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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Bernanke text

Posted by WARREN MOSLER on February 3rd, 2011

Just when you think he’s making progress:

>   
>   (email exchange)
>   
>   On Thu, Feb 3, 2011 at 1:41 PM, Cullen wrote:
>   
>   After a glimpse of hope from some of Bernanke’s speeches late last year
>   he appears to have suffered some sort of memory loss as he is once again
>   talking about the dangers of the govt debt:
>   

Bernanke:

By definition, the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit.

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134 Responses to “Bernanke text”

  1. Tom Hickey Says:

    I am not sure that this is strong evidence that Bernanke himself doesn’t get it. He may, but also realize that creditors by and large don’t. I think that Bernanke may be like the politicians to whom Warren has explained MMT. They agree privately, and then public say the opposite, apparently because in their view espousing this would be politically toxic.

    I suspect that what is needed is a critical mass before there is a paradigm shift. Then everyone will come out of the woodwork with snippets of things they said or wrote in the past proving that, of course, they knew this all along.

    Think critical mass. :)

    Reply

    Neil Wilson Reply:

    +1 Tom.

    Reply

    danw Reply:

    RE: Critical Mass

    As George Jones said, THE RACE IS ON. What I mean is this: Which ‘critical mass’ will win? Will it be the realization that, operationally, were the world to embrace MMT, then we could quite probably create a global system that was highly sustainable, perhaps even relatively fair? Or, will critical mass be realized that favors global class warfare and the tearing asunder of the nation-state?

    OK, a bit of hyperbole, I’ll admit. But perhaps not. Goings-on in north Africa and on the Arabian Peninsula are instructive. ALL periods of social upheaval are based upon a critical mass of angry, hungry, disillusioned, people saying that ‘enough is enough’. And while I happen to believe that such a critical mass is far FAR off reality for the U.S. (mostly because operationally we can always fund SS and Food Stamp programs, etc.), steadily rising commodities prices and the massive exploitations created by (some aspects of) a globalized economy are surely having a significant impact upon the rising tide of disillusionment in the developing world.

    I suspect that the critical mass needed to save us from our own greed and moral impoverishment may be falling further and further behind the incipient struggle against a global monetary system that enriches a few while leaving the majority to go hungry.

    Yes, I know—normative and political vs. operational.

    Reply

  2. Rodger Malcolm Mitchell Says:

    Tom,

    That “woodwork” hides many Nobel winners. Won’t it be a hoot to watch them twist and turn, trying to explain how their theories not only agree with Monetary Sovereignty, but actually presaged it. In fact, if I’m not mistaken, they invented it, but were so far ahead of us, we didn’t understand.

    Rodger Malcolm Mitchell

    Reply

  3. Rodger Malcolm Mitchell Says:

    On second thought, if Bernanke actually is saying that people would not want to exchange their sovereign currencies for the dollars necessary to buy the T-bills of a nation in the throes of rampant inflation, maybe he’s just saying the obvious, and trying to make it sound like he’s agreeing with popular myth. Is he that clever?

    Rodger Malcolm Mitchell

    Reply

    Neil Wilson Reply:

    Perhaps that is what needs to happen. People refuse to buy the government saving certificates and yet the government has to continue to spend due to the automatic stabilisers.

    And then nothing much will happen, bonds won’t be sold and spending goes on pretty much as before.

    A lot like coming of Bretton Woods, or the Gold Standard.

    Reply

  4. Ramanan Says:

    Sorry whats the claim here ?

    Is the claim here that the government debt doesn’t rise to 200% of GDP as projected by the CBO ?

    If the public debt/gdp ratio is 200% as the CBO projects in an alternative scenario, all auctions of government debt will still be successful – is that the claim here ?

    Reply

    ESM Reply:

    The latter statement would be my claim.

    Reply

    Ramanan Reply:

    Just a matter of faith ?

    Reply

    beowulf Reply:

    Its not like we’re being sucked into a black hole and not even light can escap…. First, what percentage of “200% of GDP” debt is simply compounded interest? Answer… much.
    http://www.american.com/graphics/2009/Chart_12-3-09.gif

    Second, is it possible for the US to determine by fiat the interest on debt, has it been done before? Yes and Yes.
    From 1942 to 1951, Tsy and Fed agreed to cap interest rate (ranging from 2.5% long term, 1.0% for 1 year, 0.375% short term) to allow Uncle Sam to fund wartime spending. If auctions didn’t sell out, Fed stepped in to buy at cap prices. If we did this again, particularly if Tsy issued only short term, it would cut the projected debt burden dramatically (CBO projections assume 5% avg interest rate, using 0.375% instead would cut net interest by 92.5%).

    Of course, this would require controlling inflation by alternative means (e.g. capital controls, Vickrey inflation warrants, Fed adjusting prime rate or Congress creating adjustable tax rates or… wait for it… a Job Guarantee to provide an employment buffer stock).

    ESM Reply:

    I feel like we’ve had this discussion before. But, no, it is not a matter of faith. It is a matter of simple logic. When a government bond is redeemed, an interest-bearing IOU is replaced by a non-interest bearing IOU (reserves). When the Treasury auctions a new government bond, the market place has an opportunity to replace some of its non-interest bearing IOUs with interest-bearing IOUs. How could anybody in his right mind pass up such a deal?

    Now, I suppose an auction for a 30yr bond could fail, because there is a lot of interest rate risk associated with the ownership of a 30yr bond. But there is no reason for a 1-day or 1-week T-bill, or even a 1-month T-bill auction to fail.

    WARREN MOSLER Reply:

    agreed.

    but if they held a surprise 1 week auction at 3am on a saturday it might fail…

    Ramanan Reply:

    I know these discussions very well.

    The Treasury has an auction process. http://www.ny.frb.org/research/current_issues/ci11-2.pdf

    If foreigners hold a lot of Treasuries as opposed to citizens, do you think the auctions will be successful ?

    Bid-cover ratios can’t depend on public debt/gdp ratio, esp if foreigners hold a lot of G-secs ?

    Ramanan Reply:

    “If auctions didn’t sell out, Fed stepped in to buy at cap prices.”

    Yes I know, the Fed and the Treasury can decide to do these things. That time, the US was the world’s biggest creditor ?

    And I wouldn’t go into inflation in such a discussion because the decision to set the 10y at 5-6% can’t cause inflation.

    Don’t you think however, that this action can cause a huge amount of speculation on the dollar especially if foreigners do not alloted Treasuries in the auction ?

    Pz Reply:

    MMT says “debt” is issued at on-the-need basis to drain excess reserves out of the banking system. See the explanation: http://www.youtube.com/watch?v=4J0j5VwnD7I

    So it can’t possibly go wrong. It is not even a debt, because what happens is that government issues two kind of a assets: new money and government bonds. So it is a stock of issued assets.

    Ramanan Reply:

    Please no Japan here .. Japan is a creditor of the rest of the world

    Reply

    Neil Wilson Reply:

    Really. Somebody else issues Yen then?

    Reply

    Ramanan Reply:

    Yes. Euroyen markets also issue Yen.

    Scott Fullwiler Reply:

    Not the same thing at all, Ramanan, just as eurodollars aren’t the same as dollars created by US govt or Fed–proven by the fact that the Fed had to lend $600B to ECB to keep eurodollar markets from collapsing in fall 2008.

    Tom Hickey Reply:

    “If the public debt/gdp ratio is 200% as the CBO projects in an alternative scenario, all auctions of government debt will still be successful – is that the claim here ?”

    1. Hey, if the entire GOP doesn’t believe CBO numbers, who am I to argue? :)

    2. I have learned the hard way never to underestimate the power of government when its keepers want to move in a direction, especially one the scope of the USA.

    Reply

    Ramanan Reply:

    So you are saying that the US public debt to gdp won’t hit 200%?

    Reply

    Tom Hickey Reply:

    First, I don’t think so. Secondly, who cares?

    Ramanan Reply:

    Why again a matter of faith ?

    WARREN MOSLER Reply:

    it will if non gov savings desires get that high, which they probably will eventually with our current institutional structure

    Tom Hickey Reply:

    R: Why a matter of faith?

    Uncertainty and reflexivity. :)

    Tom Hickey Reply:

    Warren, to get there due to the present institutional structure would involve automatic stabilizers, which means persistent high unemployment. I don’t see this as feasible politically. There will be institutional change of some sort. But the situation might even deteriorate due to some bad choice before we get meaningful change. I believe it was Churchill who observed that Americans always come up with the right solution — after they have gone though all the wrong ones. Hey, that’s what feedback is for.

  5. John Says:

    I have a quick question and I know there are plenty of people here who can answer it for me. I’ve been studying MMT for some time now (reading the works of Mosler, Wray, Mitchell, etc) and I understand and agree with the concepts that MMT present but always come up against a wall with this stuff when thinking about how the theory interact with current legal constraints.

    Warren has stated that government checks don’t bounce and I understand that operationally there is no constraint preventing Bernanke and other central bankers of monetarily sovereign nations from clearing whatever ggovernment payments they wish to clear, even if that means generating a negative electronic number in a government account. However, under current law, isn’t Bernanke legally prevented from doing so being that the Treasury cannot overdraft at the Fed? Don’t get me wrong, I understand perfectly that this law is basically an anachronism from the gold standard-age! But until that law is repealed, as it should be, isn’t it a simple reality that it really does matter what the current cash balances are in the Treasury’s accounts, and will not checks bounce if indeed there turns out to be insufficient funds in one of these accounts?

    Reply

    Peter D Reply:

    Yes, by law the Treasury has to issue debt to cover the potential overdraft. But, as Warren shows in section “The Myth of Debt Monetization” of Soft currency economics, this is somewhat of a stupid meaningless dance because of the mandate to maintain a target fed funds rate: since issuing debt drains reserves from the system and this in turn immediately affects the fed funds rate (driving it up), the Fed has to add reserves to the system by buying the same debt back and thus to bring the fed funds rate back to the target! So, the net effect is the same as if the Treasury simply credited the bank accounts in the first place.
    Somebody correct me if I got this wrong.

    Reply

    WARREN MOSLER Reply:

    you are correct.

    Reply

    beowulf Reply:

    Tsy could be authorized to overdraft, but if Congress has to change the law anyway, it’d be easier to simply strike 5115(b), authorizing unrestricted issuance of United States currency notes (“in a form… Secretary prescribes” could mean electronic issuance). Since they’re interest-free debt, US Notes are not counted towards the statutory debt limit.
    http://www.law.cornell.edu/uscode/31/usc_sec_31_00005115—-000-.html

    Total Public Debt Subject to Limit is defined as the Total Public Debt Outstanding less…old currency called United States Notes…
    http://www.treasurydirect.gov/news/pressroom/pressroom_bpd11082004.htm

    So if Tsy spent US Notes into circulation, Fed could peg FFR by IOR payments. Though couldn’t the Fed also manage interest rates by selling and buying its own Federal Reserve bonds?

    Reply

    Peter D Reply:

    But some sort of issuance of interest-bearing instruments is still necessary, is that right? Here I guess I am trying to figure out if that again is simply a self-imposed constraint or an actual one. If the Tsy simply overdrafts and creates deposits in the system, the FFR will move, right? Is that a bad thing? Do we really need to hold FFR at a certain target?

    WARREN MOSLER Reply:

    right, as beo says, the ff rate would actually move down with deficit spending by overdraft, no interest paid on fed funds, and no ‘open market operations.’

    the excess reserves would mean a marginal cost of funds of 0 for the banking system.

    Peter D Reply:

    Wanted to say “If the Tsy simply overdrafts and creates reserves in the system”

    beowulf Reply:

    IF Congress authorized Tsy to overdraft and create deposits in the system the FFR will move down, since its at 0.25% now, it wouldn’t take long to reach zero. Whether its a bad thing and whether we need to peg FFR, no and no.
    See Warren’s The Natural Rate of Interest is Zero.
    http://moslereconomics.com/mandatory-readings/the-natural-rate-of-interest-is-zero/

    Politically, freezing it at 0.25% is easier to explain and its only slightly less optimal than zero, but there’s no operational reason to pay interest on risk-free reserves.

    Tom Hickey Reply:

    Peter D, under the present system the Fed issues reserves and the Treasury issues tsys, hile the Fed sets the overnight rate (FFR) and the discount rate. This is a policy choice, not an operational requirement.

    Operationally, the Treasury could just directly issue notes, and the Fed could set the overnight rate at zero. No bonds, and no interest paid out.

    Fiscal policy — appropriations and taxation — would still take place through the budgetary process as is presently the case.

    All it would take is some legislative tweaks.

    WARREN MOSLER Reply:

    and with current institutional arrangements, the tsy could simply issue nothing longer than 3 month bills and accomplish the same thing for all practical purposes

    Peter D Reply:

    OK, so I guess I am still at loss why we target the FFR at all. Is it really because of the mistaken (?) belief that it allows control over money supply and inflation? Is this inflation targeting what is easier to explain politically, as per Beowulf’s comment?
    Thanks!

    Peter D Reply:

    In the comment below Warren says of Patman
    “hi misses the point of interest rate support operations, which is what federal debt is ultimately about”. But if we don’t really need interest rate support operations as Beowulf and Tom suggest, when Patman was exactly right, wasn’t he?
    Forgive my thickness :)

    WARREN MOSLER Reply:

    problem is cash needs to be issued only as demanded by the population.

    if you pay people with more cash than they want, for example, they put it in a bank account and presto- there are reserves the gov needs to pay interest on to support its target rate

    Peter D Reply:

    Warren, I’m back to square one: why support a target rate at all? So, suppose there are excess reserves the the FFR falls to zero. Why is that a bad thing?

    WARREN MOSLER Reply:

    i’ve been proposing just that for a very long time.

    see ’0 is the natural rate of interest’ on this website under ‘mandatory readings’ thanks

    WARREN MOSLER Reply:

    agreed!

    Tom Hickey Reply:

    The Natural Rate of Interest Is Zero by Mathew Forstater and Warren Mosler

    WARREN MOSLER Reply:

    thanks!

    Peter D Reply:

    Right, Tom, it is probably the forth time I am reading this paper and every time I understand it better and better. But then I again don’t understand Warren’s criticism of Patman. If Patman says we don’t need to issue debt and implicitly also understand that there is no real danger from 0 fed funds rate (which will result from not issuing debt) then he is a proto-MMTer!
    (Or maybe Warren wasn’t actually criticizing him…)

  6. Matt Franko Says:

    Bernanke’s speech: 5 paragraphs on Monetary, 8 paragraphs on Fiscal… all paragraphs out of paradigm.

    Was looking at fiscal FYTD, thru end of January (4 months into FY YoY) (data from DTS)

    FY 2010 as of Jan 30
    Total Treasury Acct Withdrawals: 3678
    Minus Treasury Redemp: 2314
    Equals Net Treasury Withdrawals: 1361

    Total Treasury Acct Deposits: 3494
    Minus Treasuries Issued: 2514
    Equals Net Treas Acct Dep: 980

    FY 2010 YTD (Jan 30) Deficit: 381B

    FY 2011 as of Jan 30
    Total Treasury Acct Withdrawals: 3707
    Minus Treasury Redemp: 2357
    Equals Net Treasury Withdrawals: 1350

    Total Treasury Acct Deposits: 3746
    Minus Treasuries Issued: 2808
    Equals Net Treas Acct Dep: 938

    FY 2011 YTD (Jan 30) Deficit: 412B

    So you can see from this data that it looks like YoY ‘Tax receipts’ are down from 980B to 938B. Deficit has increased by 412-381=31B ($100 per capita, $25 per month per capita). Net Withdrawals have only increased by 1361-1350=$11B ($35 per capita, $8.80 per month per capita)….. an additional 9 bucks per month, some Fiscal support Ben!

    On the non-govt side, Bank credit (H.8) is flat to down YoY if you factor in the 300B add to Loans & Leases due to CIT bankruptcy adjustment (last Aprilish?) Crude is up, imports up.

    This is not a lot of support for the economy/growth imo. Resp,

    Reply

    Matt Franko Reply:

    Take it back my mistake, they are actually providing net 9 dollars (per capita) per month LESS than at this point last year in net govt spending…

    Reply

  7. Rodger Malcolm Mitchell Says:

    I continue to be puzzled about why anyone cares about Debt/GDP.

    1. Does the federal government pay its bills with GDP? No.

    2. Does the federal government need to create T-securities out of thin air, then trade them for dollars it previously created out of thin air (aka “borrow”), in order to pay its bills? No.

    3. Does Debt/GDP have anything whatsoever to do with the government’s ability to pay its bills? No.

    4. Could the federal government redeem all T-securities (aka “debt) tomorrow, simply by crediting the bank accounts of T-security holders? Yes.

    5. If, for some reason, no one purchased T-securities, would this impact the federal government’s ability to pay its bills? No.

    6. Are T-securities (borrowing) necessary for a Monetarily Sovereignnation? No.

    Could someone please explain why we continue to have discussions about the least meaningful ratio in American economics: Debt/GDP

    Rodger Malcolm Mitchell

    Reply

    WARREN MOSLER Reply:

    because they don’t understand 1-6

    Reply

  8. Pete Hero Says:

    Tom,

    You said about DEBT to GDP “….. who cares?

    Cullen Roche said “I have NEVER said the deficit doesn’t matter.”

    Can you explain the seeming contradiction?

    Reply

    Tom Hickey Reply:

    Pete, no one has come up with a convincing argument as to the supposed inevitable dire significance of either the absolute size of a deficit and debt, or debt/GDP ratio. It is just asserted as a given. To me that is a flag that it is functioning as a norm.

    In the real world, things like this work out or they don’t. Government has enormous powers to shape events and perceptions, although they sometimes use them stupidly or don’t use them, resulting in consequences that could have been avoided. But to project trends into the future and see dire consequences is to me a waste of time. Too many variable and too much uncertainty.

    In short, my estimation of the probability of the US destructing over government debt is extremely low, about on the level of the US succumbing to hyperinflation. This is just either hyperventilation or fear-mongering in my view, unless it is a purely academic exercise.

    BTW, I am not saying that the deficit doesn’t matter. That is an entirely different issue, involving fiscal policy and public purpose.

    Reply

    beowulf Reply:

    Debt to GDP is confusing stocks (Debt) and flows (GDP). Riddle me this, what’s the net worth of the United States of America if it produces an income of $15 trillion a year? At a 5 cap rate, assets are worth $300 trillion. Considering that three year Treasuries yield 1%, to use a cap rate of 1… $1.5 quadrillion. To answer it from another angle, EPA calculates economic value of human life at $7 million and we know the US has 300 million residents, putting value of human capital alone at $2.1 quadrillion. So the country’s net assets are in the order of magnitude.

    Once you compare stocks (debt) to stocks (assets), you see how absurd it is to sweat our debt burden. Suppose there’s $30 trillion in debt, while it may be 200% of current GDP, it would only reduce USA’s net worth from $1.50 quadrillion to $1.47 quadrillion.

    Reply

    WARREN MOSLER Reply:

    and it isn’t a debt burden as most understand it to be in any case. the point is moot before you start adding all that up.

    Reply

    WARREN MOSLER Reply:

    we don’t have a debt burden in any case
    :)

    and you are mixing metaphors elsewhere as well, seems?
    the ‘cost’ of the gdp is all the goods and services sold and consumed, for example, so the ‘profit’ that would be subject to a cap rate is far less, etc.

    Reply

    ESM Reply:

    That’s correct. Over 70% of GDP is consumed (some of which is depreciation on capital assets), so you would at least multiply your number by 0.3. Also, you can’t use a price/earnings multiple of 20 for a slow-growing “company” like the US economy. Why don’t you just use the Fed’s estimate of net wealth of the US private sector? Something like $65T.

    Also, I know I’ve mentioned this before, but the EPA’s calculation of the value of a human life is based on how much people are willing to pay in order to avoid risk. It has absolutely nothing to do with the productive capacity of a human being. Actually, it has more to do with the irrationality of a human being because the values are inflated by people’s irrational fear of miniscule risks. If you used material risks in the calculation (e.g. probability of dying in a car accident because you don’t replace your worn out tires), you would probably come up with a much lower value for a human life.

    beowulf Reply:

    The US Govt is operated on a nonprofit basis, but I take your point Warren. :o)

    Esm, Cap rate of 20 = P/E of 5.
    Probably the most common example to illustrate the cap rate concept is the stock market’s price to earnings multiple (the “price/earnings ratio,” or P/E ratio): the reciprocal of this multiple is the market’s cap rate for that equity issue.
    http://www.enotes.com/biz-encyclopedia/capitalization-rate

    “has absolutely nothing to do with the productive capacity of a human being.”
    I would preface this clause with “the value of a human life”, YMMV. :O)

    The net worth of the private sector doesn’t include (obviously) public assets, nor does it include human capital or those assets, public or private, that can’t be tabulated in a spreadsheet nor traded on a financial exchange. Its like what Robert Kennedy said of GNP (though I’ll concede now, most poetry is worthless): :o)
    It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.

    Tom Hickey Reply:

    Fortunately, GNP doesn’t include “the integrity of our public officials.” :(

    ESM Reply:

    “Esm, Cap rate of 20 = P/E of 5.”

    Yeah, but you muliplied GDP by a factor of 20.

    “The net worth of the private sector doesn’t include (obviously) public assets, nor does it include human capital…”

    The net worth of the private sector does include a substantial fraction of public assets and human capital, at least implicitly. Certainly the market capitalization of Microsoft is included in private sector assets, and that value derives in large part from its human capital. And, as I’m sure you and Tom would agree, the value of private companies is higher thanks to public infrastructure.

  9. Tom Hickey Says:

    Is California the new Japan?

    “All those gains in homeownership have been wiped out like dust in the wind all thanks to the once in a generation housing bubble. Now we are left confronting the reality that we have spent over a decade basically spending money we did not have. The wealth has been transferred to Wall Street investment banks and all you need to do is pull up one of their financial statements. They don’t even bother hiding it from the public. There seems to be anger at so many things except the number one culprit and that is the vampire like nature of investment banks to strip out true wealth from the economy.”

    Reply

  10. Ivan Says:

    Rodger:

    Let’s suppose potential GDP is $12 trillion and the government runs a deficit of $6 trillion while private sector demand is $10 trillion, pushing aggregate demand well in excess of potential GDP. In that instance, the deficit become hyper inflationary. I suppose that would be the only reason to care about the Debt/GDP ratio.

    Thoughts?

    Ivan

    Reply

    Pete Hero Reply:

    Is it a deficit of $6 trillion or government spending of $6 trillion that makes your scenario inflationary? Hence, does $12 trillion from the private sector and $6 trillion from the government, of which say $2 trillion is deficit spending, push aggregate demand in excess of GDP. I don’t think “potential” GDP should be used, since “potential” is subjective and non-existent.

    Reply

    Ivan Reply:

    Deficit of $6 trillion. Potential GDP can be replaced with full employment GDP. Less subjective.

    Reply

  11. Ralph Musgrave Says:

    I vote for Wright Patman, a Democratic representative from Texas, and chairman of the House of Representatives Committee on Banking and Currency (1965-75). He said:

    “When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far. I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money… I am saying to you in all sincerity, and with all the earnestness that I possess, it is absolutely wrong for the Government to issue interest-bearing obligations. It is not only wrong: it is extravagant. It is not only extravagant, it is wasteful. It is absolutely unnecessary.”

    Reply

    WARREN MOSLER Reply:

    hi misses the point of interest rate support operations, which is what federal debt is ultimately about

    Reply

    beowulf Reply:

    Patman was an interesting fellow. I seem to recall reading that he made the Fed a little nervous and was the proximate cause of the Fed voluntarily refunding net earnings back to Tsy. Also, he rightly called out Tsy-Fed Accord of 1951 (uncapping interest rates) as a bad deal for Tsy. Just reversing the 1951 Accord would do much good.

    Lets see, if instead of CBO’s projected (over 10 yrs) 5% avg interest rate for debt service, we capped interest at current 0.25% FFR, Tsy would pay 95% less than projected $6 trillion in net interest. That would cut the 10 year deficit by $5.7 trillion. By way of comparison, the Bowles-Simpson Commission woud cut SS, Medicare and just about everything else to reduce deficit by $3.8 trillion over 10 years. That would “pay” for a lot of tax cuts. :o)

    Reply

    WARREN MOSLER Reply:

    and with a cut like that we’d need taxes about that much lower and/or govt spending about that much higher

    Ralph Musgrave Reply:

    Warren is right: Patman misses the interest rate support thing. But my answer to that is that I agree with Abba Lerner, i.e. that government net spending alone should be used to regulate AD, not interest rates (though possibly interest rates might play a minor role). My reasons are here:

    http://ralphanomics.blogspot.com/2010/12/interest-rate-adjustments-are-useless.html

    Abba Lerner DID advocate adjusting interest rates, but for another reason: because he though this enabled government to optimise the amount of investment. A daft idea I think.

    Ivan Reply:

    Why can’t the govt just pay interest on deposits and let the market for risk assets find its own clearing level further out the curve?

    Reply

    Tom Hickey Reply:

    The issues are why the cb through its BoG (a small group of unelected and unaccountable technocrats) should be setting rates at all, and why government should be paying interest on risk-free assets. The first smacks of a command economy, and the second constitutes a subsidy. Seems to be anti-capitalistic and anti-democratic. It would seem that the logically consistent solution is set the overnight risk-free rate to zero, go to no interest bearing tsys, and let markets determine rates and yields.

    WARREN MOSLER Reply:

    it does have that option

  12. Matt Franko Says:

    Pete Peterson speaketh:

    http://finance.yahoo.com/tech-ticker/pete-peterson-state-budgets-a-%22potentially-explosive-problem%22-535892.html;_ylt=AhkEyamab1yrKkr1oMHOMmq7YWsA;_ylu=X3oDMTE1NTV1MDZyBHBvcwMzBHNlYwN0ZWNoVGlja2VyBHNsawNwZXRlcGV0ZXJzb24-?tickers=MUB,AGG,HYG,LQD,TLT,TBT,JNK

    Topic this time is State budgets. Resp,

    Reply

  13. Paul M Says:

    Seems like the conventional wisdom folks are latching onto, “We are the next Japan” and that is going to be their mantra for whatever ill concieved public policy they are advocating.

    Could someone enlighten me as to what actually caused “Japan’s Lost Decade”?

    Seems like that is where the next battleline needs to be drawn with nonMMTer’s.

    Thanks!

    Reply

    WARREN MOSLER Reply:

    they let their budget go into surplus from 1987 -1991 much like we did from 1997=2000, and the result has been a chronic lack of aggregate demand.

    Reply

    Ivan Reply:

    If that were the only reason, their massive deficits since would have cured the problem. I think it is a meltdown in stocks by 75%, largely the result of unwinding cross holdings, a very high savings rate, a very low birth rate, and a shrinking population. At the end of the day, population growth is a large component of economic growth.

    Reply

    Tom Hickey Reply:

    Richard Koo, Balance Sheet Recession: Japan’s Struggle with Uncharted Economics and its Global Implications (2003)

    Reply

    Tom Hickey Reply:

    Also see Bill Mitchell post, where critiques Koo’s position for the vantage of MMT.

    Balance sheet recessions and democracy

    Reply

    Ralph Musgrave Reply:

    Re Japan,
    1, This paper pretty much agrees with Warren I think: http://ideas.repec.org/p/mmf/mmfc04/9.html
    2, Organised crime, i.e. the “Yakuza” played a part. See: http://www.jref.com/forum/showthread.php?t=120
    3, The lost decade was not as bad as is often claimed. Unemployment never reached the level that exists in the US right now.

    Reply

    beowulf Reply:

    The lost decade was not as bad as is often claimed. Unemployment never reached the level that exists in the US right now.

    The importance of this cannot be overstated. Japan’s post-occupation unemployment high 5.7% (reached in 2009) is considered full employment in this country, Japan’s unemployment is currently 4.9%.

    What’s going on is that the bureaucrats who run Japan recognize the best way to keep US protectionists off their case is by poormouthing their economy at every turn. Japan is a very wealth country that continues to grow wealthier. They have no intention of ever “recovering” from their “depression” since that might lead US policymakers to someday wake up. Tokyo-based journalist Eamonn Fingleton has written about this often.
    http://www.fingleton.net/

    Reply

    ESM Reply:

    I haven’t had time to search around for backup on this, but my understanding was that Japanese unemployment was understated relative to the US. I don’t remember the reason. German unemployment is supposedly understated because of (potentially) multi-year government retraining programs where the unemployed are considered to be employed. MMT folk might consider this to be legitimate employment (as in a JG), I guess.

    I’ve always felt that Japan’s lost decade was not terribly lost. The underperformance of GDP growth had much more to do with demographics than economics. Their population growth was essentially zero during the ’90s, and ours was 1.5%. On top of that, their population is aging faster than ours because we get an influx of young immigrants. I’m not sure why people focus on GDP growth as opposed to GDP per capita growth. The latter seems much more sensible.

    WARREN MOSLER Reply:

    Japan had a form of ‘employment for life’ and for all practical purposes only ‘frictional’ unemployment before the bust that followed the yen financial asset draining surplus years of 1987-1991 destroyed that social fabric and ushered in two decades of near 0 growth as well.

  14. Ivan Says:

    Question: when the Fed “bailed out” the banks, did the money come from the Fed or the Treasury? Was any “debt” issued? Thinking that if they made the transfers without issuing debt…or even before issuing debt, one cam make a pretty persuasive argument in support of MMT.

    Reply

    Tom Hickey Reply:

    Ivan, as I recall, Paulson wanted Bernanke to resolve the freeze through the Fed’s keyboard. But Ben refused, saying that the problem was fiscal, so Paulson had to go to Congress for the bailout. Bernanke did eventually see the light, providing liquidity and guarantees, but technically that was subsequent to what is called “the bailout.” e.g., TARP.

    Reply

    beowulf Reply:

    Right, Bernanke (by majority vote of the BOG) could have bailed out the banks without getting Congress involved. Interesting article published by Minneapolis Fed in June 2008, that is, BEFORE the bailout:

    by what legal authority did the Federal Reserve intervene in the business of a nonbank (in this case an investment firm).. Section 13 paragraph 3 of the Act, which begins: “In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may …,” and then there’s a lot of technical language which essentially means that the Federal Reserve can lend money to “any individual, partnership, or corporation,” as long as certain requirements are met.
    http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3485

    IIRC, Dodd-Frank tightened up Fed’s 13(3) discretion, but in 2008, I don’t think there’s an question that the Fed had the legal authority to loan against any bank asset. Paulson states in his memoirs that Geithner (then at NY Fed) and Kashkiri (at Tsy) and even President Bush all suggested that the Fed use 13(3) powers but Bernanke declined (though perhaps Paulson isn’t, as novelists say, “a reliable narrator”).

    My surmise is that Bernanke felt that if the Fed had to jump off a bridge, he wanted Congress to jump with them– just weeks before an election. Its astonishing Congress just took that lying down without taking a pound of flesh out of the Fed in the bargain. It does look rather shady that the Fed waited until the weekend after after TARP passed to use 13(3) powers to assist commercial paper market.

    Reply

    Peter D Reply:

    didn’t Bernanke say at some point “we simply use the computer to mark up the size of the account that they have with the Fed”?

    Reply

    Ivan Reply:

    Yes. Just trying to remember if they put the bailout on balance sheet. Very funny that you don’t really need to borrow money if you don’t put expenditures on balance sheet. Wherever are we getting that money!!

    Reply

    WARREN MOSLER Reply:

    but you do have to pay interest on any net spending that isn’t held as actual cash in circulation

    WARREN MOSLER Reply:

    yes, on the show ’60 minutes’ and it’s quoted on the back of my book.

    thought you read that?

    :)

    Reply

    WARREN MOSLER Reply:

    there is nothing to dispute in MMT in any case
    :)

    anyway, tarp was the tsy. maiden lane was the fed. either tsy secs were issued or interest bearing reserves were created. same thing. whether you call it debt or not.

    Reply

    Ivan Reply:

    I’m just thinking in terms of a simple argument. “Taxpayer money bailed out the banks”. “We borrowed from China to bail out the banks”. If in reality, we didn’t actually issue any new debt, then the whole argument about “where are we going to get the money to pay for that?” with “that” being any program or any tax cut, you’ve successfully undermined the perception among 99.9% of the population that we’re in “debt” to the Chinese.

    While issuing debt or paying interest on reserves may be the same thing to MMT people, it may present the potential for a lightbulb moment for others because it clearly indicates that the money was spent first without the need to borrow it.

    Reply

    Tom Hickey Reply:

    Ivan, my sense after monitoring a number of venues for some time now is that this is what a whole lot of people want to believe. It is perverse ignorance, and it is not only in economics but a lot of other things including politics.

    The trend is heading for a very poor outcome. I am afraid that the inertia is too great to overcome this round, and I hope that it only ends in depression this time around and not another world war. I think that we may have to learn the hard way again.

    Peter D Reply:

    I still think that a better argument against “debt to Chineese” is explaining that it is just a manifestation of CAD. Now, I know there an argument that trade deficit arises because of budget deficit. But it can be fairly easily dismissed, I think, by the arguments such as presented by R.Wray here, for example (section “INTERNATIONAL “FLOWS” AND EXCHANGE RATES”.)

    WARREN MOSLER Reply:

    it’s just dollars china has in savings account that they got from selling tires at walmart

    Tom Hickey Reply:

    Peter D, while I think that this is germane to the explanation, the key is getting people to understand that the federal government is not at all like a household since it is the currency issuer and everyone else handling dollars is a currency user. Therefore, the federal government does not have to “get” dollars from anywhere. That means it does not have to tax to fund itself or borrow to finance itself. The problem is that this sounds counterintuitive to most people and they have trouble getting their minds around it. But once a person gets that, the rest falls into place pretty easily.

    The good news is that just about everyone is concerned that the Fed is “printing money.” So they can easily get the concept of currency issuer

    On the other hand, if someone gets that the dollar is a fiat currency, then the fear is that “printing money” will inevitably lead to hyperinflation, on the argument that no previous fiat currency has survived historically and only gold has kept its value as money.

    More bad news is that most people are convinced that the Fed is independent of government and that the Treasury has to borrow from the Fed, which they think is owned by the bankers. With this level of confusion, it’s pretty hard to get folks to see what is actually happening.

    Add to this the perverse incentive to hate the government and the bankers because the person thinks they have been ripped off by them (and they probably were), and it’s like talking to a brick wall. For example, go over to Zero Hedge, and try explaining this and see what comes at you.

    It’s a damned if you do and damned if you don’t double-bind. If they think that government is like a household or firm (there’s a post at ZH today, “If the US were a business, it would be bankrupt”), then the problem is insolvency. If they admit that the dollar is a fiat currency so that the federal government is not operationally constrained in currency issuance, then hyperinflation is just around the corner.

    Tom Hickey Reply:

    Randy Wray has a good explanation of sectoral balances here.

    Peter D Reply:

    Tom, but isn’t the identity
    G-T = S-I + M-X
    taught at every elementary macroeconomic course (I wouldn’t know, I did not study economics, but this was my impression.) If so, isn’t the fact that govt deficits are private sector surpluses is just what this equation means? What am I missing?

    Tom Hickey Reply:

    Most economists seem to have either have forgotten this or are keeping it quiet. :)

    Here is an instructive article by Paul Krugman, Size Does Matter (July 1998), h/t Mark Thoma here:

    Krugman: “Not only academic economists but also some of our most influential economic pundits seem to regard it as bad manners to talk about recessions and recoveries and how governments might alleviate the former and engineer the latter. Ordinarily reasonable people now argue that the business cycle is a trivial matter, unworthy of attention when compared with microeconomic issues like the incentive effects of taxes and regulation. Trying to do anything about recessions is bad for growth, they say, and even thinking about the business cycle is a bad thing, because it distracts people from what really matters.

    “What is so peculiar about this attitude, which seems to become more prevalent each year, is that we live in a world in which those old-fashioned macroeconomic concerns are more pressing than they have been for generations. Not since the days of John Maynard Keynes have his questions (if not necessarily his answers) been so relevant. So an occasional reminder that the big things do matter, that getting microeconomic policy right is no help if you stumble into a depression, is welcome from any source–even a deficient dictionary.

    “…To see what I’m talking about, consider a recent Washington Post column by Robert Samuelson, in which he seems to dismiss all macroeconomic analysis–all attempts to understand the behavior of aggregates such as gross domestic product and the price level–as useless, even malign. ‘What we’ve learned,’ declares Samuelson, ‘is that the little picture is the big picture.’ Economic success, he argues, is simply a matter of getting the incentives right. And he goes on to deride macroeconomics for its ‘illusion that it could make the whole system run smoothly almost regardless of how the economy’s underlying sectors functioned. … It’s as if a car could run at breakneck speed even if the engine was corroded and missing some parts.’

    “One wonders why the usually judicious Samuelson found it necessary to invent this straw man. Who is supposed to have had that illusion? Even when Keynesian macroeconomists were at their most hubristic, none of them claimed that macroeconomic “fine-tuning” could make an economic jalopy into a Porsche. But they did claim that even a Porsche won’t perform very well if you don’t give it enough gas–that using three workers very efficiently is not much help if the fourth is unemployed because consumers don’t spend enough. And this is not an abstract point: Just look at the economic storms ravaging quite a lot of today’s world.

    “For example, Japan’s economy has been shrinking at an alarming pace the last few quarters. Is this because Japanese workers have become lazy or because the country’s factories have fallen into disrepair? Or to take a more extreme case, has Indonesia become a 15 percent less productive society than it was a year ago? Of course not: Whatever the ultimate sources of the crisis in Asia, the immediate cause of these slumps is a collapse in that good old-fashioned macroeconomic variable, aggregate demand….”

    WARREN MOSLER Reply:

    they all overlook that the currency is a public monopoly.

    keynes described it as such, but never recognized what he had discovered was a simple monopoly

    Peter D Reply:

    Cannot be just that, Tom! If it is indeed a basic thing taught to any economics undergrad, then I expect the majority to still appreciate it. Now, maybe it is I who misses something and while economists do understand sectoral balances they simply draw a different conclusion from those? I don’t know.
    For example, I’m reading Edward Harrison’s post following the Randall Wray’s one that you mentioned. He says that since deficits are necessary (because of the sectoral balances identity) but are unsustainable politically, we need to find the least painful way a way to reduce those and he thinks it is reduction of reserve currency status (bringing down the CAD part of the identity.) So, just because a lot of people are oblivious to the simple truth of sectoral balances identity we need to choose between evils? Deficits are not a problem but just because a lot of people mistakenly think that they are we need to reduce them? This is crazy!

    Tom Hickey Reply:

    Peter D. “This is crazy!”

    Yup.

    Did you read the entire Krugman piece “Size Does Matter” (link above). A lot of prominent economists have chucked macro, believing it to be just scaled up micro.

    All read the entire Bruce Bartlett piece (link at #17 below). The public is complete confused, and giving them the facts apparently makes no difference.

    These are some of the many reasons I have concluded that the inertia is too great to overcome before this failed ideology and its failed model implodes on itself, taking the world down with it. See, for example, Ravi Batra’s The New Golden Age: The Coming Revolution against Political Corruption and Economic Chaos (2007), which updates The Downfall of Capitalism and Communism (1978).

    The problem is not simply economic; it is also social and political, and has historical precedent. I’m not saying not to try to get out in front of it, but it is a juggernaut. As James Lovelock says, ominous consequences of climate change seem to be baked in, but we still have a moral responsibility to do what we can.

  15. Steve Says:

    I think a reasonable thinking person with a firm grasp on how fiat currency works could still be VERY concerned about our large deficit and how it will impact inflation in the next 5 – 20 years. Maybe that is all Ben is expressing. I would bet he understands this all much better than we give him credit for. I would not say the same about Greenspan.

    Reply

    Tom Hickey Reply:

    Where are the bond vigilantes, or do you think you get it but big money doesn’t? :)

    Reply

    Ed Rombach Reply:

    Where are the bond vigilantes? Haven’t you noticed that 5yr & 10yr Tsy yields have backed up since start of QE-2, erasing 70% to 80% of the previous drop in yields from early April of last year to end of August?

    Reply

    Tom Hickey Reply:

    Uh, this hardly indicates inflationary expectations in 5-20 years. Look at the graph again, interest rates do fluctuate a bit. In addition, fundamentals seem to indicate the economy picking up and traders are putting more risk on, which is a likely explanation of rising rates.

    WARREN MOSLER Reply:

    all they do is anticipate future fed moves, along with a few technicals.

    and the steep yield curve says they are anticipating much higher rates.

    in fact, convexity adjusted, US Tsy rates 20 years forward are near 7%.
    seems way higher that the ‘mid point of expectations of future fed funds rate settings’

    Reply

    Steve Reply:

    Tom, I have lot of respect for the depth of your knowledge. I look at the current deficit, and welcome it. The concern I am expressing is if we have a string of 5, 10, 20 years of Trillion plus deficits. Institionalized government spending is hard to stop. I think this is what Ben is expressing conern with, and I share the same concern given the aging boomer population and my perception of the younger generation’s work ethic.

    Reply

    Tom Hickey Reply:

    Steve, it always comes back to the availability of real resources. Does the country and world have the resources they needs now, and will thy have them in the future. What can we be doing now policy-wise to ensure adequate resources going forward. This is what we should be asking, not about “affordability.” A properly run monetary system can facilitate the production, distribution and consumption of real resources, but it can only facilitiate it. However, a poorly designed economic policy can undermine the use of present resources and inhibit the deployment of resources in the future.

    This is the issues as far as I am concerned, and we should be looking at the global economy as a closed system in attempting to address it equitably. Thousands of years ago, ancient Vedic seers, The world is my family.

    “Only small men discriminate saying: One is a relative; the other is a stranger. For those who live magnanimously the entire world constitutes but a family.”
    Maha Upanishad, VI 71-72

    WARREN MOSLER Reply:

    then he should say ‘longer term current spending and taxing patterns could lead to excess aggregate demand and inflation could rise’

    and he should then direct some of his fed research dollars to try to quantify how much inflation there might be.

    but he isn’t doing that so it’s not what he believes.

    Steve Reply:

    Where are the bond vigilantes? I’m just not sure the markets are a reflection of the our collective wisdom. I would have more confidence in markets if there wasn’t so much liquidity, and the partipants were all making longterm bets they could not unwind quickly. Again, I think wise people have some solid ground to stand on with regards to long term inflation concerns. …but don’t put me in the Glen Beck end of times category. :-)

    Reply

    WARREN MOSLER Reply:

    right now the tsy is cramming in long bonds to the point that the forwards are approaching a convexity adjusted 7% yield 20 years forward.

    that’s way beyond any notion of a mid point of expected fed funds settings that far in the future.

    technicals are trumping expectations right now and the very long end is very, very cheap, at tax payer expense, in support of rentiers.

    the tsy should not be selling anything longer than 3 mo bills in my book

    Neil Wilson Reply:

    Warren,

    Do you think that the issuing of government bonds at higher interest rates than the base rate is contributing to the ‘corporate hoarding’ that is clearly going on in Japan, the UK and the US?

    Would simply stopping issuing these bonds force corporates to wean themselves off government welfare and start working for a living :)

    WARREN MOSLER Reply:

    no to both.

    corps respond to demand for their goods and services

    WARREN MOSLER Reply:

    Well, in that case as a professor of economics and Chairman of the US Federal Reserve, a politically independent agency, he should just come out and say it. Which he doesn’t.

    Reply

  16. Matt Franko Says:

    Ed,
    Do you think the bond vigilantes would have been as successful in pushing up rates if the FRBNY was not relentlessly buying bonds on a scale down every day with their unlimited balances? ie lowering their offer every day? Inadvertantly accomodating/helping to facilitate this speculative attack on Treasury prices.

    I think there was a NYT article a few weeks ago about how the 30-somethings at the NY Fed keep lowering the prices they are willing to pay to “get a good deal” on the bonds they are buying…. so they can “make a profit for the US taxpayers”.

    Then there has been some reporting (at ZeroHedge) that the PDs are just selling the FRBNY (under QE2) the same CUSIPs that they bought from the Govt 2 weeks ago at the Treasury auctions… how can a PD survive if they have to go to a Treasury auction and buy bonds at the highest price the govt can get, then 2 weeks later, they have to sell the same bonds back to the same govt but now the govt buyers dont want to pay what the govt just sold them to the PDs for 2 weeks ago? they may have to short bonds/futures just to be able to protect themselves from these govt mandated losses. Down we go.

    That drop in yields that started in April – August came exactly when the Fed stopped their QE1 program at the end of March..

    Reply

    Ed Rombach Reply:

    Matt Franko Says:

    “Do you think the bond vigilantes would have been as successful in pushing up rates if the FRBNY was not relentlessly buying bonds on a scale down every day with their unlimited balances? ie lowering their offer every day? Inadvertantly accomodating/helping to facilitate this speculative attack on Treasury prices.”

    ER — No.

    “That drop in yields that started in April – August came exactly when the Fed stopped their QE1 program at the end of March.”

    Exactly! It was preposterous for the Fed to announce that QE-2 was intended to lower long term interest rates and stimulate inflation, because those two objectives are mutually exclusive. Where did the Fed get the hubris to think that they could advertise a policy to push inflation higher and not scare bond investors?

    Here’s my take on QE-2 and related issues in the video links below.

    Recent FOMC show

    http://insider.thomsonreuters.com/link.html?cn=share&ctype=group_channel&chid=3&cid=174722&shareToken=MzphYTg5MDVkMS1hNmYzLTQzMzYtOWQ3MS0xZTdkYzA2NjZhZTg%3D&start=0&end=218

    12/23/10 – QE-2

    http://insider.thomsonreuters.com/link.html?cn=share&ctype=group_channel&chid=3&cid=183491&shareToken=Mzo1NDM3NTRkNi02Zjk5LTRlOTMtOTg4OC1iMDEzZjFhMmVjNTg%3D&start=0&end=1225

    Reply

    Tom Hickey Reply:

    Ed, the former Fed governors weren’t agreeing with your concern about perceived inflation, and apparently the Fed isn’t concerned either, for reasons similar to the one’s I cite above.

    Ed: “It was preposterous for the Fed to announce that QE-2 was intended to lower long term interest rates and stimulate inflation, because those two objectives are mutually exclusive. Where did the Fed get the hubris to think that they could advertise a policy to push inflation higher and not scare bond investors?”

    Seems to me that the Fed does think it can have it both ways. It can control LT rates through QE (but only if it targets price and not quantity). It might also be able to move core inflation through the wealth effect by taking risk-free assets off the table and pushing greater risk, thereby driving up equities and commodities. A lot of money managers have been buying on just this strategy. Whether the rise in equity prices will spill over into the CPI remains to be seen. So far commodities haven’t been rising in tandem, and with a strapped consumer, the result of commodity price increases seems to be margin compression, affecting corporate profits instead of consumer prices.

    I agree with one of the guests who said that the Fed is very cautious now about not doing enough after essentially missing the boat in the run-up to the crisis. Doing nothing would be to admit that the Fed is essentially powerless.

    I am not defending the Fed on this, by the way. I think the policy is daft, and I think that Bernanke himself realizes that what is needed is fiscal. But the Fed is doing what it thinks might work with blunt instruments, figuring that something goes wring they can fix it.

    In my view, Bernanke should be honest and just admit that this is a problem that Congress and the president need to take on by increasing aggregate demand through fiscal policy based on functional finance and sectoral balances. As long as the Fed gives politicians cover they will either not do anything. or else do the wrong thing by cutting back when the domestic private sector is saving/delevering, and exports haven’t taken up the slack.

    But relying on exports is no improvement over relying on the Fed. Cutting taxes and increasing expenditure is what is needed now to close the output gap and increase employment before debt deflation from continually falling housing prices kicks in.

    Reply

    Matt Franko Reply:

    Ed, #1 I love your stuff on Reuters, nobody else reports on such things, NOBODY….I think we all mostly agree here, maybe we differ on the amount of ignorance (and/or intellectual fraud) on the part of the Authorities.

    It looks like Bernanke thinks that “quantity” only matters, he thinks the fact that they are buying should alone be supportive of bond prices, and he does not look at it like Warren does that the Fed could/should be acting as a price setter under QE2.

    I posit that they are in fact acting as a type of price setter, ie they are setting bond prices at ever lower prices. The govt is selling Treasury securities to PDs at the auctions at a price of $(x) and then a week or two later the same govt (Fed) is demanding to buy back the very same securities from the very same PDs but at a price of $(x-1). For instance, in your second video, you talk specifically about a three year issue that I guess the Fed bought back one day after the issue settled: what price did the Fed demand to pay for those securities? If they demanded to pay less than the recent settlement price, are they not then acting as a price setter at lower prices?

    Bernanke cannot see that one govt hand does not know what the other govt hand is doing, each govt hand is trying to “get the best deal for the taxpayer”, and this combination maybe plays into the hands of the short side speculators. Just this week he said this about the QE2: “Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases” I think he is mistaken on this. Rates are going up because the govt sector is effectively setting them there by continuously lowering the price they agree to pay for bonds under QE2.

    Warren often writes about the Saudis as ‘price setters’ ie he has said ‘they never hit a bid’ in the oil market. It could be a similar monopolist at work here; the Fed ‘never hits an offer’ in the bond market. Resp,

    Reply

    Matt Franko Reply:

    Zero Hedge was following this action today.

    Seems ZH is claiming some type of conspiracy theory in action that the Fed is overpaying for the bonds it buys under QE2 (I say perhaps to the contrary) and giving free profits to the PDs (please excuse ZH hopelessly out of paradigm):

    “Take today’s POMO for example. In 15 minutes the FRBNY will announce the completion of today’s $7-9 billion monetization of bonds between 2017-2020. The most recently auctioned off CUSIP in the roster of 19 bonds is the 912828PC8 CUSIP also known as the 2.625%s of 11/15/20. This is the 10 Year bond acquired by PDs during the December auction (the January is structurally excluded as it matures in 2021). Now if Bloomberg is correct, not one single PC8 will be monetized today, since, as Morgan Stanley once again confirms, this is among the richest (as in, the opposite of cheapest) bonds to put to the US taxpayer, and the result of such a monetization would be yet another implicit impairment of Fed fiduciary interests. We will advise readers as soon as we know what the final outcome of today’s POMO is as to how much PC8 was put back to Sack Frost.”

    http://www.zerohedge.com/article/frontrunning-todays-pomo-1

    Seems it did not work out the way ZH predicted, as the Fed DID NOT buy any of the PC8′s Scroll to bottom of list:

    http://www.newyorkfed.org/markets/pomo/display/index.cfm

    The price for those bonds was probably too high. The monopolist Fed is setting the prices lower “to get a good deal for the taxpayer”, likely raising interest rates in the process. Still waiting for the ZH post ……”We will advise readers as soon as we know what the final outcome of today’s POMO is as to how much PC8 was put back to Sack Frost”…… ZH? ……. ZH?……

  17. Tom Hickey Says:

    Complicating the matter further, this from Bruce Bartlett (source):

    “Presumably, if people simply had better information they would make better judgments….

    “Unfortunately, the political science literature suggests that it may not matter. Princeton political scientist Martin Gilens examined the effect of political ignorance on political opinions and found that giving people correct information had little impact on their political judgments. “Policy-relevant facts seem to carry little weight,” he found. This conclusion is confirmed by the Ipsos/Reuters poll cited earlier. When people were asked their views on raising the debt limit and cutting various programs, and then given factual information about the impact, it had virtually no effect on their opinions. Indeed, a 2010 paper by political scientists Brendan Nyhan and Jason Reifler found that giving people correct information not only had little effect on changing their misperceptions, in some cases it actually increased them.

    “I don’t know the answer to this problem. I would like to believe that most people will make the right decisions given the correct information. If that is not the case, then we have a far more serious problem than just the budget deficit. It calls into question the fundamental basis of democracy itself.”

    Reply

    WARREN MOSLER Reply:

    just a definition of ‘better’ from Bruce and then later your definition of ‘right’

    :)

    Reply

    Tom Hickey Reply:

    “then later your definition of ‘right’”

    That is part of the Bartlett quote, too.

    Reply

  18. Dave Begotka Says:

    Warren I think this is the model of control, offer some “hope” to quiet and or throw off the loudest dissenters then business as usual.

    Reply

  19. Ray L Phenicie Says:

    Relative to the discussion here this may be off topic but I was interested to hear what Bernanke said in response to a ‘tough’ (not really) question about the putative effects of QE II during a CNBC interview after said imperial address on 02/03/11. How did he justify increases in
    both interest rates and commodity prices since he first announced QE II?

    Saith the Bernanke
    “Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20% plus and the Russell 2000, which is about small cap stocks, is up 30% plus.”

    In other words QE II caused a spike in stock values, especially the ‘small caps’ so that’s good ’cause the Fed can be shown to be looking out for the ‘small’ entities, small being good and therefore by association the Fed is good.

    Several points came across my intellectual radar immediately.

    Who cares about stock values?
    How do we know that the current DJI really shows the true value of stocks-has it ever shown the real value?

    Why does the DJI show on Friday, 02/04/2011, 12,092.15 based on share trades numbering 4,345,372,168 while at the end of the week Jan 10, 2000 it showed a similar value of 11,723 on 1,033,939,968 shares that exchanged hands.

    So the stock market is a lot busier today, but the value of stocks (which should show the value of any given entity and its expected performance) about the same as eleven years ago? Is the DJI not really showing the value of common shares for any given company along with said assets and performance accurately? Why is the Bernanke touting stock market values as one of the Fed’s accomplishments? Should we pay attention to the DJI? How do I know the Bernanke is not deliberately foisting one off on us by driving speculation in commons stocks? Is this a good thing? Should I fire the Bernanke?

    Reply

    WARREN MOSLER Reply:

    best I can tell modest gdp growth, earnings and valuations are being largely supported by the 9% federal budget deficit. Not to mention the assist from falling unit labor costs due to the high unemployment. etc. as this President continues to preside over the largest transfer of wealth from low income to high income net worth individuals in the history of the world

    Reply

  20. Rodger Malcolm Mitchell Says:

    In several of the above comments, there is some confusion between federal debt and federal deficits. In fact, the two have no functional relationship, though they do have an unnecessary legal relationship.

    Federal debt is the total of outstanding T-securities. Federal deficits are the annual difference between taxes and spending. We could have either without the other. We could create and sell T-securities, while not having a deficit (done that), and we could have a deficit without creating and selling T-securities (should do that).

    Federal debt is not the total of federal deficits.

    Rodger Malcolm Mitchell

    Reply

    WARREN MOSLER Reply:

    it is under current institutional arrangements.

    the tsy sells new tsy secs one for one with deficit spending.

    the fed has to buy them to cause there to be cash in circulation and reserves.

    Reply

    Peter D Reply:

    Warren, what if we don’t count the debt held by the Fed? Wouldn’t the “real” debt be different from cumulative deficit? I guess I am trying to say that Rodger is right and that debt is really decoupled from deficit even under current institutional arrangements if we look at the “real” debt. The reason being exactly what you point out about the Feds lack of control over the amount of debt because of the mandate to maintain the FFR?

    Reply

    Tom Hickey Reply:

    Peter D., the way to look at it from the MMT vantage is that the deficit is saved by nongovernment rather than borrowed from nongovernment. Owing to the present institutional structure, the deficit (net currency issuance) is saved as tsys (net securities issuance), since there is a S-4-$ offset requirement. (Currency is a zero interest/zero maturity government liability, and tsys are non-zero interest/non-zero maturity government liabilities.) IAW sectoral balances and national accounting identities, government deficit (surplus) = nongovernment surplus (deficit).

    Peter D Reply:

    Tom, suppose there is a deficit spending of $100. The Tsys worth of $100 are sold to cover the deficit. Then, for whatever reason the $100 spent don’t end up in reserves (maybe they were withdrawn by the public as cash or something like that) in which case the $100 worth of Tsys creates a lack $100 of reserves in the banking system. The FFR is bid up. The Fed has to buy back $100 of Tsys to add reserves to the system. So, there is still a deficit of $100 and $100 of Tsys at the Fed, but these Tsys are not “real” debt since we treat Fed and Treasury’s balance sheets as one. In fact, it seems to me that since the Fed had to spend $100 to buy the Tsys, we now have a “real” deficit of $200 with no real debt? Am I totally bungling this?

    Tom Hickey Reply:

    Peter D. I think you are still confused about how the system works. Deficit spending injects net financial assets into nongovernment by crediting bank accounts. The Fed provides bank reserves to clear these accounts. Since Treasury cannot run an overdraft at the Fed, it exchanges tsys for the reserves. The Fed is not allowed to accept the tsys directly from Treasury for its book, but rather it has to auction them off. When the Fed auctions off the tsys in gets paid in reserves in the exact amount that were issued to the Treasury account to clear the deficit spending. This drains the excess reserves created by the deficit sending, allowing the Fed to hit its target rate. The Fed also uses open market operations (OMO) as needed to adjust the overnight rate by buying and selling tsy as needed.

    I think that where you are confused is in thinking that “we treat Fed and Treasury’s balance sheets as one.” That is not the case. We treat the Treasury and Fed as being consolidated government rather than entirely separate entities, e.g., Treasury a government agency and the Fed a private bank, as many erroneously suppose. But they are separate agencies have separate balance sheets in doing so.

    Keeping these balance sheets in balance with each other involves a recording a lot of transactions that are not operationally necessary but required politically, e.g., the Treasury is not permitted to run an overdraft at the Fed and the Fed cannot purchase tsys directly from Treasury in order to make it seem as if government were borrowing from nongovernment.

    This mandates some rather convoluted transaction and accounting to do something that could be very simple under a fiat system functioning in terms of its basic operations. For example, Treasury could just issue notes and coin and banks could be prohibited from creating deposits, in which case all transactions in the currency zone would have to be settled by cash. In the simplest system this is what would happen. The rest of the system is just built on this, with further restrictions placed on the system politically. The way to keep it straight is by understanding the accounting, which is record of the transactions involved.

    So it is necessary to keep the accounting straight. The players are Treasury, the Fed, the primary dealers, the banks, and foreign governments they all have separate balance sheets and they also have accounts at the Fed, where reserves are exchanged to clear various transactions in the FRS.

    Peter D Reply:

    I think I understand what you’re saying, Tom, I just probably did not explain myself well enough.
    What I am trying to say is this. Suppose we freeze frame: FFR is at target, no new spending, no new deficit. At this point there is probably some amount of Tsys on Fed’s balance sheet. Now, it is true that it is a separate balance sheet from the Treasury, but it is still Fed that owns these Tsy and the Fed is a part of the Govt sector, so, this is a debt that the government owes to itself (and you can add here Tsys held by Social Security trust fund and other govt agencies.) So, while the total of Tsys outstanding is equal to the cumulative deficit, if you don’t count the debt owed by the govt to itself and are left with what I called “real” debt (i.e., everything else), then this “real” debt would be less than the cumulative deficit.

    Tom Hickey Reply:

    Yes, what is not held as tsys by nongovernment due to Fed monetary ops is held as some combination of bank reserves/deposits/cash by nongovernment. The amount injected by a deficit remains unless taxed. The residual is held as some combination of tsys, bank reserves, customer deposits, and cash. For example, if a bank sells tsys to the Fed, its reserves account is marked up. If they tsys are sold by a bank customer, however, then the customer’s deposit account is marked up. The accounting is just the record of different forms of assets being exchanged among different parties.

    A deficit results in corresponding reserves for settlement and corresponding tsys in offset. These may be held in combinations by the Fed and nongovernment due to different circumstances. The only way that reserves are withdrawn from the system, that is, extinguished, is through taxation. The only way that tsys are extinguished is at maturity, when they are exchanged back into reserves/deposits. Otherwise, reserves and tsys shuffle around based on transactions by the Fed and nongovernment (banks, private domestic entities, US states, and foreign).

    The important thing to keep in mind is that only currency issuance through deficit expenditure inject NFA into nongovernment and only taxation withdraws NFA from nongovernment. The rest is shuffling existing assets around among different asset holders through transactions that show up in the respective accounting records.

    The other thing to notice is that in reality under a fiat system government doesn’t save and it doesn’t borrow either. Saving and borrowing in its own currency doesn’t make sense, although the terms “saving” and borrowing” are often used analogously, frequently resulting in confusion about what is actually transpiring. Similarly with “printing” applied to the Fed.

    One final observation. You say, “if you don’t count the debt owed by the govt to itself and are left with what I called “real” debt (i.e., everything else), then this “real” debt would be less than the cumulative deficit.”

    The point is that nongovernment net saving remains the same, regardless of the asset form or combo of asset forms in which it is held at any particular time. When the Fed buys tsys, then nongovernment has just exchanges a non-zero maturity asset for a zero maturity one. Nongovernment NFA doesn’t change through the Fed op (other than future interest payment foregone).

    WARREN MOSLER Reply:

    total govt liabilities outstanding are always going to equal net govt spending/lending

    i agree repackaging the language around it could make a difference in public perception

  21. Elli Davis Says:

    Great point Dave Begotka. I totally agree with what you are saying. Though it still surprises me how well this model works in our more or less open society. People would unfortunately buy anything.

    Reply

  22. nystockguru Says:

    what a superbowl!

    Reply

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