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

Robert Reich’s no so innocent fraud

Posted by WARREN MOSLER on April 21st, 2011

Obama’s Real Budget Plan (and Why It’s a Huge Gamble)

By Robert Reich

Here’s the part of interest to me:

Yet what are the chances of a booming recovery? The economy is now growing at an annualized rate of only 1.5 percent. That’s pitiful. It’s not nearly enough to bring down the rate of unemployment, or remove the danger of a double dip. Real wages continue to drop. Housing prices continue to drop. Food and gas prices are rising. Consumer confidence is still in the basement.

Fair enough, now on to the problem and the remedy:

By focusing the public’s attention on the budget deficit, the President is still playing on the Republican’s field. By advancing his own “twelve year plan” for reducing it – without talking about the economy’s underlying problem – he appears to validate their big lie that reducing the deficit is the key to future prosperity.

Promising rhetoric there- deficit reduction isn’t the answer!

The underlying problem isn’t the budget deficit.

Really getting my hopes up now!

It’s that so much income and wealth are going to the top that most Americans don’t have the purchasing power to sustain a strong recovery.

****sound of a balloon deflating****

Until steps are taken to alter this fundamental imbalance – for example, exempting the first $20K of income from payroll taxes while lifting the cap on income subject to payroll taxes, raising income and capital gains taxes on millionaires and using the revenues to expand the Earned Income Tax Credit up to incomes of $50,000, strengthening labor unions, and so on – a strong recovery may not be possible.

Message to Bob:

I suspect you understand taxes function to regulate aggregate demand, not to fund expenditures per se?

So please don’t blow smoke and instead just state that the tax cut part of your proposal is meant to add to aggregate demand,

And that the tax increase part is to achieve your vision of social equity without subtracting very much from aggregate demand.

Instead, by doing it the way you are doing it, you are implying that the deficit per se is of economic consequence.

This makes you part of the problem, rather than part of the answer, as you are supporting the deficit myths which are preventing any actual solution from being implemented.

Robert B. Reich has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He also served on President Obama’s transition advisory board. His latest book is Supercapitalism.

279 Responses to “Robert Reich’s no so innocent fraud”

  1. beowulf Says:

    And that the tax increase part is to achieve your vision of social equity without subtracting very much from aggregate demand.

    Reich is a sharp guy, I suspect he’s in paradigm on this and knows that the important parts are the tax cut and expanded EITC to boost AD.
    The tax hikes on the wealthy (which as you say, wouldn’t subtract very much from AD) are merely the dead chickens thrown out to distract the deficit zombies

    Reply

    pebird Reply:

    There is something about corporations like GE not paying any income taxes, and CEO compensation in the hundreds of millions annually that doesn’t quite sit right. But that’s just me.

    Taxes are not necessary to fund anything, but politically that is what people think. Also getting income into the hands of people that will spend (eliminate taxes for those under $20K, expanding EITC) makes perfect sense.

    I think reducing the aggregate demand of the greedy would probably cut down on some speculative, non-productive activities also.

    There has to be SOME level of taxation for fiat currency to have value – what should that level be for millionaires and billionaires and babies?

    Reply

    Tom Hickey Reply:

    pebird, most of the income of the rich goes to wealth accumulation (saving). This creates demand leakage. Progressive taxation is a drain on savings accumulating at the top. This creates a negative incentive to save and a positive incentive consume more and to invest productively, both of which contribute to the economy, where as saving is taking money and putting in it under a mattress.

    Reply

    djp Reply:

    Hi Tom,
    Why should we prevent people from saving?

    Can’t we make make the same argument about savers in the US as we do about the Chinese — real imports are a boon, real exports a cost ?

    When the Chinese provide us with a good or service in exchange for a dollar, and then bury the dollar in the ground (save), we are happy because real imports are good. Shouldn’t we be just as happy if it was our neighbor and not someone in China? Aren’t you just getting to benefit from what you may see as your neighbors irrational desire to save ?

    Tom Hickey Reply:

    Djp, ask Keynes: “Euthanize the rentiers.”

    I am not talking about ordinary folks saving for a rainy day. I am talking about fund garnered from economic rent that are used to generate more economic rent. It used to be called “usury.”

    When an economy becomes financialized to the degree that productive investment suffers, there is a problem. The US has that problem now, and so does the world. The result is lagging demand.

    There are two ways to solve this. The first is increasing deficits (and therefore debt) and the other is recycling saving to productive investment. If debt increases faster than GDP, there are sustainability problems. It means that the funds are not flowing to spending (c & I ) but to hoarding. So savers at the top have to be incentivized to invest rather than hoard, since the people at the top can only consume so much and cannot carry the economy without investing.

    The way to go is to tax away economic rent that gathers at the top and recycle it into demand at the bottom, sending a signal to invest instead of hoard or speculate. The folks at the top are not saving for a rainy day, and most of the savings (financial wealth) belongs to them.

    See Michael Hudson on this.

    ESM Reply:

    Djp is correct. Domestic misers are good to have, just like Chinese savers and mercantilists are good to have. We just need to make the proper fiscal adjustments to keep aggregate demand up.

    By the way Tom, investment doesn’t happen before consumption. Nobody is going to invest in new production until they see that the demand is there to generate sales. Raising consumption is the key, and the way to do that is for the government to give more money to the people.

    Also, it is unnecessary to tax away the wealth of the misers or the rentiers. It accomplishes nothing except to piss them off. Let them roll around in their money if that’s what they like. To the super-wealthy, money is just a way of keeping score (much like how MMT views the Fed). If they’re not going to spend it, who cares?

    Tom Hickey Reply:

    That’s true now, ESM, but over the past decades during financialization, investment in the US has lagged as multinationals have shifted investment abroad. The US doen’st have an exploding numerator problem (debt) it has a shrinking denominator (GDP) problem.

    I agree that the problem now is demand, but look where the money is flowing: to the top and trading financial assets.

    djp Reply:

    ESM,
    Agreed, if the super-wealthy just want to look at a big pile of money – or even just numbers in a spreadsheet – that’s fine by me, as long as we got something out of them in return for the scores they are accumulating.

    Tom,
    I don’t see how you addressed the difference between the Chinese increased desire for $ nfa, and the rich (or even not so rich) American’s desire for $ nfa.
    The ‘real’ benefit it would seem that you should get from taking away the saver’s cash is perhaps more production out of them, since they clearly have a desire to have all that savings. But I also think that this mentality could backfire (and has in many countries) once the people who desire to have savings realize that no amount of extra production will ever allow them to satisfy that desire. Imagine what would happen if the Chinese suddenly realized that all of their $$’s were worthless because you thought *all* rentiers needed to have their nfa savings taken away (why stop at the American savers of $$ nfa). They probably wouldn’t want to give us any more real goods and services in return for our pieces of paper.

    I’m curious if your definition of rentier only applies to $$ or monies, or if it also applies to land, gold, etc. There appear to be varying usages out there.
    If it applies only to currency, then would it be ok if all of these savers switched to gold, would you then allow them to satisfy their savings desires?

    Tom Hickey Reply:

    Djp, according to MIchael Hudson, capital (ownership) gets to distribute the surplus created by productivity to the owners’ share and the employees’ share. Capital has been taking an increasing share for some time, as productivity rises and wages do not keep pace. Those funds go to owners’ consumption, investment (capital expenditure) or saving. Presently, investment is low relative to consumption and saving. The luxury market is doing well and money is also flowing into financial vehicles. CAPEX in the US, not so much. This trend predates the crisis, because US companies have been investing in emerging markets for some time, since they perceive that this is where the growth is and will be coming from for the foreseeable future.

    Moreover, owners are not investing (spending on capital goods) as much as spending on luxury items and saving financial assets. The result has been stagnant wages and increasing financial insecurity and indebtedness for workers. The US is subsidizing this though its economic policy including monetary and fiscal policy.

    The result is lagging demand in the US and a dilemma between worker indebtedness and unemployment. The proper response is fiscal according to MMT. I would say that in addition to deficit expenditure to offset the leakage, negative incentives need to be applied in order to discourage excessive accumulation at the top and positive incentives for productive investment.

    The way to do this is by taxing economic rent, which accumulates at the top, instead of taxing income from production and gains from productive investment. For example, exempt primary investment from taxation and get rid of FICA while taxing economic rent (land rent, monopoly rent, and financial rent), on one hand, regulating FIRE, prohibiting behaviors that are parasitical, and actually instituting accountability.

    Moreover, the ROW is saving dollars due to the net import condition of the US for some time instead of balancing trade by accepting more US exports. This is a problem because some countries are operating on a mercantilist policy as a national business model. The result is demand leakage for net importers like the US and in effect exporting jobs. The US is acquiescing in this by not taking steps to increase employment, subsidizing external savings desire by paying interest on tsys (which is operationally unnecessary), and by allowing its external policy to be set by those with vested interests at odds with US workers.

    Fixing the unemployment catastrophe goes beyond offsetting leakage to savings and net imports by fashioning a policy that discourages leakage in the first place. Tax incentives can play a role in doing this, since taxation constitutes a negative incentive.

    There are three principal reasons for discouraging accumulation at the top. First, excessive economic inequality has been shown empirically to be a drag on an economy. Secondly, accumulation at the time undermines democracy and leads to plutocratic oligarchy. Third, the basis of an economy is the production cycle (production, distribution, and consumption); extraction disrupts this cycle.

    Finally, shared productivity increases lead to distributed national prosperity and greater social harmony by distributing income, hence effective demand. Henry Ford knew he had to pay his workers enough to buy his cars. The new business model is to lend enough to one’s workers to enable them to buy one’s cars and also to finance used cars for those unable to afford new.

    This is the road to debt peonage and increasingly frequent economic crises.

    Tom Hickey Reply:

    Apparently, most Americans agree with something like this.

    Study: Most Americans Want Wealth Distribution Similar to Sweden

    Recent analyses have shown that income inequality in the US has grown steadily for the past three decades and reached its highest level on record, exceeding even the large disparities seen in the 1920s, before the Great Depression. Norton and Ariely estimate that the one percent wealthiest Americans hold nearly 50 percent of the country’s wealth, while the richest 20 percent hold 84 percent of the wealth.

    But in their study, the authors found Americans generally underestimate the income disparity. When asked to estimate, respondents on average estimated that the top 20 percent have 59 percent of the wealth (as opposed to the real number, 84 percent). And when asked to choose how much the top 20 percent should have, on average respondents said 32 percent — a number similar to the wealth distribution seen in Sweden.

    “What is most striking” about the results, argue the authors, is that they show “more consensus than disagreement among … different demographic groups. All groups – even the wealthiest respondents – desired a more equal distribution of wealth than what they estimated the current United States level to be, while all groups also desired some inequality – even the poorest respondents.”

    Tom Hickey Reply:

    Here is a video that speaks to this:

    Hudson/Wolff On Debt and Recession

    save america Reply:

    Hickey, regarding some of your other points, my Poli Sci professor back at university always said that a benevolent dictator was the best form of government. For example, we all agree this comments system is CRAP and replying to deeply embedded comments is frustrating and hard, but our benevolent dictator Warren knows what is best for us right and so there is no change. :*(

    Secondly you say:
    Henry Ford knew he had to pay his workers enough to buy his cars.

    I want to expand on this meme, I see very serious problems in the USA, women get so much from the STATE now, that they don’t have to depend on the men for themselves or thier children and this is ruining many things. So back to Ford, I need to have enough resources to be able to support and grow a family to attract a good wife. The nations laws, economy, courts, welfare, etc etc is destroying that ability, so in essence, I am not being given enough to buy that car, but its OK, the state is going to come in and buy that car (the woman and family) for me and use it for themselves, while I get put into debtors prison because I couldn’t afford child support payments because FORD crushed me down so low into poverty.

    JCD Reply:

    @ Tom Hickey says:

    Apparently, most Americans agree with something like this.

    Study: Most Americans Want Wealth Distribution Similar to Sweden

    It’s not so shocking that the majority of Americans would like to take money from a minority of Americans and give it to themselves. But just because the majority desires it doesn’t make it right. I think that’s the essence of constitutional protections on liberty, isn’t it?

    What if I ran a poll that resulted in the majority of Americans favored taking 90% of Tom Hickey’s wealth and giving it to the poor?

    As for the wealthy favoring a more even distribution of wealth, well all I can say it’s in their power to do something about it.

    These kind of polls are silly. It’s like asking people if they’d like a free car every year provided by extraterrestrials.

    WARREN MOSLER Reply:

    all legit questions

    Reply

  2. Craig Says:

    Beowulf – what exactly is he saying that is in paradigm? Is it just me or does anybody else get tired of trying to read between the lines of these economists. It’s almost like these guys specifically try to speak in code while the rest of us are trying to understand if they get it? Why can’t they just come out and state their underlying assumptions.

    1. Currency issuers determine interest rates (ie. the interbank overnight lending rate) because as monopolists they are the price setters.

    2. Currency issuers don’t need to “raise” money. Fiat money (Latin fiat, meaning “let it be done”) is money that has value because of government law (Article 1, section 8, 10). Currency issuers create money when they spend and destroy money when they tax. Taxes for currency issuers serve to regulate the economy (reduce demand) not fund public spending.

    3. Currency issuers don’t need to borrow money. Borrowing for a currency issuer only serves to provide risk-free savings for the private/foreign sector. A currency issuer need never default on a loan except by choice, such as a self-imposed debt ceiling, specifically because of their ability to issue currency by fiat.

    Fiat currency issuer’s are essentially the scorekeepers within the economy – not the players (ie. currency users). They are are unlike other participants in the marketplace precisely because their ability to create to spend without needing to earn or borrow like other currency users. Deficits and surpluses are accounting identities to currency issuer’s not constraints of finite resources. Government deficits are dollar for dollar equal to private/foreign sector savings.

    government deficits = non-government surplus (ie. private & foreign savings)

    As Tom might say, do they think the primary responsibility of a monetarily sovereign government as monopoly currency issuer is to provide the correct amount of currency to balance spending power (aggregate demand) with goods for sale (real output capacity)? Where if the government issues currency (nongovernment net financial assets) in an amount that results in effective demand in excess of productive potential to expand capacity to meet it, demand-side inflation will occur due to demand exceeding supply. Conversely, if the government falls short in maintaining this balance, so that supply exceeds demand and inventories build up, business activity contracts. Recession and unemployment result due to insufficient demand relative to supply (like what we are seeing today).

    What are exactly are these people operating assumptions? The refreshing thing about Glenn Hadden’s email is that he just laid it out as he saw it. Take it or leave it at least you know that the guy thinks.

    Reply

    beowulf Reply:

    Reich isn’t actually an economist, he’s a lawyer by training who fell into writing and teaching, well, what does he teach, ahh “political economics”. I’ve read a fair amount of Reich’s other writings, but I take your point that there’s nothing here that makes him sound in-paradigm.

    I think he’s looking at this in a lawyerly way. Whatever the Democrats ask for, the Republicans will be certain to oppose, so there’s no disadvantage in going left in the opening offer. In fact, it makes a bipartisan deal more likely where the GOP will score a great victory (in this context) by forcing the Democrats to give up their “main goal”, tax hikes on the rich, while agreeing to let the Democrats achieve their secondary goal of tax cuts for the working class. If you want the moon, your opening offer should be for the Sun.

    Reply

    Mario Reply:

    EXACTLY!!!!

    except who’s doing that!??!! I find Obama a giant woos (I am choosing not to use mean language here) when it comes to dealing with the repubs…his idea of “compromise” is very, very different than mine.

    Honestly, I feel Obama is playing the role really well but as one who voted for him I feel seriously let down and abandoned. Man.

    Reply

    rvm Reply:

    You are not alone in your disappointment. We got fooled again.:-(

    Go, Warren!!

    Mario Reply:

    “We got fooled again”

    yeah and I really didn’t think it would happen to me…I mean I was already totally skeptical of the whole game to begin with!!! So this one really hits pretty deep…I feel like a used high school girl. LOL!!

    Tom Hickey Reply:

    Richard wolf on kabuki

    “The revenge of trickle-down economics”

    Differences between Democrats and Republicans on the deficit are cosmetic. Both are committed to a broken, corrupt system

    President Obama’s basic budget for fiscal 2012 is mostly a done deal, supported by the entire political establishment. The hyped choreography of forthcoming battles between Democrats and Republicans is a very secondary sideshow. The battles clothe basic agreement in a disguise of fierce oppositions – perhaps aimed to mollify each party’s none-too-discerning militants.

    Reply

    Dan Kervick Reply:

    Reich is addressing a large number of people with his columns, most of whom are not economists, and have no notion of competing economic “paradigms”. He has to explain things in a way in which general readers can understand.

    Reply

    Tom Hickey Reply:

    The problem is that Reich is reinforcing the Dem ’12 campaign strategy of taxing the rich to fill the deficit hole (it’s polling around 70-80%), instead of recognizing that they are just reinforcing the opposition’s game plan, which is to divert attention to pseudo-problems instead of dealing with actual issues, like huge idle resources. There is no debt or deficit “problem” and the Democrats should call the GOP on this, at least prominent “experts” like Reich and others that are deficit doves. Moreover, the public wants politicians to focus laser-like on jobs. The deficit is not high on the list of concern in comparison.

    Reply

    Craig Reply:

    i completely agree. a misunderstanding of the budget deficit removes your available policy options. if policymakers are concerned with the size of the deficit then they are going to be hesitant to spend.

  3. roger erickson Says:

    He’s buying into one or both paradigms, without ever revealing which.

    1) gold-std economics still hold
    or
    2) you can’t simply tell the truth to the American electorate

    With innocent frauds like that, who needs enemies?

    Implicit in all such plausible-deniability ponzi schemes is the message that “My job is more important to me than group survival.” Ignorant treason to group is self-defeating in the long run.

    Reply

  4. Craig Says:

    i’ve been in TED kick lately and i couldn’t help but to think of this video when listening to all this economist groupspeak

    Eric Berlow: How complexity leads to simplicity
    http://www.ted.com/talks/lang/eng/eric_berlow_how_complexity_leads_to_simplicity.html

    Reply

    roger erickson Reply:

    exactly; that’s what I’ve been trying to say to everyone in MMT for over a year now; this is straightforward to anyone previously introduced to ANY system science;

    yet policy needs to be even simpler than saying “the closest interactions dominate in any system”; that alone doesn’t help the average politician

    What really needs to occur is general appreciation of the CATALYSTS that change the pattern of local connections faster. And how to make such catalysts. [Social catalysts are PR/propaganda.]

    Ecologists have been spreading that message for ~80 years, it’s NOT new. Problem is that those prepared to use that info are still a statistically insignificant proportion of the population. Few or no MMT people understand PR, few PR people understand MMT, and close to none of either are mixing quickly enough to gain cross-domain expertise fast enough to keep up with the “foreign” monetary concepts that banking lobbies keep re-introducing to our policy pond.

    Recognizing a context doesn’t yet make you adept at surfing or shaping it.

    Reply

  5. SethM Says:

    Reich is a politician and could teach many who otherwise are “correct” in their economics. What’s the point of talking about aggregate demand when most Americans don’t understand “aggregate” or “demand” in any real sense?

    Reply

    Keith Newman Reply:

    I agree with SethM. Nobody outside of economists understands what ”aggregate demand” means. Whether Reich understands ”in paradigm” analysis or not the result of what he proposes is good: a big (?) increase in aggregate demand. While it’s true the part about raising taxes on the wealthy is entirely a matter of equity it does add balance to the rhetoric.

    Reply

    Robert Kelly Reply:

    I think the point might be to get a certain 535 Americans to understand aggregate demand and sectoral balances. It might help to get a bunch of those on the periphery of those 535 to understand as well. Six months ago, I had no clue about MMT. The epiphany comes slowly. Standing on a soap box won’t work, but if you teach two friends and they teach two friends…

    Some of you have friends in higher places than others. Keep at it!

    Reply

    roger erickson Reply:

    here’s a simple truth;

    out of paradigm models, like the flat earth & ptolemaic astronomy theories DO NOT SCALE UP. They’re a dead end. As is orthodox economic policy. There’s no group future in trying to fix failed ideology – only short term, self-serving profit.

    to orient to a new context requires dissemination of new terms;
    It’s like introducing the world to the decimal math notation, once accomplished, many more options become accessible to many more people … and the whole result scales up beyond what was previously possible

    the concepts required, aggregate demand, etc, are not new, similar wording was actually used in the US Constitution (“more perfect union”, “general welfare of the people”, etc)

    Seth’s point is well taken, however known solutions are already at hand. Will more MMT proponents simply step outside THEIR jargon and use jargon lifted from familiar political history? That would go a long way.

    Reply

  6. Peter D Says:

    Krugman says “MMT” again!

    Reply

    jason m Reply:

    Warren, he’s almost asking for a discussion from you in the section in parenthesis in his blog about limits of seignorage. This, to me, is an opening that you should address and if I were you I would contact him personally to set up an amicable discussion of ideas. Bringing Krugman over would be a huge coup and a major win to the cause.

    Reply

    Craig Reply:

    Seriously, you get Paul on board with MMT and it would be a watershed moment. Be provocative too. Tell him he’s got it all wrong and taxes for currency issuers serve to regulate the economy (reduce private sector spending) not fund public spending! Like a bulldog – take Krugman down!

    Reply

    Mario Reply:

    yes do it Warren…this is an opportunity…he’s reaching out to you man…go for the jugular (in a respectable fashion of course)…this could get some real wind under our sails ;D

    Hey at least the guy is reaching out and not being a stubborn baboon…Paul’s a good guy who definitely means well and apparently has the ability to engage in intelligent discussion on both sides and frankly that’s more than most so kudos to PK for that.

    Go Warren!!!!!!

    Reply

    Tom Hickey Reply:

    Invite him for a boat ride next time he is on the island? :)

    Reply

    WARREN MOSLER Reply:

    good thought! Ted Kennedy used to visit here too…

    Dave Carr Reply:

    Ditto to the invite. His condo is in Harbor Beach, Fstd. Princeton spring break?

    Dave Carr Reply:

    You could just pull up to the beach & honk the horn.

    Keith Newman Reply:

    I agree with Jason M, Krugman is soliciting a response and I think Warren should take him up on it.

    Warren, you are the master of monetary operations and MMT. You’ve spoken to Krugman before and it didn’t amount to much but doing so now when it looks like he’s ready and open to taking in something new may be the breakthrough moment.

    Reply

    WARREN MOSLER Reply:

    i sent in a nice comment. let’s see if it’s published

    Reply

    Peter D Reply:

    http://krugman.blogs.nytimes.com/2011/04/21/comment-gremlins/:

    The Times blog team informs me that the whole comment system has gone down, possibly taking a number of submitted comments with it into oblivion. So if you posted a comment and it never shows, it’s not because I don’t like you; it’s because the gods of IT don’t like you.

    Are MMTers taking down the NYTimes comments system?
    Warren, you might need to resubmit that comment of yours.

    ESM Reply:

    I love this ending by Krugman:

    “Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.”

    A more precise formulation would replace “Ph.D.s” with “Nobel Prizes.”

    The muddled, shallow reasoning that comes from that guy continues to amaze me.

    Reply

    roger erickson Reply:

    Agreed. I read his post & was immediately shocked that he received a Nobel prize, let alone a PhD. What’s most puzzling is that his test of logic is apparently to ramp up any path tangent to infinity, completely oblivious to the fact than any complex system has endless checks & balances, added by new layers of indirection.

    Maybe he never got introduced to multi-variate logic, or even chess? Never took math? Never tuned an engine? Never practiced navigation?

    Warren, if you take him on your boat, set 12 course headings in succession. Each time, ask him whether you’re all doomed – because of where you’ll be if you don’t establish limits to staying on that heading. Maybe he’ll catch on, after making course corrections 12 times.

    Reply

    Matt Franko Reply:

    Jason, Agree wrt Warren…

    Peter,
    Krugman; “So taxes are, first and foremost, about paying for what the government buys (duh). ”

    No they are not, how does he get to this logically? Think about his statement here: Taxes (whereby the govt drains bank accounts) “first and foremost” is a payment to the non-govt sector ????? He has it entirely backwards. It’s like he is saying “taking balances away from the non-govt sector is providing them balances”…… incoherence. Resp,

    Reply

    Peter D Reply:

    Same tortured logic of “yes, you can turn on the printing press but this causes inflation”. Seriously, I think the MMTers should from now on concentrate on explaining why functional finance works. That’s the gist of MMT idea of controlling the economy. Unless you convince people that fiscal adjustments, if done right, are enough, you’ll never make any inroads.
    Did anybody here follow Nick Rowe’s thread on MMT? If we cannot convince super-smart people like Nick Rowe, what chance do we have?

    Reply

    wh10 Reply:

    Did you see his last reply here? http://delong.typepad.com/sdj/2011/04/is-modern-monetary-theory-modern-or-monetary-or-a-theory.html

    I’m not sure if he disagrees that much. I think the biggest potential role MMT can play these days is to put the deficit in context and to steer us away from austerity. He seems to agree on that point and thus isn’t the main enemy.

    WARREN MOSLER Reply:

    just replied favorably

    Tom Hickey Reply:

    Peter D, I think Nick has moved considerably since he first started posting on MMT. That he and Warren are talking at Brad’s will have an affect on Brad, too. I just posted a reply to Nick, but I don’t know whether Brad will post it. He didn’t post my previous comment, so we will see.

    wh10 Reply:

    Agreed. And one has to be realistic. You are never going to get everyone to agree on everything. Not all Keynesians agree on everything. Even within MMT, there is slight disagreement on policy options. I think it’s the broader points which MMT makes which are the most important which aren’t necessarily MMT exclusive (i.e. don’t be freaking out about the deficit and debt as much you have been now that you have an additional perspective on monetary options).

    Peter D Reply:

    Tom, I also posted something! It is still in moderation as well.
    Warren, did you see Nick’s call-out to you?
    Krugman, Rowe, they all want to talk to Warren :)

    pebird Reply:

    “They don’t primarily exist as a way to induce lower private consumption, although they may sometimes have that effect; they are there to ensure government solvency.”

    I guess to the extent that having the currency accepted is a condition of solvency, Paul is kind of, sort of right.

    But when we talk about governments, we should use political terms. I prefer “taxes are there to ensure government legitimacy” or “state stability”.

    Lets keep the term solvency in the financial lexicon. Otherwise it’s kind of like thinking of government not as a big household, but as a big corporation.

    So, Paul, what are the limits on seignorage? I mean you must have a model since this is so critically important and obvious.

    Ramanan Reply:

    This is one of the better posts by Krugman amongst the 4(?) references to “MMT” (the first two didn’t have “MMT” I guess.)

    Unlike the last 3, this one is much better.

    Its a straighforward fact – the government needs taxes for its expenditures whatever argument one tries to sneak in.

    Its true that the government’s expenditures are higher than its income, and that governments are generally in a deficit, but it is an overkill that taxes don’t fund government expenditures. This overkill is counterproductive.

    More importantly while it is true that taxes control aggregate demand, neither fiscal policy nor monetary policy is sufficient to do so. One cannot fine tune the economy. It requires all sorts of active policies by the government and the future may tell us much more on these issues when economists discuss various policies in different parts of the world. Needless to say, it has sociological connections as well.

    I like Dan Kervick’s comments here posted two days back http://feedproxy.google.com/~r/CommentsForTheCenterOfTheUniverse/~3/VMnx2s99DJc/

    Wait to see Anon’s comments on this .. Anon always has a nice way of putting thoughts across.

    Reply

    Tom Hickey Reply:

    My comment for Krugman:

    Prof. Krugman, it is you who can’t seem to fit the two pieces together. A monetarily sovereign government that is the monopoly provider of nonconvertible floating rate currency is not operationally constrained since it funds itself (although it is constrained by inflation and the exchange rate). Political restraints can be imposed, but this does not change the operational reality of the present monetary system; Political restraints simply hobble it, leading to political kerfuffles like the debt ceiling controversy that threaten the economy needlessly.

    Taxes do not — and cannot — fund the federal government, since it is the currency issuer, unlike state and local government, and households and firms, which are currency users. Taxes are not revenue for the federal government as they are for state and local governments. Nor is borrowing required to finance the federal government. Nongovernment net financial assets are injected through federal expenditure (spending and transfers) and are withdrawn by taxation. Addition and subtraction on spreadsheets.

    Treasury issuance shifts the composition and maturity of government liabilities, providing interest as subsidy to bondholders. Tsy issuance is not operationally required under the present system, so this subsidy for bondholders could be eliminated. Congress could remove the no-overdraft rule, and the Fed could carry negative equity. Tsy issuance is monetary operation to drain excess reserves to allow the Fed to hit its target overnight rate. The Fed can do the same by paying a support rate on reserves, as its does now.

    You say you cannot figure out MMT. Have you read any of the literature? For example, consult Warren Mosler’s “Soft Currency Economics” and Mosler and Forstater, “A General Analytical Framework for the Analysis of Currencies and Other Commodities.”

    This is important because the problem of the debt and deficit is a pseudo-problem, and accounting mirage. The only problem the US faces is the availability of real resources. Right now, the US has enormous idle resources while we are wasting time arguing over pseudo-problems. The opportunity cost of this is huge.

    Reply

    Peter D Reply:

    Tom , I think that (a) this is kind of a counterproductive tone: (i”t is you who can’t seem to fit the two pieces together”!?) and (b) your comment misses Krugman’s point, which is what to do with inflation resulting from excessive seignorage.

    anon Reply:

    Tom,

    You are wise in your ways, but this conventional blurred framing of MMT continues to be counterproductive, and in fact is a big impediment to useful discussions with the likes of Krugman. Congress creates the actual operational reality, which is that the government has a bank account with the Fed, with no overdraft. That intentionally makes government a currency user. And that account will be the point of default in the event of default. The government is not the currency issuer in this situation; an independent Fed is. Congress has the option of changing that operational reality to allow the government to spend without borrowing from the market. There are a number of ways of making this change. E.g. one way is for the central bank to buy all bonds directly from the government. Another is to allow government overdraft at the central bank (no bonds # 1), which is a form of credit granted by the central bank to the government. Yet another is simply to allow the government to become the currency issuer (no bonds # 2, with treasury/CB consolidation). Those are all operational changes. Note that every form of change involves replacing market issued bonds with bank reserves. That is the kernel of the necessary operational change required to materially affect the existing operational reality. You should stop using the term “operational reality” to describe monetary arrangements that do not currently exist. And this idea of taxes not being revenue is a framing of MMT in the context of the consolidated treasury/CB version, a version which should be made explicit and pointed in such discussions. That is the only version in which the government is a currency issuer. And only then is it even marginally useful to suggest that taxes aren’t revenue – technically, they’re a redemption of consolidated liabilities. But so what? They’re still revenue from an accounting terminology standpoint. So what’s the big deal about not using the word revenue? This uptight control of accounting terminology implies nothing directly useful about deficit capacity.

    anon Reply:

    btw, on the other side of the coin, I think its outrageous and disrespectful that Rowe claims to read something as carefully thought out as the 7 deadly innocent frauds in 20 minutes or so and then opines on it summarily; no way can he assimilate this stuff like that with his background, and he proves it by constantly reinventing his views as he goes along

    Peter D Reply:

    What Tom is right about is that it is possible to imagine a state of the world in which the govt spends without ever taxing. And there being no inflation if all the spending is absorbed by savings and increased productivity. But it is impossible for households and the rest of non-govt sector. So, in this sense taxes are NOT like revenues.

    Peter D Reply:

    Anon, Krugman accepts that the govt can just print money, so, his objections are different from yours.

    Tom Hickey Reply:

    Peter I was not responding to his aside on MMT but his main point on taxes being revenue necessary to fund the government.

    Peter D Reply:

    Tom , I know, I was responding to Anon’s and Dan’s points.
    My comment refered to the position that saying that taxes don’t fund spending is kind of meaningless, since one needs to tax anyway. And I say that for currency issuer it is actually possible not to tax at all (in a situation where all injection of NFAs is absorbed by savings and prodictivity increases) while for any currency user it is not possible to spend without obtaining funding.

    Sergei Reply:

    “your comment misses Krugman’s point, which is what to do with inflation resulting from excessive seignorage.”

    Well, it is either government or banks who have seniorage. The current system shifts all seniorage to banks. Was it excessive? Ouch, absolutely so if one looks out of the window and checks some facts about bank profits. And yet we have had little inflation.

    Sergei Reply:

    Taxes do not fund anything. It is a redistributional tool by which real resources and economic output are redistributed among populace according to the existing political desires. There are two obvious way to redistribute output in a monetary society. One is to tax output from its producers and give it those who do not produce anything but need to consume. Government budget is just a medium for this with a accounting by-product called deficit. Second way is just to spend money. This often creates competition for output which can lead to inflation. There is nothing wrong with inflation per se and inflation IS a redistributional mechanism. However consisent and volatile inflation leads a much less stable economy.

    Ramanan Reply:

    “Taxes are not revenue for the federal government as they are for state and local governments. ”

    Professor Paul Krugman understands your overkill and that is what the post was about. Say in the year 2020, when things are fine hopefully, and the government want to spend $6T, it has to earn $5.5T by taxes (assuming a deficit of 2%). Its true that the private sector’s saving propensity can change, but it may still need something maybe … $5T.

    “Addition and subtraction on spreadsheets.”

    Yes Milton Friedman also knew this.

    “Tsy issuance is not operationally required under the present system, so this subsidy for bondholders could be eliminated.”

    Unless you convince each and every citizen of your nation that this will not cause asset bubbles.

    “Congress could remove the no-overdraft rule, and the Fed could carry negative equity.”

    If you guarantee that the government won’t launder funds by dodging accounts. It can even go unnoticed if you have national banks and the government siphons out funds by spending by crediting the national bank reserve accounts.

    “Tsy issuance is monetary operation to drain excess reserves to allow the Fed to hit its target overnight rate.”

    “Is” is an overkill. The Treasury issuance is a financing operation for the US Treasury. In your prescriptive world, it may be.

    “The Fed can do the same by paying a support rate on reserves, as its does now.”

    Well if you wish to pay banks huge amounts of money which is sociologically unacceptable. Also, it is a pitfall in liability management.

    “Right now, the US has enormous idle resources while we are wasting time arguing over pseudo-problems.”

    Yes even Paul Krugman says that as well.

    Reply

    Tom Hickey Reply:

    So your answer, R. is to gift the super-rich with an interest subsidy and virtually complete control over the economy. I’d rather worry about the pseudo-problem of “hyperinflation.” Vincent Cate makes more sense than the mainstream postion that we are beholden to the bondholders to prevent us from tipping to hyperinflation if we operate the monetary system under the fiate rules instead of creating a stage illusion.

    beowulf Reply:

    >“The Fed can do the same by paying a support rate on reserves, as its does now.”
    “Well if you wish to pay banks huge amounts of money which is sociologically unacceptable.”

    Ramanan, wrap your brain around this RSJ post about taxing away seigniorage as an alternative to paying IOR to anchor Fed Fund rate. Interesting stuff, wonder if any country’s ever tried this.
    http://windyanabasis.wordpress.com/2011/03/28/leaving-modern-money-theory-on-the-table/

    Ramanan Reply:

    “So your answer, R. is to gift the super-rich with an interest subsidy and virtually complete control over the economy”

    Its an irony. At any rate, the government can promote holding of bonds to everyone.

    Even when the government builds a bridge, its paying money to a contractor not directly the contractor’s employees. The contractor can pocket a lot and pay less money to his employees.

    WARREN MOSLER Reply:

    the govt more responds to ‘the holding of bonds/cash/reserves’ than promoting it.

    for a given level of govt spending, there is a level of taxing that corresponds to full employment.

    that level of taxation varies as the ‘holding of bonds/cash/reserves’ desires shift.

    Matt Franko Reply:

    @Ramanan,
    Last week there was some chatter about how China wants to reduce it’s foreign reserves from “$3T” to “$1T”. There is no way China could have this “$3T” of US Dollar reserves can they? That’s larger than the Fed’s balance sheet. I think there has been misleading reporting on this issue as usual.

    http://www.zerohedge.com/article/china-proposes-cut-two-thirds-its-3-trillion-usd-holdings

    Resp,

    Reply

    WARREN MOSLER Reply:

    I suspect China is ‘back door spending’ their dollar reserves via the state banking system, etc.

    See if you can find out how much outstanding dollar debt China has, including its state banks and state owned enterprises?

    Ramanan Reply:

    Matt,

    IMHO, China will continue accumulating US Treasuries. A fire sale is disastrous for China. Selling a fraction too quick will affect the remaining portfolio.

    China will continue accumulating dollars draining demand on a vast scale in the US.

    Mario Reply:

    “I suspect China is ‘back door spending’ their dollar reserves via the state banking system, etc.”

    that’s really interesting Warren. Which also just goes to show again that foreign ownership of US tsy really only brings inflation to that foreign country since it will more than likely be liquidated in their country…and the states in china have been spending haven’t they!

    djp Reply:

    For a broader view of the context of the blog post:
    http://gregmankiw.blogspot.com/2011/04/people-talking-past-each-other.html

    Mankiw has a good point — even if you disagree with other views of his on economics/monetary policy.

    The starting point, the article in the Bay Citizen referenced by Landsberg, is a pretty awful example of not being able to recognize the difference between productivity and savings.

    Reply

  7. Craig Says:

    good point – i think he sends in alot of his articles from the islands. tell him you have a stockpile of dog treats for his beagle. god, i’m not sure why or how i even know that tidbit about him.

    Reply

  8. Dan Kervick Says:

    I suspect you understand taxes function to regulate aggregate demand, not to fund expenditures per se?

    This seems too fussy to me. Whatever you want to call the process – whether “taxation” or “shmaxation” or just “deposit extinction” – the fact is that people’s private sector bank accounts are debited by certain amounts in order for them to meet their tax obligations to the federal government. Not everybody’s account is affected in the same way. The quantities are deleted from specific accounts, in specific amounts, belonging to specific people. So clearly this process does more than simply regulate an aggregate. The specific and detailed way the taxation process is carried out has both important economic implications and important political implications – completely apart from the separate theoretical issue of whether the taxation should be seen as “financing” government expenditures.

    At the same time, if the government spends money into existence by crediting private bank accounts by certain amounts, these quantities are credited to specific accounts, in specific amounts, belonging to specific people. And again, the specific way this is done has important economic and political consequences.

    You might with perfect reason decline to view the deposit quantities that are debited from the accounts in the first group as “funding” the expenditures that are carried out through the crediting of other accounts in the second group. But the fact is that these debits and credits are carried out in highly specific, differential ways. And so in the end they amount to a redistribution of income, with profound implications for the pocketbooks of individual citizens, and are not just a process by which aggregate demand is affected.

    The bottom line lesson that needs to get conveyed by the MMT crowd, it seems to me, is essentially Lerner’s functional finance lesson. The government is the monopoly producer of the currency, and so is clearly capable of spending out more money than it either receives as revenue from the private sector through “taxation”, or extinguishes from private sector bank accounts through “shmaxation”, or deducts from other private sector accounts in exchange for bonds. It can do this because it always has the capacity to produce the money it wants to spend, and essentially no cost. And the choice of how and whether to do this should be based on the economic impact of those spending and taxation decisions, which includes the economic impact of changes in the supply and distribution of money. It is one thing to worry whether a particular pattern of money creation, transfer and extinction, combined with certain pattern of provision of goods and services, along with voluntary legal commitments to supply money to public or private sector entities on a settled time schedule, puts us on a destructive economic path. It is another thing to worry that we can “run out” of money.

    The issue about the public understanding of taxation is much more politically challenging that MMTers seem prepared to grapple with. How in the world do you plan to communicate to the public the idea that (i)their taxes are not really needed to fund government expenditures, but that (ii) we do need to tax anyway, as a way of regulating both the supply and distribution of money, and the aggregate demand that is supported by that supply and distribution of money? It’s easy to explain the idea that the government needs to collect money from its citizens to “fund” a number of spending projects. It is quite another thing to say that the government needs to collect and extinguish money from some of its citizens, in certain amounts decided upon by government, so that its money creation elsewhere does not lead to an inflationary oversupply or maldistribution of money.

    Reply

    Ramanan Reply:

    Nice comment Dan .. in fact there are enough statements in the MMT blogosphere which literally say that tax payments by cash are shredded or burned to defend this stand.

    My use of “literally” is not the usual usage of the word as described here: http://www.economist.com/blogs/johnson/2011/04/misuse_words To be doubly sure, there are many statements in the MMTosphere which say that it is ontologically true that notes paid for taxes are destroyed (without necessarily adding qualifiers such as “unfit notes are taken out of circulation” ..thereby implying that all notes paid in taxes are destroyed.)

    On the other hand, there is a rough analogy about revenues:

    Z.1 B.102 Balance Sheet of Nonfarm Nonfinancial Corporate Business http://www.federalreserve.gov/releases/z1/current/z1.pdf

    Financial Assets ~$14.2T, Tangible Assets $12T.8T, Liabilities $13.9T, Market Value of Equities $14.5T

    So corporates have a negative financial net worth. Does that mean they don’t need sales ?

    Reply

    ESM Reply:

    I have felt for some months now that the fundamental disconnect between MMT and the mainstream is not about solvency or the ability of the government to always meet its obligations by creating money ex nihilo. The fundamental disconnect is about what a Treasury bond is.

    The mainstream believes that the issuance of Treasury bonds dampens inflation by soaking up cash and forcing the private sector to defer consumption. Krugman has stated this theory indirectly, but clearly -that consumption can only be effected or realized through the circulation of cash, and bond issuance removes that cash from the system.

    Thus, the reason (according to the mainstream) that $12T of net financial assets doesn’t cause inflation right now is that $10T is in the form of “useless” Treasury bonds. Of course what worries the mainstream is that these Treasury bonds represent a sword of Damocles hanging over the economy. Eventually, these useless bonds have to be paid back with cash, and then an inflationary spiral will begin.

    MMT gives us a strong reason to believe (although does not prove as a point of logic) that a Treasury bond are roughly equivalent to cash in terms of its ability to satisfy savings desire and therefore its effect on aggregate demand. With the monetary system we have currently, Treasury bonds do not represent deferred consumption. They are liquid, stable, and trivial to monetize. Thus, MMT tells us that we are already experiencing the full effect of the government debt on aggregate demand and inflation. And of course we know that there is not just low inflation, there is a rather significant output gap.

    I think the MMT focus should be on this difference. Not the one about how government checks will always clear, yada yada yada.

    Reply

    Tom Hickey Reply:

    I think that this is correct. It is the subtext underlying a lot of the uneasiness about MMT implications and prescriptions. This can be removed or reduced by clarifying the MMT description of this.

    MMT is a lot like figuring out a stage magic trick. An illusion has been created that MMT’s description removes, but you have to be able to get it. People that are heavily under the illusion have a hard time getting it.

    Reply

    Ken Reply:

    This is a key point for me and I’ve been trying to get a better handle on it. Yes, for any individual T-Bill holder, the bond is easy to monetize. So it would seem that holding it is not much different from holding cash from a liquidity point of view.

    However, I find myself wondering if there is a fallacy of composition here from the macro point of view. If a large fraction of the bond holders all wanted cash at once, they might not appear as liquid. In that case the difference between having 10T in cash vs 10T in bonds may become apparent.

    Reply

    WARREN MOSLER Reply:

    the larger point is that the bond holders have already decided not to spend, and are simply seeking the best risk adjusted yield/terms etc.

    and when the fed buys secs, they are bought from willing sellers who are ‘natural savers’, at least at that moment, and sold the bonds to the Fed because at that price they preferred other savings vehicles. In fact, when the fed buys and exchanges 3 trillion in overnight reserve balances for longer term securities with willing sellers, what changes is the duration of the total govt liabilities held by the ‘economy’.

    if all bond holders ‘wanted cash at once’ or even any additional ‘cash’ all that would happen is the market price of the securities would shift to the point where all, in aggregate, are happy with the same securities at that new price. And, to get to that point, other prices could adjust as well, including the price of gold, the fx value of the dollar, housing prices, etc. etc.

    Lastly, and not leastly, keep in mind that when the fed buys securities there is a shift in non govt income through the interest channel.
    When the fed exchanges balances that pay .15% for securities that yield north of 3% the fed has reduced the interest income the govt pays to the economy.
    Note the fed turned over some 79 billion in ‘profits’ to the tsy not long ago. Consider that interest income removed from the economy.

    Also, in today’s economy, lower rates shifted income away from savers more than it shifted income to borrowers, as savings rates fell far more than rates paid by borrowers, with bank/lender net interest margins getting that benefit. And those lenders have no marginal propensity to consume from that income which could be another 200 billion a year or so?

    Bottom line, if qe ‘works’ its only via the resulting term structure of rates being lower than otherwise. the quantities make no difference, just the rates.
    But any ‘benefit’ from the lower rates is offset by the negative effect of the lost interest income to savers.

    Mario Reply:

    great discussion. Changing hands of bond ownership doesn’t effect aggregate NFA…NFA seems to only be effected in that way in terms of the interest on the bonds when the Fed sells tsys at auction as that is “new bonds” coming into the market that were otherwise receiving no interest on reserves. Aka bond subsidy.

    Regardless I think Ken’s point was just about the liquidity factor of holding assets in bonds that’s all. And as far as I know…correct me if I’m wrong…the US government will always satisfy the redemption of a bond/bill/note before maturity date. Now if the debt ceiling wasn’t raised for example would everyone in bonds lose those assets until the debt ceiling was raised and they could be liquidated? I presume so correct?

    Regardless that is “self-imposed” constraint not an operational constraint which seemed to be Ken’s objection, which I think is now cleared up. Right Ken?

    Ramanan Reply:

    “I have felt for some months now that the fundamental disconnect between MMT and the mainstream is not about solvency or the ability of the government to always meet its obligations by creating money ex nihilo. The fundamental disconnect is about what a Treasury bond is.

    The mainstream believes that the issuance of Treasury bonds dampens inflation by soaking up cash and forcing the private sector to defer consumption.”

    Very important point in my view ESM …

    Reply

    WARREN MOSLER Reply:

    True.

    Three guys win the lottery.

    one guy gets his million in cash

    the second gets his as a 2 year tsy note

    the third gets his taxed away.

    As a banker,

    I see one and two in about the same financial position

    the mainstream sees two and three in about the same financial condition

    Ramanan Reply:

    “the mainstream sees two and three in about the same financial condition”

    I don’t think it is correct.

    For case 1, they will say it leads to inflation because most mainstreams have monetarist genes whether they accept or not.

    For case 2, they will say that taxes have to be increased in case two from a future Peter to pay this Paul because most mainstreams have Ricardian equivalence running in their genes whether they accept it or not.

    In case 3, whats the meaning of “gets his taxed away” ? If I interpret it right, the third one is also equivalent to 1 and 2.

    anon Reply:

    Ken is right. There is a fallacy of composition.

    But either way, MMT needs to explain its theory of inflation better. The rest is accounting.

    Reply

    WARREN MOSLER Reply:

    We have the definitive ‘explanation’ of inflation- it’s necessarily a function of prices paid by govt, the currency monopolist, at the point of spending.

    Sergei Reply:

    “Ken is right. There is a fallacy of composition.”

    No, there is no fallcy. Inflation that you imply here means increasing real demand. If you exchange bonds for reserves then consumption might marginally increase (due to whatever effects) but it will also lead to smaller supply of bonds (smaller budget deficit) and potentially even a drawdown of bonds (budget surplus). There is zero basis to claim that inflationary effects of one will always outweigh the dis-inflationary effects of the other for any time horizon.

    anon Reply:

    “There is zero basis to claim …”

    Ken didn’t mention inflation.

    The fallacy is that it is unreasonable to claim that $ 10 trillion in bonds can be “monetized” in aggregate to make it equivalent to $ 10 trillion in deposits.

    So the basis for any discussion of inflation beyond that is flawed, because the two situations are not comparable at the composite level.

    Sergei Reply:

    :) anon, a fallacy of composition is something that looks unquestionably right on all levels of abstraction.

    However the claim about bond vs. reserves/deposits needs additional qualifications to be either right or wrong. MMT makes such additional qualifications by saying that sellers of bonds are indifferent savers and therefore do not spend their deposits in the real economy. This message is very clear and repeated very often. It is obviously impossible to prove this claim but in general it *can* be accepted. There will be certain spill-overs at the margin and I am sure MMTers understand them but they rather choose to ignore. It might be one of those cases where MMT would probably benefit from a bit softer stance providing a bit broader explanations of all important qualifications involved. There are no 100% laws in economics and everything depends.

    WARREN MOSLER Reply:

    not exactly.

    it’s that if there is any shift from savings to consumption it’s from the shift in the term structure of interest rates, and not from the quantities of bonds vs reserve balances.

    and, that a shift in the term structure of interest rates alters returns of both borrowers and savers, which may have differing propensities to consume.

    and with govt a net payer of interest, that has to be factored in as well.

    MamMoTh Reply:

    I agree with Anon, in substance at least although I don’t know it I would call it a fallacy of composition. I raised the issue before but thought I was the only one.

    Personally I see an internal inconsistency between the vertical-horizontal view where NFAs are only created and destroyed vertically, and claiming that bonds are the same as deposits because they can be easily exchanged at market value, which means NFAs can be created and destroyed vertically as the market price of bonds fluctuate.

    WARREN MOSLER Reply:

    so using the horizontal/vertical imagery of my ‘general framework’ paper, in the vertical component govt taxes to be able to subsequently spend in order to provision itself. And if there is a residual savings desire, govt. can spend more than it taxes, with the excess funds/net financial assets created by that spending going into the ‘warehouse’ as some combo of cash, reserves, and tsy secs, with the Fed determining that mix, and with the Fed also determining the interest rate paid/earned on what’s in the warehouse.

    the question is then how the interest paid on those net financial assets in the warehouse, determined by the fed, alters the macro economy.

    the general behavioral assumption is that lower rates help borrowers but hurt savers.

    but also, and largely ignored by the mainstream, higher rates add income and net financial assets to the macro economy.

    so the questions posed in these comments like ‘if someone gets his tsy secs exchanged for reserve balances, will he spend them’ can be said to miss the point.
    anyone can sell tsy secs at any time and spend the proceeds.
    The fed isn’t needed for that.
    The only thing that changes when the Fed looks to buy is that the Fed becomes an ‘additional’ buyer and presumably rates are that much lower, just as they’d be if any buyer came into any market.
    So the relevant question is whether any particular term structure of rates/mix of nfa is working to increase or decrease savings desires.

    And whether the interest income effects, presumed to work in the opposite direction, are stronger or weaker forces.

    MamMoTh Reply:

    Sorry, I meant horizontally in the last sentence.

    Ramanan Reply:

    “We have the definitive ‘explanation’ of inflation- it’s necessarily a function of prices paid by govt, the currency monopolist, at the point of spending.”

    The government does not set prices. It is set by the private sector.

    Not denying the role of fiscal policy in determining prices . for example a tight fiscal stance can lead to deflationary pressures … but its a different thing than saying government determines prices or arguments in that direction.

    WARREN MOSLER Reply:

    a monopolist sets price one of two ways. he sets q and let’s p adjust, or sets p and let’s q adjust.

    most all public monopolies set p and let q adjust- electric, buses, water, etc.

    except the currency monopoly, where they set q (the budget, etc.) and then let the market decide the corresponding p.
    No wonder it’s so chaotic, running a monopoly from that perspective.

    But they still are setting P, either directly or by default, which remains prices paid when govt spends.

    anon Reply:

    “it’s that if there is any shift from savings to consumption it’s from the shift in the term structure of interest rates, and not from the quantities of bonds vs reserve balances…. anyone can sell tsy secs at any time and spend the proceeds.”

    The seller hits the bid for bonds, which moves term structure at the margin. So why should the seller’s associated newly realized propensity to consume not be offset by the buyer’s associated reduced propensity consume?

    WARREN MOSLER Reply:

    It very well may be. I think that is consistent with my point?

    ESM Reply:

    @Warren:

    “so the questions posed in these comments like ‘if someone gets his tsy secs exchanged for reserve balances, will he spend them’ can be said to miss the point.
    anyone can sell tsy secs at any time and spend the proceeds.
    The fed isn’t needed for that.

    The fallacy of composition guys disagree with you. They don’t believe that anyone can sell Treasury securities at any time, because they don’t believe everyone can at the same time.

    I understand your argument about price, and agree with it generally, but the same argument could be applied to equities. Anyone can always sell a stock, so does the value of the stock market contribute to private sector savings in the same way that the value of the outstanding Treasury debt does?

    What is the difference between 100 shares of Microsoft and $2500 face amount of the current 10-yr Treasury note (besides the $13 at current market prices)?

    WARREN MOSLER Reply:

    yes, both represent nominal wealth.

    I don’t see the problem?

    anon Reply:

    “the question is then how the interest paid on those net financial assets in the warehouse, determined by the fed, alters the macro economy … the general behavioral assumption is that lower rates help borrowers but hurt savers … but also, and largely ignored by the mainstream, higher rates add income and net financial assets to the macro economy.”

    We shouldn’t compare bond and reserve alternatives of equal principal amounts. That’s a false comparison. We should compare deficits of equal magnitude.

    In order to compare situations of higher and lower rates on equal deficit footing, we should allow for additional net spending to offset the interest differential. E.g. lower rates accommodate additional gross spending or reduced taxes in order to result in the same deficit level.

    Given that offset, lower rates on a deficit equivalent basis should be net stimulative, based on horizontal dynamics and propensities.

    Lower rates allow additional gross spending (or lower taxes) to NEUTRALIZE the marginal deficit contraction due to lower interest. That adjustment should be assumed first in the comparison of high and low rates. Otherwise, its a false comparison.

    WARREN MOSLER Reply:

    i think you are mixing metaphors?

    but i agree with this:

    yes, if lower rates reduce aggregate demand, lower taxes for a given size govt is in order.

    MamMoTh Reply:

    Warren, I agree with most of what you say concerning the macroeconomic effects of interest rates. Especially with the income effect of interests paid to the private sector which means the debt/GDP level really matters.

    However since I think NFAs are only created and destroyed vertically, I also think it’s wrong to consider the market value of bonds as NFAs. Horizontal transaction don’t change the amount of NFAs, there will always be the same amount of bonds and deposits after any transaction. Valuing bonds at market price boils down to creating or destroying NFAs at the horizontal level, which is inconsistent with basic MMT.

    WARREN MOSLER Reply:

    I don’t think I ever indicated anything to contradict that?

    MamMoTh Reply:

    so the questions posed in these comments like ‘if someone gets his tsy secs exchanged for reserve balances, will he spend them’ can be said to miss the point.
    anyone can sell tsy secs at any time and spend the proceeds.
    The fed isn’t needed for that.

    Yes and no.
    The private sector, in aggregate, neither buys nor sells bonds. They only change hands, which determines how the NFAs added as interest on bonds will be distributed.

    WARREN MOSLER Reply:

    true, when you sell your tsy secs to someone else private sector nfa doesn’t change. different point entirely, though

    point is, anyone with tsy secs is free to sell them and spend the proceeds, which go to someone else who can do same, Fed or no Fed.

    and Fed purchasing them doesn’t change nfa either

    ESM Reply:

    MamMoth:

    I don’t see why you are so focused on this Vertical-Horizontal distinction. Even 10-yr Treasury notes do not deviate very much from par value (although I’ll admit 30-yr Treasury bonds do, there are not very many of them), and from an accounting perspective they are recorded on the books at par value. If held to maturity, par value will be realized no matter what.

    Would it make you feel better if the Treasury recorded changes in the market value of the debt as items of income and spending in the budget? I think it would be a good idea actually, but that’s just not how the bean counters do it.

    MamMoTh Reply:

    I don’t see why you are so focused on this Vertical-Horizontal distinction.

    Because it’s a beautiful representation of how the system operates and it’s in my opinion one of the indisputable features of MMT.

    What would make me happy is that MMT stuck to it instead of using it selectively.

    Also receiving a few millions in bonds, regardless of how the bean counters Fed record them. I will keep my own record.

    ESM Reply:

    @Warren:

    re: equities vs Treasury bonds

    “yes, both represent nominal wealth.

    I don’t see the problem?”

    Consider 3 scenarios:

    1. The stock market rises $3T in value over the next 3 months (<20% return);
    2. The government hands stockholders $3T of cash, pro rata, in direct proportion to the market value of their stock holdings;
    3. Same as in 2. above, but government hands stockholders $3T of 10-yr notes.

    What is the relative effect on aggregate demand in the 3 scenarios? What is responsible for the difference?

    WARREN MOSLER Reply:

    if the govt buys the stocks at ‘fair market value’ it’s just an exchange of financial assets on a risk adjusted basis.

    i’d say it would reduce volatility of financial assets held in the private sector, but trading off return/income for the reduced vol

    MamMoTh Reply:

    and Fed purchasing them doesn’t change nfa either

    I strongly disagree. The Fed purchasing tsys changes NFA by the amount of interest paid to the private sector.

    This is the kind of remark I find inconsistent with the vertical/horizontal description.

    WARREN MOSLER Reply:

    interest payments alter future nfa

    but presumably the anticipated interest earned via short term secs equals interest earned by long term secs, as the curve reflects expected future fed moves.

    Ramanan Reply:

    “This is the kind of remark I find inconsistent with the vertical/horizontal description.”

    Its a matter of phrasing it Mammoth .. at the time of the transaction with the Fed, the private sector’s net financial assets do not change (as in before versus immediately after the transaction). As one moves forward in time … it receives less income than otherwise…

    MamMoTh Reply:

    I disagree Ramanan. Even immediately after the transaction bonds carry the promise of future interest payments which will be extra NFAs added to the private sector. Deposits don’t unless you pay interests on them.

    Saying they are the same is like saying two streets are the same when you are standing at their crossing.

    WARREN MOSLER Reply:

    except market participants anticipate the term structure of rates reflects future fed rate decisions

    Ramanan Reply:

    Mammoth,

    I avoid all confusions by using the market value of financial securities .. SNA 2008 also does that.

    Say there is a 10y bond issued in 2006 paying 5.5% coupon. Since the 10y yields are lower now .. and had been even lower during the crisis, its possible to sell it to the Fed at maybe at $109.

    The $109 is $109 because one includes PV of the future cash flows… hence it is $109 not $100.

    So suppose I hold only one bond and thats all I have – my net worth is $109. After the transaction its still $109.

    Any issues with that ?

    Suppose I sit with that money (deposits) at 0% interest for another five years till 2016 … then my net worth at the end of 5 years is $109.

    Hadn’t the transaction happened, my net worth in 2016 would have been higher than $109. But it would also depend on what I do with the coupons.

    In the simplest case assume I just deposit the coupons at the bank at 0% interest. Then my net worth in 2016 will be $127.5

    But one cannot say my net worth is $127.5 now or any such thing. Rather, my net worth is $109.

    MamMoTh Reply:

    I would say your (private sector) net worth will be $127.5 in 2016 when the Fed purchases the bond (assuming interests are paid at that time).

    If you sell it now to me, then the private sector net worth is unchanged, yours is up $109 down the bond, mine is down $109 up the bond.

    Notice that in the above post Warren was referring to the Fed purchasing tsys, for instance at maturity. That is precisely the moment when the Fed actually adds the NFAs, hence my comment.

    MamMoTh Reply:

    Warren:if the govt buys the stocks at ‘fair market value’ it’s just an exchange of financial assets on a risk adjusted basis.

    It also adds NFAs.

    WARREN MOSLER Reply:

    when the fed buys a financial asset that financial asset is removed from the economy.

    And replaced by a reserve balance.

    so the net financial assets for the economy remain unchanged.

    when the fed buys non financial assets, like pencils, financial assets are added to the economy in the form of reserve balances and no financial assets are removed from the economy, so net financial assets increase.

    i think this is pretty well covered in ‘full employment and price stability’

    ESM Reply:

    @Warren:

    I was unclear with my thought experiment, so let me rephrase. I am trying to isolate the effect on aggregate demand of an increase in private sector stock market wealth (i.e. paper wealth) and an increase in holdings of government liabilities. I try to control for the actual holders of the wealth by distributing cash or Treasuries to them (for free) in proportion to their stock market wealth.

    Consider 3 scenarios:

    1. The stock market rises $3T in value over the next 3 months (<20% return);
    2. The government hands stockholders $3T of cash FOR FREE, pro rata, in direct proportion to the market value of their stock holdings;
    3. Same as in 2. above, but government hands stockholders $3T of 10-yr notes FOR FREE.

    What is the relative effect on aggregate demand in the 3 scenarios?

    I guess the answer is "it depends." During normal times, I would expect an increase in stock market wealth to have a smaller effect on aggregate demand than an equivalent increase in reserves or Treasuries, due to the perception that the stock market increase was ephemeral, or at least at-risk. During the Nasdaq bubble, however, the rise in the stock market seemed to be offsetting actual budget surpluses and spurring an increase in private sector leverage and demand.

    WARREN MOSLER Reply:

    the ‘for free’ part is a fiscal distribution.

    Let’s call it a welfare check.

    in 1. nfa remains unchanged as corporate liabilities rise by the same increase in the stock price. There has been much debate about the ‘wealth effect’ of rising stocks on GDP, but at most the proponents of the wealth effect show it to be a small fraction of that increase. The price increase values the transfer of ‘profits’ from the economy in general to shareholders of the company.

    in 2. and 3. the welfare checks for 3 T add exactly that much in nfa to the economy. The effect on gdp is a function on propensities to consume.
    paying with tsy secs vs paying with ‘cash’ may lower propensity to consume and increase savings desires. Hard to tell, as there can be no data as it’s never been done before. To date, payment from the govt has only been in cash, with tsy secs bought only by those who prefer them to cash or other financial assets.

    Mario Reply:

    ESM…isn’t this thought experiment kind of moot b/c people that choose into bonds are savers already while people that are just “given bonds” is a different thing all together. In other words you’re taking out the individual decision to save in this.

    It also seems rather moot to think that all stockholders would get that $3T in equal amounts…more than likely the professionals would sell into the strength while the amateurs held on through the strength all the way back down again. In other words you’re taking the individual out of it again.

    You might as well just ask, “If the government just gave $3T to the public in bonds or in cash, which would be more inflationary?” Do you see what I mean? These people are just getting tons of money for doing nothing. Why not just give social security pensioners a giant $3T check in cash versus bonds…same thing…all of no relevance it seems to me.

    The point about bonds is that people are taking their ALREADY EARNED cash and saving it. That is the point about bonds if I’m not mistaken, b/c that mindset doesn’t change very much if at all and if it does it is very unlikely it will do a 180 and become consumptive instead. An increase in savings (aka government liabilities) is a demand leakage and we would need to fill that through fiscal policy. I think that is what Warren has been saying no? The wealth effect in the stock market does seem to exist but it seems that what most people do is spend their extra cash in hand (or on loan!) b/c they think/feel so much more wealthy rather than actually liquidating their positive stock positions and spending that wealth…this leads to them holding the positions too long and the move turns and they lose it all again and the boom/bust continues. This is why your experiment, though interesting, seems to be rather moot no? I have no stats for you, its just my own personal independent survey on that one. LOL

    WARREN MOSLER Reply:

    right, this whole discussion is about the effect of different forms of payment.

    roger erickson Reply:

    As a biologist, there’s another aspect of what finance people call inflation. When any population scales up in size, their context changes, and they have growing obligations to support their growing/changing population. The implication of that is depreciation in emerging terms of the real value of old products/services/methods.
    The fact that populations grow means that depreciation of the old is more than outweighed by the appreciating return-on-coordination, regardless of what the details are.

    To me, the ‘definitive explanation’ of inflation focuses on the friction between old/new terms of payment, which in real contexts misses the underlying fundamental.

    Transaction denomination terms have to follow Adaptive Rate, not the reverse. Anyone trained to study group survival is puzzled by the maladaptive fixation on financializing an option range that can never be adequately predicted by financial metrics. I keep coming back to the simple observation that we have no predictive power, but unlimited adaptive power. Reality is that we adapt accounting post event to account for unpredictable reality – but economists keep trying to convince people that the reverse is true. How the hell did that get started? It’s an attempt to put ideology before operations.

    Financialization, including over reliance of invented concepts like denomination-term inflation, is just another tool to use, and has become a bad habit to be managed, not worshiped.

    Financialization is equivalent to alcoholism, and MMT is the reality check in a room where most are in denial.

    Craig Reply:

    “How in the world do you plan to communicate to the public the idea that (i)their taxes are not really needed to fund government expenditures, but that (ii) we do need to tax anyway, as a way of regulating both the supply and distribution of money, and the aggregate demand that is supported by that supply and distribution of money? ”

    Definitely a tall order. Where to start…explaining how the federal government is not actually “funded” or explaining how the public debt is actually the national savings account of the private and foreign sector. Okay where are the marketing folks! ha ha!

    Reply

  9. Peter D Says:

    Is MMT going on a tear or what?
    http://yglesias.thinkprogress.org/2011/04/taxes-in-the-mmt-perspective/
    At this rate we’ll get Warren in the White House in 2012! Well, OK, 2016.
    :))

    Reply

    mdm Reply:

    Thanks for the link. These are my thoughts on the article (if I make an errors please point them out to me):

    I can see some serious lacuna in this model. It ignores, for one thing, the actual institutional set-up of our government.

    As I understand it, it is providing the operational structure of the monetary system. If the operational structure is government liabilities (currency) are not convertible into another commodity or currency at a specified ratio (financial constraint), then the government has no financial constraint in issuing its liabilities. (of course, it may have real constraints, either in the domestic economy or overseas, due to importing real goods). The institutional arrangement is irrelevant because it doesn’t impact the operational ability to pay. an analogy used(I think by Fullwiler) is: a person clearly has the ability (operationally) to run, but they may decide to self-impose (institutional) a constraint upon themselves to not run, such as, tying their shoes together or simply vowing to never run. In either case, they still have the ability to run, they just choose not to for whatever reason.

    It also ignores the fact that you see money in, for example, prisoner of war camps so it’s not clear that the emergence of social conventions around mediums of exchange is really all that dependent on coercive tax power.

    I find this comment to be bizarre, particularly considering the amount of work done in the history of money by Wray and others.

    I think the best way to think about money is as follows:

    1.Money is a credit-debt relationship.
    2.Money is a financial asset (which by definition of a financial asset has a matching liability).
    3.As Minsky states, all entities can create money, the key is getting your liabilities accepted.
    4.Some entities get their liabilities accepted by explicitly stating that they will convert it into something else. For instance, banks allow their money to be convertible into state money.
    5.States (defined as a set of institutions which have a monopoly on force over a geographic area) have an easier time in getting their liabilities accepted, they can impose a tax upon the population which cam only be extinguished by using their liabilities. The ability to do this depends upon the political power of the state, smaller states may not be able to impose a tax, therefore, they may need to provide other incentives to get their liabilities accepted. The modern nation state has complete control over a geographic area and its political power is supreme (it has the ability to always enforce its power) it simply needs to announce a tax, specify what is needed to pay tax, and its liabilities become acceptable.

    Once 1 – 4 are understood, it then allows us to talk a hierarchy of money. The hierarchy of money can be thought of as a pyramid, with different levels or tiers: at the top is state money, below bank money, and below that private sector forms of ‘money’. Each tier(s) above a particular tier act as a clearing unit for that tier. For instance, in the private sector bank money for all intents and purposes acts as the clearing unit for payments. Within the banking tier, state money acts as the ultimate clearing unit.

    Another point that is important to this analysis is the social context in which money is created. As money is a credit and debt relationship the person receiving the liability needs to have some sort guarantee that by the issuer that they will stick to their financial commitment, laws go a long way to achieving this, but so does trust and existing relations with the persons. Trade between potential enemies, prisoner of war camps, are extreme examples where the social context isn’t comparable to a normal society. In the former instance, you have an (almost) completely absence of social institutions and trust, and in the latter case, the time-horizons, ability to produce, etc. are minimal or non-existent.

    Reply

    Oliver Reply:

    more here via interfluidity:

    http://ftalphaville.ft.com/blog/2011/04/21/552236/if-you-prick-a-sovereign-why-do-they-not-bleed/

    Reply

    Tom Hickey Reply:

    The US is able to print dollars to fund itself. Whereas it’s usually good if a sovereign shows it’s willing to do anything to ensure it’s solvent, we do wonder how willingness to trash the planet’s faute de mieux reserve currency would be received in world markets. The dollar is a Keynesian beauty contest, not an immutable world hegemon, and there’s no necessary reason why the US would get off scot-free in a crisis when there are plausible alternatives out there.

    Of course, no “plausible alternatives” are named because there aren’t any currency alternatives and the world is not going back to gold anytime soon. More rant.

    Reply

    Tom Hickey Reply:

    I sent Matt a backchannel message to read Warren’s 7DIF instead of trying to figure out MMT from what non-MMT’ers say about it.

    Reply

  10. jrbarch Says:

    Simple point is that the monetary system is just a plug-in. It can be and do anything that you want it to do, in terms of relating human beings to the resources of the skin of the earth through human values and natural constraints. All this argument about something that is intrinsically ephemeral is just that. The real problem is greed, and greed is simply an absence of generosity. When people value ‘the good’ that is in them more than they values resources, then things will change. In the meantime, best to enjoy being alive!

    Cheers,
    jrbarch

    Reply

  11. Ramanan Says:

    Btw Tom,

    I noticed Delong quoting Waldman …

    “Enthusiasts sometimes present MMT in a manner that’s too complete and hermetically sealed. While some MMT theorizing is based on “double entry accounting” or “obvious, unarguable facts”, when MMT adherents offer non-trivial conclusions, they rely upon assumptions about human behavior that are in fact contestable…”

    and I think its an excellent point by Waldman …

    I am reading a book called From Keynesianism To Monetarism – The Evolution Of UK Macroeconomic Models by Peter Kenway … (no price for guessing who the central character of the story is) …

    Kenway lists all kinds of models used by the UK Treasury and NIESR and the Bank of England in the 1970s … some non-Cambdrige ones are surprisingly enlightening.. and even though they are incorrect I am planning to read about them …

    So there is this LBS model (amongst many from the Business School) .. where the initial stimulus provided by the government leads to an increase in demand but the medium/long run effect is exactly ZERO! Reason .. something like higher government expenditures increases demand in the short run but slowly increases wages. Higher demand increases imports but higher wages reduces exports … more details in the book …

    The Business School modelers were well aware of the CEPG’s models and were influenced by them a bit … and were income-expenditure models but had this strange conclusion …

    I know one can give ten criticisms to what I have outlined above .. but that can be to anything …

    So if you try to present something as obvious to someone … you will end up getting such responses …

    Reply

    Tom Hickey Reply:

    Waldman has not read the MMT lit.

    Reply

    beowulf Reply:

    OT but I see Donald Trump isn’t in Paradigm, rather he’s.. in Ramananigm. :o)

    The centerpiece of his deficit reduction program appears to be a 25 percent tax on all Chinese imports…Trump also sees no need to reform entitlements, which will magically attain solvency on their own. “When this country becomes profitable again, we can take care of our sick; we can take care of our needy,” he told Human Events. “We don’t have to cut Social Security; we don’t have to cut Medicare and Medicaid. We can take care of people that need to be taken care of. And I’ll be able to do that.”

    And he says we won’t need to raise taxes either. Trump is suggesting that, as our economy improves, it will expand to cover trillions of dollars in future deficits, an assumption held by no one else that I’m aware of.
    http://www.politico.com/news/stories/0411/53562.html

    Reply

  12. Tom Hickey Says:

    Anon: Congress creates the actual operational reality,

    I am simply repeating what MMT pros have said, namely, government cannot change operational reality by imposing political restraints. The operational reality is that taxes do not fund spending. Political restraints may make it seems so, but cannot make it so. The US is running a nonconvertible floating rate (fiat) currency, of which it is monopoly issuer. There are no operational constraints, although there are political restraints. To change operational reality, the monetary system has to be changed.

    This is the MMT position as I understand it, and I will represent it as such until I hear differently from one of the MMT developers.

    Reply

  13. rdf Says:

    Sometimes I wonder why MMTers don’t just take the direct route and argue that “printing money does not lead to hyperinflation.”

    Obviously, this misses a lot of MMT’s other valuable points, but it challenges the root assumption of debt orthodoxy in a way that people can easily understand.

    Reply

  14. Tom Hickey Says:

    The fallacy of composition guys disagree with you. They don’t believe that anyone can sell Treasury securities at any time, because they don’t believe everyone can at the same time.

    This overlooks the Fed as buyer of last resort in the unlikely event that everyone would sell tsys at once. Governments do support markets, and the Fed has unlimited reserves to exchange for tsys. It’s against the law for the Fed to buy all tsys? Not in an emergency. The Fed is not bound by rules in emergencies.

    Reply

    ESM Reply:

    I agree with you, although I would go one step further and point out that through the operation of the FOMC, the Fed (or any bank with access to the Fed) already stands ready to buy an unlimited amount of Treasury securities on repo, (i.e. the Fed lends reserves against Treasuries). I think this makes Treasuries uniquely liquid and cash-like versus any other type of financial instrument.

    I don’t think Warren agrees with this reasoning, however. He argues instead that the very fact that $10T of Treasury securities exists shows that the private sector has aggregate savings desire equal to $10T at prevailing interest rates, and that that is the key point.

    I’m not convinced this is enough. Savings desire can shift, and perhaps more importantly, the market understands savings desire can shift. If there is poor liquidity, that makes everybody nervous and less confident in their savings.

    I can make an analogy to a crowded theater where the fire alarm goes off. If there is only one exit door, a panic ensues and people get trampled. If there are 20 exit doors, everybody remains calm and exits the theater in an orderly fashion. Even before a fire alarm goes off, people will be much more confident sitting in the theater (in particular, in the middle of a row) if there are plenty of exit doors.

    Reply

    Tom Hickey Reply:

    The point I am making is that tsy markets will always clear because the Fed will ensure they do, and this will just shift composition and maturity, not NFA. The presumption of the everyone selling argument seems to be that they won’t. It’s a variation of the insolvency and hyperinflation scenario, as I understand it.

    Reply

    WARREN MOSLER Reply:

    The tsy mkt is continually priced at indifference levels vs overnight fed funds.

    but yes, shifting savings desires will alter things for different mixes of secs and reserves differently

    Reply

    anon Reply:

    “the Fed (or any bank with access to the Fed) already stands ready to buy an unlimited amount of Treasury securities on repo, (i.e. the Fed lends reserves against Treasuries)”

    they’ll buy enough to keep funds trading at target
    that’s typically not a lot
    i.e. miniscule relative to $ 10 trillion
    quite different than unlimited

    Reply

    Calgacus Reply:

    But “enough” can mean all 10 trillion, in the atypical situation when everyone takes all their cash out of the banks to put inside a mattress. ESM is right; this mechanism supports Warren’s aggregate savings desire – and makes the actual use of the mechanism, the 20 doors, when only two or three are actually necessary, fantastically improbable.

    Reply

    WARREN MOSLER Reply:

    no need to worry about all that. just count bodies in the unemployment line and adjust fiscal balance accordingly

    anon Reply:

    subject was $ 10 trillion in treasuries, not $ 10 trillion in bank deposits

    ESM Reply:

    “no need to worry about all that. just count bodies in the unemployment line and adjust fiscal balance accordingly”

    But if you believe that cash is fundamentally different from Treasuries, then you will believe that unemployment can be cured through QE, without a fiscal adjustment.

    WARREN MOSLER Reply:

    your mixing metaphors. what you are trying to get at would be more likely to be true if tsy secs that couldn’t be sold, or where there was at least some difficulty of selling, were used as payment by the govt.

    for example, if social sec was instead paid with the credit of 10 year tsys it’s likely aggregate demand would be reduced, as at least some people wouldn’t go to the trouble of selling them, etc.

    or if social security was paid with equiv steel bars, or anything else other than ‘cash’ by the govt.

    savings desires are not ‘all powerful’

    the same amount of income will not go unspent with different forms of payment

    Mario Reply:

    I don’t see how Warren is saying that ESM…fiscal adjustments as you know would be reducing taxes and/or increasing spending…QE is just an asset swap in reserve accounts at the Fed…totally different things. At least as far as I can tell…I’ll let the man speak for himself ;)

    WARREN MOSLER Reply:

    i agree that if govt changes the form of payment, say from cash to tsy secs or popcorn or whatever, savings desires may change.

    anon Reply:

    unless we venture into the realm of imagined institutional markets concerning a point originally about existing insitutional markets

    Reply

  15. Tom Hickey Says:

    Warren: Bottom line, if qe ‘works’ its only via the resulting term structure of rates being lower than otherwise. the quantities make no difference, just the rates.
    But any ‘benefit’ from the lower rates is offset by the negative effect of the lost interest income to savers.

    Do the lower rates resulting from QE lower margin rates and thereby contribute to asset appreciation? Do you think that this figured into Bernanke’s plan to increase the wealth effect by driving equities “higher than they would be otherwise”?

    Reply

    WARREN MOSLER Reply:

    the ‘term structure of rates’ includes all assets priced via an implied discount rate, which is most everything.

    so qe lowers that discount rate.

    but it removes interest income, and incomes support valuations of most everything.

    Reply

  16. Peter D Says:

    Warren, was your comment in reply to Krugman published? I skimmed the 6 pages of comments and did not see it there.

    Reply

    WARREN MOSLER Reply:

    I guess not. sent it in twice. haven’t seen it

    Reply

  17. Ramanan Says:

    Mammoth@

    “I would say your (private sector) net worth will be $127.5 in 2016 when the Fed purchases the bond (assuming interests are paid at that time).

    If you sell it now to me, then the private sector net worth is unchanged, yours is up $109 down the bond, mine is down $109 up the bond.

    Notice that in the above post Warren was referring to the Fed purchasing tsys, for instance at maturity. That is precisely the moment when the Fed actually adds the NFAs, hence my comment.”

    I don’t think that Warren was talking of the Fed purchasing Tsys at maturity… where does he say that ?

    I don’t understand the language “down $109 up the bond” …

    Reply

    MamMoTh Reply:

    sorry, down=minus and up=plus, thought it was clear from context.

    it doesn’t matter when the Fed purchases the bonds. usually it’s at maturity, can be earlier. but that is the moment when NFAs are added, not before.

    Reply

    Ramanan Reply:

    Mammoth,

    I am really not sure what you want to convey. Its still not clear what up $109 down the bond means.

    Best is to carefully write balance sheets and flows and watch it change over time.

    “it doesn’t matter when the Fed purchases the bonds. usually it’s at maturity, can be earlier. but that is the moment when NFAs are added, not before.”

    The Fed just exchanges one asset for another. Its purchases of bonds do not add net financial assets to the consolidated private sector’s balance sheet.

    Reply

    MamMoTh Reply:

    Ramanan, when you sell me your bond at $109, your deposits increase by $109 and you don’t own the bond anymore, my deposits decrease by $109 and I own the bond. Our consolidated NFAs remain unchanged, as with any other horizontal transaction.

    Purchases of bonds replace one asset (bonds)with another (deposits). The net effect of the Fed first selling and then buying a bond is the creation of NFAs equal to the interests paid on the bond as deposits.

    You cannot say bonds and deposits are equivalent both at the time of selling and purchasing them.

    Reply

  18. Ramanan Says:

    Mammoth,

    I think we are discussing different scenarios all the time – not sure why!

    “Ramanan, when you sell me your bond at $109, your deposits increase by $109 and you don’t own the bond anymore, my deposits decrease by $109 and I own the bond. Our consolidated NFAs remain unchanged, as with any other horizontal transaction.”

    Sure! (Except price changes in the market changes the NFA.)

    “Purchases of bonds replace one asset (bonds)with another (deposits).”

    Yes.

    “The net effect of the Fed first selling and then buying a bond is the creation of NFAs equal to the interests paid on the bond as deposits.”

    Yes and no. These things Assets, Liabilities etc have a time subscript as well.

    That is Assets at the end of 2009, Assets at the end of 2010 etc.

    “You cannot say bonds and deposits are equivalent both at the time of selling and purchasing them.”

    Don’t think I said bonds and deposits are equivalent.

    I think you are trying to add and subtract too many things. Lets go one by one and not bring in too many things.

    If the Fed purchases a bond for $109 you will agree that the private sector’s composition of assets changes. What is the change in NFA (if any) due to *this* transaction of the private sector with the Fed ? Do not bring in future NFA.

    Reply

  19. MamMoTh Says:

    Sure! (Except price changes in the market changes the NFA.)

    Well that is what I disagree with! Market changes do not change NFA.
    Only the Fed/Tsy can change NFA.

    Do you agree that if you value bonds at market prices then your NFAs will change endogenously which is in contradiction with the vertical/horizontal view?

    If the Fed purchases a bond for $109 you will agree that the private sector’s composition of assets changes. What is the change in NFA (if any) due to *this* transaction of the private sector with the Fed ? Do not bring in future NFA.

    deposits increase by $109 and the private sector does not own the bond anymore.

    Reply

    WARREN MOSLER Reply:

    if you value govt bonds at market prices then rising govt bond prices increase the value of those govt liabilities and the nfa of the economy increases.

    this will be matched by a decline in net interest accruals by the economy, as the ‘new’ bond premium is amortized over time.

    as before, when the fed acts to reduce interest rates, interest income to the economy falls

    Reply

    MamMoTh Reply:

    if you value govt bonds at market prices then rising govt bond prices increase the value of those govt liabilities and the nfa of the economy increases.

    Aren’t the liabilities of the government fixed (payments of coupons + principal) regardless of the market price?

    when the fed acts to reduce interest rates, interest income to the economy falls

    Future interest income will probably fall, by how much it falls depends on the price paid by the government.

    Reply

    WARREN MOSLER Reply:

    if the fed pays a premium it’s valuing it/setting its value/defining its interest rate etc.

    that is, govt decides nominal nfa and can alter the value of what it issues at will as well. both real and nominal.
    govt holds all the vertical cards.

    MamMoTh Reply:

    I think the confusion comes because you think like a bond trader and I don’t. I think in nominal terms which to me is the right way to look at things. The government cannot alter the nominal value of its liabilities including the coupon and the principal of a bond, unless it defaults on its debt.

    Suppose in year 0 I buy a 5yr bond at 4% for $100.
    By year 2.5 I’ve received $8 in interests, and the bond is worth $110 in the market.
    Now the Fed steps in and decides to buy my bond for $112 in order to lower future interest rates.
    So I’ve actually received my $20 in interests before maturity.
    By lowering the interest rate, the Fed might reduce its interest payments on future debt but not on current debt it purchases.

    This is the way I think which seems operationally correct to me. NFAs are only added nominally when the Fed pays the coupons and repays the principal and that’s regardless of the market value.

    Mario Reply:

    “if you value govt bonds at market prices then rising govt bond prices increase the value of those govt liabilities and the nfa of the economy increases.”

    Warren if bond prices rise then their interest declines. How does the nfa of the economy increase if the interest they are earning is declining?

    you seem to state what I am saying in the next line: “as before, when the fed acts to reduce interest rates, interest income to the economy falls.”

    I don’t understand how you can say as bond prices go up the economy benefits while you also state interest rates are reduced the economy falls.

    Reply

    WARREN MOSLER Reply:

    i didn’t say the economy benefits as bond prices go up

    Mario Reply:

    this quote below is the first sentence you wrote in the first reply to comment #19 above by Mammoth (my italics are added).

    “if you value govt bonds at market prices then rising govt bond prices increase the value of those govt liabilities and the nfa of the economy increases.”

    Doesn’t this say that rising govt. bond prices increase the nfa of the economy?

    WARREN MOSLER Reply:

    sort of. the lower rates (from the fed or anticipated from the fed) increase the value of those financial assets.

    Ramanan Reply:

    Mammoth,

    “Only the Fed/Tsy can change NFA.

    Do you agree that if you value bonds at market prices then your NFAs will change endogenously which is in contradiction with the vertical/horizontal view?”

    If yield curve shifts 30bp tomorrow the NFA of the private sector is affected accordingly. Yes its a contradiction. That was what I was pointing out in the other blog in the quiz answers discussion.

    “deposits increase by $109 and the private sector does not own the bond anymore.”

    Yes agreed – which shows that the market value of the bond is the best way to value it.

    So now in the future, the private sector earns lesser income than otherwise due to selling the bond to the Fed before maturity. And hence will affect future NFA in the sense that less income is earned. In a different sense, it doesn’t affect the future NFA.

    On the other hand, you were at some point talking of transaction between two parties in the private sector and since it will bring interest income in the future it will affect the future NFA, but positively.

    Agreed ?

    Reply

    MamMoTh Reply:

    OK, then there is a contradiction. When I see a contradiction it means something is wrong.

    I can agree with you that the best was to value your bond will be at its market price of $109.

    However, the part I don’t agree with is valuing the whole private sector NFAs as $109 x nb_of_bonds. I think there is a fallacy of composition as Ken and anon mentioned above.

    When bond prices go up, it seems NFAs are increased because it is not recorded anywhere that the amount by which the bond price has increased will come from someone else within the private sector.

    But NFAs remain the same in aggregate, by definition! They only change when the Fed purchases the bonds.

    Reply

    WARREN MOSLER Reply:

    again, the fed controls the interest rate (by prices it pays/rates it sets) which is also the value of the nfa it issues.

    MamMoTh Reply:

    Let me add that this contradiction (or paradox) doesn’t disturb me as much as the valuation of the stock market.

    After all, the government is bound to purchasing the bonds at maturity, but not to purchasing stocks. So rising stocks might make stock holders feel wealthier but the whole private sector is not.

    Reply

    Ramanan Reply:

    “After all, the government is bound to purchasing the bonds at maturity, but not to purchasing stocks. So rising stocks might make stock holders feel wealthier but the whole private sector is not.”

    True in some sense. Not true in another.

    The Federal Reserve’s Z.1 does it exactly that way – market value of equities.

    Increase in stock prices also affects liabilities of corporations because if the buy back shares they will have to do it at the market price. (Of course, an act of buying back may increase share prices! but that is a different matter).

    High capital gains can be said to increase consumption. There is a lot of research on this I believe but conclusions will always be debatable since in economics it is not possible to do controlled experiments.

    MamMoTh Reply:

    The Federal Reserve’s Z.1 does it exactly that way – market value of equities.

    That is the problem, since we know it’s wrong in terms of NFAs of the private sector. The same applies to the housing market.

    It’s a fiction which is behind Ponzi lending. This is why the stock and the housing markets collapse the way they do. Because it’s an illusion created by inconsistent accounting.

    Ramanan Reply:

    “That is the problem, since we know it’s wrong in terms of NFAs of the private sector. The same applies to the housing market.

    It’s a fiction which is behind Ponzi lending. This is why the stock and the housing markets collapse the way they do. Because it’s an illusion created by inconsistent accounting.”

    Well don’t see an inconsistency.

    Don’t see a connection to Ponzi lending as well. You can have a view that the housing market will crash 50% but cannot force national accountants to value houses at 50%.

    save america Reply:

    Mammoth, did you say housing market collapse? We got a fix for that:

    http://siliconinvestor.advfn.com/readmsg.aspx?msgid=27326543

    You don’t need an SSN to get a loan for a house in the USA, just an ITIN and I bet there are even ways around that too. I told warren many years ago It churned my stomach that a loan officer in miami gave his illegal alien relatives all kinds of loans for condos, new cars, money for the hookers and blow, etc etc and no one was doing anything to stop this. This created many LOANS that everyone KNEW was never going to be repaid. They all went back south of the border, but it looks like a new wave is coming in.

    Ramanan Reply:

    No, I do not see that as a contradiction.

    Say I work for national accounts (which I don’t), I will take the add revaluation gains for the private sector and revaluation losses for the public sector.

    I may work with three kinds of tables or matrices.

    1. Balance sheets at the beginning and the end of the period;
    2. Transactions Flow Matrix;
    3. Revaluation Matrix

    The revaluations didn’t come from “somewhere” as in there was no transaction to bring this change about because transactions affect the transactions flow matrix.

    The other things you have raised is a slightly different point and is more behavioural.

    I understand Anon’s point as well actually but that has to do with behavioural stuff not about valuations.

    As far as monetizing the debt is concerned, I believe the answer is given in James Tobin’s Essay on Debt Management: http://cowles.econ.yale.edu/P/cp/p01b/p0195.pdf

    However till date I haven’t been able to decrypt his ideas but I like Tobin.

    Reply

    MamMoTh Reply:

    Then we disagree.

    If we accept that NFAs of the private sector come only from net government spending, then any accounting of NFAs of the private sector should reflect that.

    We might as well say there is a law of preservation of NFAs within the private sector: any internal (horizontal) transaction preserves the overall level of NFAs.

    Like the preservation of energy in physics, it only applies to a closed system. If you are measuring changes, then you are not considering a closed system.

    WARREN MOSLER Reply:

    and add that the govt can subsequently alter the value of any nfa it issues.

    Ramanan Reply:

    “If we accept that NFAs of the private sector come only from net government spending, then any accounting of NFAs of the private sector should reflect that.”

    No, I do not accept it because it can be due to revaluations and also due from the external sector.

    “We might as well say there is a law of preservation of NFAs within the private sector: any internal (horizontal) transaction preserves the overall level of NFAs.”

    Yes Financial Assets = Financial Liabilities doesn’t mean revaluations are to be avoided… in fact the opposite…

    MamMoTh Reply:

    Ramanan if you don’t believe NFAs are created only when the government net spends, which is the basis of the vertical/horizontal description, then there is no inconsistency problem!

    Financial Assets = Financial Liabilities
    It’s an invariant that holds all the time. When they both belong to the private sector it means no matter how much they are both revalued/devalued, they net to 0, that is, no NFA is created/destroyed.

    WARREN MOSLER Reply:

    why is it a contradiction with the v/h view when the govt changes the interest rate that changes the value of nfa which are govt liabilities?

    can’t follow what you are asking me to agree with at the end

    Reply

    Sergei Reply:

    “If yield curve shifts 30bp tomorrow the NFA of the private sector is affected accordingly.”

    No it does not. The visible part adjusts accordingly. However it is a wrong claim that private sector loses NFA simply by holding it. When the yield curve shifts, the NFAs are redistributed within the private sector from holders to non-holders. The problem is that you can not directly measure or identify the non-holders. Fixed instruments are like fx: for every winner there is a loser.

    Reply

    Ramanan Reply:

    Of course it does.

    Take a closed economy. The net financial assets of the private sector is currency notes, reserves and govt bonds.

    A fall in bond prices reduces the value of govt bonds held by the private sector.

    “However it is a wrong claim that private sector loses NFA simply by holding it.”

    Not wrong.

    Let us say the central bank is out to kill demand and takes short term rates from 2% all the way to 20%. Long term rates will fall and bond prices also fall.

    The private sector’s net financial assets hence falls.

    WARREN MOSLER Reply:

    (and private sector interest income increases)

    MamMoTh Reply:

    It does not, Sergei is right. The key word is fixed.

    If I buy my 5yr bond at 4% for $100, I will receive $120 at maturity no matter what if I hold it.
    That is, the amount of NFAs added to the economy is fixed: $20.

    Changes in yield/price between issuance and maturity will only affect how these $20 will be distributed within the private sector when the bond changes hands.

    I can’t see where what I am saying is wrong, so saying the opposite must be wrong.

    WARREN MOSLER Reply:

    why does all this matter? we know part of nfa is tsy secs, and we know market value of them varies with fed rates.

    so what?

    ESM Reply:

    MamMoth,

    You’re ignoring time. Money received in the future is worth less than the same amount of money received today.

    If the government issues zero-coupon bonds, does that add the difference between the issue price and par to NFA? If I gave you a $1MM zero-coupon 100-yr bond, would you feel like a millionaire? What could you buy today with it, or even next year?

    Sergei Reply:

    The fact that you can measure the value of the measurable part (i.e. bond holders) does not mean that you do not miss the part which is not directly measurable (bond non-holders). If you chose to sell your bonds 1ms before the yield curve shifts by 30 bps you suddenly realize a gain or loss which comes from the buyers of your treasuries. Now, every moment you have a choice between selling or buying and every moment the yield curve changes. All that it means is that the value of NFAs is redistributed regardless of whether you sell your bonds or not whenever the yield curve changes between holders and non-holders of bonds. However in aggregate the value stays the same.

    Even standard accounting rules recognize this logic. That was the way how many banks showed profits a couple of years ago.

    Sergei Reply:

    “You’re ignoring time. Money received in the future is worth less than the same amount of money received today.”

    It has nothing to do with time. This is a trap for bond-traders :)

    MamMoTh Reply:

    Sergei, I mostly agree with you, but it also has to do with time.

    When the (future) interest rate is lowered, bond prices increase so past interest rate increases.

    I think the important point is that market values reflect the price at which the Fed is willing to buy the bonds at the time or accept it as collateral.

    However, I don’t know what to think in the case of other financial assets, like gold, stocks or houses. In these cases any change in market value nets to 0 unless the Fed is willing to buy them or accept them as collateral at market prices.

    Ramanan Reply:

    “It does not, Sergei is right. The key word is fixed.”

    To do some consistent analysis, you have to establish a framework of accounting principles.

    While it is true that no matter what, the private sector will receive the same amount of coupons and the principal, it does not mean that the value of the bonds already held is the same due to bond prices falling maybe due to a rate hike by the central bank.

    Here is a book which takes super special extra care in getting the accounting right. http://www.amazon.com/Monetary-Economics-Integrated-Approach-Production/dp/0230500552

    You may also consult System of National Accounts 2008….

    http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf


    2.60:

    Assets and liabilities are recorded at current values at the time to which the balance sheet relates, not at their original valuation. Theoretically, national accounts are based on the assumption that the values of assets and liabilities are continuously uprated to current values, even if in fact uprating occurs only periodically. The appropriate valuation basis for assets and liabilities is the value at which they might be bought in markets at the time the valuation is required. Ideally, values observed in markets or estimated from observed market values should be used. When this is not possible, current values may be approximated for balance sheet valuation in two other ways, by accumulating and revaluing transactions over time or by estimating the discounted present value of future returns expected from a
    given asset (see also chapter 13).

    13.59:

    Long-term securities should always be valued at their current prices on markets, whether they are bonds on which regular payments of interest are paid or deep-discounted or zero-coupon bonds on which little or no interest is paid. The price should always be that including accrued interest (the so-called “dirty” price). Although the nominal liability of the issuer of a long-term security may be fixed in money terms, the market prices at which fixed interest securities are traded may vary considerably in response to variations in general market rates of interest. As the issuer of a longterm security usually has the opportunity to refinance the debt by repurchasing the security on the market, valuation at market prices is generally appropriate for both issuers and holders of long-term securities, especially financial transactors who actively manage their assets or liabilities.

    Reply

    MamMoTh Reply:

    Thanks R. I’ll think a bit more about this. It seems what I am saying is correct but also that there is no contradiction with valuing bonds at market value. I need to get my head around it.

    Sergei Reply:

    Ramanan, you keep on taking a micro-approach to this. The claim that nominal value is lost on macro level due to some changes in market variables is ridiculous. On macro level nominal value can be lost only due to default when nominal values are clearly wiped out.

    Ramanan Reply:

    “is lost on macro level due to some changes in market variables is ridiculous. ”

    Straightforward revaluation accounting.

    How about the central bank rising interest rates all the way to 20% causing a huge drop in bond prices … don’t you think the private sector feels less richer ?

    Its of course true that the government pays higher interest rates due to this on bonds .. but that effect takes some time …

    WARREN MOSLER Reply:

    yes, the non govt sector is a net saver, and its income rises with higher rates from the fed. and it does take time. but there’s a pv effect operating there as well.

    MamMoTh Reply:

    The private sector on aggregate actually should feel richer since interests on future debt will increase whilst interests on past debt remain unchanged.

    Of course current bond holders should feel less rich since they will have to wait longer to get the same nominal interests paid.

    Sergei Reply:

    “Straightforward revaluation accounting.”

    Ramanan, try to do your straightforward revaluation accounting for the whole private sector paying particular attention to those poor bond non-holders (say deposit owners). While doing so please do not forget that fixed income instruments are not like liabilities on houses :) I even gave you an example of the absolutely recognized accounting rules which many commercial banks used to show profits but you happily ignored it. Instead you even turned it back and cited with central bank hiking rates to 20%.

    I am surprised that such simple and straight-forward macro-point is completely missing your attention and you keep sticking to your micro-accounting perspective.

    Ramanan Reply:

    “The private sector on aggregate actually should feel richer since interests on future debt will increase whilst interests on past debt remain unchanged.

    Of course current bond holders should feel less rich since they will have to wait longer to get the same nominal interests paid.”

    If you want NFA to measure it, then it drops.. else construct a quantity which shows that households feel richer when bond prices drop.

    Ramanan Reply:

    Sorry what example … redistribution ?

    The threading here is a bit complicated … so can you please point out again ?

    Take a closed economy. If government bond prices drop, net financial assets drop.

    Sergei & Mammoth .. think clearly. If you have any measure or a system of accounting where bond prices dropping doesn’t cause private sector net worth to fall, please let me know.

    WARREN MOSLER Reply:

    if you add back the increased pv of private sector net income from higher rates earned it’s about a wash?

    MamMoTh Reply:

    If you have any measure or a system of accounting where bond prices dropping doesn’t cause private sector net worth to fall, please let me know.

    That’s easy. Instead of valuing bongs in terms of dollars, you could value dollars in terms of bonds.

    Sergei Reply:

    Ramanan: “Take a closed economy. If government bond prices drop, net financial assets drop.”

    Exactly, take the closed economy and forget about the government. So you are left with domestic private sector. Now imagine that the yield curve shifts and … nothing happens. Yes, your visible part (bond-holders) changes its value but invisible part (bond-non-holders) does as well. It is like you have an fx-position and then fx-rate moves against you. Surely you will have a loss on your position but because you do not know the winner it does not mean that there are no winners. There are but you just can say who they are because they are the rest of the private sector.

    MamMoTh Reply:

    Also, along this line, if I own 1M USD and 1M EUR bought at parity a long time ago. When the fx is 1 EUR = 1.5 USD, am I richer in USD or poorer in EUR?

    Ramanan Reply:

    “Yes, your visible part (bond-holders) changes its value but invisible part (bond-non-holders) does as well. ”

    No invisible bond-holders’ value of assets stay the same. Say the US 10y yield moves 15bp tomorrow and others in a similar fashion: Depositors value does not change.

    “Surely you will have a loss on your position but because you do not know the winner it does not mean that there are no winners. There are but you just can say who they are because they are the rest of the private sector.”

    The various sectors of the US hold around $17T of assets abroad. If the dollar depreciates, the value of those assets, receive a revaluation because when converted back to dollars, they gain in value.

    This is as per the IMF’s Balance of Payments and International Investment Position Manual.

    Here Table 1 http://www.bea.gov/newsreleases/international/intinv/2010/pdf/intinv09.pdf Column 4 “Valuation Adjustments, Exchange Rate Changes” & footnote 1

    Ramanan Reply:

    “The various sectors of the US hold around $17T of assets abroad.”

    should be equivalent of around $17T.

    Ramanan Reply:

    “Also, along this line, if I own 1M USD and 1M EUR bought at parity a long time ago. When the fx is 1 EUR = 1.5 USD, am I richer in USD or poorer in EUR?”

    Assuming you earn no return in either …which is a crazy assumption …

    You have $2.5M equivalent or €1.67 equivalent.

    So ??

    If you were a European, your investment was bad .. if from United States, its good….

    So ??

  20. ESM Says:

    May as well start a new thread, as this 3-level reply commenting system (except for Warren’s ability to do one more — perhaps up to 11?) is getting cumbersome.

    @Mario:
    “The point about bonds is that people are taking their ALREADY EARNED cash and saving it. That is the point about bonds if I’m not mistaken, b/c that mindset doesn’t change very much if at all and if it does it is very unlikely it will do a 180 and become consumptive instead. An increase in savings (aka government liabilities) is a demand leakage and we would need to fill that through fiscal policy. I think that is what Warren has been saying no?”

    Yes, I agree that’s Warren’s main argument, and I think it is insufficient.

    Just because there’s $10T of Treasuries outstanding does not mean the owners of $10T of Treasuries all made the decision to save. At the end of the day, no matter how much spending there was or how many transactions, the reserve balances held at the Fed are the same as at the beginning of the day, net of any open market operations of the Fed. If, by 5pm EDT, the Treasury offers Treasuries in exchange for reserves at a rate that is higher than can be earned on reserves, the exchange will happen, regardless of whether anybody particularly wanted to save or spend. Ownership by the private sector of the entire stock of Treasuries is simply the result of overnight investment decisions (ones that in the aggregate are inevitable, even if the Treasury auctions additional Treasuries). Dollars are hot potatoes, and at the end of the day, some people are holding those hot potatoes. So, they store them in pots overnight, and then come morning, they pass them along to other people in exchange for stuff.

    So what is my point? My point is implicitly contained in the above argument. It’s that Treasuries are so liquid and so cash-like that entities in the private sector will hold them regardless of their desire to save or spend. Investing in Treasuries does not handcuff you; it does not constrain you; it does not force deferral of your consumption. You are as liquid after as before the investment. Therefore, the impact of full monetization of the Treasury stock (maximum QE) is pretty much already being incorporated into aggregate demand. The Paul Krugmans of the world think that if all Treasuries were replaced by an equivalent amount of reserves, hyperinflation would result. But there would probably be little change in aggregate demand. That’s the key point. In fact, I’m not sure Warren’s point is even correct. You could have raging hyperinflation, where nobody wanted to save, and still the Treasury could sell as many Treasuries as it wanted.

    Reply

    Mario Reply:

    okay I think I see what you’re saying here then but I am not really sure the significance of it. Don’t we already agree that there really isn’t any direct channel between reserve accounts and the money supply?

    “Just because there’s $10T of Treasuries outstanding does not mean the owners of $10T of Treasuries all made the decision to save.”

    but they bought them versus not buying them so they did choose to save…assuming buying tsys is equivalent to saving.

    “Investing in Treasuries does not handcuff you; it does not constrain you; it does not force deferral of your consumption.”

    yes that’s hypothetically true I guess b/c you are speaking of the liquid nature of tsys…however if you were going to consume why would you put that money into tsys in the first place? You wouldn’t. And if you did put in tsys only to take it out tomorrow what difference does it really make? And who does that in the real world anyway? If you are referring to bank reserves isn’t it a moot point really b/c they aren’t going to spend those dollars anyway…they are just getting a subsidy and building up their nfa rather than letting it sit in reserves. That money will probably never see the light of day anyway (aka enter into the actual money supply). Actually it seems that there must be soooo much money in tsy bonds through bank reserves that it would go on forever like that wouldn’t it? I mean those reserves are considered nfa for those banks so essentially the banks are literally stockpiling cash all day everyday no? Crazy eh?

    “Therefore, the impact of full monetization of the Treasury stock (maximum QE) is pretty much already being incorporated into aggregate demand.”

    However now they have lost all that interest income. But I think I see what you mean b/c once the Fed buys all the bonds, that money just goes back to the reserves which is where it came from in the first place. So it’s no different..except that it is b/c now there is no interest. The difference between cash and bonds will always be the bond’s interest rate so I still don’t see the point?

    “You could have raging hyperinflation, where nobody wanted to save, and still the Treasury could sell as many Treasuries as it wanted.”

    Well if you had raging hyperinflation you’d also have a major run on the banks more than likely wouldn’t you agree? And therefore banks may not have the ability to buy as many tsys as normal correct? Still even if you could doesn’t that still follow suit in that reserves don’t have a direct channel to the money supply as well?

    I am missing the ramifications of this scenario. Heck I may not even be understanding you…it seems you are saying that all Treasuries could be sold to the public and nothing would change and in fact that’s the way it already is in a way b/c bonds and cash are basically no different and equally liquid already…is that right? But what about the interest rates? And even if it was somehow true, I am still not sure what the larger significance of this is…

    Reply

    WARREN MOSLER Reply:

    “If, by 5pm EDT, the Treasury offers Treasuries in exchange for reserves at a rate that is higher than can be earned on reserves, the exchange will happen, regardless of whether anybody particularly wanted to save or spend.”

    the exchange happens because interest rates adjust to indifference levels.

    Reply

    Gary Marshall Reply:

    Hello ESM et al,

    I just had a question for you guys.

    The US Government sells treasuries for its expenditures over and above what taxes supplied, as always.

    With QE1, the Fed bought say Fannie Mae/ Freddie Mac assets and in return gave funds. But the FM’s did not do much with it, just letting it sit, adding to reserves I suppose. Both sides of the Fed’s balance sheet are affected.

    With QE2, the Fed bought treasuries from various entities placing the funds in depositors’ accounts, adding to both sides of its balance sheet. The depositors use their funds to buy stocks and commodities, driving up demand.

    With QE1, the Fed stands to take a large loss on the assets received, if received at face value. With QE2, the Fed stands to take a loss if the economy should recover somewhat on their treasuries with rising rates; therefore it should sell the treasuries to avoid losses, meaning its a temporary measure. The Government debt is permanent.

    I would think the government debt more contributive to inflation since it is permanent. QE2 would be a temporary surge up when implemented and then down when withdrawn.

    Is that out of line or paradigm?

    Regards,
    Gary Marshall

    Reply

    ESM Reply:

    Gary,

    I don’t think anything you said is out of paradigm, but there are some things I don’t agree with.

    First, with QE1, the Fed was buying Fannie and Freddie insured paper. Therefore, it cannot take a loss if it holds to maturity. Another way of looking at things of course is that the government is already on the hook for the Fannie and Freddie credit exposure.

    Second, with Treasuries, the Fed cannot take a loss if it holds to maturity unless it originally bought the Treasuries at negative yields (which of course it didn’t).

    I don’t understand what you mean by the permanance of government debt. Any individual bond that the Fed bought has a fixed maturity date — not that that matters terribly much.

    I think that in terms of its effect on stimulating the economy (not inflation per se) QE1 would be more effective, all other things being equal. By purchasing mortgage bonds, the Fed is more directly lowering the interest rate which is important for private sector leverage — the rate at which homeowners can borrow money against their houses.

    QE2 strikes me as particularly useless because the people who own Treasuries are the most risk-averse, unimaginative, numb-nut savers in the world. They’re far more likely to just stay in cash when you buy their Treasuries from them, and the only effect of QE2 is that the yields on Treasuries are lowered somewhat, but no other interest rates or discount rates throughout the economy.

    Reply

    Gary Marshall Reply:

    Hello ESM,

    Yes, if held to maturity, there will be no loss. However, as you know, if interest rates rise, the yields on those securities adjust by price movements. So, with rising interest rates, the bonds devalue in price leaving the Fed with a bit of a loss if sold. That is why I would think the Fed more inclined to dispose of the bond to avoid carrying that nominal loss until maturity. If their holding is temporary, then QE2 is temporary. If not, then QE2 bears a heavy cost for the Fed in that its returns are much diminished with rising rates.

    QE1 also bears a great cost for the Fed in that the assets purchased, probably at face value, in no way reflect their true value. If 50% of face value, then the Fed is carrying a large loss. I am not exactly sure of the exact figures on the transactions and the Fed is reluctant to disclose them. I cannot imagine the Fed having received value for money. Otherwise, the FMs would have just approached private sources of money.

    QE2 I see as a temporary measure in that rising interest rates will compel the Fed to sell. They would be foolish to hold on to those securities purchased at near top value.

    QE1 I see as temporary in that again the Treasury may have to step in to right the Fed’s financial ship, or the Fed may force the FM’s to take their dubious securities back.

    The government debt is a more permanent addition to the money supply in that the Treasury bills will never die. The debts will be repeatedly rolled over.

    Thank God I stayed in paradigm. I’m getting better at this.

    Sergei Reply:

    The stock of NFAs is latent demand. It might not materialize today or tomorrow however should any supply shock happen you will get hyperinflation in no time. Just look at history of command economies. Soviet Union practiced forced savings to free up the capacity to produce tanks etc. It did not end well for the price level.

    The stock of NFAs might be irrelevant today but the ever increasing stock of NFA does indicate economic inefficiencies. And there is nothing positive, practical or theoretical, about those inefficiences. MMT will never ever be able to convice critical people about the inflationary non-consequencies of its fiscal recommendations. Why not just drop this claim? However justified it is from theoretical perspective, the real life, as Roger Erickson says, is full of checks and balances. So from a practical perspective at some point of time we will get inflation which will force the redistribution of the real wealth even if the MMT inspired fiscal policy blindly denies the need for it.

    Reply

    WARREN MOSLER Reply:

    the ever increasing stock of nfa in today’s low aggregate demand economy is the evidence that savings desires are higher than the nfa made available by deficit spending.

    and when savings desires shift, optimal fiscal policy shifts.

    like driving down the road and you know a sharp left turn is coming up. you don’t make that turn until you get there.

    Reply

    Sergei Reply:

    “like driving down the road and you know a sharp left turn is coming up. you don’t make that turn until you get there.”

    Warren, we all know that you are a fan of driving and driving fast but not everybody has enough savings to give it a try :)

    We are talking theory here. And from theoretical point of view I believe that such a strong savings desire is a clear sign of real inefficiencies. For such cases the theory has to come up with solutions which address the *cause* of apparent inefficiencies rather than its *effects*. MMT proposes the latter and so many people intuitively questions its solutions. And they are right whatever the operational realities of our system are.

    WARREN MOSLER Reply:

    the main ‘inefficiencies’ are the tax advantaged savings plans.
    then there is the demand to hold actual cash which i suppose could be termed an inefficiency
    then there is the non resident desire to save our dollar financial assets, which is a highly beneficial inefficiency for us.

    ESM Reply:

    What inefficiencies? Once your level of consumption reaches an acceptable level, doesn’t it make sense to create a nest egg of financial assets equal to at least a low single-digit multiple of your annual income? If everybody could do that, you’d have government debt into the several hundred per cent of GDP range, without even considering the dollar savings desires of the rest of the world (which is understandably large given the stability of the government and the property rights in the US).

    It all makes perfect sense to me that as the world develops and as people become wealthier, financial wealth will become a larger fraction of GDP than it is right now.

    Matt Franko Reply:

    ESM,
    This shows how far we really are from the better scenario you describe: 1. Consumption is no where near an acceptable level, 2. We cant save as much as we would like (several low digit multiples of GDP? Can you imagine what the debt phobe Peterson people would say to that?!). 3. Then you have foreigners who want to save in the USD as well… and our govt doesnt recognize any of this…

    But this is a good point, we probably NEED several hundred percent of GDP in so-called ‘public debt’ to get there under current arrangements…. (we’re in big trouble with the morons we have in govt and leading policy analysis!), hang in there! Resp,

    JCD Reply:

    @ESM sez

    “doesn’t it make sense to create a nest egg of financial assets equal to at least a low single-digit multiple of your annual income?”

    Many people do this, but not with NFA. That is they save in Equity (real assets), or debt of other individuals or groups of individuals (corporations). Many people are comfortable with a shockingly low ratio of NFA to annual income. It’s the balance between ownership of NFA and offsetting borrowing and lending among individuals and corporations that causes the credit cycle.

    So it’s not clear to me that we ultimately require NFA of multiples of GDP.

  21. ESM Says:

    @Warren:

    “in 1. nfa remains unchanged as corporate liabilities rise by the same increase in the stock price. There has been much debate about the ‘wealth effect’ of rising stocks on GDP, but at most the proponents of the wealth effect show it to be a small fraction of that increase. The price increase values the transfer of ‘profits’ from the economy in general to shareholders of the company.”

    Ok, well, I know I’ve been around the block on this with other people, but this is the first time you’ve said that the value of a stock is a corporate liability. I just think that makes no sense.
    My reason for NFA remaining unchanged by a rise in the stock market is that stocks are not financial assets. Sounds ridiculous right? Well, I have always thought of financial assets under MMT as those assets which have value entirely derivative of TWINTOPT (using Randall Wray’s terminology for the fundamental government IOU — “that which is necessary to pay taxes”).

    A house or an airplane or a factory is not a financial asset because it is something that has value regardless of the existence or value of the dollar. A bond is different. Its value is entirely dependent upon the value of the dollar, and if the dollar goes to zero value, so does the bond.

    A stock, which represents fractional ownership in a value-producing enterprise, has a value independent of TWINTOPT.

    If a stock rises in price, it’s because the market consensus is that the value of the underlying enterprise has just increased in dollar terms. It could be the stock price rose because of things only to do with the dollar (e.g. the dollar goes down in real value, or the dollar interest rate has gone down, both of which make the PV of the enterprise’s output look better in dollar terms). Or it could be that the risk premium has contracted, which makes ownership of stocks look more attractive. Or it could be that the enterprise has had some positive news which means that its ability to create value going forward has increased in real terms. Perhaps its new process for spinning straw into gold or making silk purses from sows’ ears has been shown to be effective, for example.

    In any case, the effect of a stock market rise of $3T is important to understand and for MMT people to wrap their heads around. I think the effect on aggregate demand is comparable to a rise in the market value of the housing stock of $3T, but perhaps the effect on inflation will be lower because some of that $3T is due to an unexpected increase in the aggregate productivity of the underlying enterprises. With housing, market value changes have nothing to do with a house’s future value creation prospects.

    Along the same lines, what happens to aggregate demand if the US government discovers $3T of easily accessible oil in the middle of Death Valley National Park? (Probably nothing because the Democrats will immediately declare it off-limits to drilling. :^))

    What happens to aggregate demand if cold fusion is invented in a government laboratory and the royalties are distributed to US citizens per capita? What happens if Al Gore invents the internet (oops, already happened)?

    Reply

    MamMoTh Reply:

    Neither an increase in the stock or the housing market of 3T corresponds to an increase in NFAs of 3T.

    Any increase in aggregate demand due to this fiction must come from increased borrowing within the private sector which is unsustainable, as the financial crisis in the US has shown.

    Reply

    Mario Reply:

    unless they cash out of their stock positions then it would be an increase in nfa. Regardless it’s all fiction anyway. I still fail to see the larger significance with this.

    I do second ESM’s question to Warren though about how is a company’s stock a liability to the company? That is interesting but I don’t see the connection since the company doesn’t take the other side of the stock (the exchange does it anything but really it’s just investors in the market). Unless the company buys shares in its company, in which case it would not be a liability but an asset (assuming positive returns). If the stock paid dividends then those would be an expense for the company (call it a liability but it’s really not in accounting terms but that’s neither here nor there). But how is the existence of stock a company’s liability, b/c ownership transfer is not the responsibility of the company…it is the responsibility of the investor hence the exchanges for public companies and just private investors for private companies. Where is the liability?

    Reply

    WARREN MOSLER Reply:

    :)

    Reply

    WARREN MOSLER Reply:

    A stock, which represents fractional ownership in a value-producing enterprise, has a value independent of TWINTOPT.

    THE ONLY THING A SHAREHOLDER GETS FOR OWNING STOCK IS DOLLARS FROM THE COMPANY. THE VALUE OF THE STOCK IS THE PV OF THOSE FUTURE PAYMENTS.

    If a stock rises in price, it’s because the market consensus is that the value of the underlying enterprise has just increased in dollar terms.
    THE HIGHER PRICE REFLECT A HIGHER DOLLAR PV OF FUTURE PAYMENTS

    Reply

    ESM Reply:

    “THE ONLY THING A SHAREHOLDER GETS FOR OWNING STOCK IS DOLLARS FROM THE COMPANY. THE VALUE OF THE STOCK IS THE PV OF THOSE FUTURE PAYMENTS.”

    That’s not true. If you own enough stock, you can get a seat on the board of directors and eat as much shrimp as you want during meetings.

    Also, companies can dividend out anything they want to. Shares in other stock, warrants, bonds, other currencies, gold, or Krispy Kreme donuts. There’s no rule or law that says they have to pay shareholders dollars, or even anything at all.

    Reply

    WARREN MOSLER Reply:

    the stock price reflects the pv of all that as well

    ESM Reply:

    I’ll take that as a tacit admission that a stock is not a financial instrument.

    After all, the same could be said of a piece of machinery or a factory.

    In fact, the price of a car or a house is just the PV of all of the expected utility the marginal buyer can derive from it, added to the PV of any resale value. The same is true for a work of art.

    WARREN MOSLER Reply:

    a financial asset is a dollar denominated liability

    ESM Reply:

    “a financial asset is a dollar denominated liability”

    I agree, although to be clear, it must be a liability whose entire value derives from the value of the dollar. If I give you an IOU that says I will pay you the value of 100 barrels of oil in dollars, that is not a dollar financial asset.

    It would probably be helpful to define this rigorously in mathematical terms.

    MamMoTh Reply:

    a financial asset is a dollar denominated liability

    What is a net financial asset then?

    I would say a dollar denominated liability where the liability lies outside of the sector considered, e.g. the private sector.

    How could then a stock be an NFA? Or a corportate bond?

    WARREN MOSLER Reply:

    one person’s dollar denominated liability is another’s dollar denominated asset

    net the two and you have nfa

    MamMoTh Reply:

    net the two and you have nfa

    the two always net to 0 when they lie within the same sector.
    hence my definition.

    Mario Reply:

    right that’s true about the price of stock except this one line, “THE ONLY THING A SHAREHOLDER GETS FOR OWNING STOCK IS DOLLARS FROM THE COMPANY.” Those dollars don’t come “from the company” however.

    The company itself is not paying shareholders any money…except if there are dividends through earnings. When a shareholder exits a position (sells stock previously owned) the company has nothing to do with that exchange of assets for that individual. It is not listed on their books anywhere, it is not their liability or concern. That exchange of assets is between that individual investor who is selling their stock and some other investor who is buying stock at that price (hence the bid/ask and market makers, etc.) that is handled all through the exchange. That’s what exchanges are for.

    If it was a private (or public) company and there was a shareholder of stock in the company that wanted to liquidate his position the corporation has NO OBLIGATION to satisfy that request. No obligation. If that investor wants to sell their shares then they need to find someone else (a buddy, neighbor, enemy, etc. LOL) to buy their shares from them. The company itself has nothing to do with that transaction.

    This is why I say I don’t see how the stock of a company is a liability for them or their books. Of course the stock price is important to a company and they do watch that and want to please their investors etc. but that’s different than it being a directly related liability like an accounts payable or something. As far as I know that is how that works…am I wrong there?

    Reply

    pebird Reply:

    Equity is a special kind of liability for a company. It is equivalent to base money for a government. Companies can generally create as much stock as they wish. From that liability they receive an asset (capital) which they leverage to build up the firm and run the business.

    If the company goes belly up, the stockholders are the last in line to receive anything left over from the liquidation. Whereas other creditors such as vendors or employees have different standing depending on whether they are secured, etc.

    Equity represents a “loan” from stockholders – we call it an investment from the perspective of the stockholder – dividends are kind on an interest payment on that “loan” There is a much higher risk being a stockholder than a trade creditor or a bank lender, but the potential rewards are higher.

    ESM Reply:

    I completely disagree with this characterization. Perhaps under some accounting conventions, equity is considered a liability of the company (although to be honest, I don’t remember any), but it is not a useful way of looking at things. I also don’t think it is helpful to look as stock as money. There are some similarities, but you’re still trying to put a square peg in a round hole.

    A company is an enterprise run as a joint venture. Shares represent fractional ownership of that enterprise, nothing more.

    Ramanan Reply:

    “Perhaps under some accounting conventions, equity is considered a liability of the company (although to be honest, I don’t remember any), but it is not a useful way of looking at things.”

    Did you honestly go into how national accountants do this ?

    Table 1.7.9 of Britain’s Blue Book Page 91 of the PDF, Page 82 of the document. Line AF.5 you see:

    Total Shares and Other Equity

    of the various sectors.

    This intuition of “not debt” appears at various places and especially when foreigners are involved. For example, the White House thinks equities held by foreigners shouldn’t count as liabilities.

    Ramanan Reply:

    http://www.statistics.gov.uk/downloads/theme_economy/bluebook2010.pdf

    The link mentioned in Ramanan Reply: April 24th, 2011 at 1:00 pm

    Ramanan Reply:

    Should mention … AF.5 in Liabilities …

    WARREN MOSLER Reply:

    if the company was never going to give the shareholders anything, anytime, including at time of sale of the company, why would they be worth anything?

    ESM Reply:

    “Did you honestly go into how national accountants do this ?”

    LOL. No, I can’t say – honestly – that I have delved into the details of the British government summary of accounts. It all looks very interesting, but I don’t have time right now to try to understand what the heck they’re doing. However, I’ll point out that, dating back to Luca Pacioli in 1494, accountants have used double-entry bookkeeping in order to isolate certain items and to provide a check against double counting the same item.

    I am not interested in whether some accountant decided to call equity a liability in a particular context so as to ease his computational burden. I am interested in common sense.

    Ramanan Reply:

    “if the company was never going to give the shareholders anything, anytime, including at time of sale of the company, why would they be worth anything?”

    Would assume that the reply was to ESM… who is saying that equities should not be looked at as liabilities.

    WARREN MOSLER Reply:

    it was in reply to something like ‘equities are worth more than just the dollars they may get from the company’

    ESM Reply:

    “if the company was never going to give the shareholders anything, anytime, including at time of sale of the company, why would they be worth anything?”

    The company isn’t giving the shareholders something. The shareholders are giving it to themselves. Selling a company for cash is like selling your stock for cash, except that all the shareholders are doing it together.

    When you sell your house, your house isn’t giving you money. The title to the house is not a liability of the house.

    Ramanan Reply:

    “I am not interested in whether some accountant decided to call equity a liability in a particular context so as to ease his computational burden. I am interested in common sense.”

    I think I know what you mean, believe me. You are saying that items such as “Shares and other Equities” in liabilities are purely technical and is just an item so that the balance sheet balances. I believe it is not. The Blue Book lines I quoted takes the market value of equities and then calculates the net worth of firms at a national level.

    However, to take such a viewpoint, one has to assume the extreme that in general, firms have full volition to pay zero dividends to shareholders. It also assumes that if I need to buy back shares (“rational” buyback price =0) OR to say that it doesn’t make sense for companies to buy back shares at the market value. In the real world, they do that because other sources of funds are cheaper.

    ESM Reply:

    Ramanan,

    My fundamental point is that even though a corporation has a legal existence independent of its shareholders, it is in fact not independent of its shareholders. It exists at the pleasure of the shareholders. It exists to serve them, and it is completely controlled by them. The shareholders are owners and beneficiaries. The management and directors of a company are simply agents of the shareholders, and if the management and directors choose not to pay a dividend, that is simply a cash allocation decision made for the benefit (in theory) of the shareholders.

    From a lawyer’s perspective, a liability is something that is undertaken by contract. The obligation to satisfy that liability according to its terms is a contractual one, and it is enforced by applying the letter of the law within the four corners of the contract. A default leads to a breach of contract claim.

    For equity, it is a different legal relationship. The agents of the shareholders owe a fiduciary duty to the shareholders as beneficiaries. The company does not owe the shareholders anything, any more than your car owes you a ride or your house owes you shelter.
    And the managers and directors owe you only their best efforts as fiduciaries.

    Ramanan Reply:

    A car or a house is a real asset and has not liability and hence different from financial assets.

    A car cannot speak but Jamie Dimon can.

    If Jamie Dimon comes and says that he does not owe anything to the shareholders, investors will dump the JPM stocks before the conference call ends and find other dividend paying companies making it difficult of JPM to raise capital and it will be so devastating to the business that CDS will start rising and all sources of funds will stop.

    Mario Reply:

    “if the company was never going to give the shareholders anything, anytime, including at time of sale of the company, why would they be worth anything?”

    Public companies do give to shareholders. They give them the opportunity to own part of the company and profit on that ownership as the company profits. The basic assumption is that as the company does better so will the stock do better and hence be a more valuable stock. However there is no liability for the company in this scenario that is directly related to the shareholders of the stock. No direct relation. Of course indirectly the company wants the stock to do well so the company looks good and more money is put into the stock…more money available to the company if they wish to sell their own stock positions, do buybacks, a split, pay dividends, etc. Companies own their own stock as does management usually so this creates a built interest in the value of the stock and the company. Shareholders like that, etc., etc. However there is still NO DIRECT liability for the company with its shareholders. In other words, if the stock drops and shareholders lose money, the company isn’t responsible for those losses at all (assuming no fraud of course), so why and how would the company be liable for any shareholder gains? They just aren’t as far as I can tell at least.

    At the sale of the company (assuming that happens in the lifespan of any of the current shareholders anyway) it depends upon the nature of the dissolution. MA’s don’t destroy a stock they are just merged and that is a sale of the company but I am assuming you are not referring to that. More than likely the sale of a corporation (other than an MA) will only happen b/c of bankruptcy since corporations by function can exist forever since ownership can change hands anytime without effect. And at bankruptcy shareholders are usually not paid then either simply b/c companies are just not obligated to pay them back. If they were obligated then shareholders would be compensated for their losses at a corporate bankruptcy and we all know that is just not the case at all. Corporate bondholders do get paid back at bankruptcy though b/c those are real liabilities for the company that are legally backed through legal contract, and sometimes even then bond holders get stiffed as we all also know.

    WARREN MOSLER Reply:

    there is a direct liability to shareholders. at a minimum, in the event of a sale, they get what’s left over after everyone else has been paid.

    ESM Reply:

    Mario,

    You’re still speaking as if a company is a living, breathing being, with wants and incentives of its own. It is not. The company is run by human beings called managers, but those managers work for the shareholders.

    Ramanan is theoretically wrong when he says that if Jamie Dimon does not act in the best interests of the shareholders, shareholders will dump the stock. In theory, the shareholders will dump Jamie Dimon instead.

    There is actually an analogy to the federal government here. The federal government is not a living breathing being either. It has been created to serve the citizenry, and federal bureaucrats and politicians act as agents of the citizenry. When the politicians do a bad job, they can be voted out of power, just like the directors and managers of a company. Citizenship and the right to vote is like company stock (although each person gets only 1 share, and that share is given back upon death — except in Chicago). Money and Treasuries are like corporate bonds.

    The key point, though, is neither the government nor a company should be trying to enrich itself (whatever that means) or its managers, or grow for growth’s sake. It should be maximizing value for its shareholders. That is all.

    Mario Reply:

    “there is a direct liability to shareholders. at a minimum, in the event of a sale, they get what’s left over after everyone else has been paid.”

    that’s true but it is still based on “what’s left over,” which makes it not a very strong liability at all. It’s like the dogs that gets the scraps from the table…calling them a liability is basically meaningless.

    ESM–”The company is run by human beings called managers, but those managers work for the shareholders.”

    no one is arguing companies aren’t run by human beings, this actually proves that a company is a living, breathing entity, and for tax purposes (hence liabilities as well) it is considered a separate entity. The board of directors rules over the managers and the owners/shareholders rule over the board. It’s also very important to note that the “owners” of the company through purchasing public stock holdings are of two types…the original owners before it went public (aka preferred stock) and the “owners” after it goes public and is based on typical stock purchases (aka common stock). The original owners since before the IPO are really the strong suits in ownership b/c they have the largest share, if not all of the share, of the preferred stock and that is a liability for the company b/c it is valued at a liquidation. Regardless this stock is also not a liability in regards to the company’s stock either b/c it operates in the same fashion as common stock in that regard. The holder of preferred stock can liquidate his holdings by converting it to common stock and selling it through the exchange. The corporation then has less preferred stock ownership (less of a liability since less dividends to pay).

    In short common shareholder ownership is very different than preferred shareholder ownership in corporations. But both are still not direct liabilities to the company in terms of stock. They are in terms of dividends.

    WARREN MOSLER Reply:

    it’s a dollar liability
    and yes, it’s the bottom of the credit stack
    but a financial liability none the less

    ESM Reply:

    “it’s a dollar liability”

    Look, if you want to continue to assert, without any explanation or justification whatsoever, that a share of stock is somebody’s liability, it’s not terribly important since it can be made to come out in the wash accounting-wise.

    But if you say it’s a dollar liability, that’s just plain wrong. If the US government declared that it would no longer accept dollars as payment for taxes or anything else, would dollar liabilities be worthless? Of course. Would stocks be worthless? Of course not.

    WARREN MOSLER Reply:

    ok, how about I broaden it to it’s a financial liability?

    anon Reply:

    shareholders have rights

    the liability is legal

    the value of the liability is the same as its value as a financial asset

    ESM Reply:

    Anon=Warren ???

    It all makes sense now :^)

    Sergei Reply:

    lol, isn’t equity considered from legal point of view as limited liability these days?

    pebird Reply:

    The corporate is independent of its shareholders. You can’t assume that all shareholders have the identical interest (which is not just profit, but also time horizon of holding, and also how the company should be operated).

    It is true that the company owes shareholders nothing, except that if they act that way, the management would be replaced very quickly by a majority of stockholder ownership.

    Just do the accounting relationships on a spreadsheet – you start a company and invest it in – as an individual you have decreased an asset (cash) and increased an asset (equity holding) – basically changed your asset composition. On the company side, they have received an asset (cash) and have issued stock which is what? A negative asset? A liability? Something different altogether – lets call it equity.

    Now, equity is a special kind of liability – in fact it is called equity for a reason; its relative value changes using different rules than other “liabilities”.

    Also, the way in which this special “currency” is exchanged has different rules than plain old liabilities, and also whether it is a public or private corporation.

    There is no doubt that companies are “on the hook” for that number of their balance sheet.

    RSJ Reply:

    That’s wishful thinking. Given that the average hold time for stocks is around 22 seconds, a rise in the price of stocks could reflect expectations that the price will rise in the future.

    Companies can live forever whereas investors do not. Investors do take re-sale value into account, or changing capital goods prices into account.

    If you want, you can think of this as adjusting the discount rate of the PV of earnings downward, meaning that the price of the stock increases. But let’s not kid ourselves as to what is driving prices.

    Reply

  22. Ramanan Says:

    Mammoth,

    Its very easily stated as a flow identity. Take a closed economy for simplicity. The flow equivalent of NFA is NAFA (Net Accumulation of Financial Assets). Actually in modern terminology NAFA is used a bit differently – Net Lending is used but lets not go into the terminologies and use NAFA instead.

    So the way one can state what you are interested in is by saying that the only way the private sector can have a positive NAFA is by the public sector running a deficit. Or the only way the private sector can acquire net financial assets is via positive net spending by the government sector.

    Reply

  23. Mario Says:

    Randy Wray article explaining the S&P downgrade in real terms just came out on creditwritedowns.com. I started reading and was getting excited and then I looked up at the name of the author and understood why!! LOL

    check it out here: http://www.creditwritedowns.com/2011/04/sovereign-government-cannot-go-bankrupt.html

    Reply

    Ramanan Reply:

    The original is here:

    http://neweconomicperspectives.blogspot.com/2011/04/s-downgrade-much-ado-about-nothing.html

    I have commented there on the difficulty the Congress can face in achieving a Zimbabwe like situation.

    Reply

  24. Andrew Says:

    I don’t see how Reich is talking about the deficit here. He is saying, I think, that redistribution of wealth (through taxation and government spending) will lead to a better economy for more people.

    I think he has it right. Given the popular perception of the current deficit situation, whether it is correct or not, just spending to increase demand isn’t feasible. Increased spending along with a tax increas on the rich can work together.

    Wealth is relative – it’s not an absolute based on some number of dollars or what one owns – it’s about what one person can afford relative to what another can afford.

    Reply

    WARREN MOSLER Reply:

    different point

    Reply

  25. Ramanan Says:

    Anon,

    If you are around have you seen this ?

    http://neweconomicperspectives.blogspot.com/2011/04/s-downgrade-much-ado-about-nothing.html?showComment=1303756713272#c8834648294040978036

    Reply

    anon Reply:

    mais, oui

    the only blur is due to “anon”

    :(

    :)

    Reply

  26. vjk Says:

    Ramanan:


    As I understand it, these special banks do not have an option of NOT buying the offered treasuries.

    That is clearly incorrect. A dealer bank may choose to cease being a dealer at any time if staying a dealer is not in the bank’s financial interest. In fact, many did — a dealer bank is not a GOSBANK. The dealer bank may choose not to intermediate a treasury auction which may or may not lead to ceasing to be a dealer bank.

    Did not read the rest as the first phrase was enough. Maybe should have.

    Reply

    Ramanan Reply:

    Vjk,

    Didn’t see that initially, as I was more interested in the my stand on the ease in creating a hyperinflation scenario – which is difficult for the Congress!

    Yeah these bids are competitive bids… even if the banks are “forced” to bid, they can send abnormal bids.

    Reply

    Ramanan Reply:

    “b) YES when Treas does spend (write check on its deposit at Fed) then reserves are returned to banks, which can then buy bonds from Fed or Treas if they do not want the reserves. (Fed targets overnight rate, so bidding it down triggers sale)”

    Vjk,

    Some complicated argument there.

    This creation of the reserves is actually not one like an overdraft spending type, but the Treasury moving funds back to the TGA from the TTL and banks going into a daylight overdraft at the Fed. If there are no funds in the TTL, the reserves could not have been created.

    “d) A “failed Treas auction” just means banks are happy to hold excess reserves; not a problem.”

    Banks wouldn’t get the excess reserves if there is a failed auction.

    “A quadrillion of spending in a year would drive up prices; I don’t see how that could be controversial. Congress would hold the key: it would have to budget the spending and raise the debt limit to allow it to proceed.”

    (Response to my comment)

    New response by me .. (will appear) was something like .. the market can discipline the government.

    ” Contrary to what “anon” says, it is not MMT that blurs anything. We try to make all operations as clear as possible. LRWray”

    Anon has been quite rightly persistent on this.

    Reply

    Ramanan Reply:

    I said :

    “This creation of the reserves is actually not one like an overdraft spending type, but the Treasury moving funds back to the TGA from the TTL and banks going into a daylight overdraft at the Fed. If there are no funds in the TTL, the reserves could not have been created.”

    Should have been clearer. The funds move from TTL to TGA before the Treasury wants to spend. Reserves drain but daylight overdraft brings it back to initial level. Government spends, and daylight overdrafts are extinguished. Reserves don’t change due to spending.

    Reply

    anon Reply:

    Ramanan,

    Have a look at this:

    http://neweconomicperspectives.blogspot.com/2011/04/s-downgrade-much-ado-about-nothing.html?showComment=1303836457354#c4284619028567406640

    Caught in the blur!

    Reply

    Matt Franko Reply:

    Anon,
    It reads to me like Prof Wray is providing a review of the current methods of operation within the context of the way the conventional wisdom is confused/deceived into a false belief as to what is really going on. ‘Operationally’, this of course is not what is going on:

    “The treasury current medical practioner writes checks on its demand deposit places leeches on the patient at the central bank barber shop and moves removes tax receipts the bad blood from its accounts the bloodstream at private banks of the patient to the central bank bucket on the floor when it he wants to spend cure the patient.”

    It doesnt mean (to me) that Prof Wray agrees with the conventional wisdom.

    anon Reply:

    its not about agreeing, Matt

    its about describing

    (with options on reality, apparently)

    Matt Franko Reply:

    Anon,
    It must be the word “operationally” you are having a problem with:

    Operationally:
    1. Of or relating to an operation or a series of operations.
    2. Of, intended for, or involved in military operations.
    3. Fit for proper functioning; ready for use: an operational aircraft.
    4. Being in effect or operation.

    Definition 4, the part “being in effect” looks like it may be the correct usage here within the context of MMT writings like “not operationally constrained” no? IOW the true ‘effect’ is not that taxes provide money for the govt to spend… Resp,

    anon Reply:

    I’m not having a problem, Matt

    being in effect in this case means actual accounting entries according to actual operations and transactions

    Ramanan Reply:

    Yes saw that comment Anon.

    Its how one presents – what you have been emphasizing.

    While its true that saying taxes fund government expenditures gives one the incorrect impression that spending is dependent on taxes, hence the stand is taken by MMTers that “taxes don’t fund anything” which is incorrect. Not only that, they rush to show this by “operational realities”.

    “Taxes don’t fund government expenditures” is precisely wrong because taxes fund government expenditures.

    It helps to directly state the overdraft constraint upfront.

    The gold-standard/pre-1971 anti-analogy doesn’t work as well .. Pre 1971, the US Treasury had an overdraft facility at the Fed and taxes would “destroy money” – the government would use tax receipts to reduce its indebtedness to the central bank and spend by taking a direct overdraft.

    But the claim is that pre-1971 taxes fund expenditures and post-1971 they don’t. Opposite in this way of describing it isn’t it ?

    Matt Franko Reply:

    Maybe it’s like if you knew that attaching leeches to a human body actually hurt rather than helped, you have to make a decision: Do you try to convince the morons to not attach leeches at all? Or do you decide it may be easier to recommend the morons attach leeches but only to the surfaces of the fingernails and toenails?

    anon Reply:

    “The gold-standard/pre-1971 anti-analogy doesn’t work as well”

    yes, you’re right on that, as you’ve noted before – and it’s a fundamental point to emphasize

    relativities in the overall explanation need to be realigned quite signficantly

    pebird Reply:

    If a primary dealer did not purchase Treasuries over the long-term, they would lose their relationship with the Fed. Certainly, on any given auction day, different primary dealers have different balances, but the whole idea of being a primary dealer is that you intermediate between large pools of cash and low risk securities for large depositors.

    Now, if a primary dealer did not buy government bonds, what would they do with all the excess dollars accumulated? They would either move them into riskier, less liquid investments – and would eventually be unable to meet their clients’ need for capital preservation and liquidity.

    Or, they would hold cash at 0% and their clients would move their holding to someone who did buy Treasuries – and that entity would eventually become a primary dealer. How do you think PIMCO became a primary dealer?

    Government bonds have two functions, one is a reserve drain and interest setting function, the other is a provision for low risk, interest bearing, liquid savings vehicle. This is an intersection of vertical and horizontal transactions. The primary dealers are basically pooling points of liquidity seeking low risk options.

    If savings accounts were insured to infinite dollar limit, then the 2nd function would be fulfilled via banks and the two functions would merge.

    Reply

    vjk Reply:

    “If a primary dealer did not purchase Treasuries over the long-term, they would lose their relationship with the Fed. ”

    Perhaps it would, perhaps not.

    In the US, as far as I remember, the PD does not have a contractual obligation to bid at every Treasury auction, much less an obligation to buy a certain volume of issues, as in some other countries, like Portugal.

    Besides, again as I recall, about half of the current issues bypass PDs and are bought by direct buyers, so the business is not as lucrative as it used to be.

    I believe Cantor Fitzgerald reported loss on the operations. Maybe wrong though.

    As I said, the Feds are not GOSPLAN (yet) and PDs are not its branches, however much one presumably wanted it to be this way.

    Reply

  27. KRG Says:

    Isn’t one of the effects of higher top end taxes, so long as capital spending (like worker compensation and business expenses) are deductible actually a net increase in aggregate demand? That’s where I think Reich is wrong; the idea behind raising taxes is to deliver a clear message to those sitting on idle cash to, essentially, use it or lose it so that there’s a motivation for those who are otherwise on the far side of the Brewster’s Millions issue to actually need to keep the system liquid for better long term profits.

    Reply

  28. Basiswissen Derivate Says:

    Wertpapiere…

    I think you should use more pictures on your website, but besides that, it is great. Regards….

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