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MMT on MarketWatch

Posted by WARREN MOSLER on February 16th, 2011

MMT breaking through???

Deficit hysteria grips Washington

By Darrell Delamaide

February 16 (MarketWatch) — Deficit hysteria is rising to fever pitch in Washington as the political jockeying over the budget begins in earnest.

“Fiscal nightmare,” “buried under a mountain of debt,” “awash in red ink” – these are some of the colorful phrases being bandied about by politicians, pundits and even journalists ostensibly reporting facts. Most of them are winging it on a single undergraduate course in economics, if that, but they know they’re right because everybody agrees.

Yet, if you look out the window, you don’t see any red ink or mountains of debt. The only nightmare is unemployment continuing near 10% and ongoing waves of foreclosures – neither of which is attributable to the federal deficit and neither of which will be fixed by budget cuts.

There is no visible harm from current deficits. Yields on U.S. Treasurys are up a tick but still near historic lows. Core inflation in the U.S. is still so far below the 2% annual rate deemed desirable by the Federal Reserve that deflation continues to be more worrying. There is no crowding out of private borrowers in the debt markets.

Just you wait, cry the deficit hawks, it will be a nightmare by 2016 or 2020 or 2050. Well, let’s wait and see. If we put those 15 million people back to work and get the economy growing at a steady clip, tax revenues will rise and cheat all those bloodthirsty hawks of their fiscal Armageddon.

Worried? Confused? Alarmed at the slow-motion train wreck in Washington?

There is cause for alarm. There is the possibility that the government, held under the sway of misguided and obsolete economic theories and driven by a not-so-hidden corporate agenda, will make genuinely harmful cuts in both discretionary spending and entitlement programs – cuts that will cause real and needless misery to millions.

The overwrought hysteria of the deficit hawks – one economist calls them deficit terrorists – has already sabotaged government stimulus that could have rebooted the economy much more quickly and alleviated unemployment to a greater extent.

It’s certainly useful to comb through the budget and reexamine programs for possible cuts. Military spending can certainly be cut back. Some recalibration of entitlements is also necessary.

But the helter-skelter axing of programs to meet a target pulled out of thin air – what’s so magic about $100 billion in spending cuts this year? – risks causing much unnecessary harm.

Before you succumb to the deficit hysteria, think about the disconnect between the dire language and the observable facts. Be careful about false comparisons – such as the U.S. going the way of Greece.

The U.S. is not Greece. The U.S. has full monetary sovereignty – that is, it has complete control over its own currency. Greece, as a member of the euro, does not, which is why it has constraints on its borrowing.

When the U.S. was bound by the gold standard, it also faced constraints. Most of the thinking and language about budgets and deficits actually goes back to this time, when the U.S. genuinely had to “finance” its deficit.

Since abandonment of the gold standard and the de facto adoption of a fiat currency, however, these constraints no longer apply. The U.S. is free to print as much money as it likes; the U.S. government is free to spend money without financing it.

How crazy, you say. What about inflation? Inflation occurs when there is more demand than supply and this simply isn’t going to happen when there is 8-10% unemployment. Treasury and the Fed have ample tools – selling debt securities and raising interest rates – to deal with inflation when it does threaten.

Modern monetary theory – which is espoused by a growing number of economists and investment managers because it explains the observable facts better than the obsolete theories driving most of the public discussion – deals with the world as it is without a gold standard.

A better comparison for the U.S. than Greece is Japan, which also enjoys full monetary sovereignty. Japan has a public debt approaching 200% of GDP. This compares to the U.S. at 60% in 2010 and on its way up.

Deficit terrorists have decided arbitrarily that 60% is the maximum limit. They have been predicting the imminent collapse of Japan – for the past 20 years. And yet Japan continues to finance its deficit with rock-bottom interest rates.

The federal government is also not comparable to a household. It does not have a checkbook to balance or a credit card to max out, even though our folksy politicians like to use these metaphors. It does not have to “live within its means” like a family or individual. Our grandchildren will never have to repay all that debt. No one will, ever. It will continue to grow as our economy grows.

All this flies in the face of all the groupthink going on in Congress, in the press and on cable TV. So if you want to reject modern monetary theory as hogwash and cling to theories that worked a century ago, you’re in good company. But think about it, look around you, and decide for yourself what best describes the world you live in.

534 Responses to “MMT on MarketWatch”

  1. rvm Says:

    Great!

    From Wikipedia:

    “It (Marketwatch) is now a wholly owned subsidiary of Dow Jones, which in turn is owned by News Corporation. MarketWatch is part of Dow Jones’ Consumer Media Group, along with The Wall Street Journal, Barron’s, the WSJ.com and affiliated Internet properties. Through the Rupert Murdoch-controlled News Corp. ownership, MarketWatch is also affiliated with, among many other global media properties, the New York Post, The Times of London, Fox News Channel and multiple other 20th Century Fox spinoffs, and HarperCollins publishers.”

    Reply

  2. Digger Says:

    I would dispute his statement about “theories that worked a century ago.” They didn’t work very well even then although perhaps arguably better than what came before.

    The Panic of 1907 in which the stock market dropped 46% was caused by the Bank of England’s September 1906 instruction to British banks to stop renegotiating American loans as they came due and to demand immediate payment in gold.

    This caused about one percent of American gold to be shipped overseas causing about a two and a half decline in the money supply.

    The major New York banks had adequate reserves to defuse any panic but refused to use them. The Federal government responded with $150 million in new bonds and certificates to use as reserves. Thankfully the government did have to find new gold to back these or rescue would have been unlikely and the fallout even worse.

    Altogether an unnecessary and contrived event yet we still have those willing to sacrifice human reason on the altar of an inert mineral.

    Reply

  3. Digger Says:

    Meant to saw “did not have to find new gold”

    Reply

  4. Dan F Says:

    Ugh, I haven’t even clicked the link but I can already smell the noxious fumes emanating from the Marketwatch comment section from here…Still though, it’s nice to see the word finally getting out.

    Reply

  5. Tom Hickey Says:

    Another step along on the last mile.

    BTW, there is an MMT blog recently launched that is taking on the task of organizing the material for accessibility to the general public. Good place to send your friends looking for info on MMT.

    Modern Money Mechanics—MMT simplified

    Reply

  6. jaymaster Says:

    Pretty good overall, IMO.

    But I’m scratching my head over that “not-so-hidden corporate agenda” line.

    If there is a corporate agenda against deficit spending, I can’t see it. Hell, it seems 180 degrees opposite to me.

    Am I missing something?

    Reply

    SethM Reply:

    I would say its the not so hidden agenda of bankers that is fueling deficit hysteria.

    Reply

    Min Reply:

    A corporate agenda against deficit spending?

    The corporations are doing well, to judge by the stock market. Why should they want deficits spending? After all, high unemployment puts pressure on workers and unions to accept lower wages in the future.

    Reply

  7. Senexx Says:

    Thanks for the promotion Tom.

    And we’re pretty much out of material around mid-May.

    We’re in need of something that explains supply-side inflation as I find even Bill Mitchell’s blog post on supply-side to be a little dense even though it is in his debriefing 101 category. The next closest I can find is Warren’s explanation of shifting from oil to gas after the 70s oil crisis [for electricity] which is in the introduction to his book. And I thought that might be pushing copyright risk a little too far.

    If you’re on twitter I’d also recommend following http://twitter.com/ausMMT – this is also aggregated on the blog and currently in the MMT Weekly http://bit.ly/ihMlJE put together by Paper.li

    It is currently out daily whilst it undergoes a slight revamp and will return to Weekly once complete.

    Like most people that follow these blogs I’m just learning the concepts but it’s the only school of economic thought that makes logical sense.

    And I realise this comment has now turned into an advertorial so I’ll be quiet now (though there is more to say)

    Reply

  8. Michael Norman Says:

    I shot this guy an email today telling him he did a great job with the article. Here’s his email address:ddelamaide@aol.com please give him your support. He’s being attacked in comments by deficit terrorists.

    Reply

  9. zanon Says:

    “deficit terrorist” phrase prove he read MMT blog.

    of course, he does not mention this. there is lots of reporters parroting what they read on blog with no acknowledgement. those guys just use google likes everyone else

    Reply

    roger erickson Reply:

    Darrell Delamaide is a DC freelance writer who was at the MMT mtg last spring at GWU in DC, where Mosler, Mitchell, Wray, Kelton, Tcherna all spoke & met attendees.
    Seemed like a nice enough guy.
    ddelamaide@gmail.com

    Despite the lack of references, it’s useful publicity. And yes, many of the comments to his article are odious – but you know it’s progress when Luddites target something for attack.

    Also, it’s a positive sign when freelance writers calculate that a topic is safe enough to further their career with. Please encourage him.

    Reply

  10. Curious Says:

    “Inflation … isn’t going to happen when there is 8-10% unemployment.”

    Why not? Can someone explain?

    Reply

    Neil Wilson Reply:

    To get an inflation (rather than just a rise in prices) you really need to have those prices ‘confirmed’ by a rise in wages to compensate.

    If you don’t get that then you don’t have an inflation. Instead what you have is a reduction in the real standard of living of the population.

    It’s very difficult to ask for a wage rise when there are millions of people willing to do your job.

    Journos regularly and consistently cry ‘inflation’ when they are really looking at standard of living reductions.

    Reply

    roger erickson Reply:

    > To get an inflation (rather than just a rise in prices)
    > you really need to have those prices ‘confirmed’ by a rise\
    > in wages to compensate.

    exactly; so how is our current situation being labeled?

    “Goods and Services Price Split Keeping Inflation in Check”

    http://www.financialadvisory.com/article/17-02-2011/966/goods-and-services-price-split-keeping-inflation-in-check/

    translation? labor rates falling as product prices rise?

    or: exacerbating wealth disparity; aka “public fleecing”?

    overall conclusion is that large populations of people are bored, complacent & bickering over visible resources instead of creating new group capabilities

    this micro-state of human economics can’t last long; it’s inherently unstable & totally lacking in public purpose

    our kids need things worth doing, and they’ll eventually invent them EVEN if we totally abrogate responsibility to join in

    given how connected world populations are, it’s simply no longer possible to prevent group intelligence from drifting upwards

    it’s only a question of how long Luddites take to cede control, via attrition

    meanwhile, there’s no need to argue with anyone; the better/faster/cheaper way forward is always to tempt people with available options … stated in their terms

    it’s actually hilarious to see Luddites personally sell out to progress, every time, if they get a piece of the pie :)

    All Luddites really want is to be invited along, not left behind.

    Reply

    MamMoTh Reply:

    Of course you can have inflation even with 10% unemployment.
    It already happened in many countries, although it might no be the case in the US.

    Reply

    Matt Franko Reply:

    Curious/Mamo,

    For explanation on “inflation”, see the 2nd video at the 14:00 minute mark at the below link where Warren and Prof Mitchell explain the difference between “inflation” and supply shocks, relation to MMT, etc..

    http://bilbo.economicoutlook.net/blog/?p=12089#more-12089

    Reply

    WARREN MOSLER Reply:

    yes, long history of that happening, usually due to currency depreciation, traditionally when govts get bogged down with foreign currency debt and then deficit spend to buy the fx to service that debt.

    very rarely does one see inflation from excess domestic demand, which is what the deficit terrorists worry most about.

    ‘if you give THOSE people all that money THAT will cause inflation’ type of thing.

    Reply

    MamMoTh Reply:

    Now that’s a much more realistic and interesting take on how inflation can arise from deficit spending than what you can read from Bill Mitchell.

    Now the question is why do most countries get indebted in foreign currency. Is it because they are dumb or is it because they have no choice since they can’t pay for their imports in their own currency?

    I think this is the main point overlooked by MMT advocates when they assume for instance that trade deficits arise from the desire of the foreign country to save in your sovereign currency. That’s bollocks.

    Oliver Reply:

    Ramanan? Quick, there’s a fire that needs more fuel! ;-)

    Matt Franko Reply:

    Mammo,

    “why do most countries get indebted in foreign currency”

    imo you are witnessing it in Egypt right now. Mubarak and his people, operated their system with foreign reserves (probably USD, Euro & Pounds), skimmed and stuffed much of this foreign currency in accounts outside of Egypt their whole lives in anticipation of this day (press reports $40B equiv.). imo They basically rob their own govt Treasuries over decades, or as long as they can get away with it.

    Then when the s hits the fan, they and the people close to them fly out of the country and have to live in exile for as long as that takes, etc… in the lap of luxury in the west.

    The leaderships of the third world/non-western type of governments become zealous for the leading western currencies for this reason. Once their totalitarian govts collapse, they have their stash all sacked away and waiting for them in the west. They do not want their own govts currencies/financial assets as they would be more accountable under that type of system, it would be harder to commit their frauds.

    WARREN MOSLER Reply:

    and often the local cb sets interest rates high thinking that fights inflation, so the tsy borrows dollars, yen, or other fx because interest rates are lower.

    Ramanan Reply:

    Oliver,

    I have written a lot on this and will keep quiet on this issue except this comment.

    But fiscal policy alone cannot resolve the crisis. Whats needed is a coordinated fiscal action of a much bigger scale combined with running international trade on a fresh set of principles as Wynne Godley has emphasized since the 1970s.

    On a slightly different note, a link by the IMF on international capital flows http://www.imf.org/external/np/pp/eng/2010/111510.pdf see Figure 1 especially “bank flows”.

    It is claimed by the MMTers that the IMF has no role to play. Exactly the opposite. The IMF is set to play a critical role to put the world growth back on track – only if they understand the political economy of international economics well. This will take time and so much of lost output.

    WARREN MOSLER Reply:

    any one nation can make a fiscal adjustment to bring it to full employment which will move it towards maxing real wealth and real terms of trade.

    in fact, it’s then better for that nation if no other nation does it.

    Tom Hickey Reply:

    Ramanan: I have written a lot on this and will keep quiet on this issue

    Why? These are issues requiring careful consideration and open debate.

    Oliver Reply:

    Yes, that was an approving wink, Ramanan – just in case that wasn’t clear.

    WARREN MOSLER Reply:

    reading between his lines, he saying he still thinks a trade deficit is a negative…
    :)

    Ramanan Reply:

    Tom,

    This subject is so much fraught with causalities.

    Economists associated with Nicholas Kaldor have written at length about this. Kaldor was no ordinary economist. He was the first economist who understood how banks work (along with Sir Dennis Robertson). You can see a lot of appreciation for him in Basil Moore and Charles Goodhart’s works.

    Here is what he had to write in 1971 in The Times:


    The persistent large deficits in the United States balance of payments—given the universal role of the dollar as the medium for settling inter-country debts—acted in the same way as a corresponding annual addition to gold output . . . So long as countries preferred the benefits of fast growth and increasing competitiveness to the cost of part-financing the United States deficit (or what comes to the same thing, preferred selling more goods even if they received nothing more than bits of paper in return), and so long as a reasonable level of prosperity in the United States (in terms of employment levels and increases in real income) could be made consistent with the increasing uncompetitiveness of United States goods in relation to European or Japanese goods, there was no reason why any major participant should wish to disturb these arrangements . . .

    . . . [But] as the products of American industry are increasingly displaced by others, both in American and foreign markets, maintaining prosperity requires ever-rising budgetary and balance of payments deficits, which makes it steadily less attractive as a method of economic
    management.

    If continued long enough it would involve transforming a nation of creative producers into a community of rentiers increasingly living on others, seeking gratification in ever more useless consumption, with all the debilitating effects of the bread and circuses of Imperial Rome . .

    (though I have some issues on his comments on the annual output of Gold).

    You wrote a comment here that the “last mile is closing”. Unfortunately I think that the first mile itself isn’t crossed in the discussion of the open economy.

    The academic study of open economy issues radically changes the game and economies cannot be said to be just constained from the supply-side. There is a big constraint called the “balance of payments constraint”.

    Recently the IMF issued a note warning Turkey about financing its current account deficit. http://www.businessweek.com/news/2011-02-17/imf-warns-against-turkey-s-growing-dependence-on-capital-inflow.html

    So if you talk to the Turkish government and central bankers and simply ask them to deficit spend, they will dismiss your argument as amateurish. The Turkish Lira moved 56% during the crisis and with more than 10% unemployment is on the path to making painful retrenchments while foreigners speculate on the Lira. (The central bank of Turkey has enough reserves to take care of the government’s foreign currency debt).

    The United States – which has lived on rent because of its position as the creditor of the rest of the world earlier and gaining hugely from increased valuations of foreign direct investment in the rest of the world and high income from abroad can’t finally keep doing it.

    To me the whole thing is so backward – the current account signifies that the local producers have not been able to sell their (potential) output to the consumers. This is usually presented here as saying that there is no reason for the United States to consume its output and what the foreigners have to sell – as if foreigners are supply constrained. The constraint rather is on the demand-side.

    The strategy of pump-priming won’t work. To bring down unemployment to near full employment will require huge infusions from the government sector and the United States is in a position where the income elasticity of demand is nearly 1. This strategy will cause a huge widening of the current account deficit and increase indebtedness to foreigners by a tremendous amount. Now you can keep saying its “not debt”. Whats the pretense – foreigners won’t get the animal spirits one fine day for bouts of speculation on the dollar ? Thankfully Ben Bernanke knows this but his solution to relax policy now and make a plan to target primary surpluses in the long term doesn’t work either. Its a demand-drain on world output.

    There is no other way than coordinated government action with less and less dependence on market forces and coordinated efforts to intervene in international trade with the simultaneous use of fiscal policy. A whole new chapter in political economy is in the waiting. Thats Wynne Godley’s viewpoint. In: “A Crisis That Conventional Remedies Cannot Resolve”


    Fiscal policy alone cannot, therefore, resolve the current
    crisis. A large enough stimulus will help counter the drop in private expenditure, reducing unemployment, but it will bring back a large and growing external imbalance, which will keep world growth on an unsustainable path.

    Note that even though I brought in political economy here, the constraints due to the external sector are simply not political alone.

    WARREN MOSLER Reply:

    ok, so you agree, above,that the payroll tax holiday, revenue dist. to the states, and $8/hr job for anyone willing and able to work will bring down unemployment.

    and i agree the trade deficit will probably grow a lot.

    then you jump to some vague notion of that being unsustainable growth? why should more people going to work to produce, sell, and consume more real goods and services be inherently unsustainable?

    and if somehow it is under current institutional arrangements, isn’t that just letting the monetary system get in the way of what otherwise comes naturally?

    Ramanan Reply:

    “then you jump to some vague notion of that being unsustainable growth? why should more people going to work to produce, sell, and consume more real goods and services be inherently unsustainable?”

    Firstly, only the US has this exorbitant privilege of foreigners holding pieces of paper in its own currency. No other nation has this privilege. Not even Australia – more imports are invoiced in USD than AUD. So the comment “reading between his lines, he saying he still thinks a trade deficit is a negative” – if at all applies to any nation then its the US only.

    If Australia pump primes its economy, the nation as a whole will be more and more indebted in foreign currency with banks picking up more and more of it. They can reduce exposure by doing derivatives, but they still have to roll them. (and face ratings watch negative by Moodys)

    Doesn’t matter if you change something in the current institutional environment.

    So the US seems like the only exception to this rule. Except that foreigners selling goods reduces the US demand unless there is a continuously large infusion of demand from the government sector. However, this ends up with foreigners holding trillions of dollar assets – $4T net now and this strategy will easily take it to anything.

    The US is in a position with the income elasticity of imports close to one. To reduce the unemployment to near zero will take huge amounts of increases in public debt and debt to foreigners (yes debt even though in your own currency).

    Letting such a scenario happen – i.e., strategies were such scenario are plausible is a strategy of overconfidence – confidence that foreigners holding – maybe $10T net of US assets will remain peaceful and not play speculation on the US dollar.

    The US has continued to make huge amount of returns on foreign assets and this has kept the game active for a long time. Its like borrowing with negative interest rates. Foreigners in the US have earned next to nothing and this has also worked in the United States’ favour of keeping this game alive.

    So I take it that you say that $20T of public debt and $10T of indebtedness to foreigners is ok ? the US holds $10T worth of assets overseas and foreigners hold around $14T of US assets. $14T now, $20T later ? $25T ? $50T ?

    “Not debt” ?

    WARREN MOSLER Reply:

    Australia ‘got’ the priv. when it’s currency was added to the world indexes and got automatically purchased by those indexed to that kind of thing.

    also, the govt only uses Australian dollars, for all practical purposes. The currency of invoice is of no economic consequence

    Ramanan Reply:

    Damn …. Oliver you made me give in and write so much.

    roger erickson Reply:

    I think Ramanan is paraphrasing Wynne Godley a bit out of context:

    > But fiscal policy alone cannot resolve the crisis.
    > Whats needed is a coordinated fiscal action

    To me, Godley was simply saying that in addition to sane fiscal policy, a country may want to actively manage the real terms of trade policy in whatever context holds.
    Well, Duh!

    This has been going on since the days of Frankincense & Myrrh. If some other group claims a monopoly on something that tempts your group to accept addiction behaviors, then you might want to consider other options. Any semi-sentient group probably would.

    Where’s the mystery in this?

    As Warren has said repeatedly, it always boils down to “how do you get people to explore their options?”

    Time to put this petrified-horse topic back in the bog & stop beating it. It’s been unchanged since before Piltdown Economics Man arrived in court. Let’s move on.

    Ramanan Reply:

    “Well, Duh!”

    Oh oh .. temerity. Precisely why governments do not get overdraft facilities at the central bank so easily ;-)

    Wynne’s ideas were different dear. In his superb 1983 text with Francis Cripps – “Macroeconomics” (which is based on his work on stock-flow consistency, sectoral balances etc.), he had this to say


    In the long run fiscal policy can only be used to sustain growth of real income and output in an open economy provided that foreign trade performance so permits

    Get empirical ! International trade decides the fate of nations.

    WARREN MOSLER Reply:

    wynne always agreed with me when pressed on that issue

    Pz Reply:

    I think that lot of the worries over current account deficits are from Bretton Woods era, when governments were restrained in their policy options.

    And it is my understanding that the reason there is CA deficit in US is that the foreign central banks are buying up dollars to depreciate their own currency, so that there is inflow on capital account and corresponding outflow on current account, a current account deficit. If so, solution is simple, as soon as foreign powers stop accumulating dollars CA deficit is eliminated.

    Cross-border bank lending to the private sector, is an another issue. Pushed by neoliberals, it is clearly highly disruptive. Nominating assets and liabilities in different currencies is sure way get exposed to huge FX risks. I think capital controls should make comeback.

    WARREN MOSLER Reply:

    you’re not going to get continuous upward price pressure from excess demand with an output gap as large as we have.

    you can get upward price pressures from imported oil and products from monopolists and also upward price pressures from changes in relative value.

    Reply

    ApeMan1976 Reply:

    Is it true to say that for high unemployment and high inflation to coexist there must be some sort of supply shock?

    That’s what I always thought – if aggregate supply shifts to the negative you get unemployment plus inflation, while when aggregate demand shifts negative you get unemployment plus deflation.

    Reply

    MamMoTh Reply:

    Not true. Proof is most if not all latin american economies in the 2nd half of the 20th century which suffered high unemployment and very high inflation sustained in time.
    A supply shock is, by definition, a one time event.

    WARREN MOSLER Reply:

    except since the saudis took over as swing producer from the texas railroad commission back in the early 70′s, they’ve been pushing up crude prices continuously

  11. Neil Wilson Says:

    One swallow does not a summer make.

    Reply

  12. ds Says:

    “Deficit terrorist”…”monetary sovereignty”…”modern monetary theory”, all in a Wall Street Journal blog post?

    When will CNBC sit you next to David Walker as a guest host on “Squawk Box”?

    Great work!

    Reply

    WARREN MOSLER Reply:

    write them and suggest it, thanks!

    Reply

    ApeMan1976 Reply:

    Warren:

    Getting onto those shows regularly is a science; if you have the right people working for you it can be done without much trouble.

    I can help you with that pro bono if you’re interested. I can also put you in touch with pros who are much better at it. Let me know.

    Reply

    WARREN MOSLER Reply:

    Unfortunately I don’t have much money to spend at the moment, but if it can be done on the cheap let me know!

    rvm Reply:

    I wrote to Charlie Rose show last month suggesting inviting you, Prof. Wray or Prof. Mitchell.
    I think the first MMT textbook is published, we have to do a lot for its promotion.

    Also wrote to my senior Senator – Chuck Schumer with links to your and the other major MMT blogs. Although the “big shots” are busy, we have to always bother them with our presence. :-)

    Reply

    rvm Reply:

    Sorry, I missed the word “when”.

    I think when the first MMT textbook is published, we have to do a lot for its promotion.

  13. Ralph Musgrave Says:

    Tom Hickey (above) wants a “Good place to send your friends looking for info on MMT.”

    I’m not satisfied with ANY of the alleged “introductions to MMT”. Bill Mitchell is good, but to borrow Sennex’s phraseology, Bill is too “dense” for a simple introduction. Plus Bill churns out 1,000 to 2,000 words PER DAY. No one looking for a simple intro will read that.

    Re Sennex’s site (Modern Monetary Mechanics) I’ve looked at it, but with all due respect, I just don’t think our target audience (say Wall Street Journal readers) will find it readable.

    I tried drafting a simple introduction myself a few months ago on my site, and got a favourable comment from Tom Hickey. But on re-reading it now, I think it’s nowhere near right.

    I’ll have another go in the next week. Perhaps Warren or Sennex could run a contest: “article of 1,500 words suitable for WSJ readers introducing MMT”.

    Reply

    Neil Wilson Reply:

    We need a wiki!

    Reply

    wh10 Reply:

    I think this is pretty good…

    http://pragcap.com/resources/understanding-modern-monetary-system

    Plus tons of links to other resources at the bottom.

    Reply

    Tom Hickey Reply:

    We need a dedicated MMT wiki, and also a more developed presence on Wikipedia, where most people get their initial info. The present Wikipedia article on MMT is titled Chartalism, and it needs work. Here are some of the topics I would suggest:

    History of the development of MMT

    Chartalism and the state theory of money

    Vertical and horizontal money creation; exogenous v. endogenous money

    Convertible fixed rate v. nonconvertible floating rate monetary systems

    Advantages and disadvantages of hard and soft currencies

    The modern monetary system

    Operational parameters of the modern monetary system

    General case

    Special case: political restraints

    Post Keynesianism and MMT

    Role of Demand

    Abba Lerner’s principles of functional finance

    Wynne Godley’s stock-flow consistent (SFC) macro modeling; monetary economics

    National accounting identities

    Sectoral balance approach

    Hyman Minsky’s financial instability hypothesis

    Irving Fishers’ debt deflation theory of depression

    Mitigating financial instability

    Incentives

    Economic rent; rent-seeking v. productive contribution

    Legislation, regulation, oversight and accountability

    National prosperity and public purpose through economic policy

    Achieving full employment along with price stability

    Employment

    Inflation

    NAIRU v. NAIBER

    Price anchor

    Employer of last resort – Job Guarantee

    Employment assurance v. employment insurance

    (What did I forget?)

    Reply

    Mr. E Reply:

    I agree Tom.

    I kick-started the wikipedia article on Chartalism in January 2009 when I was just getting into Warren’s ideas. Looking at it now, its laughable. It needs a ton of structural work to create a narrative that makes sense. I still think it is better than nothing.

    I think it says something that my spell checker consistently flags Chartalism as a misspelled word.

    Senexx Reply:

    A dedicated Wiki is a grand idea. Imagine how it would go if all of us here contributed? It’d be done quickly.

    Senexx Reply:

    That’s not a problem Ralph. Modern Money Mechanics wasn’t designed for WSJ readers. It was designed for lay people.

    Reply

  14. anon Says:

    question:

    do you consider a government that is on the gold standard to be a currency issuer or a currency user?

    if its a user, what is the currency it is using?

    Reply

    WARREN MOSLER Reply:

    currency issuer with a self imposed constraint

    Reply

    anon Reply:

    so gold is a self-imposed constraint

    and bonds under fiat are a self-imposed constraint

    so what are bonds under a gold standard?

    and why do bonds under a gold standard differ from bonds under fiat?

    Reply

    Neil Wilson Reply:

    Currency under a gold standard allows you to swap the currency for gold.

    bonds under a gold standard are not able to be swapped for gold.

    So under a gold standard it makes sense to issue bonds at a higher interest rate to remove the owner’s ability to swap for gold and reduce the amount of gold you need in your vaults.

    Once you get rid of gold, bonds are just a form of money that pays a higher interest rate than the currency.

    Tom Hickey Reply:

    Bonds under fiat and gold are directly a reserve drain, except that under a fiat system reserves are independent and under gold they are relative to the amount of gold held against them.

    And as Neil points out, bonds under gold are indirectly a gold drain. As yields on bonds rise, zero-interest storing of value (and there is also some storage costs with PM’s) becomes less and less attractive. Rates rise with inflation, so there is less of an incentive to convert to gold as an inflation hedge should inflation and rates rise. The rise in rates chokes the economy and inflation falls. Monetary policy under a fiat system mimics this.

    WARREN MOSLER Reply:

    under a gold standard, bonds compete with the option to convert, and the fallout is the interest rate, which is set accordingly by ‘market forces’

    see ‘exchange rate policy and full employment’ on this website

    WARREN MOSLER Reply:

    see my paper ‘exchange rate policy and full employment’

    under gold, bond sales keep the holder of gold certificates and reserves convertible into gold from immediate access to the gold

    anon Reply:

    yeah, good paper

    but Fullwiler seems to argue that bonds are as liquid as deposits

    so why does the gold standard require bonds instead of deposits?

    what good are bonds for gold liquidity protection if they’re as liquid as deposits?

    WARREN MOSLER Reply:

    why do i care how liquid anything is, whatever liquidity actually means?

    on the gold standard deposits were convertible into gold on demand.
    selling bonds removed that immediate imperative.
    see ‘exchange rate policy and full employment’

    mixing metaphors with the word ‘liquidity’

    Scott Fullwiler Reply:

    “but Fullwiler seems to argue that bonds are as liquid as deposits”

    Not what I’m arguing at all. Saying that more bonds relative to deposits or reserves doesn’t constrain aggregate spending is quite different from that. And, as Warren suggests, the word “liquid” is almost as misused as “money.”

    anon Reply:

    “why do i care how liquid anything is”

    OK, scrap the use of the word “liquidity”, its just a word

    suppose I hold a government bond under the gold standard

    for purposes of this discussion i see no difference in the characteristics of that bond in my hands, whether we’re talking about the gold standard or fiat

    so if i can sell that bond or repo it or whatever to get cash under fiat, i can do the same under the gold standard

    and if i can sell it easily under fiat to buy goods …

    why can’t i sell it under the gold standard to buy gold?

    and if that’s the case, what effective protection does bond financing provide the government against a run on gold?

    what am i missing about here?

    i.e. what am i missing about the possible related operation and accounting entries under the gold standard in my scenario?

    WARREN MOSLER Reply:

    under a gold standard you’d have to sell it or borrow against it to convert to gold at the cb. (it’s not about buying gold in the marketplace, it’s about conversion)

    so the degree to which players want to do this is expressed in the interest rate. that is, rates spike/bond prices go down to indifference levels as bonds compete with the option to convert.

    you can see this happening continuously with the $HK or any other fixed fx regime.

    see ‘exchange rate policy and full employment’

    Neil Wilson Reply:

    A bond doesn’t protect a government against a gold run, but it limits the amount of gold required, allowing there to be more net financial assets in the system than there is gold to back them.

    Govt Bonds allow a fractional monetary system under a metal standard just as the fractional banking system allows trillions of pounds of transactions in the banking system to be cleared with very little state money.

    A bond is really just a term bank deposit that is tradeable in a secondary market.

    A government bond is just a tradeable bank deposit where the bank is effectively the central bank for the country.

    Government bonds are historical artefacts. Why should the government pay unemployment benefit to feckless corporations who are wilfully refusing to invest in productive ventures?

    They should be scrapped. If the private sector needs tradeable term deposits then they should go to a private bank offering them.

    anon Reply:

    As I understand it, your Russian GKO example shows how a very high interest rate on government liabilities may still not be able to compete with a fixed rate conversion option.

    That doesn’t answer my question, which is – why it is necessary for the government to issue bonds under a fixed rate regime?

    That’s what MMT maintains is necessary, anyway.

    But a fixed rate regime has an alternative to bonds – paying interest on CB reserve liabilities – the same alternative as prescribed for fiat under MMT.

    This will provide the same type of interest rate support as it does for fiat.

    The fixed support is to compete with the conversion option; the fiat support is to implement fiat monetary policy.

    The fact that the interest rate may fail to compete with the conversion option under a fixed rate regime – as per your GKO example – is neither here nor there insofar as my question is concerned. It may fail either way. That’s not a reason for bonds.

    The question is why are bonds necessary for a fixed rate regime, as MMT maintains they are?

    WARREN MOSLER Reply:

    with a fixed exchange rate, the point of issuing ‘bonds’, which can either be tsy secs, term cb liabilities, notes, etc, would be to postpone the ability to demand the object of conversion (gold, fx, etc.)

    if all the deficit spending simply stood as convertible reserve balances the reserves are continuously at risk, etc.

    anon Reply:

    In a fixed rate regime:

    What is to prevent somebody holding a deposit in a commercial bank from asking for gold in exchange for his deposit?

    And/or what is to prevent a commercial bank itself from requesting gold in exchange for its reserves at the CB?

    It seems to me that the worst that can happen is that the bank goes overdraft in either case, and/or the CB can choose to raise interest rates in response – to compete with the conversion option.

    I can’t see how this depends on the maturity profile of outstanding bonds. How does that maturity profile impose a constraint on either of the above transactions?

    WARREN MOSLER Reply:

    with a fixed fx regime reserves are convertible on demand for the reserve currency (or gold on a gold standard), and bank deposits are payable on demand with actual convertible currency.

    see ‘exchange rate policy and full employment’

    anon Reply:

    meant the conversion object in general above, not necessarily gold

    anon Reply:

    also wondering why anybody holding bonds in a fixed rate regime can’t obtain money for them quite easily – as maintained in the earlier part of this post discussion – which seemed to argue that bond term structure is not an impediment in general when it comes to aggregate demand implications – so why should it be for gold demand?

    WARREN MOSLER Reply:

    it’s about the ‘rules’ of convertibility

    Oliver Reply:

    Stocks and flows? Under a gold standard, there is only so much outstanding ‘money’ (or some fixed fraction of that under fractional reserve) as to be convertible into the existing stock of gold. In aggregate, that means not everybody can convert at the same time. Nothing to do with the flow of AD, which could be infinite under any regime, as far as I can see.

    anon Reply:

    nope

    usually there are as few bank reserves at the CB under fiat than there are under gold

    and CB’s still have to do conventional OMO under the gold standard to manage interest rates

    WARREN MOSLER Reply:

    except managing interest rates on a gold standard results in reserve flows and flows out can be problematic

    Oliver Reply:

    I fear there may be a gap between the theory behind a gold standard, which much classic economic theory seems to be based on, and reality under a gold standard, which seems an awful lot like a fiat à la MMT, except with a fancy religious story and some unnecessary legal constraints superimposed. But I’ll let the experts weigh in on that.

    ESM Reply:

    I believe having a Fed that stands ready to provide unlimited financing of government bonds in order to maintain a Fed Funds target rate would significantly undermine the utility of bond issuance as a way to defer conversion demand.

    For the same reason, I believe the current Fed arrangement undermines the utility of bond issuance as a way to defer aggregate demand. The easy convertability to cash means that Treasury bonds are not so much different from cash. That gives me confidence that if we replaced all bonds with cash, that aggregate demand would be unaffected (and may even do down because of the loss of interest income).

    And just to address a point that Warren raised about stocks — it is not quite the same for a bank to lend against a stock. The bank still has to come up with the reserves to clear the borrower’s checks, and the cost of borrowing those reserves from the Fed or other banks will be much higher than the repo rate on Treasury collateral. Accordingly, stock loans cost much more, and the leverage available is much lower. Still, to the extent that stocks are marginable (i.e. repo-able), they contribute to net financial assets. There is no offsetting liability in the private sector, as there are with corporate bonds or mortgages.

    vjk Reply:


    There is no offsetting liability in the private sector, as there are with corporate bonds or mortgages.

    Sure there is. It just sits under the name of shareholder equity on the left side of the balance sheet and represents the share owner claim on the company assets.


    and the cost of borrowing those reserves from the Fed or other banks will be much higher than the repo rate on Treasury collateral.

    Well, in either case, you have to borrow to settle. The difference is the loan cost determined by the collateral risk profile, nothing else.

    Repo is no different from any other collateralized loan except some legal quirks.

    Reply

    vjk Reply:

    substitute “right side” for “left side”, of course.

    Reply

    ESM Reply:

    I’ve been down this road on this website several times. Aside from meaningless accounting conventions, equity is nobody’s liability. I can build myself a house, form a corporation and contribute the house as capital. The corporation owns the house, and I own the corporation. I have not created a liability by doing so.

    vjk Reply:


    equity is nobody’s liability.

    That statement is so patently and obviously false that I don’t know what to say.

    So I’ll leave it at that as further discussion does not look promising.


    I can build myself a house, form a corporation and contribute the house as capital.

    Right.

    Ramanan Reply:

    “I’ve been down this road on this website several times”

    Yes with me as well.

    Open a startup and issue liabilities to a capitalist – equities.

    Your life now becomes a roller coaster with the venture capitalist sitting on your head. Over time, you pay him more dividends than the interest you pay on bank loans.

    “Equities Not Liabilities” ?

    ESM Reply:

    Ramanan,

    When an entity issues a bond, that’s a zero sum game. The value of the bond exactly equals the value that is owed. If the bond goes up in value, the value of the liability rises to match. No wealth has been created, and no wealth will ever be created directly from that bond issuance. When a startup is formed, wealth has been created equal to the value of the equity above and beyond the contributed capital. That wealth can increase if the startup does well at creating value, or it can decrease to zero if the startup fails. It can obviously become negative for the owners of the firm if contributed capital is pissed away too. It can even become negative for the private sector in aggregate if real assets are pissed away.

    Just because something is unpleasant, doesn’t mean it’s a liability. Just because somebody can order you around, it doesn’t mean that you owe him anything. Venture capitalists are owners. Founders are owners too — it just so happens they are also employees.

    Ramanan Reply:

    Yep ESM,

    There is a fuzziness here ! But that doesn’t mean one can interpret as one wants. Better, it is a quibble if the other person treats it as liabilities and you insist it isn’t so.

    And there is a reason for calling it a quibble.

    “If the bond goes up in value, the value of the liability rises to match.”

    If the value of equities go up, so does the liabilities of the corporation. Now, you can use other methods of accounting of course, but that is a separate matter.

    Imagine people in Hawaii are well off (just imagine even if not true) and Hawaii as a region is a creditor of the rest of the US. Initially Hawaii only holds $1B of equities of the rest of the US plus some negligible cash. There are only a few people in this Hawaii.

    Hawaii Assets $1B.
    Rest of the US liabilities $1B.

    Now equity markets rise 10% and Hawaii is able to liquidate the equities and purchase bonds issued by some sector in the rest of the US.

    Hawaii Assets $1.1B
    Rest of the US liabilities $1.1B.

    If Rest of the US did not “owe” anything to Hawaii initially, how come suddenly – after the purchase of bonds – the rest of the US become indebted to Hawaii ??

    ESM Reply:

    “If Rest of the US did not “owe” anything to Hawaii initially, how come suddenly – after the purchase of bonds – the rest of the US become indebted to Hawaii ??”

    Because Hawaii bought them, i.e. exchanged something of value for US bonds.

    You could run the same example with a house or even undeveloped real estate as your Hawaiian asset. My claim is that equity is a tangible asset, just like a house or a car or land. It represents ownership (in part) of an enterprise which has intrinsic value. There is no true offsetting liability associated with that.

    Of course, for accounting purposes, it may be helpful to treat book equity as a liability in order to make it easier for the bean counters to avoid double-counting assets. Obviously, if Microsoft owns Treasuries, we don’t want to count those Treasuries twice (once in the outstanding amount of Treasuries, and once in the market value of Microsoft). But if Microsoft goes up in market value because Windows 7 turns out to be a wonderful product, that increase in wealth is real.

    I wouldn’t call this financial wealth per se, but if you can borrow easily against it, then it starts to look as easy to spend as a Treasury bond. We saw the same effect with houses leading up to the financial crisis.

    WARREN MOSLER Reply:

    and hawaii had the $US to pay for the bonds which was a govt liability which we all ‘owe’ to Hawaii, in this case they are owed the right to make payment to the govt with their $.

    vjk Reply:

    Can’t let it pass:

    “If the bond goes up in value, the value of the liability rises to match.”

    The liability of the vanilla bond issuer remains the same and is equal to the principal plus all the coupon payments regardless of the bond price fluctuations on the secondary market.

    That’s elementary.

    WARREN MOSLER Reply:

    for some purposes the liability is the cost to buy it back, as esm says

    beowulf Reply:

    I’ve been down this road on this website several times. Aside from meaningless accounting conventions, equity is nobody’s liability. I can build myself a house, form a corporation and contribute the house as capital. The corporation owns the house, and I own the corporation. I have not created a liability by doing so.

    Leaving aside the presumably nominal incorporation and property transfer fees you’d owe the state, you’ve converted cash, an untaxed form of wealth, to real property, a taxable form of wealth. IIRC, every state imposes a real property tax (that is on both land and improvements) ranging from more than 2.5% of property value annually in some New York counties to 0.1% in some Louisiana parishes.

    ESM Reply:

    You’re mixing your metaphors and not getting either one correct.

    I am discussing reality, not accounting, but if you want to discuss accounting, the liability stays at the principal plus accrued, not the sum of all coupon payments. Also, if you buy back that liability, you have to record a gain or loss, which will be the difference between what you paid for it (market value presumably) and the book value.

    Finally, accounting principles allow for a bond to become impaired and have its value adjusted, even for the issuer of that bond (or other types of liabilities). One of the bond insurers (either FGIC or AMBAC) recorded an enormous quarterly gain in the middle of the financial crisis because it decided its credit was so bad that its liabilities were nearly worthless. I thought that was pretty funny until they announced a deal a few months later to commute (i.e. pay off) $12B worth of liabilities at 25 cents on the dollar.

    vjk Reply:


    the liability stays at the principal plus accrued, not the sum of all coupon payments

    On the balance sheet:
    coupon event ==> current liability:interest payable
    principal=> long-term liability:bond payable

    For the entire vanilla bond life, total liability = coupon*N+principal = constant regardless of the secondary market behavior.


    if you buy back that liability,

    Operative word is “vanilla” of which the Treasury bond is a representative — there are no embedded options.


    impaired

    Operative word is Treasury which means the bond cannot become “impaired”

    vjk Reply:


    liability is the cost to buy it back

    The opportunities to buy back company’s own issues on the open market and reap benefits are pretty rare and usually are a sign of financial machination at worst and trading/speculative activity at best.

    A typical corporation rarely engages in this sort of trading since its goal is to finance its production activity rather than engage in questionable speculative activity with its own bond issues. Presumably, the goal in selling the original issue was to finance company production/expansion.

    FASB has rather strict rules to report bond retirements exactly because of presumed paper machinations.

    While under certain circumstances it may be beneficial to retire bonds, it is never possible to experience a rise in bond related liability due to the bond price fluctuations on the open market.

    The rise in bond related liability is what ESM claimed in his original message.

    Reply

  15. Vincent Cate Says:

    In the same way we can imagine that the government burns all money collected as taxes and spends money out of thin air, we can also imagine that they burn all money collected from bond sales. The selling of a bond is like collecting a tax. The later paying back of the bond is like creating money out of thin air and giving it to the people you taxed as a stimulus. For the duration of the bond demand is reduced, as if it were a temporary tax.

    Warren (or any MMT expert) you agree that my explanation of bonds is in the MMT spirit? Are there other MMT people who have explained bonds this way?

    Reply

    WARREN MOSLER Reply:

    yes, if you buy a tsy bond with cash they ‘give’ you the bond and shred the cash.

    now you have a bond instead of cash, but all evidence points to this process not reducing consumption.

    the bond is bought with the excess cash that was created by deficit spending about to sit as over night reserve balances after it has gone round and round each day by the last holder deciding to defer spending to another day as the 3pm fed wire closing time nears.

    Reply

    Vincent Cate Reply:

    If a bond delays demand for the duration of the bond then there is not much difference between cash and a 1 day bond. Just 1 day of delay.

    But what about longer term bonds? A 10 year bond or 20 year bond means that cash is gone for 10 or 20 years. If this money was taken as taxes and burned it would reduce demand. How could it not when it is burned and gone for 20 years? How can this be different than taxing and then doing a stimulus payment 20 years later?

    Reply

    Cullen Roche Reply:

    Vincent,

    We just had this discussion at pragcap. You are creating unrealistic scenarios in an attempt to build your straw man case for hyperinflation due to MMT policy.

    The desire to save would not just disappear if the govt bond market stopped existing. First off, it would most likely be a very gradual process. Second, the demand to save would certainly be fulfilled with other securities. Third, the govt bond market acts as a subsidy as the entire income from bond interest serves as private sector financial wealth.

    Best,

    Cullen

    WARREN MOSLER Reply:

    japan may have the highest savings desires and they’ve had a near 0 rate policy for a very long time.

    savings desires are also largely the result of institutional structure called demand leakages, as previously discussed.

    Tom Hickey Reply:

    When taxes are collected, nongovernment net financial assets are reduced by that amount. Tsys represent nongovernment savings of net financial assets in a risk-free form that is slightly less liquid than holding cash. The nongovernment NFA injected by deficit spending (currency issuance) gets saved as tsys (debt issuance) due to the $-4-$ deficit offset rule that forces saving the amount injected by the deficit.

    Think flow. Flow (transactions) creates demand. Injection through expenditure and taxation can both be targeted to influence flow (volume and pressure). Tsy issuance influences flow in the direction of saving.

    WARREN MOSLER Reply:

    think of three people winning the $1 million lottery

    one gets his million taxed away

    the second decides buys 250,000 in tsy secs for his ira and keep the rest in cash.

    the third puts 250,000 in cash in his ira and keeps the rest in cash.

    the second and third are way better off than the first, and their consumption probably won’t be all that much different.

    JJTV Reply:

    Vincent,

    Dr. Kelton wrote a piece a while back in response to a similar argument made by the circuitists:

    Link Below:

    http://neweconomicperspectives.blogspot.com/2010/11/yes-government-bonds-add-to-private.html

    WARREN MOSLER Reply:

    remember, the money that buys bonds has already been ‘spent’ once by govt via crediting the reserve account.

    and it may get spent many times over before the end of business on any given day when the last holder has the option of keeping it as a reserve balance or switching to an interest bearing securities account at the fed.

  16. Lest you think I’m alone, read this: « Monetary Sovereignty – Mitchell Says:

    [...] Warren Mosler [...]

  17. Vincent Cate Says:

    “When taxes are collected, nongovernment net financial assets are reduced by that amount. Tsys represent nongovernment savings of net financial assets in a risk-free form that is slightly less liquid than holding cash. ”

    If person X buys a 20 year treasury and his cash is burned the fact that it is liquid and he can sell it to person Y does not unburn his cash. He now has the cash from person Y but person Y is out cash. It could change hands many times during the 20 years but none of these transactions bring back the burned cash, there is always that much less cash. So the system is always out that much cash, even if which person is out changes. And you can’t buy real goods (supermarket, gas, etc) with treasuries, so there is a reduced demand till the bond is paid off.

    Reply

    rvm Reply:

    Yes but before deciding to buy bonds from the government you were not using that cash to buy goods or services anyway and were just holding it in your checking account or under the mattress. The demand before and after stays the same.

    You can’t use the cash for rent and food to buy bonds. You can use only cash you had saved above the needs of your lifestyle.

    Reply

    Vincent Cate Reply:

    “You can’t use the cash for rent and food to buy bonds. You can use only cash you had saved above the needs of your lifestyle.”

    Yes, but if I take my savings and put it into bonds in a private company they spend the money, not burn it. So my choosing to put in into government bonds, where it gets burned, reduces aggregate demand, for a time.

    There is evidence that when people stop buying bonds in some currency and all the existing bonds are paid off as they become due you get very high inflation rates. This fits if bonds are just delaying demand. And we want MMT to fit reality, so I think my way is correct.

    Reply

    MarkS Reply:

    The govt would offer a CD or other instrument. Your assumption that the end of the bond mkt would result in a spending spree is not realistic. That is not how the process would work.

    Tom Hickey Reply:

    Vincent: Yes, but if I take my savings and put it into bonds in a private company they spend the money, not burn it. So my choosing to put in into government bonds, where it gets burned, reduces aggregate demand, for a time.

    The money that gets saved in bonds is deficit spent into the economy by government. This is a net addition, i.e., there is an increase in nongovernment assets without an increase in nongovernment liabilities. The nongovernment NFA injected by deficit spending is not changed by tsy issuance; only the asset composition and maturity/liquidity shift. Moreover, the interest paid on the tsys increases nongovernment NFA more.

    The money saved as corporate bonds is also spent, but since there is both nongovernment asset and corresponding liability involved, the net is zero. The corp spending the money is spending money taken out of the economy, which it has to repay with interest. Payment of principal and interest have to come out of the economy.

    The point is that deficit spending and subsequent saving in tsys increases the amount of money in the economy, increasing nominal aggregate demand exogenously. Flow within the economy, including the creation of bank money endogenously, doesn’t change nongovernment NFA and just shifts money among different hands.

    ESM Reply:

    Vincent,

    A bank or broker-dealer or hedge fund or even an individual can always repo a Treasury bond at close to zero haircut at the prevailing Fed Funds rate (actually slightly under the Fed Funds rate generally). The Federal Reserve stands ready to provide enough cash to meet all repo demand in order to maintain the target Fed Funds rate. Therefore, a treasury bond or note or bill is every bit as liquid and spendable as cash. What drives the desire to spend versus the desire to save (and thus aggregate demand and eventually inflation or deflation) is both the prevailing interest rate (which determines how much it costs you to spend now, or, equivalently, the opportunity cost of spending now) and the amount of net financial assets you hold (which determines how comfortable you feel in spending now and not saving for a rainy day).

    WARREN MOSLER Reply:

    in our loans create deposits world even the ‘funds for repo’ which are not quantity constrained don’t ‘come from’ the fed.

    JCD Reply:

    Right.

    I think this is the key.

    If every holder of every bond in the world wanted cash tomorrow, they could get it. The Fed would lend them cash and hold the bonds as collateral.

    When you aggregate the Treasury and The Fed, bond issuance does not reduce demand.

    pebird Reply:

    Tom is right. A government bond held iis an asset to an individual and can be used as collateral for leverage. i wish I could say the same for my tax bill.

    Scott Fullwiler Reply:

    ESM,

    Well said, but I’ve said that exact thing to Vincent and others over in the now 600 comment thread at PragCap to no avail. Hope it works this time–maybe just need to change the messenger.

    WARREN MOSLER Reply:

    most of the decisions as to whether to buy secs of one kind or another vs holding cash are done in pension funds, ira’s, etc. where the funds don’t get spent either way.

    i’d say it’s very rare for someone to decide to not consume vs spend purely as a function of interest rates.
    in fact, with the population statistically net savers, higher rates increase incomes via interest income, and higher interest income does tend to increase spending. particularly with seniors

    Reply

  18. rvm Says:

    Yes but if we are in recession and all private businesses are cutting expenses and shrinking production, you won’t find any private bonds for sale, so your cash will be still idle.

    Reply

    Vincent Cate Reply:

    Private bond sales have had record months. At these low interest rates lots of companies want to get as much cash as they can.

    Reply

  19. Vincent Cate Says:

    “The money that gets saved in bonds is deficit spent into the economy by government. ”

    You are thinking that bond sales fund government spending, which is not the MMT way of looking at it.

    Imagine that all government spending comes from money out of thin air and all money collected from taxes or bond sales is burned. This is MMT way to think about it.

    Reply

    Tom Hickey Reply:

    That is not what I meant. From the macro viewpoint, what government deficit spends through currency issuance (crediting deposit accounts) gets saved through tsy issuance owing to the $-4-$ deficit offset requirement. That is to say, injection through currency issuance increases nongovernment NFA, which is saved as tsys due to the offset requirement. Tsy issuance does not withdraw nongovernment NFA as does taxation. Rather it shifts asset form and term.

    Tsy issuance is not operationally necessary under the rules of a fiat system. It is a politically imposed requirement that simply shifts asset composition from reserves to tsys, draining excess reserves from the interbank system. The dollars used to purchase tsys when the Fed auctions them are “burned” because government has no need to save since it is the currency issuer under a fiat system. After the books have been marked up, any cash involved is no longer needed and is either shredded or recycled.

    Reply

    Vincent Cate Reply:

    “That is to say, injection through currency issuance increases nongovernment NFA, which is saved as tsys due to the offset requirement.”

    The problem I think is that nobody is forced to keep rolling over treasuries. At any time people could decide to cut back by just taking cash as each one came due and not buying any more.

    “Tsy issuance does not withdraw nongovernment NFA as does taxation. Rather it shifts asset form and term.”

    But it shift from a form that can not be used to buy things to one that can. Again, just that a treasury can change hands does not bring back the cash that was burned and so the demand is gone, no matter how liquid the treasuries are.

    “Tsy issuance is not operationally necessary under the rules of a fiat system. ”

    Right, but they are part of the operational reality we need to understand. This $14 trillion should not be ignored just because they should never have made it. Now that we have it, what impact can it have. I think it could release a lot of demand which could flow into commodities, which could raise prices and give us inflation. It has happened in other places where a currency got into trouble.

    Reply

    Tom Hickey Reply:

    The problem I think is that nobody is forced to keep rolling over treasuries. At any time people could decide to cut back by just taking cash as each one came due and not buying any more.

    And there is no operational requirement to issue tsys. The Fed could just pay interest on excess reserves as it is now. Or Treasury could just issue short term bills. Lots of options.

    But it shift from a form that can not be used to buy things to one that can. Again, just that a treasury can change hands does not bring back the cash that was burned and so the demand is gone, no matter how liquid the treasuries are.

    The point is that the demand flowed from injection through the economy. The injection can be tightly targeted so the flow can be directed. The injection is also an increase in nongovernment NFA so it increases effective demand as a flow and wealth as savings, which also further increases NFA through interest payment.

    Right, but they are part of the operational reality we need to understand. This $14 trillion should not be ignored just because they should never have made it. Now that we have it, what impact can it have. I think it could release a lot of demand which could flow into commodities, which could raise prices and give us inflation. It has happened in other places where a currency got into trouble.

    Tsys are held as savings (nongovernment wealth as net financial assets). It is reasonable to assume that that if there were no further tsy issuance and existing tsys allowed to mature, those funds would flow into other asset forms as savings (financial) or investment (real) rather than being spent on consumption. (See Cullen Roche’s comment under #15 above.) Whatever portion that flowed to increased consumption would send a demand signal to business to invest more, promoting growth.

    Where’s the problem here?

    Neil Wilson Reply:

    “But it shift from a form that can not be used to buy things to one that can”

    You can’t buy anything with a bank deposit either. You have to exchange it for currency before you can buy stuff.

    A check is a sales receipt for a bank deposit.

    Bank deposits are swapped backwards and forwards every day in a market that uses a small amount of currency reserves to clear.

    Similarly with bonds and frankly all other financial assets.

    It’s an operation system the world has been using for a long time. And it works.

    MamMoTh Reply:

    “You can’t buy anything with a bank deposit either. You have to exchange it for currency before you can buy stuff.”

    Of course you can. Don’t you have debit cards in the UK?

    But you can’t buy anything with your tsy bonds, that’s true.

    Neil Wilson Reply:

    “Of course you can. Don’t you have debit cards in the UK?”

    If the bank in question didn’t have any dollars (ie was subject to a current bank run), would the debit card clear?

    No – despite you having a bank deposit there.

    So you are not using the bank deposit to buy anything. You are swapping some of it for currency via the debit card process.

    And if you had a debit card on your Treasury bond account that automatically sold some of them when you spent you would get the same effect.

    MamMoTh Reply:

    Your debit card will clear if you have enough money in your bank account and the bank didn’t go bankrupt of course.

    And you don’t have debit cards linked to your tsy bonds.

    You can pay with you bank deposit but not with your bonds. Period.

    Tom Hickey Reply:

    MamMoTh, the kind of person that collect tsys will certainly have an overdraft provision on her bank accounts so that her banker will honor her drafts. There are no hard and fast separations like you imagine. One of the chief functions of tsys is as collateral.

    MamMoTh Reply:

    Tom, I just believe there are harder and faster separations than what MMTers seem to believe and suggest in this and other forums.

    At the end of the day you only consume with cash or bank deposits not with bonds, stocks or houses, although bonds (like any other asset) can be used as collateral to obtain a loan (in the form of cash or a bank deposit) for consumption.

    WARREN MOSLER Reply:

    right, but ‘the $’ that go into bonds have already been spent at least ‘once’ by govt. and to some degree more than that.

    Tom Hickey Reply:

    That’s only for “the little people.”

    MamMoTh Reply:

    Is it?
    Could be, I only deal with little people.
    I can imagine big people could swap assets, bonds, houses, wives…
    But do they go to the mall and do their shopping with bonds?
    Is Warren big enough to confirm this?
    Does he sell his MT cars for bonds?

    WARREN MOSLER Reply:

    i’ll take any numeraire for an mt

    Sergei Reply:

    MamMoTh, probably 90+% of bank balance sheets is collateralized. What is worse is that in most cases this collateral is not even government bonds. Yet the sky did not fall.

    You need to check the basics of payment systems and bank operations.

    MamMoTh Reply:

    Sergei, thanks but I do not worry about the sky falling.
    Maybe I need to check the basics of payment systems and bank operations.
    That’s why I asked a simple question here about how can you pay with bonds for consumption, the kind of consumption that will signal an increase in aggregate demand, for instance, a Mosler car.
    But I didn’t get my answer.

    Sergei Reply:

    MamMoTh, not many things can be more simple than this. If you have this many bonds then you get to a private bank, open an account there, transfer your bonds and bingo. You can buy anything you want. The rest is not your business.

    It is not about cash in your current account. You purchasing power is defined by your net worth. Financial system will take of any transactions needed to allow you execute your wealth.

    Neil Wilson Reply:

    Although of course in reality there isn’t any cash in your current account. You bought a bank deposit with it. The cash has almost certainly been used to clear somebody else’s transaction.

    It’s this ‘innovation’ that allows the system to operate with so little actual currency in circulation – again something that was more important during the gold standard era.

    WARREN MOSLER Reply:

    the 14t in tsy secs would otherwise be held as reserve balances.

    should it all mature tomorrow, which it legally can’t, the holders would see their member bank reserve accounts credited for their balances.

    and, for example, lots of agents how securities that prepay at par now and then, particularly mtg backed secs, and other loans.
    Doesn’t seem to me they all run out and spend the funds when that happens.
    In fact, seems they almost never do.

  20. Vincent Cate Says:

    “The govt would offer a CD or other instrument. Your assumption that the end of the bond mkt would result in a spending spree is not realistic. ”

    If people don’t want to put their money in government “bonds” for interest they wont want to put their money in government “CD”s for interest.

    Bond sales failing has happened in many places many times. It is very realistic. It often happens at the start of hyperinflation. People don’t want to have their money tied up if it looks like inflation rates will be going up and up, so they stop buying bonds. But this helps cause the very inflation rates people are afraid of.

    When you are coming to high inflation you get rising interest rates, which hurts real estate, bonds, and stocks. So people go into commodities, gold, and silver. These looks like “spending” or “demand” as far as inflationary pressure.

    Reply

    Tom Hickey Reply:

    A lot of people who watched the monetary base climb due to QE and saw gold and other PM’s rising figured inflation was on the way and got creamed shorting tsys. And the Fed is still trying unsuccessfully to gin up inflationary expectations to get people spending. All they have managed in an incipient bubble in US equities (and maybe added to the commodity run-up, too) through cognitive-emotional bias generated by the Bernanke put.

    Reply

    Vincent Cate Reply:

    I don’t know about that, but personally I saw all the money printing and put some money into silver and it has done very well.

    Reply

    Tom Hickey Reply:

    Quite a few people were complaining over at Zero Hedge about ” government manipulation” when they had to cover their tsy shorts at a loss.

    Cullen Roche Reply:

    The hyperinflation trade (USD goes to $0, UST goes to $0, and US stocks go to $0) have all been very very bad bets. The strength in previous metals is largely due to misplaced fears in the USA and very strong economic performance and inflation in Asia. If you bought gold under the USA hyperinflation thesis in 2008 you were right, but your thesis was dead wrong. So, you get points for being lucky, but not for being smart.

    WARREN MOSLER Reply:

    and hyper inflation would have gold at $eleventy seven quadzillion, not $1400

    WARREN MOSLER Reply:

    good trade!

    called the ‘greater fool theory’ and it does work!

    (i own some silver too on the same theory)

    WARREN MOSLER Reply:

    Never heard of bond sales failing ‘at the start of hyperinflation’

    bond sales transfer existing balances from reserve accounts to securities accounts.

    bond sales fail for technical reasons, and yes, it happens quite frequently in many places in the world.
    but it has nothing to do with inflation

    Reply

  21. Vincent Cate Says:

    Saying that in hyperinflation the USD goes to $0 is just confused. One USD will always be worth $1 USD. The problem with shorting treasuries as a hyperinflation bet is that even if you win you get paid with worthless money. So that is NOT the hyperinflation bet. The hyperinflation bet is that commodities, gold, and silver become much higher when measured in USD. This bet has been very good and will continue to be so. We can check back later on this.

    Reply

    Tom Hickey Reply:

    There are reasons that commodities, and PM’s specifically, rise in price other than inflation. The initial rise in gold and PM’s was flight to a safe haven in the face of a global financial meltdown. That rise was then sustained by Asian buying for a variety of reasons, which continues strong as inflation heats up over there. Nothing to do with hyperinflation other than the demand provided by the gold bugs. There is little evidence that looming hyperinflation is driving PM’s, although irrational fear of it is playing a part.

    Reply

    WARREN MOSLER Reply:

    it’s actually been a relative value bet

    Reply

  22. Vincent Cate Says:

    “Whatever portion that flowed to increased consumption would send a demand signal to business to invest more, promoting growth.

    Where’s the problem here?”

    Sometimes an increased demand just causes prices to go up. If the monetary base of $3 trillion gets another $6 trillion as bonds are paid off over the next 12 months so we then have a monetary base of $9 trillion it would be foolish to think that we will have 3 times the real GNP. A more sensible prediction is 3 times the nominal GNP with 3 times the prices.

    Reply

    MamMoTh Reply:

    “Sometimes an increased demand just causes prices to go up.”

    More often than sometimes. But never according to MMT.
    Bill Mitchell always reminds us that an increase in demand will make companies increase their production in order to keep their share of the market, not just raise prices.

    He never ran a company though.

    Reply

    Neil Wilson Reply:

    You have the refereed papers to back up your assertion that economies at the macro level mostly price adjust rather than quantity adjust?

    Because if not then you are making bald assertions based on anecdotes.

    We need to see the econometric evidence (either way).

    Reply

    MamMoTh Reply:

    If you try hard enough, you will find refereed papers proving completely opposite economic theories. You can waste your time if you want.

    I talk from personal experience, which might have had some bad effects on me, but not to lose my hair. Yet.

    pebird Reply:

    You need to read Bill more closely. An increase in demand without a supply constraint will generate more output. Firms hesitate to increase prices due to competition and that the incremental cost of production decreases with increasing output (again, without supply constraints).

    You can have a real supply constraint (e.g., resource limitation), which would generate inflation. That resource could include labor – full employment.

    You can also have supply constraints via monopoly controls, which can generate price increases, but not general price rises (inflation). These price increases are best thought of as income distributional battles between social groups. Monopoly examples include unions as well as corporations.

    In almost all of these examples, the money supply/velocity changes are irrelevant and after-the-fact.

    Reply

    WARREN MOSLER Reply:

    I agree an increase in demand can make prices go up

    Reply

    Tom Hickey Reply:

    We just had an enormous increase of the monetary base and no inflation because there is no automatic transmission mechanism from reserves to currency in circulation. There is no money multiplier because banks don’t lend based on reserves and funds gained from QE purchases have been saved in other forms rather than spent. Increases in the monetary base do not directly translate into increased effective demand > increased consumption. If it did, Ben would be smiling instead of frowning.

    Reply

    Vincent Cate Reply:

    “We just had an enormous increase of the monetary base and no inflation because there is no automatic transmission mechanism from reserves to currency in circulation.”

    You can look at many many papers and there is a delay from when they print the new money till when the prices go up. Partly it seems to be due to the velocity of money going down initially. Only after awhile do interest rates go back up and the velocity of money goes back up and prices go up. It should start sometime in the next year.

    http://pair.offshore.ai/38yearcycle/#delay

    Reply

    Neil Wilson Reply:

    So what you’re saying is that after a recession things tend to recover and people start spending more. NSS.

    Unless and until money in all its forms is destocked there can be no increase in demand.

    That’s because what matter is the amount of money in flow in a period, not the amount of money in total. And that will show up in demand inflation, which you then control with interest rates/taxation as required.

    You’re looking for the bogeyman in the wrong place.

    Tom Hickey Reply:

    Vincent, what is the transmission?

    WARREN MOSLER Reply:

    and that delay is until fiscal policy becomes sufficiently supportive, usually via the automatic fiscal stabilizers

    pebird Reply:

    What if that increase in monetary base due to redeeming government bonds is used to pay down private debt? I doubt prices would rise.

    Put debt into your model (debt besides government debt).

    Reply

    Vincent Cate Reply:

    “What if that increase in monetary base due to redeeming government bonds is used to pay down private debt? I doubt prices would rise.”

    If people think we are getting close to hyperinflation they max out their credit cards and lines of credit, not pay down debt. The reason is that it becomes trivial to pay off debts once they have billion dollar notes.

    It is certainly my plan. :-)

    Reply

    Tom Hickey Reply:

    Yeah, it was the plan of some of my friends at the height of the bubble. Now they are negotiating with their banks and actually doing pretty well. Thirty cents on the dollar isn’t hard to get. So even without inflation this can work. The banks don’t care about the losses because the government will pick them up.

    WARREN MOSLER Reply:

    to early for me to be selling my silver?

    WARREN MOSLER Reply:

    that would be the guy who had both debt and govt bonds. he was already net 0. he’s just reducing both sides of his balance sheet

    Reply

    WARREN MOSLER Reply:

    we might have less real and nominal gdp.

    the ‘monetary base’ however defined has little to do with causing anything like gdp growth

    it’s way more of a residual

    Reply

  23. Kristjan Says:

    “If people think we are getting close to hyperinflation they max out their credit cards and lines of credit, not pay down debt.”

    People can always think that we are getting close to hyperinflation. What does this have to do with monetary base? You can max out your credit card with or without QE. Can’t you?

    Reply

    Vincent Cate Reply:

    “People can always think that we are getting close to hyperinflation. What does this have to do with monetary base? You can max out your credit card with or without QE. Can’t you?”

    What it means is they will get cash as their bonds mature and buy real things. They will not want their money locked up in bonds for any length of time when they think money is going to be dropping in value. As the government prints money to pay for each maturing bond the monetary base goes up.

    Reply

    Tom Hickey Reply:

    How high does the monetary base have to go, Vincent? It is through the roof now and nothing remotely like what you claim is happening.

    Suppose the Fed purchases another trillion in bonds and adds that to the monetary base, which is likely in QE3 if the Fed doesn’t get some inflation out of QE2, or equities falter.

    The funds from bond purchases are just flowing into higher risk assets, or may some into PMs and other speculative commodities like oil. But QE is not increasing either consumer spending or business investment, and the excess reserves are not generating loans, which would lift the real economy by sparking increased effective demand.

    Reply

    Vincent Cate Reply:

    “How high does the monetary base have to go, Vincent? It is through the roof now and nothing remotely like what you claim is happening. ”

    Again, there is a delay from when the money supply goes up to when prices go up. Typically in the 1.5 to 3 year range with shorter times for places that have had inflation recently, so we are on the long end.

    http://pair.offshore.ai/38yearcycle/#delay

    WARREN MOSLER Reply:

    again, the delay is until after some kind of fiscal expansion

    WARREN MOSLER Reply:

    yes, but, funds from bond purchases aren’t ‘flowing into higher risk assets’

    it’s that indifferent levels change with perceptions

    WARREN MOSLER Reply:

    as before, I’ve yet to meet anyone that runs out and spends when bonds mature.

    it’s usually dollars they don’t plan on spending, like their ira’s, pension funds, etc. and they get reinvested.

    pretty big inflation fear for people to break their tax advantaged savings plans to buy things.

    instead we see the likes of ‘passive commodities’ strategies within those which do drive up demand and prices, as per my paper of many years back.

    Reply

  24. studentee Says:

    “I talk from personal experience, which might have had some bad effects on me, but not to lose my hair. Yet.”

    mr. wilson said adjusting at the macro level.

    Reply

  25. Tom Hickey Says:

    Ramanan: International trade decides the fate of nations.

    This has held true historically, and there is no reason for it to change now. The current neoliberal regime is based on the premise that the invisible hand will return imbalances to equilibrium quickly enough for smooth transitions without disruptions. That is being disproved globally as we speak.

    Not only is there no invisible hand at work, there are very visible hands in the till and levers tilting the playing field, without an overarching control system in place or any accountability. In the past, this has often led to war, “soft,” like currency wars and trade wars, and “hard,” like military conflicts through proxies and open warfare.

    Reply

  26. Vincent Cate Says:

    “Vincent, what is the transmission?”

    Just imagine we all had 1000 times as much money when the sun comes up tomorrow but there is the same supply of goods in stores and the same productive capacity. When the sun comes up we rush out to buy things. It is like there is 1000 times the demand and the same supply. Understanding what is going on I rush out first thing and buy a yacht before the company has raised prices. I am happy. But shortly after me several other people show up and the company only had the one yacht ready but will have another one next week and is taking bids. The price goes up and up through the day as more people come. Same thing happens with cars, private jets, etc etc. If demand goes up faster than supply the price will go up. Understand?

    Reply

    Tom Hickey Reply:

    I mean, what is the transmission from the excess reserves created by QE and the hyperinflation you see coming? Money multiplier? If so, why isn’t it working for the Fed?

    You are seeing monsters under the bed.

    Reply

    Vincent Cate Reply:

    “I mean, what is the transmission from the excess reserves created by QE and the hyperinflation you see coming?”

    Basically people stop buying bonds and get cash when their bonds come due and put it into commodities or gold or buying any real objects.

    http://pair.offshore.ai/38yearcycle/#mmthyperinflation

    “You are seeing monsters under the bed.”

    Hyperinflation is a real monster that has happened over 100 times. If you do not believe in hyperinflation you do not understand it and should study it more.

    Reply

    Tom Hickey Reply:

    The monster I see under the bed is the possibility of debt deflation.

    studentee Reply:

    “Basically people stop buying bonds and get cash when their bonds come due and put it into commodities or gold or buying any real objects.”

    who are these people buying bonds? people don’t choose between investing in long-term tsy’s and current period consumption. it’s not a relevant margin. why can’t you understand this.

    you also don’t understand what the qe2 program connotes. what do banks do with reserves? they aren’t inflationary

    WARREN MOSLER Reply:

    so is japan closer to hyper inflation than the US?

    Sergei Reply:

    Just imagine aliens come over tomorrow and give us a technology to produce anything we want out of air. And supply of everything increases overnight to infinity. So imagine we had 1000 times more goods than we actually need. I am happy.

    This is a kindergarten. We can imagine many things. The problem is to explain them happening.

    Reply

    Greg Reply:

    Vincent

    In your scenario where everyone has 1000 times more money everyones relative position would be unchanged. Yes bread might go up 1000x but so is my salary so so what? I’m granting you the idea that prices would rise 1000x for the sake of discussion but I dont think it would be a foregone conclusion in reality. People might be just as happy to have more “savings”, why would you necessarily run to the store because you have more money in your bank account?

    Reply

    WARREN MOSLER Reply:

    yes, more spending power chasing the same goods and services
    it can come from income, credit, etc.

    Reply

  27. Vincent Cate Says:

    “The monster I see under the bed is the possibility of debt deflation.”

    So Japan let their currency go up by a factor of 5 or something relative to the dollar (world commodity currency) and so had deflation. Do you think the dollar is going to go up relative to other currencies like that? Do you know of other fiat currencies that have had deflation like over 2% and longer than 2 years? I can find 100 cases of hyperinflation (like more than 5% inflation per month) how many cases of deflation more than 5% per year deflation can you find? Are you sure you are worried about the high probability event?

    Reply

    studentee Reply:

    this guy just exhausted himself on cullen roche’s blog arguing these same lazy points.

    your examples of hyperinflation are pathetic, or irrelevant

    Reply

    Tom Hickey Reply:

    Vincent, the reason I am concerned about debt deflation is the large overhang of debt that is distressed as a result of Ponzi finance. A significant portion of this debt cannot be repaid — and not only in the US. The global financial crisis is still a long way from being resolved, and all it would take is some shock to generate a ripple effect that trips systemic risk. We are not out of the woods yet.

    Reply

    Vincent Cate Reply:

    “We are not out of the woods yet.”

    I recommend the book, “This time is different”. It shows that the following pattern repeats throughout history:
    1) fractional reserve banks getting in trouble (after all demand deposits were loaned out for 20 years)
    2) governments bailing banks out
    3) governments getting in trouble, sovereign debt crisis
    4) central banks bailing out governments
    5) currency crisis

    With the Fed buying $100 billion in US government debt every month the US is well into stage (4) at this point. Next is currency crisis.

    The strange part is how this can happen over and over again and people are still surprised. As the title of the book shows, each time people think, “this time is different”. Fools.

    Reply

    Kristjan Reply:

    Vincent,
    out of those 100 hyperinflations how many were caused by QE?(central bank was swapping treasuries for money)

    WARREN MOSLER Reply:

    rog was all about fixed exchange rate regimes. not applicable to floating fx

    WARREN MOSLER Reply:

    right, we’ve already had major ‘debt deflation’ as you describe it. the question is how much more will we get.

    with a 9% federal budget deficit it won’t surprise me if there is now sufficient income and savings to have stabilized things, all else equal

    Reply

    Tom Hickey Reply:

    It’s that “all else equal” I’m concerned about. :)

    Potential shocks looming in the EZ, revolts in Islamic world translating into rising oil prices, global food shortage spiking commodities, gridlock of US political system, contraction of US budget, US state budget cutting, housing double-dip?

  28. Vincent Cate Says:

    “out of those 100 hyperinflations how many were caused by QE?(central bank was swapping treasuries for money)”

    In every case the money creation was funding government operations. Sometimes it was indirect by printing money to buy government debt and sometimes it was just governments printing money and spending it directly.

    For those that don’t like the term “printing money” I have 120 different ways to say it:

    http://howfiatdies.blogspot.com/2010/11/euphemisms-for-printing-money.html

    Reply

    Ramanan Reply:

    One Euphemism for the “road to ruin” – Austrian Economics ?

    Reply

    Vincent Cate Reply:

    “One Euphemism for the “road to ruin” – Austrian Economics ?”

    Eagerness to make more money has clearly been the road to ruin for many currencies and countries. When do you think Austrian Economics has lead to ruin? In all the cases people have claimed private enterprise messed things up it seems if you look a little bit deeper it was really some government that was behind it. For example, some blame the recent crisis on private enterprise. However, if you look a bit deeper it was really the Fed, Fannie, and Freddie, which are all government created things, that were the keys to making the crisis.

    Reply

    Ramanan Reply:

    Yes regulation was at all time low but what you seem obsessed with M1s and the M2s and the M3s and the M4s.

    Austrian and Monetarism are partners unless you want to give a lecture on the difference.

    Finally these two schools are obsessed with the money stock and are adamant about controlling it.

    Well – governments don’t control money, they control demand. These two are different concepts.

    It was the Monetarists who caused huge amount of loss of output in the 70s and the 80s and put cracks in the foundation of growth.

    WARREN MOSLER Reply:

    again, it’s the difference between fixed and floating fx regimes.

    WARREN MOSLER Reply:

    All the austrians i’ve run into provide gold standard/fixed fx analysis which is useful in that context.

    none of them seem to have much of a handle on the dynamics of floating fx regimes, however.
    they mostly just extend what might happen on a gold standard to what looks similar under today’s floating fx.
    unfortunately much of that is inapplicable.

    Kristjan Andre Reply:

    Vincent,
    find me one case when sovereign government was doing QE and that caused hyperinflation?

    Reply

    WARREN MOSLER Reply:

    they were also fixed fx regimes that blew

    Reply

  29. Kristjan Says:

    Vincent, when there is private credit creation, that’s not inflationary or better yet hyperinflationary. When government creates money that is of course?
    1.Are you saying that economy is operating at full capasity all the time? 2.Unemployment is voluntary? 3. Choice between leisure and work?
    4.Are you saying that there is no connection in between nominal and real?
    5.In your opininon It seems like money supply(however you define It) can never grow, if It does than there is inflation (CPI)?

    Don’t you think It matters not what people think about the inflation, if aggregate demand doesn’t grow the suppliers are not likely to rise prices. Do you think money is just causing inflation sitting on a bank account. What kind of inflation are you talking about here? Demand-pull, cost-push or something else?

    Reply

    Vincent Cate Reply:

    “Vincent, when there is private credit creation, that’s not inflationary or better yet hyperinflationary. When government creates money that is of course?”

    Out of the 100 cases of hyperinflation not a single one was caused by “private credit creation”. In every case it was government creation of money (maybe they claim central bank was not government but it is).

    Reply

    Sergei Reply:

    sure, it is because your benchmark is government money which private sector can not create

    Reply

    Vincent Cate Reply:

    “sure, it is because your benchmark is government money which private sector can not create”

    There are different benchmarks for hyperinflation but the one I use is 5% price inflation per month or 80% price inflation per year. This does not say anything about who is making money.

    WARREN MOSLER Reply:

    neither is hyper inflation

    Matt Franko Reply:

    Vince,
    I may be with you on this one, these prices are too damned high for my liking…

    Back in 2008, it really sucked when prices spiked higher even than present (including real estate was way up). I think the Fed had reserve balances at around $10B at that time. Then the Fed spiked reserve balances straight up, to like $1.2T (12,0000 % increase!) and thankfully prices summarily collapsed.

    Do you think the Fed should do another 12,000% increase in reserves at this point to get these prices under control and down again?

    But, they may not have enough field widths in their computer systems to account for these high balances though if we go another 12,000% from here ?? Could be a problem….

    Reply

    WARREN MOSLER Reply:

    lebanon’s was caused by the cessation of tax collection. same with the confederacy

    germany’s was caused by accelerating buying of fx via deficit spending to meet war reparations

    Reply

  30. Vincent Cate Says:

    I am kind of surprised that anyone thinks hyperinflation could be caused by the private sector. Is their an MMT culture that bad things come from the private sector and good things from government? Where is this idea coming from?

    There are hundreds of private banks. If any private bank could cause hyperinflation we would get hyperinflation far more often than we do. Only the government/central-bank has the ability to cause hyperinflation.

    Reply

    Vincent Cate Reply:

    Actually it seems MMT is very clear on this topic. The government that is a “fully sovereigned government” is a “monopoly issuer of their own currency” and so has “full pricing power”. Clearly if the value of the currency goes down MMT holds the government responsible, not private corporations.

    Reply

    Tom Hickey Reply:

    Being the monopolist, government is both responsible and has the necessary tools in its bag to fix problems as they arise, if it knows how to use them and is politically able to do so.

    The problem now is that government has been captured by corporations and wealth. The US is now a corporate state that serves the interests of those that underwrite political campaigns and operates through the revolving door.

    James K. Galbraith, The Predator State (2008)

    Here is short synopsis by Jamie:

    Reply

    Tom Hickey Reply:

    Oops. here is the missing link:

    James K. Galbraith, What Is The Predator State? (Talking Points Memo)

    WARREN MOSLER Reply:

    agreed

    Reply

    WARREN MOSLER Reply:

    yes, it’s caused by the govt of issue

    Reply

  31. Tom Hickey Says:

    Mish Shedlock is hard core Libertarian/Austrian School. Here is what he says:

    “…concern that excess reserves will lead to lending and inflation is totally unfounded in theory and practice.”

    Fictional Reserve Lending And The Myth Of Excess Reserves

    In this post, Mish pretty much on the same page as MMT’ers wrt how modern banking works.

    See also Mish: “The real story is deflation.”

    Deflation In A Fiat Regime?

    Are we “Trending Towards Deflation” or in It?

    So it is not just the MMT’ers that think this way. Other thinking people get this, too, like Ed Harrison of Credit Writedowns, who is also an Austrian Schooler that see the wisdom in the way MMT describes the modern monetary system.

    MMT-Hyperinflation In The-USA

    On the other hand, most Neoliberals and Libertarian/Austrian Schoolers are delusional about how the modern monetary system works, as well as the role of money in a monetary economy, and so they can’t see the forest for the trees.

    Reply

    Scott Fullwiler Reply:

    Also . . .

    Anderson, Gascon, and Lui in the Nov/Dec 2010 issue of the St. Louis Fed Review have a paper “Doubling Your Monetary Base and Surviving: Some International Experience.” They chronicle some of the large monetary base expansions the past three decades, most of them sovereign currency issuers, and conclude with “we find little increased inflation from such expansions.” Note further that the St. Louis Fed’s research dept is far and away the most monetarist in stance.

    Reply

    Vincent Cate Reply:

    To me the MMT people are so focused on debits and credits to different accounts that they don’t see the forest for the trees.

    Mish is a very smart guy but he thinks you have to first get a crisis of confidence in a currency and then you get bond sales failing and money printing and hyperinflation. The reality is there is a feedback loop and bond sales failing, crisis of confidence, money printing, and prices going up all reinforce each other. They all get stronger together, so it does not make sense to claim 1 thing in the loop is first. It is like arguing about which comes first, the chicken or the egg.

    Reply

    Tom Hickey Reply:

    Why don’t you go over to his place and tell him that? I’m sure he will be delighted to be enlightened by you. :)

    Reply

    WARREN MOSLER Reply:

    mmt’ers are actually harder core libertarians than any of those others. they just don’t recognize it yet.

    Reply

  32. Vincent Cate Says:

    “Austrian and Monetarism are partners unless you want to give a lecture on the difference.”

    Sure. Monetarists like Milton Friedman believe in private enterprise except when it comes to money, where they think that if the government messes with the money supply the economy will be better. Austians believe in private enterprise all the way and would rather see gold and silver coins minted by private parties used as money and no government control over the money supply.

    http://pair.offshore.ai/38yearcycle/#friedman

    The way that MMT controls aggregate demand is by controlling the money supply. They increase the money supply by creating money out of thin air like the monitarists and reduce it by collecting taxes from private people.

    Reply

    Tom Hickey Reply:

    Vincent, obviously a lot of people believe this and convert their paper to PM’s as quickly as they get it in anticipation of the coming hyperinflation. This also entails having a well-stocked bunker hide-out, with lots of heavy weaponry and a large ammo hoard, as well as being up on survival strategy and tactics.

    http://www.survivalblog.com/

    Good luck.

    Reply

    Vincent Cate Reply:

    “This also entails having a well-stocked bunker hide-out, with lots of heavy weaponry and a large ammo hoard, as well as being up on survival strategy and tactics.

    http://www.survivalblog.com/

    Good luck.”

    You too. Remember that luck favors the prepared.

    Reply

  33. Ramanan Says:

    Vincent,

    Many people get confused about not being able to transact with bonds but being able to transact in money etc. So the implied causality of those people runs like this – “if I hold a bond, I am restricted in spending”.

    The whole thing is backward.

    Its a bit casual to say I spend my money. The correct way of saying this is “I spend my income” even though I may use my bank balance to spend for something. If I hold more bonds, I have already decided to spend less of my income.

    Let us say I and you have the same income. I don’t spend less than you because I hold more bonds than you, I hold more bonds than you because I spend less of my income than you.

    People don’t spend out of money, they spend out of income.

    (At any rate, holding bonds doesn’t restrict spending.)

    Reply

    Vincent Cate Reply:

    You don’t get it. If the government burns the money it collects when it sells the bond then that money is gone. It does not matter if the person who bought the bond can sell it to someone else, the money is still gone. The money supply and demand are reduced till when the bond is paid off with new money out of thin air.

    If you were self employed or retired you might have different views about only spending out of income.

    Reply

    Tom Hickey Reply:

    Vincent, what you say reveals that you don’t have a clue about how the monetary system works and that you are just making stuff up in your own mind, misunderstanding and misrepresenting MMT in doing so.

    Scott Fullwiler, Modern Monetary Theory – A Primer on the Operational Realities of the Monetary System

    ____________, Modern Central Bank Operations – The General Principles

    Warren Mosler, Soft Currency Economics

    Reply

    Vincent Cate Reply:

    “Vincent, what you say reveals that you don’t have a clue about how the monetary system works and that you are just making stuff up in your own mind,…”

    Warren agrees that we can think as if money from bonds was also shredded or burned.

    It seems the only consistent way to think about it. If all spending is from money out of thin air, and you think of money from taxes being burned, and that “bonds are not to fund the government”, what else but thinking of burning money from bonds can make sense?

    If 20 years later a bond is paid off how is that not like extra spending or a stimulus check? How could it not count as an increase in aggregate demand and inflationary pressure?

    Do you not permit yourself to “make stuff up in your own mind”? No thinking for yourself? Is MMT a scientific theory or a religion?

    I moved to a tropical island, renounced my US citizenship, and like to think for myself. As they say here, “I don’t care if you love me or hate me”. :-)

    Tom Hickey Reply:

    Vincent, I sympathize with your confusion on this issue. When I first approached MMT, I had difficulty getting some of these things, too. Then, I realized that it is a matter of understanding the accounting entries.’

    The “money gets” burnt after the accounting entries are made because under the present monetary system “the government neither has nor does not have money,” as Warren often says. At the level of government, “money” is spreadsheet entries. Where do the points on a scoreboard come from and where do they go to?

    Modern money is an idea (cultural artifact, logical construct) not a commodity (real good, substance). That is why money can be created out of thin air by marking up a spreadsheet and disappear into thin air by marking down a spreadsheet. The spreadsheet keeps track of the respective account balances. This is what happens at banks, and between banks and the Fed, where settlement takes place.

    L Randall Wray, Money

    If you don’t understand how the spreadsheets work, i.e., the accounting principles, you don’t understand modern money.

    You are thinking of Federal Reserve notes being “burnt,” i.e., shredded or recycled, as destruction of real money it is not. What happens is a reconfiguration of government liabilities as shown by the spreadsheet entries that show up on the books and statements of respective parties — Fed, Treasury, banks, and account holders.

    Here is an example. Say you have some cash and you want to deposit it in your bank account. The bank takes the cash and marks up your deposit account and puts the cash in the cash vault. But oh wait, the bank realizes it doesn’t need to keep your cash because it has enough cash on hand, so it sends it back to the Fed to exchange for reserves. The Fed credits the bank’s reserve account. just like the bank did for your deposit account. Then, someone at the Fed looks at the cash and decides that it is worn, so off to the shredder. Is anyone richer or poorer because the notes were shredded? No. You have your deposit, the bank has its reserves, and the Fed has recorded the cash exchanged for the reserves in its spreadsheet. The cash is no longer of any use to the Fed, so it “burns” it. Did any “money” disappear? No.

    Oliver Reply:

    The money supply is reduced by the exact same amount as the bond supply is increased. And, considering the two are near perfect substitutes, nothing much changes. Vice versa at maturity. Where’s your problem?

    Reply

    Vincent Cate Reply:

    “The money supply is reduced by the exact same amount as the bond supply is increased. And, considering the two are near perfect substitutes, nothing much changes. Vice versa at maturity. Where’s your problem?”

    Not much problem with what you said. The money is burned and whoever is holding the bond can not contribute to aggregate demand, unless he gets someone else to hold the bond. But then this new person is not contributing to demand so there is still the same net reduction in demand. And yes, when the bond comes due the demand comes back.

    Oliver Reply:

    It’s called saving, happens all the time, even without bonds. In fact, the existence or non-existence of bonds has very little effect on it, there are, for example, numerous other savings vehicles around. You’re missing the causality. The decision to save comes before the bond and is not contingent upon it.

    WARREN MOSLER Reply:

    tsy bonds function as ‘interest rate support’ (soft currency economics)

    so bonds mean higher interest rates than otherwise

    the non govt sector is a ‘net saver’

    so higher rates add income and more ‘savings’ to the non govt sectors.

    this tends to increase aggregate demand.

    Tom Hickey Reply:

    Vincent: The money is burned and whoever is holding the bond can not contribute to aggregate demand, unless he gets someone else to hold the bond. But then this new person is not contributing to demand so there is still the same net reduction in demand. And yes, when the bond comes due the demand comes back.

    If you are saying is that saving is a demand leakage and that tsys represent nongovernment net savings in dollars, as I think you are, MMT agrees.

    I think that what you are driving at is that the $-4-$ deficit offset with tsys forces saving, which means that the demand created by the deficit leaks to savings through corresponding tsy issuance. When the Fed purchases tsys through QE, it shifts the saving back into a liquid form (marks up deposit accounts) that will be spent on goods and services, invested in capital goods, exchanged for another currency, saved in another asset form of higher risk, or retained by banks as reserves. This is true. When the Fed purchases tsys for its book, then the funds provided nongovernment in exchange for the tsys have to go somewhere.

    How the funds are used is crucial. The Fed would like the funds provided from tsy purchases to be lent out by banks if the banks sold bonds (although this makes no sense in terms of transmission), or to be spent on consumer goods or investment if purchased from participants in the economy. Instead, what is happening is that banks are not lending the way the Fed would like (little demand by qualified borrowers) and the funds are mostly flowing into higher risk assets (savings > savings), which seems to be driving up equities. The Fed is OK with this equity run-up, since they see it as increasing the wealth effect, which they expect will translate into greater spending into the economy eventually — and the economy is exhibiting some green shoots (so it must be working, they likely think).

    MMTers have been opposed to QE as ineffective in creating effective demand where it is needed — at the consumer level for real goods and services, as well as making space for delevering. Instead, if anything, QE (coupled with low rates) has contributed to stoking demand for equities both by increasing liquidity for speculation (margin is high), along with the Bernanke put, risking another equity bubble in which “price are higher than they otherwise would be” (Fed). Moreover, QE reduces nongovernment NFA going forward by shifting the interest payment to government, which is deflationary.

    Inflationists think that as the economy takes off, the increased liquidity the Fed provided by reducing saving in tys will find its way into bidding up prices across the board, leading to high inflation, before the Fed can act to correct the imbalance it created. Some people argue that this is already happening in commodities, for example.

    MMTers argue that increasing prices of generally volatile items are not an indication of inflation when core inflation remains low, there is no wage pressure, and there is a huge output gap, intractable unemployment, while the air being let out of a housing bubble and credit bubble in general, affecting consumer balance sheets negatively.

    MMTers would also agree that stagflation is possible in the case of a supply shock, e.g., delivering higher commodity prices, especially of vital resources like petroleum.

    WARREN MOSLER Reply:

    if the govt gives you 2 $5′s for a $10 bill it burns (shreds, actually) the $10 as well.

    yes, ‘the money’ by your definition is reduced.

    the question is whether, functionally, that matters.

    Reply

  34. Vincent Cate Says:

    “misrepresenting MMT in doing so.”

    I really think I am patching up a little mistake in MMT that makes it then accurately describe the impact of bonds. With this it matches the historical evidence much more accurately. Fixing up a problem in an existing theory is good science.

    Reply

    Tom Hickey Reply:

    Is this what you are referring to?

    If all spending is from money out of thin air, and you think of money from taxes being burned, and that “bonds are not to fund the government”, what else but thinking of burning money from bonds can make sense?
    If 20 years later a bond is paid off how is that not like extra spending or a stimulus check? How could it not count as an increase in aggregate demand and inflationary pressure?

    The thing you seem to be missing is that the nongovernment net financial assets injected by deficit spending which get saved by tsys simply change asset from and term. Nongovernment NFA doesn’t increase of decrease when shifted from a deposit account to a tsy and then back at maturity. Nongovernment saving increases and decreases.

    Conversely, expenditure injects financial assets into nongovernment and taxation with draws nongovernment NFA. Nongovernment NFA changes through expenditure (injection) and taxation (withdrawal). Bond do not withdraw financial assets from nongovernment like taxes, even though “money is burnt” in the sense that reserves balances change and maybe some notes get shredded as no longer needed to keep score.

    If you are saying that saving constitutes a demand leakage, OK, tsys represent savings in dollars. The way the current rules are written, nongovernment must save in tsys the amount of the deficit due to the offset necessitated by no Treasury overdrafts at the Fed.

    So how can a deficit be inflationary under such an arrangement, when what is injected is simultaneously saved at the macro level (currency issuance = tsy issuance)?

    Reply

    Mario Reply:

    The only “inflationary” aspect of deficit spending is the interest non-government gains from the bonds. Is that interest substantial enough considering the level of government spending to negatively effect the economy (aka hyper-inflation)? I doubt it. Why? Well first off we must realize that no one entity is holding ALL of the government deficits in bonds, therefore in order to fully materialize the bond interest ALL BOND HOLDERS of the government spending must unilaterally act in unison. Sound likely? Yeah I didn’t think so either. Here are the two possibilities:

    Possibility #1. The interest and principle from the bond is simply re-invested in bonds or some other savings mechanism. This means no effect on aggregate inflation in the economy (aka deficit leak). In other words, nothing has changed…no “liquidation” if you will. Considering they were in bonds (savings) in the first place, this is the likely scenario and considering these are banks that are holding these bonds, then they will likely just keep them on the books as assets ad infinitum to bolster the company balance sheet. I mean I would. Kind of like Coca-Cola buying and saving its own memorabilia over the century as an asset. It is quite true that the more the government spends the wealthier the banks become PLUS the wealthier the non-banking, non-government sector becomes, which likely increases loans, making the banks EVEN MORE profitable again. Government spending is great for the non-government sector and REALLY great for the banking aspect of the non-government sector. ;)

    Possibility #2. The interest and/or principle from the bond is “cashed in” (liquidated) and then spent into the economy. This does have an effect in the economy but it is relative to the spending and is therefore a contribution to the economy. In this scenario bond investing can be considered one more employed person contributing to the economy. By definition it won’t result in hyper-inflation (aka the more you inflate the more you HAVE TO inflate…inflationary feedback mechanism which bond profit spending could not initiate or fuel) but it could (however unlikely) result in significant inflation. This is unlikely as well however b/c of what I’ve stated above but also b/c practically speaking the spending will be spread throughout the economy and through time. It’s not going to be an immediate or direct “injection” (purchase) and even if it was one giant purchase then it must be on something that warrants such a high cost (like buying a jet or something) and therefore that industry would be used to such a purchase and inflationary pressures are null or minimal and most definitely CONTROLLABLE.

    These are just my thoughts about it. Feel free to comment otherwise yeah or ney. I am LOVING this thread!!

    I’d actually like to hear more of a discussion regarding Ramanan’s issues of international trade, US debt issuance, etc. and how MMT fits into that as well as if there are any “concerns” looming for the US in that region. If anyone is interested in going there. I need to get caught up on the material and the arguments being presented first before chiming in.

    Cheers!

    Reply

    Mario Reply:

    you also must realize that when those bonds are being liquidated TIME has already elapsed (a 10 year bond comes due in 10 years). Since bonds typically follow inflation, the value of the bond (principle + interest*N) is likely not as significant compared to 10 years ago for example, making the interest earned even less of an “earning” and therefore even less of an inflationary pressure.

  35. Vincent Cate Says:

    A one second bond is really the same as cash. A one day bond is not much different from cash. Even a 1 month bond is not making a very long delay in aggregate demand and so is not really much different from cash. But a 30 year bond is really different. If interest rates go from 4% to 8% you will lose half the value if you then sell the bond. And if interest rates are going up fast it could be hard to find anyone wanting to hold that bond even at half what you paid. So a long term bond is not nearly identical to cash. There is a substantial delay in aggregate demand.

    Reply

    Scott Fullwiler Reply:

    QE isn’t about capital gain/loss from bonds vs. no bonds. That’s finance 101 and we don’t need a lecture on that. It’s about whether bonds vs. no bonds adds more “fuel.” You still don’t understand that there’s no difference in that respect, because you don’t understand the monetary system. And we’ve been through about 800 comments across different blogs and you haven’t ever addressed that even though it’s been explained to you dozens of times.

    Reply

  36. JKH Says:

    “Patching up a little mistake in MMT that makes it then accurately describe the impact of bonds”

    I don’t know whether Vincent is pointing out a mistake, but he is certainly drawing attention to an area where MMT might enhance its exposition, I think.

    Warren M. acknowledged earlier above that the gold standard is itself effectively a self-imposed constraint. I don’t recall seeing it put quite that way before, but I certainly agree with it.

    That being the case, I’d say the corresponding self-imposed constraint for a pure fiat system is the monetarist perception of money. That’s a bit different than saying that bonds per se are a first order self-imposed constraint within a fiat system. The primary constraint reflects a monetarist belief in the hard core difference between bonds and money, as debated here.

    The primary parallel is that the gold standard and the monetarist view of money are both belief systems about retaining the value of money.

    And a secondary parallel is that bonds are used in both systems to “enforce” the belief in the value of money.

    In the case of bonds and MMT, it probably remains to demonstrate that $ 10 trillion of government bonds in the existing system has the same purchasing power as $ 10 trillion of money in a no bonds system. The argument seems to rest in part on the assumption that $ 10 trillion of bonds can be repo’d into banks to create $ 10 trillion of loans and money. I suspect the answer is more complicated than that.

    Reply

    Tom Hickey Reply:

    Good points, JKH. I’ll let the MMT experts weigh in on that.

    One comment. You say:

    That being the case, I’d say the corresponding self-imposed constraint for a pure fiat system is the monetarist perception of money. That’s a bit different than saying that bonds per se are a first order self-imposed constraint within a fiat system. The primary constraint reflects a monetarist belief in the hard core difference between bonds and money, as debated here.
    The primary parallel is that the gold standard and the monetarist view of money are both belief systems about retaining the value of money.
    And a secondary parallel is that bonds are used in both systems to “enforce” the belief in the value of money.

    What I take this to means is that under a fiat system, bonds serve to anchor the system instead of gold. Under a gold standard, it is gold that anchors bond price/yield, regulating the price of money (cost of capital), and in a fiat system, it is the “bond vigilantes.” In a convertible system, it is gold that keeps government in check, and in a fiat system, it is the bond market. But the bond market would still exist in the absence of tsys. There would also be the benchmark of the risk-free rate if the Fed paid interest on reserves. In the case of no bonds, setting the overnight rate to zero, then government would not be restrained directly, but there is still the inflation constraint.

    ?

    Reply

    JKH Reply:

    This is a bit difficult to articulate.

    The comparison is between the price of gold and whatever inflation indicator(s) the CB follows in a fiat system.

    Bonds are a constraint in both systems. They are characterized by MMT as self-imposed in the fiat system. Fair enough. But to the degree that the gold standard is itself a self-imposed constraint (as noted by Warren), bonds in that system operationalize that self-imposed constraint.

    Technically, as I understand it, bonds are required in the gold system to manage gold liquidity, preventing a “run” on gold demand. This is the same thing as not allowing too much money to chase too few goods in the form of gold. It’s inflation management.

    Similarly, bonds are “required” in a fiat system because both the CB and the market implicitly follow a monetarist belief that too much money causes inflation. The effect of bonds presumably is to “drain” immediately available money.

    So the position of bonds in both systems, broadly speaking, is comparable with respect to the broad objective of inflation control.

    My point is that the natural enemy of MMT is the monetarist view of money, rather than bonds considered separately from that view. This is different from arguing that policy makers simply forgot that bonds were no longer necessary after the gold standard was lifted. Policy makers believed bonds were still necessary, given the monetarist bias that prevailed after the gold standard was lifted. The problem in my view is not that they forgot bonds were no longer necessary – it’s that they had a reformulated reason for keeping them. That’s the enemy of MMT – not bonds per se. And that being the true enemy, MMT should attack it more directly.

    Reply

    zanon Reply:

    This is exactly trues JKH.

    MMT fails to make progress because of Harvard, not because of Washington DC

    This is also why “no bond” is more than technical change — it is the conceptual change it require that destroy Monetarist orthodoxy

    Neil Wilson Reply:

    JKH,

    I suggest that the issue is the other way around. $10 trillion of reserves is the same as $10 trillion of bank deposits and is the same as $10 trillion of bonds ie a load of stocked and inert numbers. The only difference is the interest rate.

    Reply

    Ramanan Reply:

    Some history.

    The Bretton-Woods era was truly a ‘golden-age’ – nations generally achieved good growth and low unemployment. This PKEists believe was due to Keynesian demand-management by Governments.

    After 1971 when the US dropped convertibility of the dollar to Gold, the world entered a period of mini-crises everywhere.

    At the same time, inflation rose to levels unheard of. This was the time Monetarism gained power when they started arguing that money is the cause of inflation. Before this people didn’t even worry much about the definitions of money and I would imagine this was the period when M1, M2 statistics started being reported. Keynesians were defeated in this period.

    Nice history here

    http://www.amazon.com/Keynesianism-Monetarism-Evolution-Macroeconometric-Models/dp/0415093988/

    The new Edition of this book http://www.amazon.com/Keynesianism-Monetarism-evolution-macroeconometric-models/dp/0415612349/ is on the way to my address :-)

    Bonds issuance is also a part of demand-management, in my opinion. In general, long term rates are also important because they decide mortgage rates etc.

    Consumption and investment have both income-elasticity and price-elasticity, where price in this context is the interest rate.

    While the act of deficit spending itself creates or removes demand by acting via the income-elasticity effect, bond-issuance and managing interest rates acts to control the price-elasticity effect.

    The price elasticity effect may be low for the Japanese because the demand-management by the Japanese fiscal authority is not sufficient. So in other words, the Japanese don’t borrow even if rates are low because their propensity to save hasn’t been satisfied by fiscal expansion. However that doesn’t mean that the same is true for the US. The low interest rates in the US added fuel to consumption and real estate activity in the early 2000s.

    Low/zero interest rates are not always great. Demand-management has to be achieved by both fiscal and monetary policy.

    However, the “New Consensus” gives importance only to monetary policy and views fiscal policy as suspicious and is completely wrong.

    Bonds are also useful in settling international debt. Poor nations face pressures on keeping interest rates high because it attracts capital inflow to finance the current account deficit. This is via flows to purchase government securities and other flows in the financial account. Else, the financial account and the international investment position will have large concentration in “Other Investment” and “Financial Derivatives” or lead to reductions of “Reserve Assets”. In this way nations manage to keep their currencies more acceptable in international markets.

    Reply

    Sergei Reply:

    Ramanan, demand management via bonds, i.e. via price-elasticitiy at the long end, might be a valid argument but it is not different from pure reliance on monetary policy. What are the effects? What products are effected? To what extent? And can these effects be predicted? And so on. These are all questions that monetary policy can not answer or even pretend to answer. You might argue and beleive that tweaking long-term interest rates appears like management of aggregate demand (e.g. via mortgages) but how confident can you be in you beliefs? And how many factors do you need to consider beyong just long-term rates? Why do you claim that those factors have secondary effects?

    It looks much simplier to use fiscal policy alone. Clean, transparent, targeted with positive/negative feed-back loops. Everything that monetary policy is incapable of delivering.

    Reply

    Ramanan Reply:

    Well, the same can be asked about fiscal policy. Do you tax a bracket 28% or 30% ? How much should a government spend and where ? Etc. Nobody can predict these effects so well.

    Of course that isn’t an argument against fiscal policy and hence the same is true for monetary policy.

    More importantly, except for a few nations, others face increased pressures due to external constraints and they cannot do anything like setting rates to zero.

    These things are subjective. It is difference of opinion that makes horse races.

    Maybe in an ideal world, people don’t bet on real estate. Till then, the central bank has to do something. Fiscal policy cannot fine tune the economy.

    WARREN MOSLER Reply:

    the only pressures due to external constraints are those of currency depreciation.

    but seems to day everyone is trying to get their currency to depreciate and failing.

    odd times for sure

    WARREN MOSLER Reply:

    ‘monetary policy’ is about attempting to control aggregate demand via controlling savings desires.
    higher rates presumably increase savings desires.
    fed officials don’t question this, while I suspect that higher rates raise agg demand via the interest income channels.

    WARREN MOSLER Reply:

    the handoff from the golden age to today’s situation is the handoff from the texas railroad commission to the saudis with regard to setting the price of crude

    Reply

    Kristjan Reply:

    It is not about purchasing power. It’s about aggregate demand. QE can create asset bubbles, MMT is not arguing against that. QE changes P/E across the board but It is not creating CPI inflation.

    Vincent wrote: “But a 30 year bond is really different. If interest rates go from 4% to 8% you will lose half the value if you then sell the bond. And if interest rates are going up fast it could be hard to find anyone wanting to hold that bond even at half what you paid.”

    Yes you have exposure but you have exposure with cash too. They are both government issued securities. You could just as easily say that what if there is hyperinflation and nobody wants to hold the cash. They are different but fundamentally they are the same since with QE the government is offering such a price to you that It makes you give up your treasury security for cash. Does that mean you transformed from saver to spender now? Even if you did, is It because of low returns or because you gained something? How come we are not talking about hyperinflation and money printing every time fed lowers the rates? If QE is money printing then that is too.

    I think most anyone agrees that we are not talking about reserve pumping and that causing inflation. What if I am a 30 year treasury holder and fed is pushing rates low. Am I going shopping now? Am I giving up my treasury to save somewhere else? I didn’t get any richer what is more likely? Why did I give up my treasury in the first place?

    Reply

    Vincent Cate Reply:

    “You could just as easily say that what if there is hyperinflation and nobody wants to hold the cash. They are different but fundamentally they are the same since …”

    Imagine we had 5% price inflation per month or 80% per year.

    After 30 years (assuming it was steady so long) that bond will be buy 0.0000000219 as much as now. After only a month or two of 5% inflation the value of that 30 year bond could be approaching $0 if people think that inflation rate is going to continue or get worse. With cash I would lose 5% in a month and then maybe buy a bunch of canned tuna. With the 30 year bond you can lose it all very fast. If you think a bond is the same as cash just hold some bonds as hyperinflation starts and get an education.

    Reply

    Neil Wilson Reply:

    “Imagine we had 5% price inflation per month or 80% per year.”

    Imagine we don’t. Please.

    WARREN MOSLER Reply:

    nor is that hyper inflation.

    didn’t turkey have 100% inflation for many years without moving towards hyper inflation?

    WARREN MOSLER Reply:

    haven’t seen any asset bubble recently in japan, home of the world’s record qe.

    Reply

    Mario Reply:

    “How come we are not talking about hyperinflation and money printing every time fed lowers the rates? If QE is money printing then that is too.”

    great point.

    For some reason Vincent seems to want to conjure up a scenario where all bond holders just liquidate and then hyperinflation ensues b/c confidence is gone and PM’s go up, etc. However regardless of the fact that this is rather outlandish, if you just look at it plainly you will see that this by definition will NOT create hyper-inflation (at least as I define it)…but would create inflation. It would be the equivalent of a x amount of workers entering the workforce and spending money. So what?

    I don’t define hyper-inflation as “high inflation” even at 5% like Vincent seems to like. I define hyper-inflation as inflation that is OUT OF CONTROL. Aka there is a built-in feedback loop of inflationary pressure such that we cannot get out of it. It’s the opposite of a deflationary trap. Either way bond liquidation won’t get you there b/c they would be spending into the economy and therefore people would be benefiting and profiting from the consumption.

    Either way the notion that bond holders just all liquidate one day is as preposterous as thinking all stock holders will one day just “liquidate.” No more stock market, no more bond market. Yeah right. And even if it did happen that WOULD NOT create hyper-inflation (regardless of where PM prices are). Rather than buying gold and guns, I’d recommend stop holding your breath.

    Reply

    Scott Fullwiler Reply:

    “In the case of bonds and MMT, it probably remains to demonstrate that $ 10 trillion of government bonds in the existing system has the same purchasing power as $ 10 trillion of money in a no bonds system. The argument seems to rest in part on the assumption that $ 10 trillion of bonds can be repo’d into banks to create $ 10 trillion of loans and money. I suspect the answer is more complicated than that.”

    Misses the point. The point is that “money” doesn’t add any “fuel” that you don’t have with bonds. Bonds can be repo’d. Loans create deposits. Whether bonds or “money,” you still need a choice to spend out more out of current income to have any impact on aggregate demand, and that choice is not constrained either for an individual or in the aggregate by having bonds and not “money.” As I’ve often said, moreover, with bonds there is an additional interest payment, which IS income, so if anything, the bonds add more “fuel.”

    Reply

    Vincent Cate Reply:

    “The point is that “money” doesn’t add any “fuel” that you don’t have with bonds.”

    Can you find any historical cases where people stopped buying bonds and got cash for the ones that came due that did not have an inflation problem? I think in every case the bonds getting paid off with money did add “fuel”. This seems to be a key part of getting into hyperinflation.

    Reply

    Ramanan Reply:

    Man, you are so obsessed with hyperinflation.

    These events happen in the backdrop of some events such as wars, famine etc.

    Typically, in such cases, the central bank finances the government deficits and the government goes crazy. One bad thing it does is keep increasing wages of government employees with crazy rises and frequency. Such as 20% per month. The real trouble is caused by wages not “money”.

    Now you can accuse me of being too definitional, but its important and since Marcoeconomics affects everyone’s lives, it is important to study in detail and be precise.

    Is the US government increasing wages 10% per month ? No. It is reducing wages, firing employees and freezing pay. Is there a possibility of hyperinflation in the United States. No, not at all.

    (Is anyone asking the US to increase wages by 10% per month. No.)

    Ramanan Reply:

    I should add 10/20% per month every month continuously in such scenarios.

    Tom Hickey Reply:

    Vincent, you are tilting at windmills. :)

    The only serious threat of price instability on the horizon is due to supply shocks, and these are indeed possible due to shortage of water, food, and energy, for example. The Pentagon is concerned about this as a developing trend, but the rest of the world seems to be blithely going along unawares.

    See Bill Mitchell, Modern monetary theory and inflation – Part 2 for an MMT analysis of supply-side inflation.

    WARREN MOSLER Reply:

    I think you’ll be hard pressed finding any examples of that.

    Inflation from excess demand comes from govt spending more than the tax bill plus savings desires.

    WARREN MOSLER Reply:

    So let’s look at it all this way:

    For a given tax liability govt can spend that much plus any amount equal to any residual ‘savings desire’

    So in that sense the savings desire is akin to taxation in that it’s a reduction in demand due to the voluntary not spending of income.

    My take is that savings desire probably isn’t all that much a function of whether the instrument to be saved/not spent is cash, a reserve balance, or a tsy sec.
    Or what the interest rate is on those alternatives, all as previously discussed.

    Point here is that it’s the savings desire that allows the govt to spend more than it taxes.

    And it’s not particularly critical for full employment whether there is a strong savings desire or not.

    It’s not about whether the no bonds/reserves and cash only scenario causes more personal spending.

    What’s critical is that the govt. understands this and adjusts taxation accordingly for a given size govt.

    Reply

  37. Ramanan Says:

    “My point is that the natural enemy of MMT is the monetarist view of money, rather than bonds considered separately from that view.”

    Completely agree.

    However, good a banker/central banker is, he/she ends up making the money multiplier mistake and “too much money” mistake somewhere simply because of his academic training.

    However, I should add that super-economists such as Basil Moore have some reservations against fiscal policy. Okay, thats only my opinion as an outsider.

    Reply

    WARREN MOSLER Reply:

    Do you know Basil?

    Reply

    Ramanan Reply:

    No I don’t – except exchanging an email once – asking where I can get a copy of H&V. He didn’t know – but later I found it (a used copy) at Amazon France.

    Reply

  38. JKH Says:

    Scott, I hope you know me well enough from my comments by now to know that I understand the argument you’re making. I’m well aware of both the repo aspect and the income aspect.

    But I don’t think I’ve missed the point at all.

    The fact that there is relative technical ease in repo’ing a government bond does not mean that this is a significant technical factor underlying potential or actual macro aggregate demand. Almost all government bonds are purchased by institutions and foreign CBs for portfolio management and risk management purposes – which has nothing directly to do with aggregate demand. The Chinese aren’t exactly repo’ing their treasuries like mad in an effort to balance the current account with the US. And neither do domestic financial institutions have any significant effect on real economy demand through this channel. As far as households are concerned, they are relatively small players in the government bond market. It is only over the past year that their holdings have increased to any great degree – and a good deal of that is due to the bizarre data fact that domestic hedge funds are included statistically in the flow of funds household classification. I can’t see households buying treasuries for the purpose of repo’ing them into consumer loans to any great degree or materiality.

    So there is a large question of materiality with regard to your technical observation about the repo readiness of treasury bonds and its relationship to aggregate demand. It is in this sense of materiality that I float the number $ 10 trillion as a potential reference point, and I don’t think it misses the mark at all.

    I have huge problems with monetarist stories and cite them often. Just recently, Thoma has come out with yet another abomination, and John Hussman produced something that made me question my previous assumption that he was quite a good analyst.

    But if MMT’s strongest come back to this monetarist dogma is that bonds can be repo’d, I’d say that’s underwhelming at least.

    Your (MMT’s) natural enemy is monetarism in just about all its forms – particularly monetarists who don’t understand financial system operations, which probably means nearly all of them.

    Reply

    Scott Fullwiler Reply:

    My point was it absolutely doesn’t depend on repo’s. That’s a technical detail to show that someone believing bonds are a constraint doesn’t understand what bonds are; an individual with bonds isn’t constrained, and further that a bond actually creates more “money” than not issuing a bond given how repo markets work.

    And it’s not just a technicality. QE, after all, is carried out between central banks and bond dealers, not between central banks and middle income bond holders. And for bond dealers, deposits or reserves (depending on whether the dealer is also a bank) and bonds are not different.

    The main point, though, is that increased aggregate spending out of existing aggregate income (which is what would be required for QE to raise spending and most think it does) doesn’t require aggregate portfolio shifts out of exceptionally liquid non-money into money. It happens all the time without such a shift. It’s also abundantly obvious that shifts out of exceptionally liquid non-money into money don’t necessitate more aggregate spending out of existing aggregate income–you’ve said yourself elsewhere that money doesn’t spend itself.

    Reply

    JKH Reply:

    OK, there’s more than enough to agree on there.

    BTW, Thoma and Hussman both believe that excess reserves are a tinderbox ready to be ignited and converted into central bank notes as soon as inflation rears its head in the least. They actually believe in such a process. They must also therefore believe we still live in the age before the invention of electricity. That, or/plus they don’t know how to decompose the components of the monetary base. I’m not sure which intellectual challenge is the more serious for them.

    Reply

    Ramanan Reply:

    Yes even Econbrowser seems to think so I think.

    I think the main reason is that they think central banks control both the the price and quantity of reserves in normal times.

    The confusion arises because the central bank seems to “control” the reserves. The central bank operations are however defensive. The reserve target it aims is the quantity which helps the central bank hit the short term target. For a given reserve requirement, the amount of reserves is decided by the non-central-bank sector.

    So the confusion arises because of the assumption of a non-defensive behaviour of the central bank instead of a defensive behavior.

    The recent “offensive” behaviour of the Fed seems to have reinforced their assumptions.

    JKH Reply:

    yikes, you’re right – I confused Hamilton and Thoma, I think – but they’re similar

    Vincent Cate Reply:

    “That’s a technical detail to show that someone believing bonds are a constraint doesn’t understand what bonds are; an individual with bonds isn’t constrained, and further that a bond actually creates more “money” than not issuing a bond given how repo markets work. ”

    The bond sales do not constrain any particular individual, even the one who first purchased it, as they can sell it. But it does constrain aggregate demand as the money is gone (at least conceptually burned like tax money).

    The operational reality is that when China, Japan, Russia etc buy treasuries they give up money (which conceptually can be burned) and they do not do repos. So the reality is that aggregate demand is reduced. MMT needs to describe reality, or at least match the results (conceptualizing parts is fine by me).

    Also, the reality is when government bond sales fail currencies seem to go into hyperinflation. If we view bonds as delaying demand then when there are no buyers and lots of bonds come due there is a flood of demand released. This matches what we see in the real world. We want the theory to match the real world.

    Reply

    Scott Fullwiler Reply:

    wrong. as usual.

    ESM Reply:

    Ok, I’m going to take a crack at this.

    “The bond sales do not constrain any particular individual, even the one who first purchased it, as they can sell it. But it does constrain aggregate demand as the money is gone (at least conceptually burned like tax money).”

    But it doesn’t constrain aggregate demand as long as there are (1) people who were planning to just hold reserves earning 0% anyway (i.e. the equivalent of stuffing cash under the mattress); or (2) people who can use repo to buy bonds that are being offered for sale at a slight discount to the market. Because such people exist (and such reserves exist in (1) above), it is trivial for any holder of Treasuries to sell them, get cash, and spend whenever their heart desires.

    “The operational reality is that when China, Japan, Russia etc buy treasuries they give up money (which conceptually can be burned) and they do not do repos. So the reality is that aggregate demand is reduced. MMT needs to describe reality, or at least match the results (conceptualizing parts is fine by me).”

    If China et al. didn’t have the opportunity to buy Treasuries, then their dollars would sit at the Federal Reserve earning zero. If they decided to sell them to somebody else in exchange for gold, oil, Euros, goods and services, or whatever, then those dollars would be sitting in somebody else’s Federal Reserve account earning zero. But I don’t think that China is being incentivized to hold dollars because of the fantastic interest rates they’re earning on Treasuries. They’re holding dollars for their own peculiar reasons, and the interest they get from Treasires is a bonus. They’re an example of (1) above — people who want to hoard dollars anyway.

    “Also, the reality is when government bond sales fail currencies seem to go into hyperinflation. If we view bonds as delaying demand then when there are no buyers and lots of bonds come due there is a flood of demand released. This matches what we see in the real world. We want the theory to match the real world.”

    Treasury sales cannot fail due to a lack of cash because bond dealers like JP Morgan can repo an unlimited amount of Treasuries at the Fed. They will just bid where they can make a positive spread, which is some low number of basis points above the prevailing repo rate. For the same reason, you will always be able to sell your Treasuries to JP Morgan or Goldman Sachs (see (2) above).

    There may be an interest-rate risk constraint due to the duration of longer-term bonds, however. That is, the government cannot sell an unlimited number of 30-yr bonds at reasonable levels because the market cannot absorb an unlimited amount of interest rate risk. But issuance of 30-yr (or 10yr) bonds does not constrain aggregate demand directly. It merely adds risk to the market, which decreases the market’s appetite for other risky assets (and thus raises risk premia across the board). This would only constrain aggregate demand indirectly, by reducing investment in longer-term projects (e.g. starting companies, building factories, doing research). It does not constrain demand by removing cash from the system because it doesn’t do so in an irreversible way.

    Scott Fullwiler Reply:

    Again, ESM, well said. Doubt Vincent can understand it, though. In fact, I’m absolutely sure he can’t.

    WARREN MOSLER Reply:

    Double checking the causations:

    Savings desires constrain aggregate demand, as per Keynes. In fact, that was his main point.

    Only to the extent that bonds vs cash and reserves alters savings desires will bonds alter aggregate demand.

    JKH Reply:

    “The point is that “money” doesn’t add any “fuel” that you don’t have with bonds. Bonds can be repo’d.”

    “My point was it absolutely doesn’t depend on repo’s.”

    Reviewing this, lapse in two-way communication is understandable from my perspective.

    Reply

    Scott Fullwiler Reply:

    It happens in the blog commenting world where by design you’re not as careful as when writing in other formats.

    At the same time, that’s a bit selective or at least somewhat out of context, since the total paragraph from the second quote was this (which clearly does not solely rely on repos, while your selected portion does give that appearance–and I would stand by repo’s being a part of the argument):

    The point is that “money” doesn’t add any “fuel” that you don’t have with bonds. Bonds can be repo’d. Loans create deposits. Whether bonds or “money,” you still need a choice to spend out more out of current income to have any impact on aggregate demand, and that choice is not constrained either for an individual or in the aggregate by having bonds and not “money.” As I’ve often said, moreover, with bonds there is an additional interest payment, which IS income, so if anything, the bonds add more “fuel.”

    WARREN MOSLER Reply:

    and, once you’ve decided not to spend, you (at the macro level) can only have balances unless the govt decides to offer secs as alternatives to balances.

    Neil Wilson Reply:

    Scott,

    Isn’t there a danger with the ‘interest payments are income’ line in that is only true if it is new money (ie additional deficit spending)?

    If its balanced with taxation from others aren’t you simply shifting money from ‘spenders’ to ‘savers’ which is deflationary?

    JKH Reply:

    “At the same time, that’s a bit selective or at least somewhat out of context, since the total paragraph from the second quote was this (which clearly does not solely rely on repos, while your selected portion does give that appearance”

    I remember writing all that with the idea of a bond repo being one example from a number of transactions that allow bondholders ready access to the “medium of exchange” – collateralized borrowing, selling, etc. Wrote it that way for simplification and laziness – but it gave the wrong appearance out of sloppiness.

    Re the income argument – another starting point for that part of the discussion is just to assume that lower taxes offset loss of interest income in the no bond case, and drive on from there – i.e. extract NFA variance from the analysis by invoking a Mosler type tax reduction, and then examine pure monetary effects (i.e. whether or not there are any), given a neutral NFA comparison. Just mentioning it – don’t want to go down that road now, given my car is still in the ditch on the first one.

    WARREN MOSLER Reply:

    I’d add that if there wasn’t repo the desire to save might be a bit different than otherwise.

    that’s what matters.

    ESM Reply:

    In all of this Warren has consistently been making his point that once people have made the decision to spend, nothing much is changed by offering them bonds as an alternative to cash. The interest rates offered on bonds is not sufficient to dissuade materially the desire to spend. I agree with that as far as it goes.

    But Vincent was posing a different question. He was arguing that a dearth of the stuff needed for transactions, i.e. cash, can constrain aggregate demand because there is only so high the velocity of transactions can go. Thus, he worries that aggregate demand can spike if bonds are converted to cash. I can make an analogy to a crowd at a football game:

    Before the game, people enter through the limited number of entrances at a leisurely pace (and voluntarily), each arriving according to his schedule and spread out over time. When the game ends, though, everybody wants to leave at once. The same entrances (which are now exits) are jammed, and people are forced to wait to leave. These people are deferring their desire to leave, not because they are having so much fun standing in pools of stale beer, but because they have no other good choices. They are operationally constrained. Sure, they can try to push and shove their way to the exits, but there is a significant cost for doing that. They might drop some of their belongings, they make people mad at them, they might even get into a fight or get arrested.

    Bonds might have the same effect, and so people could reasonably worry that you would get a spike in aggregate demand if you removed those constraints (the equivalent of opening up additional exits from the stadium).

    It is not enough to say that you don’t think that converting bonds to cash increases aggregate demand. That’s a conclusory statement because that’s what the controversy is about.

    The fact that you can borrow very, very easily against Treasury bonds (ultimately backstopped by the Fed which can create reserves ex nihilo) is important. I think it shows that Treasuries do not and cannot create a significant constraint to spending. Wealth tied up in other asset classes are much more difficult to monetize, with higher transaction costs and higher pain-in-the-ass factors (e.g. capital gains taxes). There have been many times in my life when I’ve owned a lot of stock and said, “Eh, too much of a hassle to sell this stock in order to buy that car.” And just kept driving the same old car for another year.

    JKH Reply:

    ESM

    do you or your acquaintances do much borrowing against bonds for the same purpose (e.g. buying a car)?

    ESM Reply:

    No, I don’t. I would sell my Treasuries to buy a car. The fact that Treasuries are easy to borrow against makes it much easier for me to find a buyer. And with Treasuries, I don’t need to go digging through my files and stock databases to figure out what the cost basis was. I owned AT&T stock before the breakup, and I don’t think I’ll ever sell the crap it turned into. Somebody could write a PhD dissertation on what the cost basis of each of the components is based on the original cost basis.

    JKH Reply:

    yeah, I should have said sell or borrow or whatever

    the point is that its reasonably common for you and others to move out of treasuries in order to make household purchases, etc.?

    maybe I’ve underestimated how common that is for household money management and overall consumer purchases

    Neil Wilson Reply:

    There’s another effect of course.

    You feel a lot happier running up a credit card bill if you have assets than if you are down to your last cent.

    (And some people are quite happy running up a credit card bill regardless).

    ESM Reply:

    I think people like me (high-end affluent, not quite rich) definitely keep most of their wealth outside of cash, and then sell assets or borrow against them to make large purchases (>$10K). I definitely use credit cards, but not to borrow. I pay off my balance every month, which makes me, according to the jargon in the industry, a deadbeat.

    Tom Hickey Reply:

    Neil: If its balanced with taxation from others aren’t you simply shifting money from ’spenders’ to ’savers’ which is deflationary?

    Look at who holds the bulk of the bonds and go figure.

    Vincent Cate Reply:

    “John Hussman produced something that made me question my previous assumption that he was quite a good analyst.”

    Was it his paper showing that as interest rates go up the velocity of money goes up? Did you have cause to doubt his data? If interest rates go up you don’t think it will cause the velocity of money and prices to go up? It all seemed solid to me. What is wrong?

    http://howfiatdies.blogspot.com/2011/01/hussman-mish-hyperinflation.html

    Reply

    JKH Reply:

    His conclusion was:

    “Given the extreme stance of monetary policy, the avoidance of inflationary pressures increasingly relies on a very persistent willingness by the public to directly or indirectly hold the outstanding quantity of base money in the financial system. Small errors will have surprisingly large consequences. This is not a stable equilibrium.”

    He makes the error that virtually all monetarists make, which is to conflate the analysis of the bank reserve and central bank currency components of the monetary base. The “demand for base money” is an absurd concept, given the heterogeneous composition of the base. The factors that drive the quantity of bank reserves and the quantity of central bank currency are like night and day.

    There is absolutely no reason to believe that the future demand for central bank currency will even be a partial function of the future level of bank reserves, which is what Hussman effectively argues when he extrapolates historical relationships between interest rates and the “velocity of the monetary base”.

    The bank reserve component of the monetary base is currently outsized for a very specific reason, which is unrelated to the demand for central bank currency, now or in the future. The idea that this bloated reserve component will somehow feed future currency growth is nonsense. And it certainly won’t feed inflation if it remains as bank reserves given the fact that interest will be paid on it just as if it were short term treasury bills.

    It’s a rookie error; I was surprised he would look at it this naive way, because he’s generally a pretty thorough analyst.

    Reply

    Vincent Cate Reply:

    “The idea that this bloated reserve component will somehow feed future currency growth is nonsense. And it certainly won’t feed inflation if it remains as bank reserves given the fact that interest will be paid on it just as if it were short term treasury bills.”

    I fully agree that interest on reserves makes them like short term government debt. I very much agree with the MMT view that the central bank is part of the government. So this looks like the same potential problem as with bonds. As long as demand is delayed by bonds and excess reserves there is no trouble but if money comes out of these then there would be inflationary pressure.

    It is sort of like the Fed is hiding another $1 trillion in government debt in a way most people don’t realize it is government debt.

    A bank can withdraw physical paper money from its reserve account, right? So it does not seem that peculiar to think that higher reserves could lead to higher physical currency. I am not yet convinced Hussman is wrong.

    JKH Reply:

    This is illustrated by looking at each of the supply and demand sides for currency, and their relationship to excess bank reserves.

    First look at the supply of currency in normal times. In normal times, excess reserves are very small – roughly $ 2 billion for the system. When the central bank supplies new currency to the banks, it debits their respective accounts, and then buys treasuries to replenish for the system as a whole the reserves it just took out for the particular bank buying currency. And the competition for those available system reserves goes on as always, where the supply is set according to the central bank’s target for the fed funds rate and the system reserve setting that is required to maintain that target rate.

    What this entire mechanism means is that the prevailing level of excess reserves at the time currency is supplied is irrelevant in terms of the central bank’s ability to supply that currency.

    And what that means is that the current level of $ 1 trillion + in excess reserves (in these abnormal times) is entirely irrelevant in terms of the central bank’s ability to supply new currency.

    In other words, there is absolutely no direct connection between the quantity of bank reserves and the supply function for currency.

    Now look at the demand for currency. It is obvious that currency growth shows a trend in some sort of long term proportion to nominal GDP growth, through ups and downs, adjusted for technological changes along the way. This is just common sense, freely available by eyeballing the relevant graphs. The precise function doesn’t matter. Mostly recently, currency growth has still trended reasonably smoothly on a long term basis even with the level of excess reserves currently where it is. There is no reasonable correlation to be drawn between the extraordinary excess reserve growth rate and the currency growth rate in recent times (over the past several years). So monetarists are panicking to come up with some goofy monetarist rationalization for what is an accounting fact, including Hussman’s desperate excess reserve doomsday machine idea that tries to bail out a bankrupt idea somewhere in the vague future.

    So the demand for currency by non-banks has absolutely nothing directly to do with the level of bank reserves. Bank reserves held at the Fed are untouchable for non-banks – they simply can’t access them or trade in them. Moreover, banks’ own demand for currency is entirely a function of inventory management – being able to respond to volatility in the demand for currency around trend – such as seasonal demand. There is no other reason for banks to hold currency.

    Demand for currency may understandably trend with higher inflation and higher nominal GDP, but that has nothing directly to do with bank reserves. Non banks will demand the currency that they demand – whatever the level of excess bank reserves. The supply of bank reserves is completely irrelevant in this context. And that means that the level of excess reserves in these abnormal times is irrelevant.

    So any “study” that attempts to correlate potential currency demand with the level of bank reserves in these abnormal times is simply nonsensical. And the argument that non banks will look at the level of bank reserves (which has nothing to do with them), and start to convert their own bank deposits (which are separate from bank reserves) to currency simply because of that is crazy. It completely misunderstands both currency transaction causality and currency transaction mechanics. The level of bank reserves has nothing to do with the quantity of currency outstanding. And that error is a cornerstone in the foundation of the monetarist story – largely because monetarists don’t understand reserve accounting and causality.

    WARREN MOSLER Reply:

    yes, what matters for aggregate demand is savings desires

    WARREN MOSLER Reply:

    I’ve been postulating that the fed hiking rates adds to inflation for a long time.

    see ’0 is the natural rate of interest’ on this website

    Reply

    MamMoTh Reply:

    You also said:

    “Only to the extent that bonds vs cash and reserves alters savings desires will bonds alter aggregate demand.”

    Which makes sense to me. In that case hiking interest rates could also increase net saving desires, which is deflationary. Right?

    WARREN MOSLER Reply:

    yes, ‘could’, but my best guess is that because the non govt sectors are net savers, and govt a net payer of interest, higher rates increase govt spending on interest it pays to the non govt sectors, and that income channel adds to aggregate demand, etc. as previously discussed.

    MamMoTh Reply:

    I agree with that too. But the way I see it we have two opposite forces. The inflationary one through interest payment, and the deflationary one through increased propensity to save.
    It’s the net result that is not clear to me.

    WARREN MOSLER Reply:

    agreed
    and most evidence tells me the interest income channel may be more important

    Sergei Reply:

    It is not the problem of bond vs no bonds. It is a problem of net financial assets. These clearly represent a latent demand and the question is whether and how this demand will materialize. Because if it does then we can get to very nasty situations noone can predict and get ready for today. This is the point which MMT clearly does not address but rather short-cuts to “tax can increase” etc. But while taxes can increase in the future why don’t we increase them now? However impossible it might be politically, from the point of theoretical consistency it is still important to highlight imbalances that are being built by “government can always net spend”.

    Reply

    Tom Hickey Reply:

    It’s not exactly the case that MMT doesn’t address this.

    Lerner was aware of the political and institutional problems associated with FF, and he later introduced a market solution with David Colander in Map: A Market Anti-Inflation Plan (1980).

    See Mathew Forstater, Functional Finance and Full Employment: Lessons from Lerner for Today (July 1999).

    See also Reinventing Functional Finance: Transformational Growth and Full Employment, edited by Edward J. Nell and Mathew Forstater (2003).

    Reply

    WARREN MOSLER Reply:

    a govt can always net spend to the point of aggregate savings desires.
    past that point more net spending is an inflationary bias

    Reply

    Mr. E Reply:

    I highly recommend that you do a post on this exact idea. You should also consider something longer on this topic for the required readings.

    I promise a post like this will make some heads explode. One of the main criticisms of MMTers is “they say governments can spend all they want.” when this is not what MMTers say at all.

    Like it or not, you are the “high priest” of MMT. If you come out with a clear and detailed statement – along the lines of “past that point more net spending is inflationary” over a few paragraphs – then people can no longer make crazy claims about MMT wanting to spend our way to Zimbabwe.

    Tom Hickey Reply:

    Agreed. There needs to be a definitive statement from a MMT heavyweight explaining inflation/hyperinflation that serves as a reference. It would save a lot of time explaining this over an over on in comments on different blogs.

    WARREN MOSLER Reply:

    Quotes from just the 7 Deadly Innocent Frauds.
    And most every paper I’ve written is full of inflation discussion, beginning with Soft Currency Economics.

    From the 7DIF:

    This is not to say that excess government spending
    won’t possibly cause prices to go up (which is inflation).
    But it is to say that the government can’t go broke and can’t be
    bankrupt. There is simply no such thing.
    1

    The fact that government spending is in no case
    operationally constrained by revenues means there is no
    “solvency risk.” In other words, the federal government
    can always make any and all payments in its own
    currency, no matter how large the deficit is, or how few
    taxes it collects.
    This, however, does NOT mean that the government
    can spend all it wants without consequence. Over-spending
    can drive up prices and fuel inflation

    So, what was actually confirmed to the Sydney academics
    in attendance that day? Governments, using their own
    currency, can spend what they want, when they want, just
    like the football stadium can put points on the board at
    will. The consequences of overspending might be inflation
    or a falling currency, but never bounced checks

    The government taxes us and takes away our money for
    one reason – so we have that much less to spend which makes
    the currency that much more scarce and valuable. Taking
    away our money can also be thought of as leaving room for
    the government to spend without causing inflation.

    But I digress. Returning to the issue of how high taxes need
    to be, recall that if the government simply tried to buy what
    it wanted to buy and didn’t take away any of our spending
    power, there would be no taxes – it would be “too much money
    chasing too few goods,” with the result being inflation. In
    fact, with no taxes, nothing would even be offered for sale
    in exchange for the government money in the first place, as
    previously discussed.
    To prevent the government’s spending from causing that
    kind of inflation, the government must take away some of our
    spending power by taxing us, not to actually pay for anything,
    but so that their spending won’t cause inflation. An economist
    would say it this way: taxes function to regulate aggregate
    demand, not to raise revenue per se. In other words, the
    government taxes us, and takes away our money, to prevent
    inflation, not to actually get our money in order to spend it

    This is why the seemingly-enormous deficits turn out
    not to be as inflationary as they might otherwise be.

    And why would we ever increase taxes? Not for the
    government to get money to spend – we know it doesn’t work that
    way. We would increase taxes only when our spending power is
    too high, and unemployment has gotten very low, and the shelves
    have gone empty due to our excess spending power, and our
    available spending power is causing unwanted inflation.

    Inflation!
    OK, so the risk of running a deficit that is too large is
    not insolvency – the government can’t go broke – but excess
    aggregate demand (spending power) that can be inflationary.
    While this is something I’ve never seen in the U.S. in my 60-
    year lifetime, it is theoretically possible. But then again, this
    can only happen if the government doesn’t limit its spending
    by the prices it is willing to pay, and, instead, is willing to pay
    ever higher prices even as it’s spending drives up those prices,
    as would probably the case.
    And now here is a good place to review what I first wrote
    back in 1992 for Soft Currency Economics which came out
    in 1993:

    Inflation vs. Price Increases
    Bottom line, the currency itself is a public monopoly, which
    means the price level is necessarily a function of prices paid
    by the government when it spends, and/or collateral demanded
    when it lends. The last part means that if the Fed simply lent
    without limit and without demanding collateral we would all
    borrow like crazy and drive prices to the moon. Hence, bank
    assets need to be regulated because otherwise, with FDICinsured deposits, bankers could and probably would borrow like
    crazy to pay themselves unlimited salaries at taxpayer expense.
    And that’s pretty much what happened in the S & L crisis of
    the 1980’s, which also helped drive the Reagan boom until it
    was discovered. Much like the sub prime boom drove the Bush
    expansion until it was discovered. So it now goes without saying
    that bank assets and capital ratios need to be regulated.

    But let’s return to the first part of the statement – “the price
    level is a function of prices paid by govt. when it spends.”
    What does this mean? It means that since the economy needs
    the government spending to get the dollars it needs to pay
    taxes, the government can, as a point of logic decide what it
    wants to pay for things, and the economy has no choice but to
    sell to the government at the prices set by government in order
    to get the dollars it needs to pay taxes, and save however many
    dollar financial assets it wants to. Let me give you an extreme
    example of how this works: Suppose the government said it
    wasn’t going to pay a penny more for anything this year than it
    paid last year, and was going to leave taxes as they are in any
    case. And then suppose this year all prices went up by more
    than that. In that case, with its policy of not paying a penny
    more for anything, government would decide that spending
    would go from last year’s $3.5 trillion to 0. That would leave
    the private sector trillions of dollars short of the funds it needs
    to pay the taxes. To get the funds needed to pay its taxes, prices
    would start falling in the economy as people offered their
    unsold goods and services at lower and lower prices until they
    got back to last year’s prices and the government then bought
    them. While that’s a completely impractical way to keep prices
    going up, in a market economy, the government would only
    have to do that with one price, and let market forces adjust all
    other prices to reflect relative values. Historically, this type of
    arrangement has been applied in what are called “buffer stock”
    policies, and were mainly done with agricultural products,
    whereby the government might set a prices for wheat at which
    it will buy or sell. The gold standard is also an example of a
    buffer stock policy.

    Today’s governments unofficially use unemployment
    as their buffer stock policy. The theory is that the price
    level in general is a function of the level of unemployment,
    and the way to control inflation is through the employment
    rate. The tradeoff becomes higher unemployment vs.
    higher inflation. To say this policy is problematic is a gross
    understatement, but no one seems to have any alternative
    that’s worthy of debate.
    All the problematic inflation I’ve seen has been caused
    by rising energy prices, which begins as a relative value
    story but soon gets passed through to most everything and
    turns into an inflation story. The “pass through” mechanism,
    the way I see it, comes from government paying higher
    prices for what it buys, including indexing government
    wages to the CPI (Consumer Price Index), which is how
    we as a nation have chosen to define inflation. And every
    time the government pays more for the same thing, it is
    redefining its currency downward.

    It is like the parents with the kids who need to do chores
    to earn the coupons they need to pay the monthly tax to their
    parents. What is the value of those coupons? If the parents
    pay one coupon for an hour’s worth of work (and all the
    work is about equally difficult and equally “unpleasant”),
    then one coupon will be worth an hour’s worth of child
    labor. And if the children were to exchange coupons with
    each other, that’s how they would value them. Now suppose
    that the parents paid two coupons for an hour’s worth of
    work. In that case, each coupon is only worth a half hour’s
    worth of work. By paying twice as many coupons for the
    same amount of work, the parents caused the value of the
    coupons to drop in half.
    But what we have is a government that doesn’t
    understand its own monetary operations, so, in America, the
    seven deadly innocent frauds rule. Our leaders think they
    need to tax to get the dollars to spend, and what they don’t
    tax they have to borrow from the likes of China and stick
    our children with the tab. And they think they have to pay
    market prices. So from there the policy becomes one of not
    letting the economy get too good, not letting unemployment
    get too low, or else we risk a sudden hyperinflation like the
    Weimar Republic in Germany 100 years or so ago. Sad but
    true. So today, we sit with unemployment pushing 20% if
    you count people who can’t find full-time work, maybe 1/3
    of our productive capacity going idle, and with a bit of very
    modest GDP growth – barely enough to keep unemployment
    from going up. And no one in Washington thinks it’s
    unreasonable for the Fed to be on guard over inflation and
    ready to hike rates to keep things from overheating (not that
    rate hikes do that, but that’s another story).
    And what is the mainstream theory about inflation? It’s
    called “expectations theory.” For all but a few of us, inflation
    is caused entirely by rising inflation expectations. It works
    this way: when people think there is going to be inflation,
    they demand pay increases and rush out to buy things
    before the price goes up. And that’s what causes inflation.
    What’s called a “falling output gap,” which means falling
    unemployment for all practical purposes, is what causes
    inflation expectations to rise. And foreign monopolists
    hiking oil prices can make inflation expectations rise, as can
    people getting scared over budget deficits, or getting scared
    by the Fed getting scared. So the job of the Fed regarding
    inflation control becomes managing inflation expectations.
    That’s why with every Fed speech there’s a section about
    how they are working hard to control inflation, and how
    important that is. They also believe that the direction of the
    economy is dependent on expectations, so they will always
    forecast “modest growth” or better, which they believe helps
    to cause that outcome. And they will never publicly forecast
    a collapse, because they believe that that could cause a
    collapse all by itself.

    So for me, our biggest inflation risk now, as in the
    1970’s, is energy prices (particularly gasoline). Inflation
    will come through the cost side, from a price-setting
    group of producers, and not from market forces or excess
    demand. Strictly speaking, it’s a relative value story and not
    an inflation story, at least initially, which then becomes an
    inflation story as the higher imported costs work their way
    through our price structure with government doing more
    than its share of paying those higher prices and thereby
    redefining its currency downward in the process.

    Peter D Reply:

    I think this has always been the MMT stance: past the point of full employment any demand-pull inflation is a sign that the “aggregate savings desires” (the H(NFA) in Moslerspeak). See page 29 or so in 7DIF. is satisfied and the deficit should be kept stable or reduced. And I think MMT considers demand-pull inflation possible only after we reach full employment. Correct me if I am wrong.

    Tom Hickey Reply:

    I should add that I am of course aware of of Bill Mitchell’s two posts on MMT and inflation. But I wonder if people wade through them when I cite them. Would be nice to have a briefer treatment accessible to most people.

    Peter D Reply:

    above should read:
    “past the point of full employment any demand-pull inflation is a sign that the “aggregate savings desires” (the H(NFA) in Moslerspeak) is satisfied

    Tom Hickey Reply:

    Warren, what I would like to see is what you excerpted from 7DIF above with a link that can be cited, or something even briefer. Could you maybe put this or something similar in Mandatory Reading. Then we could link directly to it when commenting elsewhere.

    The way this blog is formatted it is only possible to link directly to the beginning of a comment thread, not directly to specific comments. That would also be a useful feature to have.

    WARREN MOSLER Reply:

    agreed on the benefit. need to find the time to work on it.

    Oliver Reply:

    I think the point Sergei is getting to is one of relative force of demand flows building up through large stocks of outstanding liabilities. He is questioning the linearity of the government’s ability to react to a turn in net saving desires. The deeper point being that there isn’t one single saving desire that must be satisfied, but rather as many saving desires as there are people and corporations and foreign central banks etc. So while one part of town may still be up to the neck in debt, the other may already be more than satisfied with its net financial stance and is just waiting for the mood to swing. Thus, by calling for unlimited govt. spending until the last person’s saving desires are met (I know, not the same as aggregate saving desires, but that’s what it sounds like), we are risking an overly strong reaction once the economy does bounce back.

    Personally, I think one of the main problems, which I’m sure Warren has addressed before, and which blends in with the discussion on rents, is that current tax structures around the world seem to encourage the amassment of large pools of inert money instead of encouraging productive investment and consumption. But the imbalance only becomes apparent if one disaggregates – which to me is the weakness of the way the MMT story is structured. Critics get caught up in the aggregate picture while their concerns can often only be addressed by disaggregating.

    Reply

    Tom Hickey Reply:

    Right. You have to take the whole MMT picture instead of focusing on one principle in isolation.

    The point of making an economy work effectively and efficiently lies in managing stocks and flows. Good economic policy also uses incentives — positive and negative — to direct flow. Fiscal policy does this through injection (spending) and withdrawal (taxation). Good economic policy also uses incentives — positive and negative — to direct flow. There is also legislation and regulation to control problems not amenable to incentives, like cheating. All this has to come together for the system to work properly.

    WARREN MOSLER Reply:

    I don’t use the ‘bonds can be repo’d’ argument for anything apart from devising trading strategies

    Reply

  39. Vincent Cate Says:

    “Man, you are so obsessed with hyperinflation.

    These events happen in the backdrop of some events such as wars, famine etc.

    Typically, in such cases, the central bank finances the government deficits and the government goes crazy.”

    Wars certainly account for some of the cases of hyperinflation, maybe even half of them. But there are many that are not caused by something outside the government’s control.

    The key does seem to be huge deficits and the hyperinflation is close once the central bank is funding the government. With QE2 the US central bank is buying about $100 billion in government debt each month, which is about the size of the deficit. No matter what anyone say, to me this is the central bank financing the deficit. This is what happens right before things really go bad.

    Reply

  40. Vincent Cate Says:

    “Vincent, you are tilting at windmills. :)

    The only serious threat of price instability on the horizon is due to supply shocks, and these are indeed possible due to shortage of water, food, and energy, for example. ”

    I suspect there will be a shock to blame the hyperinflation on. In the same way that inflation in the 70s is blamed on oil. But to me the inflation in the 70s was because the dollar went off the gold standard and was devalued relative to real goods, like oil. Today the dollar is devaluing relative to real goods as measured in the CRB. We might see oil shoot up to $250/barrel or something after Saudi Arabia has a revolution and prices oil in a basket of currencies, and then removes the dollar from the basket, or something. There will be a scapegoat, somewhere.

    Reply

    Mr. E Reply:

    The oil price shock of 1973 as a response to inflation does’t make sense. How does an increase of 10X make any sense at all? And then how does $12 a barrel oil in 2000 make sense given the inflation that pushed those prices up to $60 in 1979? The inflation from 1973 didn’t go away, it got 20 years worse.

    http://en.wikipedia.org/wiki/File:Oil_Prices_1861_2007.svg

    Reply

  41. Vincent Cate Says:

    “wrong. as usual.”

    Perhaps you could be more specific.

    Reply

    Scott Fullwiler Reply:

    I already have been, many times over the last 800 or so comments between here and other sites. And you’ve never come close to responding to the actual content of my argument. So here, I’m just doing what you’ve been doing to everyone–ignore the true argument that’s being made by the other and writing whatever I feel like. I’ll stop now, though.

    Reply

    Neil Wilson Reply:

    You are obsessed about edge cases that aren’t going to happen and you have got yourself so locked onto it that you are denying the arguments and evidence in front of your eyes.

    You may as well spend your time worrying about the possibility of all the oxygen molecules in the room moving spontaneously to one corner.

    You are now literally into ‘sour grapes’ territory.

    There’s is no point debating with the obsessed.

    Reply

  42. Ramanan Says:

    ESM @ February 20th, 2011 at 10:16 am,

    “Treasury sales cannot fail due to a lack of cash because bond dealers like JP Morgan can repo an unlimited amount of Treasuries at the Fed. They will just bid where they can make a positive spread, which is some low number of basis points above the prevailing repo rate. For the same reason, you will always be able to sell your Treasuries to JP Morgan or Goldman Sachs”

    Marshall’s Longest .. again.

    Treasury sales do not fail because the markets have confidence in the US Government. The markets also think that the Treasury can “print money” and hence won’t default in their logical reasoning.

    The Fed repoing Treasuries has nothing to do with auctions failing or not failing. The Fed does not guarantee unlimited repos.

    Don’t know where these ideas come from.

    If the Fed wanted to monetize the government spending, it can promise the dealers off-the-record to make such arrangements.

    If the central bank is not permitted to purchase Treasuries directly from the government (except for the issues that are maturing) and has no authority to provide overdrafts, there is no honest-to-goodness argument against auction failures.

    Reply

    Vincent Cate Reply:

    “Treasury sales do not fail because the markets have confidence in the US Government. The markets also think that the Treasury can “print money” and hence won’t default in their logical reasoning. ”

    In the 1970s the value of treasuries went down as interest rates went up. People who thought interest rates were going to keep going up did not buy treasuries. It was not because they thought the Treasury would default, it was because it was a bad investment.

    If the interest rate on a 30 year bond goes from 2.5% to 4.6% it has lost close to half its value. If interest rates keep going up, or the value of the dollar keeps dropping, people will “lose confidence” and not buy more treasuries. It has happened to many other countries that could print money and so had no risk of default.

    Bonds are at risk for interest rate and value of the currency, not just default. After 30 good years for US bonds people have much confidence, but it could go away fast.

    http://www.fxstreet.com/rates-charts/bond-yield/

    Reply

    Vincent Cate Reply:

    I did not mean to say “if the interest rate goes from 2.5% to 4.6%” It has already done so as that URL shows.

    Reply

    WARREN MOSLER Reply:

    at any point in time bond prices reflect indifference levels as regards risk adjusted returns.

    Reply

  43. Vincent Cate Says:

    “JJTV Reply:

    http://neweconomicperspectives.blogspot.com/2010/11/yes-government-bonds-add-to-private.html

    Thanks. However, this paper is an excellent example of MMT people getting so lost in debiting and crediting accounts that they can’t see the forest for the trees.

    When the bond is sold the government gets the money and it is no longer part of the money supply. That money does not come back out of the government into the economy at large till the bond is paid off. So for a time the money supply and aggregate demand are reduced.

    Now given the pages and pages that paper has and my 3 sentences above, which one do you think has a higher chance of having an error in it?

    If you think the government spends the money from bond sales you are then thinking that bond sales fund the government, which is not the MMT way of looking at things.

    Here is a classic MMT paper that says that when the government gets paid for a bond that money is destroyed. This makes my 3 sentences well supported. This paper is, “Can Taxes and Bonds Finance Government Spending?” from 1998. Also note Warren’s comment that bond money is shredded.

    http://ideas.repec.org/p/wpa/wuwpma/9808008.html

    Reply

    Scott Fullwiler Reply:

    Except that the bond provided is also a financial asset for the non-govt sector, so the debit of “money” is just an asset swap, completely different from taxes. There are also many technical points to add that would refute your argument, but I’ve realized you (a) can’t understand them, and (b) you never respond to them anyway.

    Reply

    Vincent Cate Reply:

    You need to count a 30 year bond as money to claim the money supply is unchanged. But even that is not reasonable as the value of the bond goes up and down relative to money.

    If you can not refute a simple 3 line argument except with something very complicated, I think I am safe in assuming I am right.

    Reply

    Scott Fullwiler Reply:

    That’s the equivalent of saying you can’t be bothered with the details. This is why I’ve stopped trying with you. Your assumption that the monetary system can be explained via your Econ 101 understanding is incorrect. I’m sorry if the world is more complex than you want it to be–it’s unfortunate that these issues are politically charged, since so many like you don’t have the patience to understand them. I never hear someone tell a physicist that if something has to be explained technically it can’t be right. You’re just laughable, Vincent, except that so many think like you do, which actually makes it rather tragic (for the rest of us).

    Tom Hickey Reply:

    Vincent, as I said to you before, you have to do the accounting to begin to understand this. Stephanie Kelton’s post lays out some of the basics but it is apparently too difficult of bothersome for you to consider.

    Why should any of us take you seriously when you spout stuff you make up and won’t consider the counter-evidence offered other than to reject it out of hand without addressing it?

    Many people here are more than willing to explain the MMT position but if others refuse to engage in good faith, it is a waste of time. Consider this my last response to you. I will not be reading further posts from you.

    Tom Hickey Reply:

    Now given the pages and pages that paper has and my 3 sentences above, which one do you think has a higher chance of having an error in it?

    Sorry, Vincent, but Stephanie has it right.

    Btw, brevity is no evidence of truth. Moreover, Stephanie’s post is about articulating the nuance behind some of MMT simplifications in the interest of brevity and accessibility. Her post is quite accessible, too, although it requires a bit of focus. Certainly, anyone interested in understanding the details of the monetary operations that MMT describes should read it carefully.

    Reply

    Vincent Cate Reply:

    In the second URL it says:

    “Bonds, then, are used to coordinate deficit spending, draining what would otherwise become excess reserves.”

    And later she says:
    “Bonds, which are used to prevent deficit spending from flooding the system with excess reserves, allow the maintenance of positive overnight lending rates.”

    Stephanie says bond sales reduce excess reserves, which are base money. Stephanie says otherwise deficit spending would flood the system with excess reserves.

    She has confirmed my claim that if bond sales fail the system will be flooded with excess reserves.

    Stephanie predicts hyperinflation!

    Reply

    Ramanan Reply:

    Oh God!

    Right now there is a lot of excess reserves in the system – north of $1T.

    You can check from http://www.bls.gov/ and confirm there is no hyperinflation.

    Reply

    Vincent Cate Reply:

    Good answer.

    Stephanie’s 1998 paper was about 20 years before the Fed started paying interest on excess reserves to make them like bonds, just another way to loan money to the government.

    Ramanan Reply:

    Vincent,

    Banks do not “lend out” reserves. That (lending out reserves) is a very crude way of describing banks.

    Imagine you go to a bank. Do they worry about your creditworthiness or the reserves ? The bank lending depends on things such as your income, wealth, collateral, banks’ own animal spirits etc.

    So you go to a bank and it approves your loan application. They do not “take the reserves” from the central bank and “give it to you”. That description is treating money as a commodity.

    The bank just makes deposits for you and doesn’t “give other people’s deposits”. Other people still have their deposits.

    At the time of the lending, the bank’s reserve position is unchanged. They may change because of other reasons – not because of lending to you. Instead banks lend by creating deposits out of thin air. After you have borrowed, you can move the deposits around and in that case your bank’s reserves will change.

    Even if you add one more trillion to reserves of the banking system, banks do not become any lesser constrained in lending.

    studentee Reply:

    did you not even bother reading jkh’s reply up there, vincent? excess reserves are not inflationary. there’s no relevant transmission mechanism. think harder

    Reply

    WARREN MOSLER Reply:

    excess reserves don’t predict hyperinflation.

    Reply

    Matt Franko Reply:

    Vince,
    “an excellent example of MMT people getting so lost in debiting and crediting accounts that they can’t see the forest for the trees.”

    Hah! This reminds me of a statemant Barry Ritholtz made on his blog about Warren’s explanations, to paraphrase BR: “Yeah I’ve looked at Mosler’s stuff, but his math never added up for ME” That’s rich! Never added up for HIM, I don’t doubt it!. Or to quote moron Stuart Varney in his latest exchange with Mike Norman at Fox News: “You print money, you’re Weimar Germany!” Ha! These people (and it looks like you) read some rule or something once decades ago and now that’s got to be the way the rule works for the eons even though the whole system has been redefined since then…. snap out of it man!

    Super lawyer-types or non-quants just cant admit they lack mathematical aptitude… this statement identifies you also as someone simply lacking quantitative skills, you are simply a ‘rules based’ person, you can only think in terms of what the rules you once learned say about “printing money” or whatever, you cannot think this thru quantitatively, perhaps join Barry Ritholtz and many economic policymakers including Ben Bernanke and Tim Geithner who cannot handle the math.

    Just admit it and get out of the way of people who can.

    Reply

  44. beowulf Says:

    She has confirmed my claim that if bond sales fail the system will be flooded with excess reserves.
    Stephanie predicts hyperinflation!

    Vincent, you should look up this fellow Warren Mosler. Interesting guy, he wrote a paper worth reading called “The Natural Rate of Interest is Zero.”

    the banking system with excess reserves would quickly drive the rate of interest to zero. I don’t want to spoil anything, so you’ll have to read for yourself to see what Mosler thinks of that prospect (I’m fairly sure Stephanie is on the same page). :o)
    http://moslereconomics.com/mandatory-readings/the-natural-rate-of-interest-is-zero/

    Reply

  45. Vincent Cate Says:

    In Warren’s paper it talks about people doing repos on the same day they buy a treasury. I had assumed that foreign governments were not doing this, but maybe that is an incorrect assumption. If you can borrow repo money at near zero percent and earn 2% then maybe everyone is doing this. Does anyone know how much money the Fed has out on repos?

    If the money for Treasuries is really coming from the Fed via repos then there is no trouble when they come due, no demand will be released. The money from the Treasury to pay back the bond will just be used to pay back the repo and it is really the government paying the government with no change in private demand at all.

    Reply

    Kristjan Reply:

    Vincent, let’s say Japan has 30% tax revenues right now. let’s say Japan is not going to deficit spent for the next 5 years and Japan is raisig taxes to a level of 60% GDP but government spending is going to remain at 30%. All that aggregate demand that is pulled out of economy is going to be replaced by QE. Japan has plenty of debt so they can do that for the next five years. What do you say? Go for It? In your logic that should not be a problem to “prevent hyperinflation”.

    Reply

    Vincent Cate Reply:

    I don’t believe there is any painless way out at this point. My view is that the government is bankrupt and hyperinflation is what bankruptcy for a government that can print money looks like.

    I think it would be extremely painful to have the austerity needed to avoid hyperinflation, so I don’t expect politicians to do that by choice. Really it would take about a 1/3rd cut in government spending. However, after the currency collapse the government austerity comes anyway and the rest of the economy is trashed as well.

    Reply

    WARREN MOSLER Reply:

    in normal language bankruptcy means inability to make nominal payments on a timely basis.
    and hyper inflation is accelerating inflation that goes into the millions of % in relatively short order.

    what you are saying via your definitions of ‘bankrupt’ and ‘inflation’ is that if govt tries to increase its deficit spending it will drive up prices
    beyond your preference for price stability.

    so try starting with that and you may even get a few people who do recognize the validity of MMT to agree with you.

    WARREN MOSLER Reply:

    right, it would be a highly deflationary bias.

    spending wouldn’t be enough to cover the tax bill plus savings desires

    Reply

    WARREN MOSLER Reply:

    again, it’s about savings desires. foreign govts that accumulate $ financial assets, like tsy secs and reserve balances, are expressing savings desires

    Reply

  46. Vincent Cate Says:

    “Btw, brevity is no evidence of truth.”

    In science we have something called Occam’s Razor which says if there are 2 different explanations the simpler one is probably the correct one:

    http://en.wikipedia.org/wiki/Occam%27s_razor

    You guys complain that I don’t bother to find the flaw in some 20 page paper and sort of dismiss it but you can’t really explain a flaw in my 3 sentence problem so I don’t see how you can really complain.

    Reply

    Vincent Cate Reply:

    Lets try a once sentence problem:

    “A 30 year bond goes up and down in value relative to money so how could anyone call it equal to money?”

    Reply

    Neil Wilson Reply:

    Term Bank deposits go up and down relative to currency over time. It’s just that there isn’t a public secondary market in them so you can’t get a price.

    If you buy a $100 bond and hold to redemption you will get $100 for it. All other prices are market speculation by third parties. The contract with the primary issuer is at a fixed price.

    Dollars go up and down in value when priced in British pounds. So by your logic dollars aren’t money either.

    Reply

    MamMoTh Reply:

    Actually it’s the other way round. Pounds are not money. And Soros figured it a long time ago.

    WARREN MOSLER Reply:

    anyone using the word ‘money’ in this type of discussion has already missed the point.

    Reply

    Neil Wilson Reply:

    A system flooded with excess reserves is not hyperinflation. We have a system flooded with excess reserves now and nothing is happening. Proof once again that money has to move before it causes anything.

    You have committed the usual logical fallacy. You missed the spending part.

    Reading your work is like reading the Watchtower – it leaps to conclusions that don’t follow from the premise. The classic description of somebody who has a conclusion and is inventing ‘evidence’ to support it.

    Occam’s razor supports MMT. Unless there is additional spending on real stuff there can be no inflation. Stocked currency is no different from any other stocked financial asset. Totally inert until used for something.

    You may find a better reception at Conservapedia than here.

    Reply

    Scott Fullwiler Reply:

    we can explain the flaw, and already have, but you don’t read it. or don’t understand it.

    And we didn’t say a bond was “money.” Remember, we don’t use the term “money” anyway. We said the bond doesn’t leave the aggregate economy with any less “fuel” than “money” does.

    Reply

  47. anon Says:

    vincent is correct insofar as there is interest rate risk on bonds that reduces their natural liquidity compared to deposits

    interest rate risk and risk of capital loss is what characterizes the difference between the two

    Reply

    Ramanan Reply:

    Our desire to hold money as a store of wealth is a barometer of our distrust of our own calculations and conventions concerning the future…The possession of money lulls our disquietude; and the premium which we require to make us part with money is the measure of the degree of our disquietude.

    John Maynard Keynes, 1937

    Reply

    WARREN MOSLER Reply:

    it’s also a measure of the institutional structure, particularly tax advantaged savings structures like pension plans, ira’s, etc.

    Reply

    Sergei Reply:

    “vincent is correct insofar as there is interest rate risk on bonds that reduces their natural liquidity compared to deposits”

    Investments into long bonds can reduce the interest rate risk. The amount of risk in the system is about ALM within the private sector and not about the volume of bonds per se. Treasury does not decide out of the blue how much bonds to issue in each particular time bucket.

    Reply

    Scott Fullwiler Reply:

    Interest rate risk on bonds has NOTHING to do with whether selling bonds or not is more/less inflationary. It’s a total side issue. That’s the problem here. Vincent is so far out of his league he can’t even make points relevant to his argument. In fact, interest rate risk if anything supports the opposite view. In his example, interest rate risk leads one to want to hold money rather than bonds–but this isn’t for spending, it’s about a portfolio choice of a saver. That supports the MMT contention that bonds vs. money doesn’t matter in terms of “fuel.”

    Reply

    Vincent Cate Reply:

    “Interest rate risk on bonds has NOTHING to do with whether selling bonds or not is more/less inflationary. It’s a total side issue. ”

    The point is that if it is going up and down relative to money you can not say it is exactly the same as money.

    MMT says they manage the aggregate demand and inflation by controlling the money supply. The way they control the money supply is by spending money into existence or destroying money using taxes or bond sales.

    Along with an “interest rate risk” there can be a “currency risk” too. If people start to see the prices for goods going up every month they will move their currency into cans of tuna and other things with no risk. The market seems to move toward shorter term bonds before things really go bad and we have been seeing that. Interest on excess reserves is really just a very short term loan to the government.

    These things have happened in many places (bond sales failing, government “forced” to print more, going to hyperinflation) so it is very peculiar to argue as if they can not happen or that bonds coming due does “not add any fuel”. Can you find any example where there was not inflation when bonds were not being “rolled over” and money was being created to cover bonds coming due? There are many cases where there was inflation in those circumstances.

    Reply

    Scott Fullwiler Reply:

    “The point is that if it is going up and down relative to money you can not say it is exactly the same as money.”

    I never did. In fact, I’ve said at least 10 times over the past week of discussions with you that they aren’t the same thing. YOu still don’t understand the argument I’m making.

    “MMT says they manage the aggregate demand and inflation by controlling the money supply. The way they control the money supply is by spending money into existence or destroying money using taxes or bond sales.”

    Wrong. You are not defining “money” the same way that MMT does. With your definition of “money” inserted above, it is a completely incorrect description of MMT. I’ve explained this already several times.

    anon Reply:

    whatever the difference in the original motivation as between holding money and holding bonds, the fact is that interest rate risk is a relative cost in terms of the option to spend from bonds as opposed to the option to spend from money

    Reply

    Scott Fullwiler Reply:

    It’s still just a portfolio choice. Vincent would still have to explain why a saver holding “money” is more likely to spend–it’s already established that it’s no easier, or at least if it is it’s trivial in terms of economic significance. Further, the entity that actually holds bonds or “money” in QE is a primary dealer, and ESM has explained twice already above why bonds are virtually as good as “money” to them (and result in more credit creation, to boot, via the repo market). Finally, in your example, interest rates can go the other way, too, where the bonds would be more inflationary.

    Reply

    Scott Fullwiler Reply:

    to repeat, though, you’ve missed the point, too.

    Vincent’s argument is that the draining of the “money” to buy bonds reduces inflation. That has NOTHING TO DO WITH INTEREST RATE RISK. Please address the actual issue instead of getting us sidetracked like Vincent has done incessantly.

    Vincent Cate Reply:

    “Vincent would still have to explain why a saver holding “money” is more likely to spend–it’s already established that it’s no easier, or at least if it is it’s trivial in terms of economic significance.”

    Historically it seems that when people start to get worried about a currency they move to shorter and shorter term bonds. You could say they want to minimize their interest rate risk or you could say they want to be able to bail out of that currency fast. It seems you don’t like the second view, fine.

    Scott Fullwiler Reply:

    Again, Vincent, this is not relevant to your original point. In critiquing Stephanie, you say that bond sales drain “money” and so are less inflationary. These interest rate issues are further down the feedback effects you are talking about. “Money” itself is the trigger for you. Interest rates, portfolio shifts, etc., come later. It’s impossible to have a discussion with you when you constantly change the topic.

    WARREN MOSLER Reply:

    right, it’s all about risk adjusted returns

    Reply

  48. Vincent Cate Says:

    “Vincent’s argument is that the draining of the “money” to buy bonds reduces inflation. That has NOTHING TO DO WITH INTEREST RATE RISK. ”

    In order for you to argue that “the money supply” or “fuel” has not changed you need to count a 30 year bond the same as the money that was destroyed when that bond was first sold. But if the bond is changing in value all the time how can you possibly think it is the same as money? If interest rates go up and bond prices go down you think the money supply is going down? This question is very much related to the topic at hand.

    Reply

    Scott Fullwiler Reply:

    Go back to ESM’s two posts above. You seem to have ignored those, even though they were directed at you. Your answer is there.

    And for the hundredth time, I DIDN’T SAY BONDS WERE MONEY. THEY DON’T NEED TO HAVE FIXED NOMINAL VALUE TO NOT ADD MORE “FUEL” THAN MONEY. IF YOU WANT TO HAVE A DISCUSSION, YOU HAVE TO ADDRESS THE ACTUAL POINT I’M MAKING, NOT CONTINUOUSLY PUT WORDS IN MY MOUTH. PLEASE START TO PAY ATTENTION IF YOU WANT TO ACTUALLY DISCUSS THESE ISSUES.

    Reply

    Vincent Cate Reply:

    If you do not mean “money supply” by your use of the word “fuel”, what do you mean by “fuel”?

    Reply

    Scott Fullwiler Reply:

    I mean that,

    (1) holding more bonds instead of deposits or reserves in no way constrains spending in the aggregate

    (2) holding more deposits or reserves instead of bonds does not necessarily raise spending in the aggregate.

    Neither of these require that bonds be defined to be the same as the traditional definition of “money” that you are using.

    Vincent Cate Reply:

    “Go back to ESM’s two posts above. You seem to have ignored those, even though they were directed at you. Your answer is there.”

    I went back to it and responded to it.

    Reply

    Sergei Reply:

    “If interest rates go up and bond prices go down you think the money supply is going down?”

    People used their houses as ATM. Shall we then count houses towards money supply?

    Reply

    Vincent Cate Reply:

    “People used their houses as ATM. Shall we then count houses towards money supply?”

    Right, it is silly. Any asset can be used as collateral for a loan, but that does not mean we should count everything as part of the money supply.

    The point is, selling bonds and destroying the money from these sales is one of the methods governments use to control demand and inflation.

    Reply

    Sergei Reply:

    Government does not control money supply to control inflation. It controls aggregate demand vs. aggregate supply of goods. And that means whichever deficits it needs to equate the too

  49. Ramanan Says:

    There are 57 instances of “hyperinflation” in this comments section not counting this one.

    Reply

    Tom Hickey Reply:

    Have you ever seen any interviews with Peter Schiff? He is constantly shouting over the conversation with constant echoes of “inflation” continuously reverberating. I don’t know why anyone even bothers appearing with him.

    Reply

    Ramanan Reply:

    Yes I see some of his videos once in a while for fun.

    However, it is really scary how Economists – neoclassicals and Monetarists – have so much control in their hands – their pen is mightier than any sword.

    Sad times ahead. The United Nations job of reducing suffering gets tougher and tougher.

    Reply

    Tom Hickey Reply:

    Here’s a comment I posted somewhere else that I thought some of you (esp. from the US) might enjoy:

    Ronald Reagan served as president of the Screen Actors Guild, then he got Alzheimer’s, and was subsequently elected president of the United States on an anti-union platform.

    BTW, Ronald Reagan was chosen America’s best president in a recent Gallup poll. Georege W. Bush beat out Thomas Jefferson.

    WARREN MOSLER Reply:

    I did once on a televised forum last year. He’s just empty rhetoric

    Reply

  50. Ramanan Says:

    “In order for you to argue that “the money supply” or “fuel” has not changed you need to count a 30 year bond the same as the money that was destroyed when that bond was first sold.”

    “In order for you to argue that “the money supply” or “fuel” has not changed you need to count a 30 year bond the same as the money that was destroyed when that bond was first sold. ”

    Vincent,

    I suspect you are avoiding accounting everything together here.

    If bonds destroy deposits, government spending creates deposits.

    You seem to be thinking that the government issues bonds and sits idle.

    Reply

    Vincent Cate Reply:

    “If bonds destroy deposits, government spending creates deposits.

    You seem to be thinking that the government issues bonds and sits idle.”

    I understand that the government creates money out of thing air and spends it. But similar to how taxes reduce the money supply and aggregate demand, bonds temporarily reduce the money supply and aggregate demand. The problem with this is that if people suddenly stop buying bonds and get their cash as they come due the government loses control of the money supply. This is how hyperinflation starts. It has happened many times. It is easy to understand in the MMT view if you understand that the government does not use bonds for funding but to take money out of the money supply and reduce demand.

    It really seems that experts in MMT understand bond sales as controlling money-supply/demand but they have not followed this to the logical conclusion that if the government loses control of bond sales it loses control of demand.

    Reply

    Mr. E Reply:

    U.S. Treasuries are viewed as being the safest investment in the world. That’s why the people who use Treasuries actually buy them- they think they are extremely safe investments. It doesn’t matter what you or I think – it matters what they think about the investment.

    Pushing these people out of U.S. Treasuries would push these people who want to have money in the safest investment in the world to buy…what exactly? Start buying lots and lots of commodities that have multiple examples of gigantic crashes in the last 40 years alone, and a long history of gigantic swings in value?

    I just don’t see the logic of assuming that people who want to hold liquid savings buying anything but the next most liquid and safe things, like slightly longer term Treasuries.

    Not only that, but even if you’re correct, the U.S. Federal Reserve is basically stocking up on anti-hyperinflation ammunition at a remarkable rate. They’ve smashed the U.S. economy before without a care to what happens to common people, and they just did it again in the recent financial crisis. Why wouldn’t they do it again?

    I think nearly all of the recent sell off in bonds was due to Pimco selling even more bonds than the U.S. Federal reserve bought. Pimco told us they sold at least $100bn in U.S. Treasuries, but the final tally was probably closer to $300bn. Are there any other bond funds out there that have the ability to sell this much. No.

    Be careful with your commodity investments. Know that the Saudi Arabia is turning on the oil spigots full blast to bring down the price of oil – it is either that or lose power entirely. I fully expect oil to be at $50 a barrel by August-September. Silver is going to deliver a total of 170 contracts at comex this month – nothing like the billions that are claimed by others.

    Reply

    Vincent Cate Reply:

    “U.S. Treasuries are viewed as being the safest investment in the world.”

    The view can change. As interest rates were going up in the 70s treasuries were not viewed as the safest investment. They lost value. Treasuries have had a 30 year bull market as interest rates came down. If the rates start to go up again it will be bad for treasuries. Investor moods can have violent swings.

    “I just don’t see the logic of assuming that people who want to hold liquid savings buying anything but the next most liquid and safe things, like slightly longer term Treasuries.”

    It is just history and logic. When people get worried that interest rates are going to keep going up or that the value of the currency is going to keep going down they don’t want to lock their money into bonds for a long period of time. It has happened many places.

    “Not only that, but even if you’re correct, the U.S. Federal Reserve is basically stocking up on anti-hyperinflation ammunition at a remarkable rate.”

    No. The MMT view is that the central bank that makes money is part of the government. So when there are net bond sales such that it is as if the Fed is buying from the Treasury it is really no different than if they just made the money and spent it.
    Bond sales to private parties fight inflation.

    “They’ve smashed the U.S. economy before without a care to what happens to common people, and they just did it again in the recent financial crisis. Why wouldn’t they do it again?”

    If I have said anything that makes you think I have confidence they won’t smash the US economy, I deeply apologize. That was not my intent. I do expect it to be smashed soon, more than it has been in the last 100 years.

    WARREN MOSLER Reply:

    so the question is, does offering tsy secs as alternatives to reserve balances as a home for ‘savings desires’ keep the price of commodities down?

    i suggest not, again due to the interest income channels.

    Ramanan Reply:

    You are confusing many things.

    I don’t think MMT says that the money supply has to controlled. Its destructive to attempt to control the money supply is what you read.

    You are mixing up many things.

    Neither has any MMTer said that money supply = demand.

    If you observe, MMTers pay little attention to the money supply.

    Reply

    Ramanan Reply:

    That reply was for Vincent, not Mr. E

    Mr. E Reply:

    No Worries, Ramanan,

    I agree, Vincent is really mixing up things through a broken Austrian lens.

    I do think that MMTers talk about money supply, but in an indirect manner. Much of the inflation argument of MMT is based on Money supply compared to Money demand, and that we know the money supply. Unlike everyone else who counts money in some bank account somewhere, we net the money supply out given the knowns in the system.

    We do not talk about it much because we don’t see the threat of inflation as being worthy of intense discussion.

    Since we know the money supply and the current inflation rate, we have a good idea about the balance between the money supply and the demand for money.

    beowulf Reply:

    Though the politicians don’t seem to realize it, Uncle Sam holds all the high cards.
    1. The Fed can lower the IOR rate to move excess reserves to bonds (IOR rate is 0.25%, 3 month T-bill rate is 0.09%),
    2. it can can increase excess reserves by buying up Treasuries itself (again, with IOR payments neutralizing excess reserves to peg overnight rates).
    3.It can raise percentage of required bank reserves and/or margin rates on brokerage accounts.
    4. The Fed can lower or raise prime rate markup (prior to 1991, it fluctuated but averaged less than 1.5% points markup over FFR, for last 20 years prime rate has been been a metronome steady 3.0% points markup).
    5. It can increase the user fees on Fedwire and other large dollar transactions that flow through Fed (which is to say, all of them) to create a de facto transaction tax.

    The Fed, in cooperation with Tsy:
    6. They could discontinue the marketing of Treasuries longer than 3 months and/or cap interest rates (the WWII T-bill cap of 0.375% wold work just fine).
    7. They could nationalize lending market by funding overnight, money market and mortgage markets via discount window (paying an origination fee to banks who bring deal in). Interest rates would no longer be FIRE sector income but would be, in effect, a tax drain (Fed refunds earnings to Tsy)
    8. I believe Tsy and the Fed have authority (I’ll check FRA this evening) to create a dual exchange rate regime to reduce our foreign sector deficit. It’d be cleaner for Congress to enact Warren Buffett’s import certificate market, but why go to Congress if you don’t have to? Economist Ravi Batra has been a big fan of dual exchange rates.
    http://www.allbusiness.com/economy-economic-indicators/money-currencies-interest/5052999-1.html

    Reply

    Vincent Cate Reply:

    “Though the politicians don’t seem to realize it, Uncle Sam holds all the high cards.”

    In other cases of hyperinflation the government thought they held all the high cards too. But what happens is a black market, that is untaxed, develops and grows. Eventually nobody is using the government money even though the law says they have to and they lock people up for not using the local money. Really. It is like a popular uprising against the currency.

    http://pair.offshore.ai/38yearcycle/#hyperinflationstages

    beowulf Reply:

    Oh really? You actually think Weimar Germany thought they held the high cards? Yeah they really made out like bandits in the Versailles Treaty. The freakin’ French Army (the French, for God’s sake!) was squatting in the Ruhr Valley and the Germans had enormous war reparations payable in Marks.. haha, just kidding, they were payable in Francs. For its part, Zimbabwe didn’t owe its debts in its own currency either, they were payable in US dollars (Gosh, where do US dollars come from? What currency is our national debt payable in?)

    As for your “popular uprising against the currency”, you’re cooking meth. Speaking of which, there is a reason that the US no longer prints currency larger than $100 and requires Tsy notification of any bank transaction larger than $10,000 (smaller than that for suspicious “structured” transactions), there are just two of the many controls imposed to control the black market in drugs. Drug traffickers have had to get very clever to avoid Uncle Sam and like any black marketeer, are willing to use massive violence to enforce contracts since the court system isn’t available to settle disputes.

    If you think that even a fraction of the participants in the legitimate economy have the resources, sophistication, amorality and access to hired killers to move from the legitimate economy to the black market economy, then my investment advice to you is to buy plenty of guns and canned food.

    WARREN MOSLER Reply:

    not to mention that tsy could constrain the prices it pays for goods and services and engineer a very ugly deflation.

    remember, we need the govs spending to be able to pay our taxes and net save

    WARREN MOSLER Reply:

    again, along with taxation, savings desires reduced aggregate demand.

    and savings desires are not caused by bonds nor is it likely they are enhanced by bonds.

    the govt, by deficit spending, allows savings desires to be fulfilled, first with reserve balances, and then by offering alternative fed accounts called tsy secs, at auction, which works to price tsy secs at indifference levels to reserve balances.

    Reply

  51. anon Says:

    “It’s still just a portfolio choice. Vincent would still have to explain why a saver holding “money” is more likely to spend–it’s already established that it’s no easier, or at least if it is it’s trivial in terms of economic significance. Further, the entity that actually holds bonds or “money” in QE is a primary dealer, and ESM has explained twice already above why bonds are virtually as good as “money” to them (and result in more credit creation, to boot, via the repo market). Finally, in your example, interest rates can go the other way, too, where the bonds would be more inflationary.”

    its not just a portfolio choice; there’s risk

    risk is risk – it has to be compensated whether or not there are favorable outcomes; people are not risk neutral

    dealers act as agents far more than principal in QE; dealers are not a bottomless original source of bonds, quite the contrary

    ESM’s explanation just argues the conclusion; its an inadequate argument

    changes in velocity do not always offset changes in liquidity, and deposits are more liquid than bonds

    repos don’t get rid of interest rate risk on the underlying, which must be bought back under repo

    the option to spend is cheaper when there’s no interest rate risk

    Reply

    Scott Fullwiler Reply:

    portfolio choice is about risk, obviously. but whether a drain in reserve balances due to a bond sale is more inflationary or not isn’t.

    Reply

    Scott Fullwiler Reply:

    You’re putting things in the wrong order. Get the understanding of how the reserve drain vs. no reserve drain works, then go to interest rate risk, if desired.

    But even then, it’s missing the point, since (a) there can be a capital gain, (b) interest paid in aggregate to the non-govt sector will usually move with rates, and could more than offset capital loss, (c) there may/may not be interest rate risk in play anyway, as with those holding to maturity, or shorter maturities, (d) there still needs to be an explanation for why a saver is necessarily going to spend, and I’ve never seen, say, a monetarist use “interest rate risk” as the reason (and even then, sometimes would support the view, sometimes wouldn’t, as in a, b, c).

    Reply

    ESM Reply:

    Anon,

    As far as I know, no government has used interest rate risk to manage aggregate demand. And although the extent of risk in my portfolio might have an effect on my desire to spend, I think it is probably a weak one. More important is how much in assets I have.

    In the example I’ve focused on, person A owns a Treasury bond but has no cash. He can liquify that Treasury bond in many ways in order to be able to spend. Usually he would sell that bond if he can’t borrow against it. If he sells it to counterparty B that can do repo, but B doesn’t want the interest rate risk, it is always possible for A and B to enter into an interest rate swap so that the risk stays with A, and B remains market neutral.

    I and many of the people here feel that the Treasury issues long term bonds because the people at Treasury think (mistakenly) like CFOs of corporations and try to manage Treasury liabilities so that they come due over time. Whatever the reason, though, I’ve never heard anybody suggest that Treasury issues long term bonds in order to dump interest rate risk on the market and make long-term interest rates rise. Seems like that would be awfully counterproductive.

    Reply

    anon Reply:

    you’re all missing the point, to use somebody’s favorite phrase

    the point is that interest rate risk exists on bonds, and bond holders take that into account; the same type of interest rate risk (risk to capital) does not exist on deposits sometimes referred to as the bugaboo of “money”

    monetarists are at one extreme in that they adopt terrifyingly simplistic notions of money and velocity

    MMT’ers are at the other extreme in that they refuse to acknowledge any difference at all in the risk characteristics of bonds and deposits sometimes known as money; and they seem to think that anybody who holds a bond will be willing to convert it to a deposit by repoing or borrowing against it; I think that’s a silly assumption that applies to a few but no means all – it certainly doesn’t apply with respect to most of the consumer goods demand in the US economy

    that’s all I’ve said; nothing as loony as governments managing aggregate demand by interest rate risk and I don’t support Vincent’s hyperinflation argument in the least; its nuts – but the MMT arguments presented against it here are pretty flat

    Reply

    Scott Fullwiler Reply:

    “MMT’ers are at the other extreme in that they refuse to acknowledge any difference at all in the risk characteristics of bonds and deposits sometimes known as money; and they seem to think that anybody who holds a bond will be willing to convert it to a deposit by repoing or borrowing against it; I think that’s a silly assumption that applies to a few but no means all – it certainly doesn’t apply with respect to most of the consumer goods demand in the US economy”

    Completely wrong. The point is that IN THE AGGREGATE there is no more “fuel” from deposits or reserves. There is no additional ability to lend. No additional ability to aggregate spend. No additional wealth. And in either case, more spending requires a decision to spend more out of existing income. All the repo stuff, as I said above to JKH, is a technical detail. It’s not what the MMT argument rests upon, but rather in response to specific questions.

    Reply

    anon Reply:

    that’s wrong

    the point is that those holding a less risky asset – specifically the medium of exchange – are in a position NEVER to have to take a capital loss if they CHOOSE to spend; its a constraint that doesn’t exist as it does with bonds

    so risk affects potential and actual aggregate demand

    you’re just not paying attention to the risk argument

    and I don’t know why you emphasize IN THE AGGREGATE, that’s not the point either – its got nothing to do with the risk argument

    anon Reply:

    btw, wealth at a point in time does NOT uniquely determine aggregate demand; there wouldn’t be any such thing as the paradox of thrift, etc. if it did; so your related comment above is irrelevant

    Scott Fullwiler Reply:

    1. I never said wealth at any point in time uniquely determined AD. Where on earth did you get that? I said regardless of “money” or bonds, we are talking about a decision to spend more out of current income–that is what would affect AD. But wealth is in the AD function of every school of though that I can think of.

    2. Interest rate risk cuts both ways in the aggregate. Rates rise and there’s a capital loss but increase in aggregate interest income. Rates fall and a capital gain but decrease in aggregate interest income. Further, I HAVE NEVER seen a serious, academic defense of “money” being more inflationary than bonds in the aggregate that relied on interest rate risk. Can you find even 1? And yields on bonds already ALWAYS factor in indifference levels between aggregate perceived interest rate risk and the opportunity cost of not holding a bond (interest earned).

    Scott Fullwiler Reply:

    “and I don’t know why you emphasize IN THE AGGREGATE, that’s not the point either – its got nothing to do with the risk argument”

    You’re not paying attention. Whether or not bonds are less inflationary is all about the aggregate. Whether QE is inflationary is all about the aggregate.

    anon Reply:

    1. “There is no additional ability to lend. No additional ability to aggregate spend. No additional wealth.” Obviously that’s saying that a given level of wealth regardless of form is associated with a given level of aggregate demand, which is false.

    2. Do you know the meaning of “risk neutral”? People aren’t risk neutral.

    Reply

    Scott Fullwiler Reply:

    1. Wrong. That’s not what I’m saying at all. You clearly have no idea what I’m saying, so I’m just going to stop.

    2. Yes. Point?

    You’re about as bad as Vincent–every discussion you get into here goes round and round just about the same without anyone ever understanding.

    Scott Fullwiler Reply:

    And “indifference levels” doesn’t mean risk neutral. It means the bond price has adjusted to compensate at the margin for the perceived additional risk of capital loss. Warren uses this term all the time.

    anon Reply:

    “vincent is correct insofar as there is interest rate risk on bonds that reduces their natural liquidity compared to deposits

    interest rate risk and risk of capital loss is what characterizes the difference between the two”

    that was my original comment here; it’s factual, specific, and qualified; certainly nothing warranting a reflexive, broad rant about it being supportive of some hyperinflation argument – an argument which I just happen to think is absurd in general

    then again, if you disagree with the main part of the quote that I qualified in context with “insofar as”, then we disagree and that’s all there is to it

    Scott Fullwiler Reply:

    “that was my original comment here; it’s factual, specific, and qualified; certainly nothing warranting a reflexive, broad rant about it being supportive of some hyperinflation argument – an argument which I just happen to think is absurd in general”

    Good for you. Also, note that my original response was not challenging the validity of your comment, but rather noting that it wasn’t material to the key point at issue with Vincent:

    “Interest rate risk on bonds has NOTHING to do with whether selling bonds or not is more/less inflationary. It’s a total side issue. That’s the problem here. “

    ESM Reply:

    @Anon

    “MMT’ers are at the other extreme in that they refuse to acknowledge any difference at all in the risk characteristics of bonds and deposits sometimes known as money; and they seem to think that anybody who holds a bond will be willing to convert it to a deposit by repoing or borrowing against it; I think that’s a silly assumption that applies to a few but no means all – it certainly doesn’t apply with respect to most of the consumer goods demand in the US economy”

    Since you’re the ultimate nit-picker, I feel justified in picking a few nits myself:
    1) MMTs don’t refuse to acknowledge that bonds are different from deposits or reserves; they just believe that in terms of the effect on aggregate demand, the difference is immaterial;
    2) i don’t believe that anybody or everybody who holds a bond is willing to borrow against it in order to spend; i just believe that the marginal buyer of such bonds has access to repo, and therefore aggregate cash availability is not an issue (as it would be for somebody who was trying to sell stock in order to spend);
    3) interest rate risk is merely one kind of risk; deposits and reserves are still exposed to currency risk; it is arguable that bonds actually have less risk in terms of buying power because the value of a currency and the level of interest rates is often negatively correlated; for example, when interest rates go up (and a bond loses value in nominal terms), the currency generally strengthens; i’ve found this to be a causal relationship.

    Reply

    anon Reply:

    re 2.

    tell me, who actually repos bonds to buy consumer goods, or investment goods for that matter?

    WARREN MOSLER Reply:

    i’ve done it now and then…

    anon Reply:

    re. 2. again

    so the interest rate on bonds compensates for risk but the return on stocks doesn’t?

    what makes bonds so special?

    WARREN MOSLER Reply:

    :)

    ESM Reply:

    Bonds are special because even if everybody is out of cash, it is possible for a seller to find a bid from somebody who has access to repo. That’s not possible in the case of a stock.

    When you sell a stock, you get cash from the buyer. But what if the buyer has no cash? Then you can’t sell the stock.

    ESM Reply:

    Few people would repo bonds in order to spend. But many people would sell bonds in order to spend. And many other people would use repo in order to buy bonds on the bid side of the market.

    anon Reply:

    If “everybody is out of cash”, then there is no repo availability because the repo counterparty needs cash to do the reverse repo. So that doesn’t hold obviously.

    And I thought we had something called a stock market.

    JCD Reply:

    Ah, but the fed never runs out of cash.

    And they set a fed funds rate.

    And they do that by acting in the repo market. So if funds start to creep up, the Fed will go out and do repos.

    And they always accept treasuries as collateral.

    But you can’t repo stocks at the Fed.

    WARREN MOSLER Reply:

    not that it matters, but you can borrow against stocks at banks which are the fed’s designated agents

    and equity futures and options are leveraged holdings.

    again, not that it matters

    vjk Reply:

    Re. 3

    a. Bonds have more risks than cash, really: in addition to interest rate risk, also yield curve risk for portfolio with mixed maturities, volatility risk, bid-offer spread risk (insignificant with treasuries, but all the same).

    For households, transaction costs are non-trivial (the mutual fund argument is not quite applicable for obvious reasons).

    b. The forex argument is inapplicable as both bonds and cash will be affected roughly to the same degree by possible exchange rate fluctuations.

    I am with Anon to the extent that some folks tend to equate cash and treasuries too easily and gloss over important differences and implications of those differences.

    Cannot offer any contribution to the great de/[hyper]inflation debate, though ;)


    if everybody is out of cash, it is possible for a seller to find a bid from somebody who has access to repo

    How is that possible if “somebody” is out of cash too ?

    Neil Wilson Reply:

    The ‘somebody’ is ultimately the fed. How does the currency issuer run out of cash?

    vjk Reply:

    “Ah, but the fed never runs out of cash.”

    That’s true, but irrelevant to the point that cash (and bank deposits) are devoid of risks and transaction overhead associated with bonds and shares.

    You can repo your share of stock, by the way, at a different haircut than a treasury bond, and a private bank will be happy to manufacture a deposit without any Fed participation.

    Leading this line of reasoning to its logical conclusion, everything is “money”, although with different risk profiles, since anything can be exchanged for “money”.

    I am not sure such a simplistic point of view is productive.

    Treasury bonds == “money” being just a special case, of course.

    anon Reply:

    vjk,

    you’ve made some very sane and balanced points, IMO, which is refreshing here

    note I didn’t say “everybody runs out of cash” is a very reasonable assumption – just responded to it in context

    you nailed it – the MMT view on this area is fragile and simplistic

    the reality is a long, long way from the monetarist hyperinflation paranoia, but its also some distance from the MMT extreme of absolutely equating bonds with deposits in the context of this sort of discussion

    WARREN MOSLER Reply:

    bonds, stocks, etc. all continuously fluctuate in price to reflect (risk adjusted) indifference levels with cash and reserves.

    anon Reply:

    P.S.

    if you stretch the conventional, compartmentalized definitions of interest rate risk, just about all risk in the bond market can be interpreted as interest rate risk of some sort – e.g. yield curve risk, vol, bid/offer spread, liquidity – the conventional definition typically focuses on “directional” (duration) risk as opposed to the others, but its all in the same pot – and what we’re really talking about here is the difference between all those things and the assured value that is typically preserved and fixed in a demand deposit, and how that can be a factor in the behavior of the holder of the deposit versus the bond

    Mr. E Reply:

    Treasury Bonds are the only USD asset that you’re 100% certain about the future. You’re getting face value at maturity.

    Stocks and corporate bonds don’t have this quality. I think this is an important difference. Every other asset has the real potential not to repay full face value, even at maturity.

    Treasury Bonds share this quality with cash money. If you hold cash money, your 100% certain in X time that you’ll get the face value of the currency.

    vhk, all the risks you mention are there for cash as well:

    “Bonds have more risks than cash, really: in addition to interest rate risk, also yield curve risk for portfolio with mixed maturities, volatility risk, bid-offer spread risk (insignificant with treasuries, but all the same).”

    Why is this the case? People that hold treasuries for non-speculative purposes are hedging the risks you mention that already exist in their portfolio. They are hedging inflation, but they have exposure to yield curve risk, volatility risk, bid-ask risk.

    Holding treasuries reduces these risks compared to holding equivalent amounts of cash.

    Yes, these risks are significant for speculators. For true hedgers, exposure to these are usually benefits, not costs. They want better exposure to movements of the yield curve than cash can provide. Even if they remain risks, the cost from the risk is lower than the benefit of the exposure – otherwise they wouldn’t make the hedge!

    Then, of course, the natural rate of interest is zero.

    MMT isn’t saying the world is perfect. What it is saying is “We know these few things are true, and let’s align our actions with these known truths.”

    anon Reply:

    “Treasury Bonds are the only USD asset that you’re 100% certain about the future.”

    only for one future – the day of maturity

    not before then, when you may want the cash but not want to take a capital loss

    that’s risk

    JCD Reply:

    Well one thing I know is that when the world get’s interesting, Bond yields head toward zero, and nothing else does.

    In 08-09, year bills got to like 10bps. It seems that investors weren’t too concerned about yield curve risk.

    Empirically, I think it’s safe to say that bonds are very different than every other piece of paper out there. They’re the only things that trade like cash when the crap hits the fan.

    WARREN MOSLER Reply:

    :)

    and if i recall correctly in maybe 1996 when congress tried to default, and just before rubin ‘outsmarted’ them and didn’t default, bonds rallied on the notion there would be shortages of them if the govt stopped issuing them

    anon Reply:

    re indifference levels interpretation

    that’s fairly close to some form of efficient markets hypothesis, which is quite reasonable

    but that’s really an ex ante valuation statement

    which is different than what bond holders may actually do ex post, if they’ve realized “negative risk” (i.e. losses)

    i.e. they may be constrained by their own behaviorial biases in their willingness to realize losses in order to sell for cash and consume

    if you think of the up front indifference premium as an option, that option premium may price in the willingness to buy but not the willingness to sell (exercise the option) later on

    WARREN MOSLER Reply:

    like mine better?

    Reply

  52. Vincent Cate Says:

    “Government does not control money supply to control inflation. It controls aggregate demand vs. aggregate supply of goods. And that means whichever deficits it needs to equate the too”

    How do you think the government controls aggregate demand in MMT? What is the “operational reality” of their method of control?

    Reply

    Mr. E Reply:

    Taxes vs. deficit spending.

    Rasing demand: Lower taxes or higher deficit spending to raise demand. Lower taxes on income created by work is the preferred way to raise demand in the MMT world. Warren has suggested a payroll tax holiday too many times to easily count on this site.

    Lowering Demand: Raise taxes or reduce deficit spending.

    Reply

    Vincent Cate Reply:

    But if we define “the money supply” as the money outside of government then when you say you are controlling demand what you are really doing is controlling the money supply. How is it different?

    Reply

    Oliver Reply:

    MMT demand control works via the total amount of outstanding liabilities, i.e. by making people richer or poorer on the government score board. ‘Money’ is only part of those total liabilities. So yes, it is money that is extracted through taxation, but no, that does not determine the subsequent mix of liabilities for that period, because that is a function of the target price and must be adjusted accordingly. Think quantity first and monetary intervention after to control price.

    WARREN MOSLER Reply:

    and remember tsy secs are issued only to the extent that there are reserves to offset/offer interest bearing alternatives to.

  53. Anders Says:

    Guys – don’t want to be hasty, but how much wilful misunderstanding do we take before we conclude someone is a troll?

    This is why a decent wikipedia page is so essential. Then we can have someone articulate the “deficits = teh hyperinflation” critique, and then we can present succinctly the reasons why it’s nonsense (and only a pathological goldbug would ever buy it) and then move on to something else.

    This thread started so well! *Sigh*

    Reply

    Tom Hickey Reply:

    Amen.

    First rule of blogging: Don’t feed the trolls.

    Reply

    Vincent Cate Reply:

    “This is why a decent wikipedia page is so essential. Then we can have someone articulate the “deficits = teh hyperinflation” critique, and then we can present succinctly …”

    I think the problem is that you don’t have succinct answers because these (like bonds are a tool for demand control) are not ones MMT people like so they have long convoluted answers. You may never be able to get a wiki to work with long convoluted answers.

    Reply

    studentee Reply:

    the world you live in, it’s worth understanding. you just need to think a little bit harder

    Reply

  54. Vincent Cate Says:

    “If you think that even a fraction of the participants in the legitimate economy have the resources, sophistication, amorality and access to hired killers to move from the legitimate economy to the black market economy, then my investment advice to you is to buy plenty of guns and canned food.”

    You really should read about hyperinflation. In every case a black market develops to avoid the government mandated currency. Trading some corn you grew for some fish your friend caught without paying sales tax on the government money equivalent value is a an illegal black market operation. However, neither you nor your friend need any massive resources or hired killers to make the trade. In hyperinflation the black market becomes a very widespread thing. People need it to get food to stay alive. It is not outside the mainstream, it grows to become the mainstream and then the old paper currency is dead.

    Reply

    studentee Reply:

    what are your examples of relevant hyperinflation? please list a few

    Reply

    Vincent Cate Reply:

    There are lots of examples of hyperinflation on the net. I recommend reading stuff by people who really lived through one. I think you get a better feel for what it is really like from someone who was in one. It also makes it more of a real thing and not just some abstract concept.

    http://www.ourholycause.com/2009/06/hurricane-fed-approaches-and-it-will-be.html
    http://www.ourholycause.com/2009/06/hurricane-fed-part-2.html

    http://gonzalolira.blogspot.com/2011/02/inflation-hyperinflation-and-real.html

    http://www.amazon.com/dp/9870563457?tag=surviinargen-20&camp=14573&creative=327641&linkCode=as1&creativeASIN=9870563457&adid=1M6DJX7940GNQNZC4AF5&

    For the theory and logic of it I think my stuff is good:

    http://pair.offshore.ai/38yearcycle/#hyperinflation
    http://pair.offshore.ai/38yearcycle/#mmthyperinflation
    http://pair.offshore.ai/38yearcycle/#hyperinflationstages

    Reply

    studentee Reply:

    zaire? really? that’s relevant? and argentina was not a true fiat at that time.

    MamMoTh Reply:

    Of course Argentina had a fiat currency at that time.
    As a matter of fact there wouldn’t have been hyperinflation without a fiat currency.

    Anders Reply:

    Vincent – you seem to confuse the symptoms and mechanisms of hyperinflation with causes. MMT’s account of hyperinflation is that it is caused by a huge shock to productive capacity which results in a massively negative output gap (AS < AD). Hence the examples from wartime or other expropriation of production (Zimbabwe and Weimar).

    In respect of Studentee's request, such relevant examples would obviously need to involve sovereign issuers, rather than countries with pegs, gold standard and/or substantial foreign ccy debt.

    Reply

    Neil Wilson Reply:

    The answers are in this thread and many others that have been unnecessarily extended across the Internet.

    Let’s leave the troll to his bridge. He has much to read.

    Reply

    Vincent Cate Reply:

    “Vincent – you seem to confuse the symptoms and mechanisms of hyperinflation with causes.”

    There are a bunch of different claims about what is the true cause and effect situation in hyperinflation. I am sure it is a positive feedback loop. So arguing about which part of the loop comes first is like arguing about which comes first, the chicken or the egg.

    http://pair.offshore.ai/38yearcycle/#hyperinflationfeedback

    Reply

    WARREN MOSLER Reply:

    but you know a non convertible currency with a floating exchange rate policy begins with the tax liability.

    so it should be no surprise that it can end there as well.

  55. Tom Hickey Says:

    On the topic of inflation, IRA reveals itself confused, and also takes a poke in the dark at “Chartalism.”

    Inflation or Deflation? Or is it Global Weimar?

    People pay them for analysis like that?

    Maybe they should come over here and read this comment thread. They might learn something. :)

    Reply

    Matt Franko Reply:

    Tom,
    Looks like he still has not learned anything, though it has been tried before:

    http://mikenormaneconomics.blogspot.com/2009/04/chris-walen-of-institutional-risk.html

    More evidence that some people are just born not to get this (lack of true free will)? Or maybe it is because IRAs primary products are predicated on the current moron policy where the liability side of banking IS the place to enforce market discipline, hard to tell. Resp,

    Reply

    Tom Hickey Reply:

    Here’s the one I love: One of Marc Faber’s favorite books, The Economics of Inflation: A Study of Currency depreciation in Post War Germany (1931) by Constantino Bresciani-Turroni, has a passage in the conclusion that sums up the present financial and monetary dilemma, namely whether the Fed’s monetary policies are inflationary. The answer is of course yes, but this does not preclude deflation at the same time. That duality is, for us, the crucial but daunting reality facing risk managers, investors, bankers and regulators in the future.

    An economist is claiming that there can be inflation (general price rise) and deflation (general price fall) simultaneously. Hasn’t he heard of the principle of non-contradiction?

    I’m sure he would respond, “You know what I meant.”

    My answer would be, “Of course I know what you meant to say, but why did you say something stupid, instead of saying what you meant?”

    Reply

  56. studentee Says:

    “Of course Argentina had a fiat currency at that time.
    As a matter of fact there wouldn’t have been hyperinflation without a fiat currency.”

    let’s use our inference skills here. what was i really trying to say?

    Reply

    MamMoTh Reply:

    You should know what you were trying to say.
    But you said argentina didn’t have a true fiat currency at the time of their hyperinflation. Which is wrong and nonsense.
    But who cares, really?

    Reply

    WARREN MOSLER Reply:

    the great latin american inflations were all traced to govt indexation best I can determine. that’s the govt paying more for the same thing, which simply ‘redefines’ the currency downward. See ‘soft currency economics’ and the other ‘mandatory readings’

    the argentine inflation stopped when they outlawed indexation

    Reply

    MamMoTh Reply:

    And when they pegged their currency to the dollar.
    Indexation surely plays a role in pushing prices
    continually up. This is something you can’t really
    avoid if for instance public servants unions are
    very powerful.
    Isn’t social security in the US indexed to CPI or something?

    Mr. E Reply:

    You know the tiger by its claw.

    Mr. E Reply:

    Sorry sb:

    We know the lion by his claw.

    WARREN MOSLER Reply:

    and the lawyer by his clause

  57. Vincent Cate Says:

    “but you know a non convertible currency with a floating exchange rate policy begins with the tax liability.

    so it should be no surprise that it can end there as well.”

    Yes, well put. It makes perfect sense.

    One of the ways the tax fails to keep up demand for the currency is if taxes are due yearly. Imagine you have a 25% income tax but it is due 4 months after the end of the year. If your salary is going up with inflation at 100% per month then by the time you pay it is like nothing.

    Also, if government provides water or other services that you can pay months later these fees become nothing.

    But the tax free black market does seem to be the real currency killer.

    Reply

    beowulf Reply:

    One of the ways the tax fails to keep up demand for the currency is if taxes are due yearly. Imagine you have a 25% income tax but it is due 4 months after the end of the year.

    Gosh, maybe someone will come up with a way for Tsy to use some kind of layaway-like system that “withholds” taxes from each paycheck instead of annual lump payments. Its pity that monetary officials come from investment banks (freakin’ Goldman!) instead of department stores. :o)
    in 1934 Ruml became an executive of R. H. Macy & Company, parent company of the department store, rising to chairman in 1945. He also served as a director of the New York Federal Reserve Bank (1937-1947), and was its chairman from 1941 until 1946… In the summer of 1942 Ruml proposed that the U.S. Treasury start collecting income taxes through a withholding, pay-as-you-go, system…
    In 1945, Ruml made a famous speech to the ABA, asserting that since the end of the gold standard, “Taxes for Revenue are Obsolete”. The real purposes of taxes were: to “stabilize the purchasing power of the dollar”, to “express public policy in the distribution of wealth and of income”, “in subsidizing or in penalizing various industries and economic groups” and to “isolate and assess directly the costs of certain national benefits, such as highways and social security”. This is seen as a forerunner of functional finance or chartalism.
    http://en.wikipedia.org/wiki/Beardsley_Ruml

    But the tax free black market does seem to be the real currency killer.
    You can’t kill a currency that’s backed by a functioning government because a tax will always be paid. You can pay the tax in dollars to the IRS for legitimate market activities or you can pay the tax in years of your life to the Bureau of Prison for black market activities. The US Dollar will outlive us all because, one way or another, The Man always gets paid.

    Reply

    Tom Hickey Reply:

    When I was living in Mendocino County, where not only is pot legal, so is growing, there was an astonishing headline in the local paper — Pot Grower Busted. In the first line of the article the sheriff explained: “I just want to make clear that we didn’t bust him for growing but for not paying his taxes.” :o

    Reply

    WARREN MOSLER Reply:

    the black market is used to get around compliance issues.

    hence my proposal for a federal real estate tax to ‘replace’ most all federal taxes removes most federal reporting requirements in general thereby minimizing black market activity.

    yes, if govt tries to spend more than the tax liability plus ‘savings desires’ for that currency it certainly can drive up prices, though I doubt your timing issues are particularly critical in that regard, but that’s a different story.

    Reply

  58. Vincent Cate Says:

    If the US dollar does get hyperinflation and all of the MMT economists said there was no chance of that, then it will discredit MMT for a long time. I don’t believe the MMT view really says there is no chance of hyperinflation. In fact, I think it makes the risk of hyperinflation rather clear. Anyway, something to think about.

    Reply

    Neil Wilson Reply:

    Thanks for that.

    I think the evidence is clear.

    Reply

    Anders Reply:

    Vincent – I shouldn’t take the bait, but for the hundredth time, MMT says that a *necessary condition* for hyperinflation is a situation where aggregate demand is massively in excess of aggregate supply. This in practice entails a huge supply shock. If war or severe weather somehow destroys a chunk of US productive capacity, then hyperinflation will likely result – this is consistent with MMT.

    If we get hyperflation this year from a 10% deficit and QE, then MMT will look silly – and you can laugh at us all, with your hoard of tin cans ammo. Let’s see.

    Reply

    Vincent Cate Reply:

    “MMT says that a *necessary condition* for hyperinflation is a situation where aggregate demand is massively in excess of aggregate supply. This in practice entails a huge supply shock.”

    So you believe in supply shocks but not in demand shocks. All kinds of bonds being paid off and no new bonds being sold (historically resulting in hyperinflation) does not worry you? But if there were revolutions in several OPEC countries and the supply of oil was hurt, then the US could get hyperinflation?

    http://apnews.myway.com/article/20110222/D9LHFSU80.html

    Then why would not every fiat currency in the world get hyperinflation when there is an oil shock? I can promise you China will not get hyperinflation, because it has no debt. But by your “supply shock” theory there is no difference between USA and China as far as oil prices going up?

    Why does a supply shock cause a positive feedback loop leading to the destruction of a currency in some currencies and just a simple price change in other currencies?

    http://pair.offshore.ai/38yearcycle/#hyperinflationfeedback

    There is more to hyperinflation than just a supply shock.

    Reply

    WARREN MOSLER Reply:

    your ‘demand shock’ is what I call a reduction in savings desires, where people suddenly want to spend their dollar savings, rather than hoard them. an example might be china deciding to spend it’s 2 trillion all at once.

    and yes, that would likely result in an increase and demand, and rising prices until spending, taxing, and savings desires are back in ‘balance.’
    But that’s not the stuff of hyper inflation, as commonly defined, though by your definition of hyper inflation it might be.

    Oil shocks like what we’ve had did drive up cpi’s all over the world, but they were not delivered in a way to cause what’s commonly meant by hyper inflation.

    that would require a continuous, rising, accelerating price hike without a supply response.

    an example would be an underwater community with a monopoly supplier of air.
    that supplier could hike prices in a manner that would resemble hyper inflation.

    Anders Reply:

    AFAIK hyperinflation has always always been characterised by downward shocks to supply, since that is the more likely route for demand to get massively in excess of supply. Weimar, Zimbabwe and wartime examples saw >30% of productive capacity destoyed. That’s why it looks remote in the US. As underlined by WalMart’s results today, monetisation / QE does not seem to have resulted in a sharp shock to demand.

    The 1970s oil shocks were exacerbated by positive feedback loops from indexation and unionisation / collective bargaining – and yet the US saw no hyperinflation then. My understanding is that oil represents a lower % of US GDP now than it did in the 1970s; and there is less indexation and collective bargaining power than there was then.

    You have been asked before for examples of hyperinflation that are remotely comparable to the current time in the US, UK, Australia and Japan. Your site has a lot of verbiage but I don’t see any attempt of a presentation of relevant examples, with an analytical read-across to the present day.

    “Why does a supply shock cause a positive feedback loop leading to the destruction of a currency in some currencies and just a simple price change in other currencies?”

    Probably depends on the (1) magnitude of the supply shock vs GDP, (2) the ability of a wage-price spiral and other mechanisms to instill a feedback loop, (3) govt obligations denominated in foreign ccy or gold.

    WARREN MOSLER Reply:

    agreed

    seems the Fed should be stating same as well.

    MamMoTh Reply:

    I do not agree with the idea that hyperinflation is always the result of some supply shock. I can’t see which kind of supply shock might had caused the hyperinflation in Argentina and Brazil for instance. I think those are cases of endemic high inflation spiralling out of control.

    Maybe you could say that in those cases inflation was the cause of a supply shock. When inflation reaches such high levels (say 50-100%), you can make much more profit from speculating on the currency depreciation or any other hedge against inflation than investing in productive capacity.

    WARREN MOSLER Reply:

    how about aggressive govt indexation and servicing fx (dollar) debt via deficit spending to buy dollars with pesos, etc.

    MamMoTh Reply:

    yes, govt indexation and deficit spending to service debt in foreign currencies were part of the problem. but that’s from the demand side.
    my point is that high inflation, triggered from the demand side can also have negative consequences in the supply side, since financial speculation becomes much more lucrative than investing to increase productive capacity.
    i don’t think any of the countries with endemic high inflation did well in terms of economic growth in the long term.
    but now that inflation is under control in latin america (except in Venezuela) their economies are booming.

    WARREN MOSLER Reply:

    Turkey had very high real growth for many years even with inflation rates hovering around 100%

    As did Italy with low double digit inflation rates.

    etc.

    WARREN MOSLER Reply:

    right, or a cessation of tax collection, or a foreign monopolist putting it to us coupled with the ‘wrong’ policy response on our part.

    Reply

    WARREN MOSLER Reply:

    hyper inflation as commonly defined is currently a very remote possibility only as far as the US dollar is concerned.
    there would have to be a near total breakdown in tax collection.
    this could happen with other currencies, especially in the ‘trouble zones’ where the cessation of effective taxing authority would instantly result in hyper inflation.

    in the US it would have to come from blowout/accelerating aggregate demand and/or dollar sales by the federal govt. but as they say, to get out of a whole first you have to stop digging, and right now there is a shortage of aggregate demand.

    prices can go up with a spike in energy costs, etc. but that’s not hyper inflation.

    Reply

  59. Ramanan Says:

    “Hyperinflation” count crosses 100!

    Reply

  60. Ramanan Says:

    Anon,

    Its hyperMonetarist to give a description of macroeconomics which says that in the Gold Standard and similar regimes the central bank controls the money supply. No it doesn’t. The government and the central bank do demand management. And demand is not equal to money.

    Consider this – even in the present system, banks promise you to convert your money into currency notes. If the private sector together demands currency notes from banks, they cannot do anything. Unlike an MMT preferred world where banks have unlimited and uncollateralized overdraft at the central bank, real world banks do not have it. Banks assets are illiquid.

    So the “proof by going into extreme” to prove something about the Gold Standard is not a proof at all.

    Central banks never controlled the money supply. The only time they ever did – rather attempted – was in the post 1971 regime – at the end of 70s, early 80s.

    Central banks and governments would manage demand. Demand is not equal to money.

    Let us say that the central bank loses gold reserves in official settlements. This does not mean that reserves (i.e HPM) also go down. Rather, the adjustment happens via “claims on banks” i.e., the banking system would go into a higher overdraft at the central bank.

    If the central bank faces the prospect of losing Gold reserves, it (and the Government) would tighten fiscal policy. However how much to tighten etc is in the control of the government. The central bank can hike rates by 200bps or 400bps.

    The error made in thinking in one direction of looking at it is to literally believe the central bank “backing” its currency… Descriptions such as that.

    Reply

    anon Reply:

    61. is a reply to you, R.

    Reply

    vjk Reply:

    Ramanan:


    Let us say that the central bank loses gold reserves in official settlements. This does not mean that reserves (i.e HPM) also go down.

    Under the “real” gold standard, in Milton Friedman’s sense, if the central bank loses gold reserves, it means it loses its rather limited ability(by the limited stock of base money) to conduct monetary policy, i.e. set interbank borrowing rate.


    the banking system would go into a higher overdraft at the central bank.

    The commercial bank cannot go into overdraft because no other bank would accept the Fed promise in lieu of gold to settle, by definition.

    Purely hypothetical of course.

    Not defending gold standard or any other system of fixed base money. Not at this time at least;)

    Reply

    Ramanan Reply:

    Whats a pure Gold Standard ?

    Reply

    vjk Reply:

    Not “pure”, “real”.

    See Milton Friedman’s article ca. 1960 (cannot find it right away) regarding “pseudo” vs. “real” gold standard. He claims that the gold standard the US had been on was “pseudo” due to parallel paper currency circulation primarily, as far as I remember. His argument is pretty simple, but I do not want to reproduce it here for fear of distorting his view.

  61. anon Says:

    can’t tell off the top if you agree or disagree with me

    i think maybe you agree

    if disagree, with what exactly?

    Reply

    anon Reply:

    p.s.

    what i’m saying is that the (bonds required for fixed) / (no bonds feasible for floating) is a false comparison

    bonds aren’t really required in either, because the CB still needs to control policy interest rates in both, and can do it in theory with or without bonds in both

    Reply

    Ramanan Reply:

    Yes. More than Agree.

    Its possible for the central bank to set the yield curve in the Gold Standard.

    For someone with too much hahaheehee on the usage of “borrow” – i.e., quibbling on the usage of borrow – the root of a lot of things.

    Reply

    Ramanan Reply:

    Was that for me ? I don’t disagree with anything.

    Reply

    anon Reply:

    yes

    good

    didn’t take sufficient time with your comment yet

    sorry

    Reply

    anon Reply:

    and (bonds required for fixed) / (no bonds feasible for floating) is a cornerstone of MMT “theory”

    so I’d sort of like to be proven wrong, but i don’t see it yet

    Reply

    Scott Fullwiler Reply:

    I don’t see how you can say it’s a cornerstone of MMT. I would actually agree with that statement if what you’re referring to is a basic fixed exchange rate peg like Mexico pegging to the $ or something like that. For a gold standard or currency board, it’s a bit squishier, though, as Warren suggested above in comments on the gold standard and bonds.

    Reply

    anon Reply:

    my brief reading of Warren’s treatment of the HK currency board is that there’s a different kind of quantity constraint there that definitely restricts commercial bank freedom to transact in the conversion object, due to specified quantity limitations and requirements

    but it looks to me like that’s best treated as a special case because of its particular treatment of commercial banks

    Scott Fullwiler Reply:

    Yes. I didn’t interpret your comment as referring to currency boards–sorry if I was wrong. Even in currency boards and gold standards, though, it would seem that Tsy wouldn’t have to issue bonds if CB drained via time deposits and such.

    anon Reply:

    no, you were right; that was just a side comment on currency boards, somewhat separate from the bond question; i’m looking more at gold and dollar pegs, etc.

  62. Ramanan Says:

    Anon,

    Sorry what about currency board versus other systems ?

    Reply

  63. Vincent Cate Says:

    “again, along with taxation, savings desires reduced aggregate demand.

    and savings desires are not caused by bonds nor is it likely they are enhanced by bonds.”

    When someone buys a regular company bond that company can then invest the money. So the money is not destroyed. But when someone buys a government bond that money goes away. So while regular savings/investment does not reduce demand buying government bonds does.

    Reply

    Ramanan Reply:

    When someone buys a US Treasury security, the funds move to Treasury’s account at the Federal Reserve.

    The Federal Reserve spends the funds.

    Reply

    Ramanan Reply:

    Oops .. that should be .. the Treasury then spend the funds, not the Federal Reserve – similar to what you say about a corporation.

    Reply

    Vincent Cate Reply:

    “Treasury then spend the funds, not the Federal Reserve – similar to what you say about a corporation.”

    You are thinking as if the government sells bonds to fund the government operations. This is not the MMT way of looking at things.

    The government can make all the money it wants, so we can imagine that all the money they spent they just printed out of thin air.

    Taxes and bonds are just done to to control aggregate demand and inflation, not to fund the government.

    In reality the government may in fact save some printing costs by reusing an existing bill but this is just an optimization detail. You are better off to imagine they shred or burn every dollar they get from taxes or bond sales if you want to “get” the MMT way of thinking about it.

    If you are too “green” to imagine that much burning, then just define “money supply” to be money outside of government and you can get the same result without burning.

    WARREN MOSLER Reply:

    bonds are not ‘done’ to control aggregate demand, as previously discussed.

    the desire to ‘not spend’ income is what reduces demand.
    the unspent income is in the first instance is reserve balance, with alternatives of cash or securities offered by the govt as well.

    and the imperative behind tsy secs is interest rate management.
    see ‘soft currency economics’ under ‘mandatory readings’

    WARREN MOSLER Reply:

    not spending income reduces demand, whether that income is held as overnight balances or as time deposits of one sort or another.

    and yes, for the non govt sectors, there can only be net savings of local currency financial assets if that govt. spends more than its income.

    that is, govt deficit = non govt savings of financial assets.

    Reply

    Vincent Cate Reply:

    “not spending income reduces demand, ”

    If I don’t spend my money but buy a bond from a company they then can spend my money. So my not spending does not mean my money is not spent, just not by me.

    However, if I give I loan it to the government they don’t spend any more than they would have anyway, since they can make all the money they need. At least in MMT way of looking at things.

    These 2 cases are very different.

    Reply

    WARREN MOSLER Reply:

    right, it’s about non govt savings desires. that includes corp decisions to spend or not spend

    spending is aggregate demand, not spending isn’t

    Scott Fullwiler Reply:

    Of course, it’s roughly the same with the corporation, too, since if you don’t give them the “money” you’ve saved and instead give it to the Tsy, there isn’t any less “money” available for the corporation–loans create deposits.

    Anders Reply:

    Vincent – to expand on Warren’s comment, if you save $100 one year and buy a bond, then your ‘not spending’ has indeed reduced demand. Now, if that is a govt bond, then you are simply rearranging your stock of govt claims to get more interest. But if you buy a corporate bond, then your ‘not spending’ has been offset by that corporation spending beyond its income, which increases demand so as to offset your reduction in demand. So buying a corporate bond is a wash in demand terms.

    Again – buying a govt bond itself is not reducing demand; the purchase is simply a portfolio shuffle.

  64. Straight from the Glorious Leader « The Traders Crucible Says:

    [...] case ya’all were thinking that MMTers think that spending is never inflationary.  It’s buried in the comments, but it is [...]

  65. Vincent Cate Says:

    “Again – buying a govt bond itself is not reducing demand; the purchase is simply a portfolio shuffle.”

    In the private case we end up with someone with the money and someone with a bond. In the case of the government bond we only have the bond and the money is gone. Even if you count bonds as “fuel” then in the government case there is 1 unit of fuel and in the private case there is 2 units of fuel. So clearly the government selling bonds, in competition with private companies, reduces “fuel”.

    Reply

    vjk Reply:

    Vincent:

    You are forgetting that the Treasury, having sold a bond to person A, immediately, more or less, spends the proceeds on person B, let’s say pays him salary. Person B can go and buy a company bond if he is so inclined, so no competition, theoretically.

    Reality is of course more complex.

    So, forgetting for a moment bonds dynamics, the amount of zero maturity money, or “fuel”, remains the same, abstracting from the small time lag.

    I believe you are confused by the money destruction metaphor which, I think, is not a very good metaphor in the current operational reality.

    Reply

    Vincent Cate Reply:

    “You are forgetting that the Treasury, having sold a bond to person A, immediately, more or less, spends the proceeds on person B, [...]”

    You are thinking that bond sales fund the government. This is not the MMT way of thinking about it. If you are going to think that you might as well think taxes fund the government. I think you can get kicked off this forum for saying that. :-)

    Reply

    vjk Reply:


    You are thinking that bond sales fund the government

    In the current operational reality, they do.

    In the MMT imagined universe, they don’t ;)


    taxes fund the government

    Ditto ;)

    WARREN MOSLER Reply:

    taxes fund the tsy, they do not ‘fund the govt.’

    it’s a self imposed constraint imposed by congress, which is the govt., on the tsy, one of congress’s agents.

    vjk Reply:

    “taxes fund the tsy, they do not ‘fund the govt.’”

    Sure, but that’s an immaterial nit, the treasury being part of the executive branch of the government.

    WARREN MOSLER Reply:

    the tsy follows instructions set by congress. it doesn’t make the rules

  66. Vincent Cate Says:

    “taxes fund the tsy, they do not ‘fund the govt.’

    it’s a self imposed constraint imposed by congress, which is the govt., on the tsy, one of congress’s agents.”

    This seems important and I am not sure I get this. Are you saying that the current self imposed constraints make it where the Treasury has to get money from taxes and bond sales before it spends money but that since the government could change these self imposed constraints they are not really binding? In other words, we could have the treasury just print the money it wants to spend, even though that is not how it is done at the moment.

    Reply

    ESM Reply:

    That’s correct. The Treasury does retain the ability to print bills, notes, and bonds, though, including 1-day T-bills which are about as close to cash as you can get while still being a bond. The Treasury can print bonds up until the debt limit, another self-imposed constraint. If it wasn’t for the debt limit, Treasury could print bonds until the cows come home.

    Reply

    vjk Reply:

    “the government could change these self imposed constraints ”

    The legislature could, not the “government” ;)

    The constraint is “self-imposed” to the same degree as any law is.

    Reply

    studentee Reply:

    i don’t understand the purpose of your latest comments here. what are you trying to get at?

    Reply

    Tom Hickey Reply:

    There are operational rules applicable generally to a fiat system and special cases constructed by imposition of political restraints. For example, the US Treasury is prohibited from running an overdraft at the Fed, so it must sell bonds to get reserves needed to clear its checks when it spends. In addition, the Fed is not allowed to exchange reserves for tsys directly with Treasury, so it auctions them through its primary dealers.

    This means that, temporally, the Treasury has to issue bonds before issuing currency by marking up deposit accounts, although, operationally, deficits fund tsys since the US is operating under a fiat regime in which deficits inject the net financial assets that nongovernment saves as tsys.

    If this looks like a shell game, it is.

    MamMoTh Reply:

    so government cheques can actually bounce, right?

    WARREN MOSLER Reply:

    sure, govt ‘clears it’s own checks,’ so it could decide not to.

    all one can say is that govt is unique in that it is not operationally constrained.
    all constraints are political.

    the difference is between what the ratings agencies call ability to pay, vs willingness to pay.

    Neil Wilson Reply:

    They do in Ireland.

    Any particular reason why semantics are more interesting than substance?

    Tom Hickey Reply:

    so government cheques can actually bounce, right?

    This can happen in the US if Congress appropriates funds in the budgetary process that exceed the debt limit and then doesn’t raise the debt limit to make the funds it has appropriated available. Sounds crazy? It is. There is no actual lack of funding operationally under the present system.

    The consolidated Treasury/Fed can always provide funding for whatever Congress appropriates, unless Congress prevents this. The executive branch and its agencies are prohibited from exceeding legislative appropriations or circumventing laws passed by Congress. Congress controls the purse strings iaw the Constitution. The executive only executes what Congress has approved iaw conditions Congress attaches.

  67. Ramanan Says:

    Vjk,

    Will read Milton Friedman’s article. Just browsed through.

    Milton Friedman knew a lot of things better than the Keynesians but his ideology blinded him to say many things not possible.

    He says

    # the use of gold as money, which I shall call a “real” gold standard;
    # governmental fixing of the price of gold, whether national or international, which I shall call a “pseudo” gold standard.

    “A worldwide free market in gold might mean that the use of gold as money would become far more widespread than it is now. If so, governments might need to hold some gold as working cash balances. Beyond this, I see no reason why governments or international agencies should hold any gold. If individuals find warehouse certificates for gold more useful than literal gold, private enterprise can certainly provide the service of storing the gold. Why should gold storage and the issuance of warehouse certificates be a nationalized industry?”

    He seems to understand money endogeneity but wishes that the monetary world behave differently than the times. So while he understood that central banks do not control the money supply, he wanted them to do so and thought it is just a question of will.

    Anyway, I refer you to some literature in endogenous money/Horizontalism where the proponents argue that money is always credit driven. The world with a fixed supply of money doesn’t work.

    Reply

  68. Vincent Cate Says:

    “all one can say is that govt is unique in that it is not operationally constrained.
    all constraints are political.”

    If they do things too crazy they can get hyperinflation and destroy their currency. But as long as they don’t do that they can print money and pay for real goods and services.

    It is much like a corporation that can print and sell shares, as long as they are not crazy about it.

    Reply

    Peter D Reply:

    Sounds reasonable to me. You can always drive even the best car into a ditch. Nobody says a fiat currency regime is a fool proof system. Pointing out that under some very extreme circumstances the system breaks is neither here nor there, IMHO, since this is true for any system.

    Reply

    Vincent Cate Reply:

    “Sounds reasonable to me. You can always drive even the best car into a ditch. Nobody says a fiat currency regime is a fool proof system. Pointing out that under some very extreme circumstances the system breaks is neither here nor there, IMHO, since this is true for any system.”

    Yes. I agree. But if you can understand what would cause a system to break and avoid doing that you can avoid a lot of pain.

    Reply

    Vincent Cate Reply:

    PS. I don’t buy that the failure of a fiat currency was ever really caused by anything other than the monopoly issuer of that currency. Makes no sense that some supply shock could cause a healthy currency to suddenly go bad. If it were near failure anyway I could see a supply shock pushing it over the edge. Like $200 oil might cause the dollar or the yen to go into hyperinflation, but only because they are in bad shape. The yuan is at no risk from a supply shock.

    Oliver Reply:

    There are other political organs attached to the central bank that are perfectly able to induce a supply shock of their own. No need for foreign entities to do that. Think Mugabe.

    Oliver Reply:

    except that government can force demand for its shares upon its unsuspecting populace by levying taxes.

    Reply

    Vincent Cate Reply:

    “except that government can force demand for its shares upon its unsuspecting populace by levying taxes.”

    Up to a point. If things get too hard you get refugees leaving, which lowers demand for the currency. If people are going to starve to death they may instead try to kill off the government. And in the case of hyperinflation the population moves to the black market, which lowers taxes and demand for the currency as the black market does not operate in the local currency in hyperinflation. Eventually so much of the economy has moved to the black market that the government needs to tax the black market to survive, so they legalize it. This means legalizing other forms of money and giving up on the old currency.

    Reply

    studentee Reply:

    it’s absolutely bizarre that you think that anything like this will happen in the us.

    WARREN MOSLER Reply:

    right, they are not operationally constrained from producing hyper inflation. the constraints are political

    Reply

    Vincent Cate Reply:

    “right, they are not operationally constrained from producing hyper inflation. the constraints are political”

    Right. This makes me think of some science fiction book I read long ago. It was set on some generational ship going between the starts. Several generations had happened since the ship departed and the current generation did not really understand the reasons for the way some of the systems were designed on the ship. This led to trouble.

    Central banking is like this. Initially the system is designed to avoid trouble. Rules are setup that the central bank can only have short term debt of the highest quality on its books. This means it can always get the full value back if it needs to take money out of the system to avoid inflation.

    But generations later people start buying long term debt, debt that is not the highest rating, even toxic assets. The ECB buying Greek debt when it is not investment grade is against the bank’s rules, but they do it anyway because they don’t understand why it would be a problem. And Bernanke buying 10 year and longer debt, he does not understand the trouble. As interest rates go up the bond values can go way down. As the velocity of money goes up he will not be able to take out enough money to avoid inflation.

    After a few generations the political constraints against hyperinflation fail due to lack of fear and lack of understanding.

    One good thing is that after the USA has hyperinflation they will probably not have it again for 80 years.

    Reply

    WARREN MOSLER Reply:

    agreed with your premise, but then you fall into the situation you warn about.

    for example, initially the fed was set up in the context of the gold standard of the time.

    what almost no one seemed to notice was that switching off the gold standard ‘changed the channel’

    anyway, most of the rest of what you said is out of paradigm

  69. Word is getting out about MMT (Modern Money theory) – Smart Taxes Network Says:

    [...] tip to Warren Mosler ‘Centre of the Universe’ for this article in Market Watch. Traders seem to be less hidebound by obsolete economic theory -  [...]

  70. Mario Says:

    Warren,

    I read natural rate of interest is zero and liked it. When you state that risk free rate is 0% for our economy is this to prove that the natural structure and architecture of our economy is sound and positively functional? Whereas under a gold standard for example, as you state, the risk free rate is negative due to storage issues and the like, making the architecture of a gold standard economy less efficient and functional than our floating exchange system?

    Also the second to last line of the essay you state:

    “Furthermore, there are a number of reasons why allowing the rate of interest to settle at its natural rate of zero makes good economic sense.”

    Do you think you could name these reasons? Also is this to say that you suggest the Fed Funds to be at 0% all the time? Just trying to clarify. Thank you!

    Reply

  71. a wiki for MMT? | MMTWiki Says:

    [...] Neil Wilson: “We need a wiki!” [...]

  72. Vincent Cate Says:

    “Yet, if you look out the window, you don’t see any red ink or mountains of debt.”

    This reminds me of the joke about the guy falling off a 100 story building. When he passes the 50th floor someone asks how he is doing and he says, “so far so good”.

    Until hyperinflation hits things may look just fine. But they won’t after that.

    Reply

    Tom Hickey Reply:

    Gotta give you credit, Vincent, you never give up. See any signs of hyperinflation yet? If you do, please let us know. :)

    BTW, did you read Cullen Roche’s post on hyperinflation at Pragmatic Capitalist yesterday? I didn’t see your name in the comments.

    Reply

    Neil Wilson Reply:

    Hyperinflation nuts see hyperinflation everywhere, green nuts see nuclear disaster everywhere, neoliberals see government waste everywhere.

    They must all find the real world a terrible disappointment.

    Reply

    WARREN MOSLER Reply:

    i see deficit terrorists everywhere

    :(

    ESM Reply:

    I don’t think neoliberals are ever disappointed if they expect to see government waste everywhere.

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