
of course, Mr. Mosler’s done the whole thing, but that’s one person’s proposal
anon Reply:
May 22nd, 2010 at 11:18 am
BTW, Tom Hickey -
you really should take on the role yourself of setting up that blog you’ve been thinking about in a few of your comments
I can’t imagine anybody would be better at it than you
from what I understand, you might require technology assistance to do so – maybe one of the MMT bloggers can steer you in the right direction for that
call it something like “MMT Junction” or “Tom’s Place”
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Tom Hickey Reply:
May 22nd, 2010 at 11:33 am
If I were more web design/development savvy I would gladly do it. Anybody out there willing to put up their hand? I’ll pitch in organizing content.
beowulf Reply:
May 23rd, 2010 at 3:27 am
Tom,
Check out the layout (that is, how the information is presented) at this site created by a fan of the APT transaction tax I’ve mentioned here before. In fact, this is where I came across it. The home page lays out the basics with links for further information (w/ bonus Glenn Beck interview!) :o).
http://www.apttax.com/
zanon Reply:
May 23rd, 2010 at 9:38 am
Why not just create entry (or edit it) in Wikipedia?
It will automatically have the best Googling, as the wonderful the Google love wiki!
And — everyone knows everything on wikipedia is new.
It has been started:
http://en.wikipedia.org/wiki/Chartalism
Tom Hickey Reply:
May 23rd, 2010 at 10:37 am
Beowulf, interesting site, but I think the MMT site would right off be much more detailed and require a pretty sophisticated design and navigation. That’w why I’m suggesting the the web master would have to be experienced.
Zanon, good point. I also made that point at Bill’s that the Wikipedia article on Chartalism needs work, and searching Modern Monetary Theory takes one to that entry. But I also think that a separate site is needed to deal with the volume and complexity of info and debate over time. aggregating everything available and providing references and links. This should be done to a lesser degree at Wikipedia also.
zanon Reply:
May 22nd, 2010 at 12:08 pm
Tom Hickey:
Just use the wonderful Google’s blogspot.
it is free and very easy.
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Tom Hickey Reply:
May 22nd, 2010 at 12:48 pm
Zanon, what I was saying over at Bill’s is that we need an MMT dedicated site where the info from all sources is organized accessibly, made permanently available, and gets regularly updated. Blogs aren’t designed for this task.
Bill kindly offered space on his server. All we need is a web master to get started, along with some content gatherers and organizers. A wiki was also suggested.
May 22nd, 2010 at 1:26 pm
The correct temporal and logical sequence is that government spending replenishes government borrowing. The Fed acts as a monetary agent in smoothing this cycle by conducting OMO around the borrowing and spending flow of funds pattern of government.
It is as powerful logically to suggest that Treasury replenishes in spending what it drains in borrowing as it is to say that it borrows what it spends. It just turns out that the first is true and the second isn’t – when looking at operational realities.
In the limit, where borrowing and spending are simultaneous, there is no difference between the two. This also points to the illusion of the “spending funds borrowing” meme as a bias.
You have to look at the operational reality to see which one is actually true, and that’s that borrowing funds spending.
The Fed’s OMO facilitation around this process is the means by which the discontinuity between the two operations is smoothed out for operational purposes.
This all begs the question – if Treasury borrows to spend and replenishes the system with what it borrows, why doesn’t the same logic work for other sectors?
The answer of course is that it does.
It’s just that the government is a much bigger slice of the pie, so the sector financial balances partition between government and non government is particularly impressive.
And of course the government issues the currency. That just makes it much easier to borrow and spend.
And if the government ever reaches the stage of a failed auction or whatever, it can just break its own rules and spend and monetize. Nobody’s denied it has that power. But that’s not what it does now.
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Tom Hickey Reply:
May 22nd, 2010 at 1:59 pm
“And of course the government issues the currency. That just makes it much easier to borrow and spend.”
That is the key difference and the basis of the vertical-horizontal distinction that MMT makes. Only government can “borrow” from itself to spend, and it doesn’t owe itself anything. These are just debits and credit entries on spreadsheets to balance accounts. Reserves are a liability of the Fed, not a “debt.” Currency is a current liability of the government, not a “debt.” Tsy’s are term liabilities of the government, not “debts.”
All govt owes those from whom it “borrows” when they convert deposits-reserves to Tsy’s is a return of their reserves/deposits used to buy the Tsy’s, plus interest accrued. Nothing here affects the government that is external to the government, considering the CB an agency of government ini its relationship with the Treasury, instead of as a private entity, which it manifestly is.
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Ramanan Reply:
May 22nd, 2010 at 2:55 pm
Anon – impressive points all over.
In the history of a country, it need not be true that spending came before borrowing.
Let us assume that a few people form a country in an island and receive a lot of funds in foreign currency. In the meanwhile, they form banks, a central bank, govt etc. They risk a currency board kind of setup and banks exchange the foreign currency for deposits in local currency. The central bank then purchases the foreign currency from the banks and pay in reserves. The government then borrows and deposits and reserves go down. The government then spends and deposits and reserves go back to the original level.
So borrowing can come before spending in the history of one country.
However I still think that “spending comes before borrowing” is a great one-liner.
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Scott Fullwiler Reply:
May 22nd, 2010 at 3:27 pm
Again, though, as I said above, it doesn’t matter overall.
Right now, due to legal constraints, the Tsy must issue debt at roughly the Fed’s target to replenish its account to spend. Besides the primary deficit, there would be interest spending roughly equal to the target rate x new debt.
If instead the Fed were permitted or even required to give an overdraft, the Fed must pay interest at its target rate or otherwise offer an interest bearing alternative to reserve balances to achieve its target rate. Besides the primary deficit, there would be interest spending by the Fed (which raises the total govt deficit since it reduces the Fed’s profits) equal to the target rate x new debt.
In either case, spending is not constrained, while the Tsy is left with roughly equivalent debt service. No difference.
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warren mosler Reply:
May 22nd, 2010 at 10:08 pm
buying fx is spending
and deficit spending at that, though ‘off balance sheet’
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Curious Reply:
May 23rd, 2010 at 10:17 pm
What’s different between the Fed buying fx or the Fed buying MBSs? Seems both are financial assets swaps, no?
RSJ Reply:
May 23rd, 2010 at 12:48 am
Let’s not forget the history of the United States, and in particular Hamilton’s “Treatise on Credit” — a must read.
You can argue that the first money of the U.S. was the credit market debt that the nation incurred during the revolutionary war. Those government bonds were effectively money.
But I agree that “The government must spend prior to borrowing” is a great liner, and it has pedagogical value.
I wouldn’t drop it, but would put an asterisk on it, with the caveat being that borrowing *is* spending, when the borrower has sufficiently good credit to have their debt be widely accepted for payment. This is what Hamilton understood.
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Tom Hickey Reply:
May 23rd, 2010 at 11:18 am
As a matter of fact, the government regularly spends by borrowing, i.e., sets payment terms favorable to them because they can. Usually term payment is net 30, but large businesses can negotiate net 90 because of the clout of their order size. Those who have dealt with the government payment system discover that the government regularly pays net 180, but, hey, they are always good for it and their orders are huge.
May 22nd, 2010 at 9:25 pm
I think MMT’s net financial asset idea dominates the importance of the temporal question about borrowing and spending.
It is clear that when the government spends, it creates income, saving, and net financial assets. All of this flows out of the related macro identities. And it is this fact that mainstream economics for the most part can’t seem to grasp. The sector financial balances model is the icing on the cake for this perspective. And this is the perspective that buries loanable funds theory, I believe. It seems to me this is all at the heart of MMT.
Moreover, government spending creates net financial assets, regardless of the temporal order of spending and borrowing.
My further point then is that even though government spending occurs after borrowing (in the current system), it is the spending alone that creates income, saving, and net financial assets for the non government sector. And these things are created as that spending occurs. They are conceptually (and operationally) simultaneous by accounting identity.
Here’s the operational sequence in the current system:
- Government borrows
- Non government deposits and reserves are debited
- Treasury general account is credited
- Central bank injects required system reserves via system repo
- Government spends from treasury general account
- Non government deposits and reserves are credited
- Treasury general account is debited
- Central bank withdraws excess system reserves via system reverse repo
It is the fourth, third, and second last stages where the government spends and non government deposits are credited that income, saving, and net financial assets for the non government sector increase. Apart from those stages, net financial assets are stable and lower before the spending and stable and higher after the spending. That includes changes in asset-liability composition while the given level of non government net financial assets remains unchanged.
The larger accounting thought behind this distinction is that the creation of non government income, saving, and net financial assets is an income statement event (which also affects balance sheets). The rest of it is comprised of balance sheet events that do not include income changes.
(Payment of interest is a government expenditure/non government income event.)
In conclusion, the net financial asset idea is the powerhouse one, rather than the operational detail around it. This is in synch with Scott Fullwiler’s point that the operational order of borrowing and spending doesn’t matter. But that’s not an excuse to be imprecise about operational facts in the current system. You want the MMT message to be as tight as possible. I would consider this for example before actively employing the phrase “the government borrows back the reserves it creates”. Then, if you want, you simply say that under a fiat system one could just as easily eliminate the overdraft operational constraint, which would allow more flexibility in the temporal ordering of borrowing and spending. The limiting case of this flexibility is the no bond proposal, where the temporal ordering becomes moot, because there is no borrowing.
For my own part, I think the desirability of eliminating the overdraft constraint can be debated. I think it can remain, and still have the MMT message be very powerful – given the overriding importance of the net financial asset concept and the sector financial balances model. But I respect the clarity of the no bond proposal as well.
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Scott Fullwiler Reply:
May 22nd, 2010 at 10:14 pm
1. Have I been imprecise about operations somewhere?
2. Any thoughts on my point at 3:27pm that the overdraft constraint is irrelevant?
Best,
Scott
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anon Reply:
May 22nd, 2010 at 10:47 pm
1. No – not at all – bad sentence structure on my part. That phrase in question is picked up from somewhere else – not attributable to you.
2. As I said before, it’s not relevant for pricing to the degree that term pricing reflects policy expectations. And it’s not relevant in the sense that Congress can make exceptions as necessary, or overrule it anytime. But it’s relevant just practically speaking in that as it stands it effectively stands in the way of such structural changes as the no bond proposal, or more permanent flexibility in timing or limits to spending without issuing debt. I really don’t have a view on that, but I’m cautious for the time being about massive structural change in bank balance sheets that goes with the no bond proposal for example. But I haven’t thought it through to give a good argument pro or con.
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Scott Fullwiler Reply:
May 22nd, 2010 at 11:57 pm
“But it’s relevant just practically speaking in that as it stands it effectively stands in the way of such structural changes as the no bond proposal, or more permanent flexibility in timing or limits to spending without issuing debt.”
I disagree. The rate paid to the non-govt sector in interest on the national debt is about the same whether you issue securities or not. As such, being required to issue securities isn’t any sort of constraint as long as the qty you issue doesn’t affect the rate in any economically signficant way.
anon Reply:
May 23rd, 2010 at 7:21 am
“I disagree. The rate paid to the non-govt sector in interest on the national debt is about the same whether you issue securities or not. As such, being required to issue securities isn’t any sort of constraint as long as the qty you issue doesn’t affect the rate in any economically signficant way.”
I think you’ve misinterpreted my meaning. I simply mean it’s currently a legal obstacle, that’s all. I don’t mean laws can’t be changed. If you think legality is irrelevant in that sense, we may be struggling at the level of “the meaning of is is”.
I’ve already said the interest rate expectations hypothesis is perfectly understandable. I don’t think that’s the only consideration, but I’m not prepared to debate it at this time. I’ll just say it’s understandable.
My only reason for commenting at all in this post is that it is my GENERAL impression that MMT writing conflates a description of the current world of monetary operations with a hypothetical world where certain operational constraints are removed. These are two different things. The fact that they are two different things is independent of whether or not the current constraints are “relevant”. This is a general observation, and is not directed to you personally or your writing. Your own description of current operations may be entirely accurate.
The world in which Treasury and the Fed are fully integrated in policy and operations with constraints removed is different from the world as it is now where Treasury is a separate entity with a bank account at the Fed – different in operations in particular.
I think the nature of the resistance I’m getting in general in these comments justifies my concern, although commenters for the most part, and not the MMT bloggers. I’ve just trying to describe current operations here and I’m getting a lot of resistance.
Rather than dwell on the interest rate expectations issue, I’m more interested in your response to my comment above and whether I’ve depicted the operational sequence accurately, including the net financial assets implications. Do you agree with it?
Scott Fullwiler Reply:
May 23rd, 2010 at 9:56 am
“I think you’ve misinterpreted my meaning. I simply mean it’s currently a legal obstacle, that’s all. I don’t mean laws can’t be changed. If you think legality is irrelevant in that sense, we may be struggling at the level of “the meaning of is is”.”
My point is that the “legal obstacle” is NOT an obstacle at all. There is no “constraint” aside from how large a deficit Congress/President choose to run, and how high they decide to put the debt ceiling, since with our without an overdraft the outcome is virtually the same.
I’ll try one more time:
If Tsy runs a deficit with an overdraft, it ultimately pays the Fed’s target rate on the deficit.
If Tsy runs a deficit without an overdraft, it ultimately pays about the Fed’s target rate on the deficit.
No difference. No obstacle.
anon Reply:
May 23rd, 2010 at 10:18 am
I’ll try one more time as well.
Who said anything about a concern on how high they put the debt ceiling? Not me.
My point is that overdrafts allow Treasury to run deficits without issuing bonds.
So the overdraft constraint is a constraint on Treasury’s ability to run deficits without issuing bonds.
It’s relevant in that sense.
You seem to think it is completely irrelevant whether Treasury issues bonds or the Fed pays interest on equivalent excess reserves instead – that the entire issue is assumed away by interest rate expectation theory. That’s a grandiose sweeping claim that assumes its own conclusion. If that’s your rationale for why none of this is “relevant” – sorry but I’m not prepared to accept that sort of simplicity. I’ve said that repeatedly. There are other factors of institutional change that require far more consideration, but I don’t wish to enter that sort of debate here. It gets down to our respective meanings of the word “relevant”. I happen to think that the difference between a world of $ 8 billion treasuries versus a world of $ 8 billion in additional bank deposits and reserves is relevant. You apparently don’t, because you invoke interest rate expectations theory and assume away any other possible factors for consideration.
anon Reply:
May 23rd, 2010 at 10:19 am
meant $ 8 trillion above
Scott Fullwiler Reply:
May 23rd, 2010 at 10:57 am
Who said anything about expectations theory? The Tsy can just issue short-term debt–they used to do that anyway. And expectations theory isn’t grandiose–as Warren noted, that’s how it works in “Krugman has it right.” If expectations theory is what’s keeping you from accepting this, though, then I’m comfortable we’ve come to a mutual understanding on the rest.
“I happen to think that the difference between a world of $ 8 billion treasuries versus a world of $ 8 billion in additional bank deposits and reserves is relevant.”
I don’t think it’s relevant to the Tsy, at least not economically relevant. And the behavior of Tsy’s the past 60 years compared to the fed funds target on average bears that out quite well.
Also, I highly doubt you’d get $8T in bank deposits. Depositors can move into CD’s, etc., to get roughly the same returns as they would’ve had with Tsy’s. I explained this all in 2005 in “Paying Interest on Reserve Balances” at cfeps.org.
“You apparently don’t, because you invoke interest rate expectations theory and assume away any other possible factors for consideration.”
Again, not necessarily relying on expectations theory. What other factors are you referring to?
Scott Fullwiler Reply:
May 23rd, 2010 at 11:18 am
“I happen to think that the difference between a world of $ 8 trillion treasuries versus a world of $ 8 billion in additional bank deposits and reserves is relevant.”
In what ways?
Tom Hickey Reply:
May 23rd, 2010 at 12:43 pm
Anon, this was explored in a previous thread. So far, I have not seen an objection that I regard as substantial. I, too, would be interested in the problems you see arising here.
Min Reply:
May 24th, 2010 at 1:23 pm
Anon: “I happen to think that the difference between a world of $ 8 billion treasuries versus a world of $ 8 billion in additional bank deposits and reserves is relevant.”
I think it is relevant, too. :) For one thing, servicing the debt is no small change. Not issuing debt would reduce gov’t spending, at least in the short run. It would also affect the distribution of gov’t spending. For another thing, not issuing debt would reduce the fears of the electorate and eliminate a lot of political BS. That would be more than worth it! :)
beowulf Reply:
May 22nd, 2010 at 11:00 pm
Tsy can create money by three methods– overdrafting Fed account, Fed purchasing of Treasuries (interest is refundable to Tsy anyway) or issuing US Notes.
Since the three are economically identical (w/ the Fed paying IOR if necessary to peg a target FFR), the preferred option should be the one likeliest to garner political support.
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Scott Fullwiler Reply:
May 23rd, 2010 at 12:03 am
Yes! (Though I personally don’t have a preferred option–but I see the logic there.)
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beowulf Reply:
May 23rd, 2010 at 5:37 am
In terms of politics, I think Randy Wray had exactly the right angle of attack with his “don’t raise the debt limit” piece. If the public doesn’t want America to go further into debt, then let’s give the people what they want. I’m unsure if IOR payments count towards the debt limit, but if FFR drops to zero, its a moot point (alternately, Warren’s proposal to close the overnight market in favor of discount window loans means the Fed could capture the ren–err, interest and offset IOR payments).
Since both Lincoln and Kennedy issued US Notes, I think those precedents make that approach easier to explain than overdrafting or Fed loans (and would garner the avid support of conspiracy theorists worldwide :o) ). In fact, the Treasury Secretary still has authority to issue “United States currency notes… in a form and in denominations of at least one dollar that the Secretary prescribes”. The only statutory change required is deleting sect. 5115 (b) ($300 million cap and the prohibition on their use as reserves).
http://www.law.cornell.edu/uscode/31/usc_sec_31_00005115—-000-.html
Finally, the biggest objection would be the risk of inflation. It must be made clear that of course inflation is a constraint, but 10% unemployment makes it a distant one. The first fiscal policy step should be a FICA tax holiday (conservatives would be the most skeptical of MMT, but a big tax cut is playing their song). Instead of using interest rates, control inflation by adjusting FICA rate quarterly based on the unemployment rate (multiply U-3 rate by 10, then subtract from baseline tax payment; at 9.9%, $200 – 99% = $2 payment due, at 5.5%, $200 – 55% = $90). If you want to wear a belt and suspenders, look at Bill Vickrey’s market-based incomes policy (“marketable gross markup warrants”).
http://tinyurl.com/2b79y82
anon Reply:
May 23rd, 2010 at 8:02 am
“Tsy can create money by three methods– overdrafting Fed account, Fed purchasing of Treasuries (interest is refundable to Tsy anyway) or issuing US Notes.”
Treasury does not create money by the Fed purchasing treasuries or by the Fed issuing notes. The Treasury and the Fed are institutionally separate in the currently configured monetary system. The Fed, not Treasury, does these things. Even in the first point it is the Fed as a bank that is creating the money rather than Treasury as its customer.
Again – the conflation between existing monetary operations and the MMT integrated operational vision. I suppose this will never end.
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ESM Reply:
May 23rd, 2010 at 8:23 am
But the Treasury can print Treasury bonds at will:
1) Auction $1 of Treasuries; this leads to reserve drain of $1;
2) spend $1; this leads to reserve increase of $1;
3) we’re back where we started with $1 extra of Treasuries.
If you consider Treasuries to be money (as I do), then the Treasury has created money. If not, consider that when the Fed sets a target rate, it stands ready to lend (create) reserves against Treasuries at the target rate in unlimited amounts. Therefore, the extra $1 of Treasuries represents an extra $1 of reserves the Fed might have to create in order to maintain the target rate.
As long as the Fed has a policy of targeting rates, it has no control over the amount of reserves it must create. The more Treasuries outstanding, the more reserves it will have to create in order to keep the target rate from rising. The Treasury’s fiscal decisions can force the Fed’s hand.
anon Reply:
May 23rd, 2010 at 10:01 am
If you consider treasuries as money, that’s fine. That’s a matter of personal preference and context as to the definition you’d like.
Apart from that, the Fed has very good control over the stock of reserves it desires and achieves. You are correct in that it less less/little/no control over the flow of reserve creation that is required to offset reserve destruction caused by transactions initiated by others. Or reserve destruction required to offset reserve creation. Those are flow transactions that net to zero if the Fed so desires.
The expansion of Treasury debt has no necessary impact on the stock of reserves the Fed desires or achieves. In that important sense, the Treasury’s fiscal decisions don’t force the Fed’s hand.
What could force the Fed’s hand is if the government changes the rule for overdrafts.
Scott Fullwiler Reply:
May 23rd, 2010 at 11:17 am
“The expansion of Treasury debt has no necessary impact on the stock of reserves the Fed desires or achieves. In that important sense, the Treasury’s fiscal decisions don’t force the Fed’s hand.”
Yes, because Treasury bond sales are actually monetary operations that aid the Fed’s interest rate targeting under procedures that set the target rate above the remuneration rate.
“What could force the Fed’s hand is if the government changes the rule for overdrafts.”
How is the Fed’s hand forced? It can pay interest at the target rate and continue to set the target and affect other rates virtually the same as previously. Or, it could supplement this by offering term rates if it wants longer rates higher. It could actually have more control, in other words, the term structure than it currently chooses to have.
Scott Fullwiler Reply:
May 23rd, 2010 at 12:02 pm
“Again – the conflation between existing monetary operations and the MMT integrated operational vision. I suppose this will never end.”
I didn’t interpret it that way. It’s obvious to me at least that one of those (issuing new notes) was the existing operation and the other two were not. I personally didn’t interpret Beowulf as suggesting otherwise.
Tom Hickey Reply:
May 23rd, 2010 at 12:02 pm
Anon, I believe that this involves the vertical-horizontal distinction that MMT makes. The Fed is a vertical entity. It doesn’t add directly to the horizontal operations of banking system other than at the interbank level in which only FR member institutions can participate. The banking system interacts with the Fed through reserves for settlement, which stay in the interbank settlement system. Banks can and do exchange reserves for FR notes, but that is an exchange of asset form, not an increase in nongovernment net financial assets.
The Treasury is the only entity that can cross the vertical-horizontal barrier and increase and decrease nongovernment NFA through currency issuance and taxation. Debt issuance just changes the composition between current and term in nongovernment; it does not alter the amount of NFA.
This is the way I understand the MMT position anyway. Am I missing something?
Tom Hickey Reply:
May 23rd, 2010 at 12:13 pm
ESM: “If you consider Treasuries to be money (as I do), then the Treasury has created money.”
MMT prefers not to use “money” without being specific, since this can lead to confusion. Once the Tsy’s that Treasury has issued (“created”) are auctioned, they are nongovernment NFA held as term instruments that can be converted to demand deposits at will, since their liquidity is perfect. Treasury creates the demand deposits by issuing currency through “spending,” and these demand deposits can be converted to term instruments (Tsy’s) if preferred. At the macro level, deficit spending is necessarily saved as Tsy’s due to the $-4-$ offset requirement.
ESM Reply:
May 23rd, 2010 at 2:39 pm
Right Tom. I was being sloppy with the term. Money is obviously an IOU of any sort. Should have said government money or vertical money.
In any case, my main point (and I’m not sure it came across) is that any holder of a Treasury bond can lend that bond to the Fed and borrow reserves against it. When you create more Treasury bonds, you’ll see more demand to lend Treasuries to the Fed (i.e. borrow reserves from the Fed). The whole point of maintaining a target rate is that if there is borrowing demand at that rate, the Fed stands ready to meet it by creating reserves. The more Treasuries outstanding, the more reserves the Fed will have to create in order to prevent its target rate from rising. The Fed’s hands are tied, as long as it targets interest rates.
anon Reply:
May 23rd, 2010 at 3:14 pm
“How is the Fed’s hand forced? It can pay interest at the target rate and continue to set the target and affect other rates virtually the same as previously. Or, it could supplement this by offering term rates if it wants longer rates higher. It could actually have more control, in other words, the term structure than it currently chooses to have.”
The Fed’s hand is forced in exactly the context of ESM’s comment:
“As long as the Fed has a policy of targeting rates, it has no control over the amount of reserves it must create. The more Treasuries outstanding, the more reserves it will have to create in order to keep the target rate from rising. The Treasury’s fiscal decisions can force the Fed’s hand.”
I disagreed with this comment, and explained why, but responded in the context of his final phrase – which was about the amount of reserves – not about pricing.
Please don’t say this is irrelevant because it excluded a reference to pricing.
anon Reply:
May 23rd, 2010 at 3:16 pm
“I didn’t interpret it that way. It’s obvious to me at least that one of those (issuing new notes) was the existing operation and the other two were not. I personally didn’t interpret Beowulf as suggesting otherwise.”
Fine. I interpreted it that way on first reading but see your point. It doesn’t matter.
anon Reply:
May 23rd, 2010 at 3:25 pm
“Anon, I believe that this involves the vertical-horizontal distinction that MMT makes.”
Interesting comment, Tom – not many tackle the vertical/horizontal intersection.
I’m a bit rusty on it, but:
Required reserves are vertical, and if the central bank increases required reserves (or excess reserves), that increases NFA.
Currency is vertical, and if the central bank increases currency outstanding over time, that increases NFA.
Government debt is vertical, and if the Treasury increases debt held by the public over time, that increases NFA.
To the degree that the mix of reserves, currency, and debt changes, but not the totality, (which can happen in many ways), then there is no net effect on NFA. E.g. if banks exchange reserves for currency, there is no net increase. But if the central bank replenishes reserves as a response to currency issuance, there is a net increase. And this is generally how currency increases NFA over time.
Tom Hickey Reply:
May 23rd, 2010 at 3:41 pm
ESM, I think that actual issue involved here is that presently, the Treasury issues currency indirectly by giving the Fed a Tsy in exchange for reserves to clear its currency issuance through spending. That creates an interest obligation associated with currency issuance.
This is roundabout and unnecessary. The Treasury could issue currency directly through bills, as it has in the past. It could reasonably be argued that this is the intent of Article 1, section 8 of the Constitution.
We need to be inquiring into the advantages and disadvantages of both.
beowulf Reply:
May 23rd, 2010 at 5:25 pm
Again – the conflation between existing monetary operations and the MMT integrated operational vision.
I conflate nothing, I cited the current law authorizing Tsy issuance of US currency notes (which can be in any “form” the Secretary wishes) and then pointed out what change in the US Code was required to move from “existing monetary operations” to the sunny upland pastures of the “MMT integrated operational vision” (as to Tsy spending at least, the Federal Reserve Act should be amended to make the operational changes that Warren has proposed).
Scott Fullwiler Reply:
May 23rd, 2010 at 7:51 pm
“Required reserves are vertical, and if the central bank increases required reserves (or excess reserves), that increases NFA.”
Nope. If RR increases, the Fed supplies the reserve balances with an open market purchase or a loan. These offset. There aren’t any Fed operations that affect NFA aside from capital gains/losses and that sort of thing. See here: http://neweconomicperspectives.blogspot.com/2010/01/helicopter-drops-are-fiscal-operations.html
anon Reply:
May 23rd, 2010 at 7:57 pm
Nope. If RR increase …
Right.
I corrected myself earlier at:
49. 6:16 p.m.
Scott Fullwiler Reply:
May 23rd, 2010 at 9:06 pm
Sorry. Looks like I missed another one.
Tom Hickey Reply:
May 23rd, 2010 at 12:28 am
“Government borrows
- Non government deposits and reserves are debited”
Where do the reserves come from to borrow first?
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anon Reply:
May 23rd, 2010 at 7:40 am
Where do the reserves come from to borrow first?
That’s a great question, because it points so directly to the potential for misinterpretation of actual monetary operations as they currently exist, which has been my most general point in these commments.
In the actual system we have, the Fed is independent from Treasury. The Fed is Treasury’s bank, among other things.
Treasury has a bank account at the Fed, along with accounts at the commercial banks.
For purposes of discussion here, the Fed account is the relevant one – because that’s where Treasury gets credit for bonds issues and where it makes its disbursements from.
The important point is that in the actual system we have, Treasury does not transact in high powered money directly. It is no different than other non-bank customers in this sense.
So in answer to your question, bank reserves are irrelevant to the question of Treasury’s own operations. It does not transact in bank reserves.
It is relevant for Fed operations.
If a particular Treasury transaction results in a diminution of system reserves, the Fed will respond accordingly.
In this case, the Treasury bond issue drains systems reserves. The Fed responds with system repo, which is the 4th stage in the sequence I outlined.
This is a more general phenomenon than this particular case. When commercial banks come to the Fed for new currency, system reserves are drained. The Fed will respond similarly to above if it wants to.
It’s a great question because it’s so illustrative of my most general point. It’s easy to skip the facts of current monetary operations by assuming that the Fed and Treasury are the same thing, and then jump to the wrong conclusion.
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Ramanan Reply:
May 23rd, 2010 at 9:10 am
I can see Anon’s points. As he/she points out that “That’s a great question, because…”.
The person “getting the reserves” is not the person buying the Treasuries. The person buying the treasuries is using his/her deposits, not reserves. The person buying the Treasuries didnt get reserves to buy the treasuries. He/she is using his/her wealth.
I may have wrongly represented Anon, but I see his/her points.
anon Reply:
May 23rd, 2010 at 10:23 am
Reasonably close, thanks.
You seem to be more tuned in than most here to the issue of the accurate depiction of existing monetary operations – and the difference between that and various possibilities for the future.
Scott Fullwiler Reply:
May 23rd, 2010 at 11:11 am
“The person “getting the reserves” is not the person buying the Treasuries.”
Right. So, for instance, a SS recipient.
“The person buying the treasuries is using his/her deposits, not reserves.”
Maybe. Could be a bank. Some banks are primary dealers.
“The person buying the Treasuries didnt get reserves to buy the treasuries.”
The Fed does a repo before the Tsy auction settles if there aren’t enough rbs already. So, in fact, RBs are created for purchasing Tsy’s, whether the actual purchaser is the one that needs them or not.
“He/she is using his/her wealth.”
Not necessarily. Many primary dealers finance their purchases of primary mkt Tsy’s in the repo mkt.
anon Reply:
May 23rd, 2010 at 3:33 pm
“The Fed does a repo before the Tsy auction settles if there aren’t enough rbs already. So, in fact, RBs are created for purchasing Tsy’s, whether the actual purchaser is the one that needs them or not.”
Not if the end buyer is a non-bank.
Which is mostly the case.
Non-banks don’t use reserves to buy treasuries and don’t care what the reserve position of their banker is.
Reserves are created to replenish the system drain due to the settlement effect from all sources of buying. The effect of the system drain without that refill would show up in all matter of bank reserve management decisions – mostly in those that don’t have anything to do with the treasury auction itself.
Reserve refills do not “fund” specific bank buyers and do not “fund” non-bank buyers at all.
Tom Hickey Reply:
May 23rd, 2010 at 11:49 am
Think of it this way (analogy, not meant as factual representation). The DoD Sec Gates calls Tim Geithner and tells him that he just bought that carrier Congress appropriated in the budget and ask him to please send XYZ Corp a billion dollars for it. Tim says, “You got it,” let them know it is on the way. Tim tell his secretary to send a billion in Tsy’s to the Fed while he is calling Ben to let him know it is on the way and to please put a billion in the Treasury reserve account ASAP. The transaction shows up at XYZ’s banks and the bank credits XYZ’s account for 1B and lets the CFO know. XYZ doesn’t need the cash that day, so he decided to buy Tsy’s and instructs the bank to do so. The bank puts in the order with the Fed and the Fed brings the 1B to auction. The bank picks up the 1B in Tsy’s for XYZ, paying in reserves, and charges XYZ’s deposit account. Everyone is happy, and the Navy has a brand new carrier.
Of course, this is not what actually transpires in such an instance, but it gives a picture of what the accounting for the various transfers of assets and liabilities looks like on the respective books when it is summed up.
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anon Reply:
May 23rd, 2010 at 3:40 pm
Tim pays $ 1 billion from his account at the Fed.
XYZ deposits $ 1 billion in his bank.
The bank gets credit for reserves from the Fed.
The treasury auction is irrelevant to this transaction – unless the proceeds from an already completed auction are settling on the same day as Tim pays out the $ 1 billion – which would be a coincidence, because auctions don’t happen every day. So normally, the $ 1 billion has to be in Tim’s account the day he pays. The $ 1 billion comes from taxes or a previous auction.
That’s the way the existing system works.
Of course, this all changes when the overdraft constraint is lifted under MMT.
Tom Hickey Reply:
May 23rd, 2010 at 5:44 pm
Not disputing how it actually works. I said it was only an analogy to conceptualize how the Treasury gets the reserves from debt issuance to clear its spending in the interbank system, and how the currency issuance (deposit) is switched $-4-$ into Treasuries. The presumption of the analogy is that is deficit spending, since if it is not, the Treasury has no need to borrow.
Spelling it out: The Tsy’s are a Treasury liability which becomes a Fed asset. The reserves provided are a Fed liability and a Treasury asset. This happens at the vertical level.
At the interbank level, the deposit in XYZ’s account is a Treasury liability to XYZ’s bank and the corresponding reserves transferred from Treasury’s account for settlement are the bank’s asset.
At the horizontal level, the bank credits XYZ’s deposit account, which is the bank’s liability and and XYZ’s asset. XYZ (nongovernment) is left with an asset of 1B and the Treasury with a liability of 1B, increasing nongovernment net financial assets. The bank net is zero in the transaction.
The Fed auctions the Tsy’s, its assets, in exchange for reserves (Fed liabilities), draining those reserves from nongovernment. If the buyer is not a bank, then the bank debits the buyers deposit account (buyer asset-bank liability) to settle the reserves (bank asset) exchanged for the Tsy (Treasury liability).
I believe this summarizes what MMT is saying about what happens operationally at the macro level. Of course, it simplifies the actual transactions, which admittedly would be unlikely to take place like this.
beowulf Reply:
May 23rd, 2010 at 6:18 pm
Tom Hickey, let me quote from Randy Wray’s debt limit article…
Note that the debt limit… does not apply to coins, Federal Reserve notes, or bank reserves… How would this work if we eliminate sales of Treasury bills and bonds? In effect, the Fed would offer an overdraft to the Treasury rather than to the private banks. Now the Treasury could spend without first moving deposits to the Fed. This would increase the deposit of the recipient of the Treasury’s spending and also the reserves of the recipient’s bank. Banks would earn interest on their reserves-at the rate the Fed chooses. The only change to current operating procedure is to give the Treasury the right to overdrafts… Voila! No more Treasury bills and bonds issued. No more debates about government debt limits. Government debt would be limited to cash plus reserves, which are excluded from such calculations.
http://www.rooseveltinstitute.org/node/244
Congress passing a law to abolish the overdraft restriction would have the same operational effect as if it deleted 1551(b) from the US Code or, to use your aircraft carrier example, authorized the US Mint to stamp a $1 billion coin. Either way its an exercise of Uncle Sam’s seignoirage power. Tsy would deposit $1 billion into its reserve account and the Pentagon would “write a check” against that account. The shipbuilder would deposit the check (electronically of course, but its fun to imagine Northrop Grumman’s CFO depositing a $1 billion check with a drive-through teller), increasing bank reserves by that amount.
If the Fed wishes to peg the FFR north of zero, it’d pay interest on those reserves. I take Randy’s article to mean that IOR is not counted against the debt limit, but even if it is, .025% of $1 billion is a heck of lot cheaper than 3% or whatever the Fed is paying on long term debt. If (per Warren’s proposal) the Federal Fund market was abolished and banks went to the discount window for onvernight loans, then even that .025% IOR would be offset by the Fed’s interest revenue from discount window loans (w/ the net profits going back to Tsy). Those Fed operational changes (zero interest and/or discount window overnight market) could be mandated by Congress or implemented by the Fed voluntarily.
Scott Fullwiler Reply:
May 25th, 2010 at 12:17 am
“Non-banks don’t use reserves to buy treasuries and don’t care what the reserve position of their banker is.”
Of course. But the non-bank purchaser won’t get its Tsy security if its bank doesn’t have rbs or get an overdraft from the Fed in settling the purchase for its customer. Treasuries auctions settle on Fedwire.
“Reserves are created to replenish the system drain due to the settlement effect from all sources of buying.”
Not exactly. Only those sources of buying that would affect the Fed’s balance sheet, as those are the only sources of changes to the aggregate qty of reserve balances.
“Reserve refills do not “fund” specific bank buyers and do not “fund” non-bank buyers at all.”
Right. Reserve ‘refills’ or repos “fund” the banking system’s ability to settle a Treasury auction for itself and its customers without disrupting the Fed’s ability to achieve its target rate (which is possible due to the penalties the Fed itself imposes on overnight overdrafts and discount lending).
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anon Reply:
May 25th, 2010 at 8:12 am
yes
“due to the settlement effect from all sources of buying”
I meant the net settlement effect on system reserve supply, but wasn’t clear in wording
Scott Fullwiler Reply:
May 25th, 2010 at 8:34 am
ok. thx.
anon Reply:
May 23rd, 2010 at 3:44 pm
So this is how it has worked. We have some facts about how the existing monetary system works. I claim that MMT is doing a not so hot job of representing those facts. I claim further that MMT’s “method” in representing those facts includes conflating a representation of the existing monetary system with a view of how the monetary system should work with a few MMT adjustments.
So we attempt to have a discussion.
In that discussion, I raise certain facts about the existing monetary system and how it works. I raise my concern about “method” as above. And I invite others to weigh in on the facts – whether they agree or disagree on the facts of how the existing monetary system works.
In that discussion, MMT determines whether or not certain facts are “relevant”. The MMT criterion for relevance of a fact is whether or not MMT can make that fact disposable according to MMT’s view for changing the monetary system. If it beats that hurdle, a fact becomes irrelevant.
Furthermore, MMT’s determination that a fact is irrelevant makes discussion of that fact redundant. MMT won’t discuss that fact. That fact is irrelevant.
Instead, MMT requires discussion of why its own “replacement fact” (in its hypothetical proposed system) isn’t workable.
On the other hand, I’m not interested in discussing MMT’s proposal. I’m interested in discussing the facts of the current monetary system. But I can’t – because MMT won’t have that discussion first.
I’m interested in having that discussion first because I believe the facts of the current monetary system came to be before the facts of a hypothetical MMT monetary system that is still in the ether. It just seems logical to me to agree on the facts of the existing situation before wading into MMT’s proposal.
But MMT won’t let me do that – because the facts are irrelevant.
I think maybe we have an Orwellian magneto problem.
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Scott Fullwiler Reply:
May 23rd, 2010 at 7:55 pm
Which facts have we said aren’t relevant?
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anon Reply:
May 23rd, 2010 at 8:25 pm
The overdraft prohibition, which effectively prevents unlimited “monetization” of government debt.
Also:
44. 10:57 am
me: “I happen to think that the difference between a world of $ 8 trillion treasuries versus a world of $ 8 trillion in additional bank deposits and reserves is relevant.”
you: “I don’t think it’s relevant to the Tsy, at least not economically relevant. And the behavior of Tsy’s the past 60 years compared to the fed funds target on average bears that out quite well.”
You’re defining relevance exclusively according to pricing considerations. You’re also defining it exclusively according to the treasury perspective.
I’m defining it in broader terms than both pricing and the treasury perspective – e.g. liquidity and the banking system perspective.
My point is that you’ve assumed away the question of relevance and the importance of this fact of current operations by resorting to one dimension – pricing – in the context of an MMT alternative. I don’t think the world is quite that simple.
You’re going to come back and ask what else is there, but as I said, I’m not prepared to discuss in great detail at this point. But I have to say that the pricing answer alone seems stunningly simple from a real world perspective.
Scott Fullwiler Reply:
May 23rd, 2010 at 8:54 pm
OK, but I’ve granted that there is an overdraft prohibition, or at least I will for the sake of argument. I’ve had some “strange” emails with the Tsy dept of financial mgmt that some who have seen them agree suggest they may be hiding something. But I can’t prove anything other than the fact that the Tsy very likely receives intraday overdrafts. So, again, for the sake of argument, I’ve granted the point, repeatedly.
Regarding “relevance” of that fact, well, it’s certainly a fact, and for that reason, it’s relevant. But, it’s not in and of itself evidence that there is an economically significant difference between if the Tsy does or does not receive an overdraft.
I haven’t “assumed away” the relevance of this fact. The FACT is that the entire field of monetary economics–neoclassical, New Consensus, Post Keynesian, MMT, and everyone in between–argues that the pricing of the govt’s debt is the core issue regarding fiscal sustainability. As I’ve explained, IF the the interest on the govt’s debt arbitrages with the FEd’s target (I’m referring to short-term debt here; ESM has explained how longer Tsy rates behave IMO in the “Krugman gets is right” thread), then the govt can run deficits without an overdraft without limit at roughly the same price as if it receives an overdraft without limit. (Note that I said “IF.” For the sake of argument here, I’m not suggesting this is true, though my published research suggests it is.)
So, it is in FACT you that is assuming away the RELEVANCE of the vast literature on fiscal sustainability, not me assuming away the relevance of a particular fact that I’ve always and repeatedly acknowledged is true. And, it is YOU who “is not prepared” to discuss this particular issue that the ENTIRE FIELD of monetary economics unanimously agrees is the core issue.
So, YES, this is all hanging on the price issue. If you think that’s silly or “stunningly simple from a real world perspective,” then go write a paper demonstrating this point and send it to a journal so other experts can finally understand how they’ve been focusing on the wrong thing all along.
Scott Fullwiler Reply:
May 23rd, 2010 at 9:12 pm
Let me state the “price” point another way. If Greece could issue debt right now at roughly the ECB’s target, there wouldn’t be a crisis, at least in terms of its ability to service its debt. It’s because it must pay a huge premium that there is a problem at least from a fiscal sustainability viewpoint. Violation of Maastricht is also a problem, obviously, and a big one if the other members enfore it, but that’s of a different nature compared to having your debt service rise so high that you either must default or face hyperinflation.
anon Reply:
May 23rd, 2010 at 9:18 pm
That’s fine. But it’s you that seems to be assuming that fiscal sustainability etc. is the only perspective that needs to be under consideration here. I have no problem with the pricing analysis as far as that is concerned or the related consequences for fiscal sustainability etc. In a longer discussion, I might start to ask some questions about details of the comparison along the pricing dimension. But that’s just detail and it’s not what I’m referring to when I say I’m not prepared to discuss it.
My larger concern is about the consequences for the banking system. I haven’t seen you make any references to that. When I say the pricing dimension alone is simple, I mean focusing only on the consequences of an alternative approach to deficits for the government itself is somewhat narrow. There are other players involved, particularly when you start planting $ 8 trillion of new banking system liabilities that weren’t there before. My concerns would be in the very general area of liquidity effects, money supply effects, risk premium effects, etc. etc. These are the areas that I haven’t thought through and the ones I’m not prepared to discuss – because I’m not prepared – not because I’m unwilling.
I have absolutely no problem with the idea that the issue for the government cost of funds and the efficiency of its own monetary operations is “all hanging on the price issue”. I do have a problem that this focus alone doesn’t give me comfort that there may be unintended consequences rippling out into the larger financial system as a result. It’s those consequences I’m interested in.
Tom Hickey Reply:
May 23rd, 2010 at 9:27 pm
Anon: “These are the areas that I haven’t thought through and the ones I’m not prepared to discuss – because I’m not prepared – not because I’m unwilling.”
As I said above, the 8T has been discussed previously, and I remain unconvinced that there is a problem. I don’t think that anyone expects you to come up with a reasoned reply right away, but it would be interesting to see your response when you work it up, if you choose to do so. Most of the regulars here subscribe to the comments RSS feed, so we’ll get to look at it whenever.
Debate is always healthy and brings out things that haven’t com out before or are buried somewhere that non-specialists are not likely to encounter.
Min Reply:
May 24th, 2010 at 12:42 pm
Scot Fulwiler: “The FACT is that the entire field of monetary economics–neoclassical, New Consensus, Post Keynesian, MMT, and everyone in between–argues that the pricing of the govt’s debt is the core issue regarding fiscal sustainability.”
Really? Verrrrry interesting. :)
And what if the gov’t has no debt to price? (But simply runs frequent deficits. :))
Tom Hickey Reply:
May 24th, 2010 at 1:14 pm
Min, no debt, no interest, and no interest contribution to deficit. The deficit declines by that amount. How is that a problem?
Scott Fullwiler Reply:
May 23rd, 2010 at 9:14 pm
Forgot something:
“If Greece could issue debt right now at roughly the ECB’s target, there wouldn’t be a crisis, at least in terms of its ability to service its debt” . . . and continue to incur further deficits.
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anon Reply:
May 23rd, 2010 at 9:25 pm
interesting point
interest rate expectations based on the policy rate break down when the system for the policy rate itself is at risk?
would that be similar to a forward market “run” on a fixed rate currency due to fears of depegging?
or a forward market run on gold due to fears of breaking a gold standard?
May 22nd, 2010 at 10:10 pm
most of my operational proposals are at http://www.moslereconomics.com/?p=8968
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beowulf Reply:
May 23rd, 2010 at 12:58 am
Sometime in the next few weeks, the Supreme Court is going to hand down a decision in Free Enterprise v. PCAOB (a government agency) that will be worth studying. Its a constitutional challenge to the Sarbanes-Oxley law’s independent Public Company Audit Oversight Board that has implications for the Federal Reserve (in a nutshell, the suit advances “unitary executive” argument that since the Constitution gives all executive power to the President, he should have the power to hire and perhaps fire any government employee with executive power).
http://scotuswiki.com/index.php?title=Free_Enterprise_Fund_and_Beckstead_and_Watts,_LLP_v._Public_Company_Accounting_Oversight_Board
The Government ((which is defending the PCAOB) will probably lose. Even If its on narrow Appointments Clause grounds, the ruling could call into question (a bank would have standing to sue, I’m not sure who else would) the legality of the Federal Open Market Committee– only 7 of the 12 are Board Governors, the other 5 from the Federal Reserve banks could raise red flag.
There’s an outside chance that the Court will overrule the 75 year old Humphrey’s Executor case and adopt the unitary executive position that any kind of independent federal agency is unconstitutional since all federal executive power must be exercised by the President or his subordinates (See Mountain State Legal Foundation amicus brief at above link for the best argument for that position). In the event the Court adopts the broad unitary executive argument in the pending PCAOB case (and I doubt they’ll be that bold), it’d make the Federal Reserve System as it currently exists unconstitutional.
http://volokh.com/posts/1207512634.shtml
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RSJ Reply:
May 23rd, 2010 at 1:02 am
Nothing will happen. The Fed’s MBS purchase program is already illegal, and no one cares.
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beowulf Reply:
May 23rd, 2010 at 3:03 am
Perhaps, though a possible violation of the Constitution is a bigger deal than a possible violation of the the Federal Reserve Act. The biggest hurdle for a Constitutional claim is whether the plaintiff has standing to sue. A bank would likely have standing to challenge the FOMC setup, while private citizens and Members of Congress who’ve filed suit on this issue before did not (albeit, in the 1980s. I’m not sure “equitable discretion” is still good law in the DC Circuit).
Suffice it to say that of the twelve members of the FOMC, five are not appointed pursuant to the procedures ordained by the Appointments Clause. Unlike their seven colleagues who are nominated by the President and confirmed by the Senate, these five members are selected by the boards of directors of the several Federal Reserve Banks…Although the appointments controversy continues unabated, we are confronted with an insurmountable barrier to the resolution of Senator Melcher’s claim. That barrier is the doctrine of equitable discretion…”
http://openjurist.org/836/f2d/561/melcher-v-federal-open-market-committee
zanon Reply:
May 23rd, 2010 at 9:25 am
Beauwolf:
If you believe that, then you are profoundly ignorance of history.
Constitution has been “violated” in major fashion about 4 times now since it was founded, and life seems ot go on.
Seriously, if you had to pick in US between Constitution and Case Law, it is clear which choise would have life go on as normal and which would create chaos.
All that matters is political sentiment around rule. that is practical reality. RSJ is correct, nothing will happen. Beleiving the Supereme Court will declare US Fed unconstitutional is as hallucinatory of Tom Hickey’s dream of popular revolutionary accounting movement!
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beowulf Reply:
May 23rd, 2010 at 5:03 pm
If you believe that, then you are profoundly ignorance of history.
Dude, I’m profoundly ignorant about most things, but what I do know is the law is what 5 Supreme Court justices say it is and the rest of us just have to deal with it. If there are 5 votes to both 1. adopt the unitary executive theory and 2. apply it to the Fed, then the Fed is gone, or rather, becomes a bureau within Tsy.
If there are 5 votes to allow the Fed to keep on keeping on, then anyone who files a suit like the Melcher case above will always be kicked out of court on some pretext or another (standing, equitable discretion, etc); much like the Jim Carrey character in the Truman Show is always kept from leaving his hometown/reality show set for various reasons (nuclear plant accident, inclement weather, etc).
I make no predictions where the 5 votes will be if such a case is heard, but I raised the issue because if the PCAOB case goes against the Government, there will be lawsuits challenging the Fed’s constitutionality, no doubt led by Ron Paul fans.
ESM Reply:
May 24th, 2010 at 9:41 am
Beowulf,
The law is NOT necessarily what the Supreme Court says it is. Originally, the Supreme Court was just another appellate court, not the final arbiter of what does and does not pass constitutional muster. Marbury v. Madison changed that in public perception, but people really should understand that the Supreme Court (indeed the entire federal judiciary) has a role as a trier of fact and settler of disputes, but not as some exogenous arbiter of what the government can and cannot do. It should not be granted veto power over the other two branches of government, especially when it fails to exercise judicial restraint (as constitutionally mandated I believe).
Now, I would not want the legislative and executive branches simply to ignore a Supreme Court ruling (Worcester v. Georgia, Andrew Jackson allegedly said “John Marshall has made his decision; now let him enforce it!”), but I would want to see those branches challenge the Court when it makes a decision with which they disagree, up to and including impeaching and replacing justices through the constitutionally mandated process.
Not to get too preachy here, but the Supreme Court is not the guarantor of our Constitutional rights. We are.
Tom Hickey Reply:
May 24th, 2010 at 11:01 am
Yes, this is the weakness of the US Constitution, and it permits a “unitary executive” to assume dictatorial powers or a populist movement to take power through Congress.
John Marshall sought to plug this hole in the dike, but as you observe, ESM, that’s just the Court speaking. It is not in the US Constitution. History will show how this plays out, but it didn’t work out so well for the Romans.
zanon Reply:
May 24th, 2010 at 12:09 pm
Beauwulf:
Yes, law is what supreme court says (so I disagree with Tom Hickey). That said, supreme might push public opinion, but not go too far. they are not suicide either. So they may find something in penumbra, but not do anything so bad that they will be kicked out/lunched. boil frog etc.
I am sure Ron Paul wants to sue Govt for all kinds of things but if you have not noticed, merits aside, everone thinks he is looney bin.
Tom Hickey Reply:
May 24th, 2010 at 12:56 pm
Zanon: “Yes, law is what supreme court says (so I disagree with Tom Hickey).”
There is nothing in the Constitution giving the Supreme Court this power. The Supreme Court declared it. Arguing that it is therefore “the law of the land” on this basis is circular, sort of like arguing that the Bible is undeniably the word of God and we know this must be the case because the Bible says so.
While I believe that Marbury vs. Madison is settled law in the US, a lot of people don’t think so, and they have lots of guns and ammo. The US fought one civil war over states’ rights and some folks seem to be itching for a redo.
May 23rd, 2010 at 9:26 am
Comment of mine dropped in another post
In short – in the US there is a lender of the last resort one way or the other since law can be easily broken. In the EZ, there was none recently till an SPV was formed, but with terms and conditions imposed. In the US as well, there are self-imposed constraints. There is a demand side problem for the demand for EZ countries’ bonds. Someone should pay attention to that. The operational details are crucial to understand but are in some sense “supply side”.
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May 23rd, 2010 at 3:10 pm
Curious: “Only the Fed can create dollars and the Treasury can’t borrow from the Fed.
“How did the Treasury get the very first dollar to deficit spend?”
There was no Fed at that time. The Treasury created the first dollar.
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May 23rd, 2010 at 5:22 pm
Anon, why are you defending so much your logic of borrowing first and spending later? Looks like you are ready to die for your own theory.
All I know it that there is a rule which _recommends_ Treasury to have 5bn on its account at F