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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.

Comment

Posted by WARREN MOSLER on June 26th, 2011

Comment:

Side note: I called “on point” on NPR last week to challenge the guest viz his talk of US default, etc. The guy who manages the phone calls told me I don’t know anything about money, and that of course the debt crisis is just that and that the US could certainly default. He would not put my call on the air. The obstacles to getting the message out are everywhere.

68 Responses to “Comment”

  1. Dan Kervick Says:

    Apropos the latest US debt ceiling wrangling, I have a question for the experts in monetary operations. I posted this question earlier on Bill Mitchell’s blog, but I would like to post it here as well to see if there is anyone out there who knows the answer.

    I want to preface my question by saying it is a question about what the US Federal Reserve System is legally permitted to do. It is not just a question about what an arbitrary sovereign government, abstractly and theoretically considered, can do in some in-principle operational sense. It’s a legal question about a specific government and institution – the US government and the US Federal reserve system – and what those institutions are permitted to do right now under existing US law.

    Some background to the question: As I understand it, the US Treasury has accounts at the Fed, and these accounts are used to process federal government payments. If the government cuts a check to someone, that check is deposited in the recipient’s bank account. Ultimately, a Treasury department account is debited and the recipients account is credited. Similarly, if someone makes a tax payment to the federal government via check, the payer’s account will be debited and a Treasury account credited when the check clears.
    So here’s the question:

    Can the Fed, acting solely under legal authorities it already possesses, at its own discretion, simply credit a Treasury department account by some amount, without processing any payment into that account from another account?

    Now it is my understanding that under current law the Fed cannot permit an overdraft on a Treasury account. An overdraft occurs in a bank account when the bank makes a payment from an account on insufficient funds. The full amount is debited from the account, and the account then has a negative balance. That negative balance is a liability of the account holder: they owe the bank money. They would usually have to pay a penalty.

    But I’m not talking about an overdraft. What I am asking is whether the Fed can effectively state something like the following:

    “We hereby create X dollars of fiat money, and credit those dollars to such-and-such Treasury Department account. End of story.”

    I am also not talking about a Fed loan to the Treasury. Loans would be constrained by laws governing Treasury borrowing, and by laws prohibiting the Fed from purchasing Treasury debt directly, rather than on the open market. But again, I’m not talking about a loan. I’m just talking about the Fed creating money and giving it outright to the Treasury.

    And finally, I’m not asking a question about the Fed’s customary practices. I understand that the Fed usually creates money by purchasing securities and crediting the account of the seller of the security. What I’m asking about is what the Fed is permitted to do, even if the action is something outside of what it customarily does.

    Reply

    JKH Reply:

    @Dan Kervick,

    I’ll stick by my earlier response. No one will disprove it.

    Reply

    beowulf Reply:

    @JKH,

    What was your earlier response?

    Reply

    Dan Kervick Reply:

    @beowulf, He said the answer is “No.”

    JKH Reply:

    @beowulf,

    I said a tad more than “no”:

    “The prohibition probably falls out from rules covering the disbursement of funds by the Fed. The latter would include, broadly speaking, secured lending against acceptable collateral, and operating expenses such as salaries, etc.

    The transaction you describe would be a credit to Treasury’s deposit account and a debit to Fed capital.

    In the context of existing institutional arrangements, it is akin to “giving money away”. It’s effectively a principal fiscal transaction, outside of the bounds of the Fed’s normal spread banking function (which also has a fiscal effect).

    Something would prohibit that.

    And as you say, that’s different than a Treasury overdraft at the Fed, which if it were allowed, would be a credit to reserves and a debit to Treasury’s deposit account (making it negative). There’s no direct CB capital account impact from such an overdraft

    It gets much cleaner if the Fed and Treasury are institutionally merged.

    Then there’s no external Treasury account at the Fed.

    Any such issue becomes internal to the combined entity, if its an issue at all.”

    beowulf Reply:

    @Dan Kervick,

    Any Federal reserve bank may receive from any of its member banks, or other depository institutions, and from the United States, deposits of current funds in lawful money, national-bank notes, Federal reserve notes, or checks, and drafts, payable upon presentation…
    http://www.federalreserve.gov/aboutthefed/section13.htm

    You are advised that the term “lawful money” has not been defined in federal legislation. It first came to use prior to 1933 when some United States currency was not legal tender but could be held by national banking institutions as lawful money reserves. Since the act of May 12, 1933, as amended by the Joint Resolution of June 5, 1933, makes all coins and currency of the United States legal tender and the Joint Resolution of August 27, 1935, the term “lawful money” no longer has such special significance.
    The $5 United States note received with your letter of December 23rd is returned herewith.
    Very truly yours,
    M.E. Slindee,
    Acting Treasurer

    http://www.famguardian.org/Subjects/MoneyBanking/FederalReserve/FRconspire/lawful.htm

    (h) The coins issued under this title shall be legal tender…
    (k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

    http://www.law.cornell.edu/uscode/31/usc_sec_31_00005112—-000-.html

    Reply

    Mario Reply:

    @Dan Kervick,

    if I am not mistaken (and that is definitely possible in this area mind you!!!) whenever the Fed credits the Treasury dollars, as it stands today, the Treasury needs to credit the Fed something to keep the accounting balanced. In this case the Treasury credits the Fed with tsy bond issuance, which the Fed then goes and sells to primary dealers at auction. The Fed then takes that money and at the end of each year gives it all back to the Treasury minus Fed operating expenses (which is about 1% of total holdings).

    In other words the Fed credits the Treasury and debits their own income accounts (probably an interest income account) or something like that, since they now have a new asset (treasury bonds) in their possession, which they then go and sell for cash at auction.

    As far as I know, there are many MMT-ers who suggest that the balance sheet of the Fed and the Treasury be merged, so this
    “song and dance” of bonds and Fed auctions can end (aka no more debits/credits between Fed and Treasury).

    That’s how I know it and again I could be waaay wrong so feel free to chime in anyone and set me straight…and of course I may not be answering your question at all!!!

    LOL

    Cheers!

    Reply

    Dan Kervick Reply:

    @Mario, Hi Mario,

    As I understand it, the Fed is prohibited by law from buying Treasuries directly from the Treasury Department. So the government can’t create money simply by means of the Treasury issuing a Treasury security and selling it to the Fed. However, it usually accomplishes much the same thing when the Treasury Department sells Treasuries to private dealers, and the Fed then buys these securities in open market operations. The Fed returns any interest to the Treasury, so this is just a complex method for the Treasury to expand its own deposits, with Fed compliance.

    Of course, if the Congress prohibits the Treasury Department from issuing new debt, this process can’t take place.

    But I could be wrong too!

    Reply

    Mario Reply:

    @Dan Kervick,

    yes that’s right. You’ve got it. Thank you.

    The Fed is constrained to the degree that Congress authorizes spending. The treasury executes that spending dictated by Congress and the Fed provides the means (the money) to the Treasury to do that. The Fed doesn’t go beyond what Congress authorizes to be spent…except for the QE’s and whatever monetary policy they are implementing.

    So I guess the answer to your question is no…the Fed cannot credit the Treasury. You just answered your question, no?

    Cheers.

    Tom Hickey Reply:

    @Dan Kervick,

    There’s a contradiction here. Congress already authorized the spending and obligations currently exist. But Congress has a rule against meeting them. Which takes precedence? The executive could simply decide and tell Congress that they sent mixed signals so he picked the constitutional one, citing SCOTUS precedent. There are ways to make the accounting work without violating the rules, too, as cited above.

    Tom Hickey Reply:

    @Dan Kervick,

    Dan, the Fed was created by Congress and Congress can alter or even repeal the Federal Reserve Act. The Fed is given specific powers, responsibilities and operational parameters, but there is no specific sanction for not adhering to them. Moreover, the Fed has broad emergency powers.

    The fact is that the Fed can do as it pleases within the constraint of not upsetting Congress enough to change the game.

    As a matter of fact, a lot of people were jumping up and down over Fed “illegal usurpation” of power in its use of emergency powers over the past couple of years. Never came to anything.

    The guiding principle seems to be do it and then ask permission if Congress scream loudly enough.

    The existing debt has already been appropriated, for example. There is SCOTUS precedent about the constitutional requirement for the US meeting its obligations. If Treasury issued tsys and the Fed sold them to the PD’s and then bought them back, so it could credit the Treasury account to meet US obligations, it could be argued cogently that this is within the power of the Fed and executive branch. A lot of people in Congress would probably go ballistic, but could Congress pass legislation and get the president to sign it that would punish the Fed and Treasury? But beyond that there would be a big political stink, and that is probably enough to keep the Fed and Treasury from taking this course. Could be the same with Beowulf’s coin caper, too, so it is unlikely to happen unless Wall Street goes ballistic and Congress doesn’t move. Then things would get interesting, and we would see who is boss.

    Reply

    Dan Kervick Reply:

    @Tom Hickey, Yes, I agree that some of the things the Fed, or the executive branch could do will not be done because they will cause a big political stink.

    I’m not sure why Congress would have to pass new legislation if Treasury started issuing new debt to pay its bills. Treasury would already be in violation of the debt ceiling law, and so Congress could take them to court, couldn’t they. Of course, that would be another big stick. I’m not sure Congress would want to go out on a plank at that point in a public effort to force the government to stop paying its bills.

    Reply

    beowulf Reply:

    @Dan Kervick,

    The initil question is whether Members of Congress would have standing to sue (answer is, probably not). Even if it standing were granted and case was decided on merits, the Supreme Court has used the strongest possible language to hold that Congress can’t back out of its debts (or even alter their payment terms), so I can’t see any circumstance where the president would lose in court on the argument that debt ceiling law is unconstitutional (excepting, of course, his tendency to defeat himself by refusing to take decisive action).
    The Constitution gives to the Congress the power to borrow money on the credit of the United States, an unqualified power, a power vital to the government, upon which in an extremity its very life may depend. The binding quality of the promise of the United States is of the essence of the credit which is so pledged. Having this power to authorize the issue of definite obligations for the payment of money borrowed, the Congress has not been vested with authority to alter or destroy those obligations.
    http://supreme.justia.com/us/294/330/case.html

  2. Robert Cogan Says:

    I have some little success by sending letters to the editor as replies to scares by local propagandist deficit fear mongers. I got 2 letters in USA Today as replies to articles by Dennis Cachon (sp?) and have tried to crack biggest circulation dead tree media – AARP Bulletin and Magazine (hard to do because of brevity requirements and necessity to tone down.)

    My guesstimate to Dan’s query is “What is the meaning of ‘exigent circumstances’ in the Fed’s founding law?” Some months ago the issue came up of whether the Fed would/could buy short term muni bonds to help retain public employers. I think I recall Ellen Brown saying in a post the it could, and Bernanke saying it would not.

    Reply

    Art Reply:

    @Robert Cogan,

    “Some months ago the issue came up of whether the Fed would/could buy short term muni bonds to help retain public employers. I think I recall Ellen Brown saying in a post the it could, and Bernanke saying it would not.”

    Seems to me they could, but it might require unusual measures such as the creation of Maiden Lane, LLC, which acquired troubled assets during the financial crisis and is carried as a line item on the Fed’s books. Anyone know offhand if that required Congressional a/o Executive approval in advance?

    Reply

  3. bob Says:

    More of the left wing media conspiracy.

    Reply

  4. Art Says:

    The Fed’s authority to exist and do stuff is governed by the Federal Reserve Act. The Federal Reserve Act allows the Fed to create money, or, more precisely, respond to market demand for reserve balances, through either the discount window (lending against certain financial assets as discussed in section 13 and section 10 of the Act) or open market operations (as discussed in section 14). Neither of the sections gives the Fed the authority you discuss.

    But, here is the thing. The authority you discuss as I understand what you are asking does not make sense in terms of what money is. Money is just an accounting identity of value. In the modern world it is just non-interest bearing debt that is recognized by the enforcer of law as the means of discharging debt. So, if the Fed credited a Treasury account, it would have to debit a Fed account because it would be manipulating the Fed’s balance sheet and the balance sheet’s must always balance.

    But maybe I’m not understanding your question.

    Reply

    Robert Cogan Reply:

    @Art, Art, here is a link to an article by Brown that contains another link to a Wall Street Journal article on the subject.

    http://www.webofdebt.com/articles/nobailout_mainstreet.php

    Could not the Fed create a credit and corresponding debit account for each of the states like Mosler in “7 Deadly Innocent Frauds” refers to when discussing China’s holding of our Treasuries? In fact, given financial interactions between them, I’d be surprised to lean that there are no such accounts. So, surprise me, if true.

    Reply

    Art Reply:

    @Art,

    Uh-oh. Two Arts.

    Other Art

    Reply

  5. Mario Says:

    And this is even more insane considering that NPR themselves put out a great program on All Things Considered about a year ago explaining how money was created at the Fed ex nihlio and how a sovereign currency issuer works and how QE 1 and QE 2 actually function. Mike Norman posted a link to the program on his blog a while back.

    I gave up listening to NPR after realizing they too are totally bought out by “them”…I think it came about during that whole attacking on public broadcasting in the Bush admin a few years ago…they apparently replaced alot of the heads of production and directors in NPR and the various stations and have only seemed to be able to get even more of a stronghold on things as time has gone on.

    “They” are far and wide in power…like Sauron!!! LOL I am reading the Fellowship of the Ring (again) and just loving it so you’ll have to pardon the reference. ;)

    Reply

  6. Dan Kervick Says:

    Thanks for responding Art. I understand what you are saying in your first paragraph. And if those are the only two forms of legally authorized money creation the Fed can undertake, then upshot is that authorized money creation always involves an exchange of money for a financial asset – a promise of some kind. Banks borrow reserves from the Fed; or dealers exchange a security for money. And so the operation I imagined would not be permitted.

    But your second paragraph puzzles me – which is not surprising, since I have a very fuzzy understanding of accounting. It seems to me that if a country’s base money supply is state determined, and if that base money supply grows over time, then at some point some entity or entities in the government have the authority to produce money from scratch, rather than simply move existing money from one account to another account. And the money that is produced from scratch during a period of time will exceed the amount that is destroyed during that same period of time, again assuming the base money supply grows during that time. In the traditional form of doing this, some physical currency is produced. A mint, acting under orders from a monetary authority, turns some stuff that is not money – metal, hemp, ink, etc. – into something that is money. And in the modern world, less tangible forms of money are brought into existence. The laws prescribe how that new money can be entered into circulation: for example, can it only be lent into circulation? Or can it be spent into circulation or gifted into circulation?

    On the assumption that if the Fed credits a Treasury account it has to debit some other account, how does it get on that other account in the first place. If the base money supply is expanding, don’t there have to be instances where money is credited to an account by fiat?

    Reply

    PJ Pierre Reply:

    @Dan Kervick,

    To put it simply, the credited funds to the Treasury would have to be book as a Fed liabilty for the balance sheets to balance.

    Reply

    Dan Kervick Reply:

    @PJ Pierre, PJ Pierre, Fed-issued base money is a liability, in accounting terms, solely by virtue of the fact that it can be redeemed at the Fed for … an equivalent amount of base money. Isn’t that right?

    Reply

    PJ Pierre Reply:

    @Dan Kervick,

    It’s a liability, in that, it discharges ones liability to the Fed.

  7. Art Says:

    Dan,

    The Fed can determine the price of money or the supply of money, but not both at the same time. If the Fed tries to determine the price (supply), the market, which includes the Treasury, will determine the supply (price) of money. This is all in Mosler’s required reading and Mosler gets it from Basil Moore. The Fed has tried in the past to set the supply of money and let the price fluctuate based on the market, but this causes banks to fail and the payment system to break down during financial crisis. The Fed was originally founded to act as a clearinghouse to stem payment system destruction by letting the supply of money adjust during bank panics. So when the Fed tries to control the supply of money, it is contradicting the reason it was created. See Hyman Minsky on this.

    Regarding money creation generally, on gold standard, or any system: When a gold coin is minted and used by the mint to buy something the government is basically creating a liability against itself and trading that liability for the asset it buys when it exchanges the coin for what it is buying. The coin is a liability of the government because it can be used to pay taxes to the government (the private sector’s liability to the government). What we call money is just the non-interest bearing debt of the government. See Innes and Knapp on this.

    Hope that is somewhat helpful.

    Best,

    Art

    Reply

    Dan Kervick Reply:

    @Art, The way I understand it the Fed directly controls the supply of MB, base money, but in doing so is generally responsive to the demand for reserves that are driven by banks’ decisions about whether or not to advance credit to prospective borrowers. To the extent that the Fed responds positively to most of this demand, the supply of money is endogenously determined by the demand for credit in the market. But these are matters of current prevailing practice – not deep principles of economics. In principle, the Fed could run a tighter regime in meeting the supply of reserves and return us to an exogenous system. But as you note, that would occasion more bank failures and breakdowns in the payment system.

    I now understand the point you were making about money as a liability. I was forgetting the Chartalist angle: all money circulated is a liability of the government, because it can always be used to discharge a tax debt to that government.

    I’ll open up my Minsky again. Chapter 10 in Stabilizing an Unstable Economy?

    Reply

  8. Ramanan Says:

    JKH,

    Unrelated to other comments here….

    Any opinion on the conclusion section here ? :

    http://neweconomicperspectives.blogspot.com/2011/06/mmt-sectoral-balances-and-behavior.html

    in particular “Still, for every country and for every currency there will be a macro balance equation.”

    Even Neil Wilson has asked a question related to that.

    Reply

    Art Reply:

    @Ramanan,

    Ramanan:

    I think the point is that there is an accouning identity for every transaction, whether domestic or international. In other words, for every buyer there must be a seller and for every credit there must be a debit. As a result, the global balance sheet must balance, and so must every the balance sheet for every country or every currency union.

    The beauty of MMT is that it understands this fundamental truth of trade and attempts to analyze the stock flow implications of the various kinds of transactions the government can initiate to stimulate economics activity.

    Best,

    Other Art

    Reply

    Ramanan Reply:

    @Art,

    While what you say is true, here is what I have to say.

    There are two kinds of transactions. Lets call them income/expenditure flows and financial flows. The sectoral balances identity links income expenditure flows i.e., it says that the sum of receipts and outlays of all sectors some to zero. This is independent of the currency used in the transaction. Looked at one way its magical. Looked at another it is straightforward accounting.

    Again its independent of the currency used.

    The identity can be written for three sectors as NAFA=DEF+CAB.

    On the other hand, what is the identity which talks of one currency only ? If there is one, it should include both income flows and financial flows unlike the usual sectoral balances identity which involves just income flows.

    Reply

    Ramanan Reply:

    @Ramanan,

    “sum of receipts and outlays”

    Oops meant sum of (difference of receipts and outlays for each sector), where the sum is over all sectors.

    Art Reply:

    @Ramanan, I’m not sure I understand you. Currencies are traded against each other like and other good. If you trade a currency for something else you get something in return. The value of all these things certainly fluctuates and that effects what would be the equivalent of an equity account on a national balance sheet. In some cases this account might go negative. But that has no consequence other than as an accounting identity.

    But, again, I don’t think I understand the point you are making.

    Best,

    Other Art

    Ramanan Reply:

    Other Art,

    Lets say that in one year the US runs a budget deficit of 1%, a private sector balance of 2% and hence an external balance of 1%.

    Lets simplify even more. Imports=0 and the 1% export is selling some stuff to Japan and the firm doing that invests the amount in JGBs.

    Now, its difficult to say anything consistently like this except for simple cases:

    private sector balance in dollars = 1%, budget deficit = 1% and external surplus in dollars=0% &

    private sector balance in Yen = 1%, budget deficit in Yen=0% and external surplus in Yen=1%.

    i.e., in this example – by construction it was easy (assuming its a right way of putting it).. not in general.

    art Reply:

    @Art,

    So you’ll be Other Art? A bit confusing since I signed above that way, but works for me.

    Art

    Reply

    JKH Reply:

    @Ramanan,

    Ramanan:

    Seems vaguely written, whatever its trying to say.

    If you and I swap treasury bills, Canada has a rupee net financial asset (so do I) and India has a Canadian dollar net financial asset (so do you). Nothing else, other things equal. What’s the sector balance interpretation of that in the context of this article? No idea.

    There may be another point, which is that sector flows in different currencies would have to be reflected at book value within a given GDP accounting cycle, in order for stocks to reconcile with flows over that cycle. After that, stocks are revalued (e.g. NIIP; flow of funds; etc.).

    Reply

    Ramanan Reply:

    @JKH,

    Thanks.

    Yes, no idea on the sector balance interpretation.

    Reply

    Other Art Reply:

    @Ramanan, I think one would have to do all the flow of funds accounting at book value to make it all balance. In the eyes of the law, trade is all nominal, i.e. dollars = dollars, yen = yen, and not value per se. Things might not balance in terms of value, but in terms of book value they do. When values change, you write up something similar to an equity account to reflect the difference.

    Are we speaking past each other or are we on the same page?

    Ramanan Reply:

    Other Art,

    Though I don’t disagree with you on anything, we may not be in the same page.

    Matt Franko Reply:

    @Ramanan,
    I’m sure you dont eat like that! ;)
    Ramanan,
    From the Ritholtz Blog:
    http://www.ritholtz.com/blog/2011/06/jump-starting-the-u-s-economy/

    “2) Corporate Tax-Free Repatriation: US corporations are sitting on trillions of dollars of cash in their overseas divisions. A one year tax holiday to bring that back to the US. It can be structured in tiers (0%, 5%, 10%). The goal should be to bring to the US a trillion plus in overseas profits.”

    Do you believe they are actually ‘sitting on trillions of dollars of cash in their overseas divisions”?

    Resp,

    Reply

    Ramanan Reply:

    @Matt Franko,

    Probably the article meant equivalent of trillions of dollars ?

    Maybe it is trillions of dollars with banks in Europe ? (As in lot of it in money markets in dollars and others in other currencies)

    Reply

    JKH Reply:

    @Ramanan,

    Interesting, that in order to repatriate it, foreigners must liquidate equal dollar claims on the US.

    Ramanan Reply:

    JKH,

    Nice point.

    Matt Franko Reply:

    @Ramanan,

    This from the instructions on how to report ITA flows to the US BEA: “Affiliates of multinational corporations are considered as residents of the country in which they are located, not as residents of the country of the parent; thus, U.S. affili­ates of foreign corporations are considered U.S. residents, and foreign affiliates of U.S. corporations are considered foreign residents. Economic activities of production and consumption occur predominately in the countries in which the affiliates are located.”
    http://www.bea.gov/scb/pdf/2010/02%20February/0210_guide.pdf

    So I guess that you could have a foreign division of a US Corporation (just like any foreign entity) export product into the US, the US importer would pay them in USD into a US bank account and that would be the end of the transaction. In the US ITAs, US Current Account (imports) would be debited and the US Financial Account (bank liabilities, ie foreign owned liabilities in the US) would be credited. Done.

    I dont see how the “money” then ends up “sitting overseas”, it’s here in the US system, albeit owned by “foreigners”, but it is here nonetheless the way it looks to me…. the transaction may not have been a taxable event for the US based parent Corporation, but that is a separate tax issue.

    The foreign entity exported goods and got paid and the transaction is over. The “money” is still in the US banking system…. Ritholtz is not the only one to talk about this, I dont see how US multinational corporations can have huge amounts of USD “sitting overseas” that they should “bring back” … Resp,

    beowulf Reply:

    @Matt Franko,

    The corporate tax is terribly inefficient. It’d be better if corporations were all treated liked REITs, no corporate-level taxes so long as at least 90% of earnings are paid out to shareholders (and REIT dividends are taxed at ordinary income rates). That would bring overseas earnings back every year.

    Reply

    Ramanan Reply:

    @Matt Franko,

    Microsoft has offices in other countries and makes profits there. Plus it has bank accounts at those places and probably buys short term paper in those places.

    I think there is definitely an issue with repatriation. I don’t know what the law is on taxes and how they have changed, but the discussion such as in Ritholtz make sense to me.

    None of it is inconsistent with BEA’s definitions of sectors.

    US corporations may have dollar denominated accounts in banks outside the US, but which are subsidiaries of US banks but they may also have dollar denominated deposits in non-US banks.

    I don’t see the connection between imports and exports.

    Reply

    Matt Franko Reply:

    @Ramanan,
    Rmanan, I dont get what the issue is with “repatriation”.

    In your Microsoft example, Microsoft Europe (a foreign entity per the US BEA), sells some French version Windows software to some French entities and gets Euro balances. OK. That doesnt have anything to do with the US per the US BEA (the BEA could care less it does not show up in the BEA’s ITA flow reports).

    Now Microsoft USA parent probably reports that as revenue in their GAAP reporting in USD equivalent terms, but the transaction actually occurred in France in Euros, and Microsoft USA does not get a US tax liability out of it at that point because it doesnt have anything to do with the US.

    So now Microsoft may want to “repatriate” some of these retained earnings from France but as JKH says above, “that in order to repatriate it, foreigners must liquidate equal dollar claims on the US.” And executives at Microsoft have been happily reading the GAAP reports which report in USD equivalent and didnt see this coming… So MSFT CEO Balmer is calling his European Division and says “send us some USDs for a stock buy-back” and the European Divsion reports back “We don’t have any.”

    Is this part of your overall concerns with the external sector: The “crisis” is that morons may suddenly realize that a USD balance is not the same as a Euro balance? Resp,

    Ramanan Reply:

    Matt,

    Well depends on what you think is going on in their minds.

    The United States government in fact gave a one time tax incentive in 2004.

    The objective was that firms repatriate funds from abroad and this will incentivize them to invest more (invest in the economic sense, not financial sense) and hence it would create more jobs locally than creating jobs abroad.

    Of course, the bad thing about this is that firms may take advantage of this and buy back their stocks and this does not create jobs.

    Also, it is certainly not true that Microsoft’s European division has all its cash in Euros (at least not obvious) – it can have them in either a foreign branch of a US bank or someone like Barclays London – both denominated in US Dollars. Even though they have been converted to USDs from Euros, they still haven’t been “repatriated”.

    So if Balmer gets a one-time incentive where the US government gives an incentive to repatriate funds, he can call up his Europe office and ask them to send the dollars and they will do so via SWIFT.

    Tom Hickey Reply:

    @Ramanan,

    Why would they convert euros to USDs when the dollar is falling wrt the euro. I would think that they would be hedging in the currency market to make what they can in rent.

    Matt Franko Reply:

    @Ramanan,

    “and ask them to send the dollars and they will do so via SWIFT.”

    Could you instead say “Microsoft Europe would instruct their European banking institution to send instructions to the US Fed on how to reassign ownership of their (Microsoft Europe) USD liabilities via SWIFT”

    Are those equivalent statements? Resp,

    Ramanan Reply:

    Matt,

    These transactions would go via CHIPS after SWIFT ;-)

    After that netting will happen and settlement via Fed.

    beowulf Reply:

    @Ramanan,

    Right, on which the Fed should be taxing– err charging transaction fees. There’s a lot more money in Cede & Co. than Microsoft.

    DTCC’s Depository Trust Company (DTC) provides custody and asset servicing for 3.5 million securities issues, mostly stocks and bonds, from the United States and 110 other countries and territories, valued at $40 trillion, more than any other depository in the world.
    In 2007, DTCC settled the vast majority of securities transactions in the United States, more than $1.86 quadrillion in value… Stocks held by DTC are kept in the name of its partnership nominee, Cede & Co.

    http://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_Corporation

    WARREN MOSLER Reply:

    And why would being able to move them from one branch of a bank to another matter?

    Like there are companies that would invest and hire if only their cash was in a different bank?

    Reply

    Ramanan Reply:

    @WARREN MOSLER,

    Yes, its their argument.

    It matters because its taxed.

    The firms are not highly dependent on funds abroad .. they can raise money via so many routes locally and expand. At the macro, they even have lots of funds locally and they are not expanding.

    But there is some truth to their arguments.

    Imagine this. Since its taxed and people want to minimize taxes, they won’t repatriate. Now someone at the management takes a decision to hire x000 people and after that someone else decides its more efficient to hire abroad etc.

    But as Thoma correctly says (which is rare), these things are driven by lobbyists.

    WARREN MOSLER Reply:

    name one company that has funds in foreign banks but isn’t investing in the US because of that, thanks

    Matt Franko Reply:

    Thoma: “At a time when we are struggling to bring the long-run budget into balance, why would we consider a proposal that makes the long-run budget picture worse?”

    Oh brother…

    I wonder if under GAAP, US parent corps have to reserve for the tax liability? Or if they just report the top line from their foreign operations in USD equivalent “as is” and this goes right onto GAAP earnings (the latter would be fraudulent activity/control fraud imo).

    Ram, As the US would run a balanced trade deficit without the permanent OPEC and China contributions to the trade deficit, it seems that OPEC and China are ultimately the “swing exchangers” (think Warren’s Saudi “swing producer” paradigm) for foreign divisions of US corporations to be able to get foreign earnings converted over into USD… (Japan is not included because once they get a hold on a USD Financial Asset, the data shows they never give it up)

    So perhaps US multinationals use the OPEC vehicle in the west (Europe) and the China vehicle is used in the east (Asia) to get converted into USD. Resp,

    Ramanan Reply:

    Matt,

    What else would you expect from a mainstream economist than writing about balancing budgets in just about anything ?

    Also, the repatriation talk just tries to take the focus away from fiscal policy.

    Even though Mark Thoma argues that costs outweigh benefits, he argues about balancing the budget. On the other hand, there are others who will argue about benefits (and use the repatriated amounts to purchase financial assets or buy back their shares in reality) and balancing the budgets.

    The issue probably is that the firms already have paid taxes in the foreign country and don’t wish to pay again.

    I wouldn’t know if the US companies have accounted for the fact that if they are forced to repatriate, they may have to pay taxes etc.

  9. Peter D Says:

    I wanted to call them too! Just did not have time with kids running around. Guess they wouldn’t have let me in, based on this experience, but at least if enough people tried to get the MMT point across, maybe it would reach the critical mass to get noticed.

    Reply

  10. Gary Says:

    the deficit has been made a “popular” issue. And “popular” issues are shaped by “popular” media. That media monopolizes the opinions. Scaring people makes more money for media. Even if they let one or two dissenting comments – that would not likely make a difference. But why should they? It would just confuse the public and they might be scared less. Who wants that? Not the “popular” media.

    Reply

    Tom Hickey Reply:

    @Gary,

    I would not lay it directly to the media, which is just an echo chamber for propaganda.

    Reply

    Gary Reply:

    @Tom Hickey,

    I don’t think it starts with media, but then it continues with media, and once the message reaches the critical mass – nothing can stop it.
    My guess is that even if Obama now started speaking of MMT – he would just be ridiculed by the media and would have to recant.

    Reply

  11. MamMoTh Says:

    Is this an example of someone not understanding something even if his job depends upon understanding it?

    Reply

    PJ Pierre Reply:

    @MamMoTh,

    Or in this case, his job may depend on him not understanding it?

    Reply

    jason m Reply:

    @PJ Pierre, Manufactured Consent anyone?

    Reply

    Tom Hickey Reply:

    @PJ Pierre,

    Michael Hudson has said that one of the qualifications for running a central bank is not understanding banking and finance operationally. Otherwise, he would be dangerous.

    Reply

    MamMoTh Reply:

    @PJ Pierre, we will know when the spending cus affect NPR.

    Reply

    PJ Pierre Reply:

    @MamMoTh,

    Well if they succeed in cutting spending, the private sector will rush to dis save and the surge in private spending will usher in prosperity, the likes of which we’ve never seen. With Ricardian equivalence at work, NPR should be flushed with contributions form their now prospering listeners.

  12. Ken Says:

    I personally wouldn’t have a problem with lying to the call screeners on such programs to get past them and on the air. Why should those losers control the debate.

    Ken

    Reply

  13. Henry Says:

    Re: Michael Hudson has said that one of the qualifications for running a central bank is not understanding banking and finance operationally. Otherwise, he would be dangerous.

    In other words, the people who do the hiring understand perfectly. And that is why this battle between MMT and the Washington Consensus is utterly beside the point, politically speaking. The endgame is plutocracy and economic serfdom. And they also have the guns.

    Reply

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