MMT to President Obama and Members of Congress:
Posted by WARREN MOSLER on July 17th, 2011
Comments welcome, and feel free to repost:
MMT to President Obama and Members of Congress:
Deficit Reduction Takes Away Our Savings
SO PLEASE DON’T TAKE AWAY OUR SAVINGS!
Yes, it’s called the national debt, but US Treasury securities are nothing more than savings accounts at the Federal Reserve Bank.
The Federal debt IS the world’s dollars savings- to the penny!
The US deficit clock is also the world dollar savings clock- to the penny!
And therefore, deficit reduction takes away our savings.
SO PLEASE DON’T TAKE AWAY OUR SAVINGS!
Furthermore:
There is NO SUCH THING as a long term Federal deficit problem.
The US Government CAN’T run out of dollars.
US Government spending is NOT dependent on foreign lenders.
The US Government can’t EVER have a funding crisis like Greece-
there is no such thing for ANY issuer of its own currency.
US Government interest rates are under the control of our Federal Reserve Bank, and not market forces.
The risk of too much spending when we get to full employment
is higher prices, and NOT insolvency or a funding crisis.
Therefore, given our sky high unemployment, and depressed economy,
An informed Congress would be in heated debate over whether to increase federal spending, or decrease taxes.
July 17th, 2011 at 1:10 pm
@Warren – Good talking points. I like it. Some other ideas a few of us have been bouncing around with at DollarMonopoly.com:
The US Nation debt is simply a digital account – a digital account corresponding to the currency users’ savings in banknotes, deposits, and treasuries. The issuer’s debt simply creates the supply of currency, or savings, that people either spend or choose to save. A common misperception of our monetary system is that the issuer “borrows” from currency users, such as the US borrows from China. This is not only a complete misunderstanding of our system but leads to catastrophic outcomes when the currency is not managed correctly – just look at the erosion of our middle class. The correct interpretation of “debt” is that the US government produces the currency that China choses to save.The more China saves the more debt our government takes on. A mutually beneficial relationship with little downside as long as the currency supply is optimized to the conditions. Most of the academic community continues to trip over itself because of their complete failure to grasp the fundamental nature of our monetary system.
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Rodger Malcolm Mitchell Reply:
July 17th, 2011 at 2:49 pm
@Dollar Monopoly, Dollar, of course you and Warren are correct. Sadly, facts don’t affect faith.
We’re dealing with the debt-hawk, Tea Party religion, which just knows within its soul that the debt is too high. Anyone who disagrees, even using solid facts, is a heretic and either should be ignored or burned at the stake.
Fifteen years ago I wrote what I thought was an easily understood book (Free Money) saying essentially what Warren says. I was told then, and continue to be told on my blog, I am a fool for “wanting to give everyone a trillion dollars” and for “not remembering the Wiemar Republic and Zimbabwe.”
University of Chicago and Harvard professors have spread the nonsense, and they have their reputations invested in BS, so they aren’t going to change.
I suspect Bernanke knows the truth, but no way will he stick his neck out and defy the popular wisdom. Obama may know it too — or maybe not. He is from Harvard, after all.
So we plug on, but the single most important question of all is this:
Given that we will have deficit reduction, which absolutely, positively will cause a recession or a depression (depending on how big the reduction will be), what are the best investments to make today?
Rodger Malcolm Mitchell
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WARREN MOSLER Reply:
July 17th, 2011 at 5:58 pm
Maybe whatever has worked out well as an investment in Japan?
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SethM Reply:
July 17th, 2011 at 10:37 pm
@WARREN MOSLER, From my experience the past 10-20 years in Japan have been boom times for dollar stores, cheap fast food and others selling “inferior goods.” Depressing.
BFG Reply:
July 17th, 2011 at 6:20 pm
@Rodger Malcolm Mitchell,
What about the capital gains on government bonds.
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WARREN MOSLER Reply:
July 17th, 2011 at 8:03 pm
what about them?
BFG Reply:
July 17th, 2011 at 8:21 pm
@Warren,
On Rodger’s thread he mentioned treasuries but said their was scant income but would he not gain from the capital gains?
Given that we will have deficit reduction, which absolutely, positively will cause a recession or a depression (depending on how big the deficit reduction will be), what are the best investments to make today? Cash may be safest, but there’s no income. Treasuries are safe too, but again, there is scant income. Its a dilemma. What do you suggest?
Jason Reply:
July 17th, 2011 at 8:44 pm
@Rodger Malcolm Mitchell,
Stocks have been and may continue to be a decent place to invest. Corporate earnings are respectable, their balance sheets are good and dividends on many high quality stocks beat Treasuries. I just don’t believe they are going to pass any substantial deficit reduction that starts the spending cuts immediately. If they announce a big multi-trillion dollar cut it will all be in the far future and will never actually materialize.
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Crake Reply:
July 18th, 2011 at 10:36 am
@Jason,
I am trying to find some good market neutral and long-short funds. Not being an “accredited investor”, I cannot invest in actual hedge funds, and not having the experience or time to successful engage in the risk management needed to do it myself, the only routes I have to invest in market neutral settings are mutual fund and closed-in funds. And this hedge-fund strategy is fairly new for traditional mutual funds so not much track record on them to gauge.
The one I like the best, that does have a 20 year track record, is the Merger Fund (MERFX.) On mergers, when the spread between the acquired offer price and the market price less cost of hedges is optimal, it shorts the acquiring firm and goes long the acquired firm, and hedges both sides in-case the deal busts. My feelings are that mergers might increase, especially during a flat or down-turning economy, because cash rich large companies will probably be more inclined to buy marketshare since organically growing it will be hard. The more mergers happening, the better this fund will likely do because more opportunities to choose (it can be picky just going after the bigger spreads les hedging costs scenarios.) It has a good steady track record since 1988 (I think it has only one down year – 2008 and it only lost like 3% that year while most equity funds lost 30%+.)
Anyone know of any other good market neutral, or well run long-short funds in which “regular” investors can invest?
WARREN MOSLER Reply:
July 17th, 2011 at 5:52 pm
To me ‘digital account’ doesn’t tell me much? And it could mean a lot of different things to different people
I use expressions like ‘it’s just a number in the fed’s books, or fed’s spreadsheet. Like the points on a scoreboard, etc.
Agreed on the mainstream econs
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PJ Pierre Reply:
July 17th, 2011 at 6:37 pm
@WARREN MOSLER,
I agree with Warren, digital accounts can easily be discarded by dissenters as new age nonsense being pushed by quacks who think that with out the invention of computers we would have no monetary system. I think it is important for us to maintain an accurate account that holds up under scrutiny when describing the modern monetary system. The last thing we, being heterodox, can afford IMHO is discrediting ourselves by oversimplifying or misrepresenting these important concepts.
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DollarMonopoly.com Reply:
July 17th, 2011 at 7:02 pm
@PJ Pierre,
what about:
Our national debt is simply a digital savings account corresponding to all the users’ savings in banknotes, deposits, and treasuries at the Federal Reserve Bank.
i think the idea of currency being digital is very helpful. why? how can a digital resource ever act as a constraint? constraints are real not digital.
Roger Erickson Reply:
July 18th, 2011 at 9:18 pm
@PJ Pierre,
As noted in earlier emails, there are ~1800 professions in the NAICS codes, most with their attendent jargon, journals, blogs, conferences, etc, etc.
DM’s “digital” metaphor may very well work well for a few or many dozens of those jargons. It’s counter productive to want to change the jargon on this particular blog, since it exists for a reason dictated by it’s audience.
There is, however, a need to translate the core content to the jargon that many other audiences will use in their own, extensive discussions. Spread the various words, DM!
If MMT gets translated into 80 languages, and eventually even gets a King James version :) then we’ll all sleep better at night.
Paul Palmer Reply:
July 18th, 2011 at 11:28 am
The value of the economy is all the useful goods and services we are producing. We can keep track of it with “points” if we want to, sort of like the way we keep track of “who’s winning” in a game with “points.”
But right now, we have a lot of players sitting on the sideline doing nothing in the game, not scoring any points. Others are playing the game with one hand tied behind their back. Some players have to give other players some of their own points, as they sit around on the bench doing nothing of any use, instead of going out and playing and scoring points.
And why are we voluntarily keeping players on the bench? Why are we fielding only 7 on our baseball team when we can field 9? Because we are arguing with the umpire over “points”. Somehow we think there are only so many points to go around, and we’re fighting over them. Heaven forbid we take those players off the bench and start scoring more points. Some people think if we do that, a point won’t be worth what it once was.
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Crake Reply:
July 18th, 2011 at 10:55 am
@Dollar Monopoly,
I think the epiphany moment of general MMT understanding is when one realizes that conventional wisdom has the federal government spending cycle completely backwards (in other words, the moment when one realizes that ‘spending happens first then taxing’ versus ‘taxing first to finance spending’.) I think this is the cornerstone of general MMT understanding and the premises that must be learned first.
I was thinking about this today while listening to news coverage of the debt ceiling debate. I think an analogy that will help visually show this cycle is a large water tank with two pipes (inflow and outflow.) Federal spending is the inflow pipe and taxes are the outflow pipe. First lesson (purpose of spending): before the tank can have any water and before any water can be “taxed” out of the tank, water must first be supplied/”spent” into it. Lesson two (purpose of taxes) assuming that it is good to have the tank near full which is analogous to an economy near full capacity, the outflow/”taxes” is only needed as a tool for pressure relief if the tank becomes “too” full.
Again, I think if the above lessons could be hammered again and again, it would be the most fruitful premise/idea to get more people to understand MMT in general. And the more simple and short the lesson, the more people you can influence. Simple and short is why the deficit hawks are winning (all that have to do is recite the flawed household budget analogy, for example.)
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Crake Reply:
July 18th, 2011 at 11:23 am
@Crake,
Thinking about it further, I think this would be a very good base analogy to put forth because further lessons could be added to it.
For example, horizontal borrowing could be viewed as just stirring water around. For example, to explain horizontal credit: if a person/company wants to save and another person/company wants to borrow around the same amount, or if a bank creates a loan, its assets cancels out the liability of the borrower, so both situations cancel each other out, just like stirring water around the tank does not increase nor decrease the water level, it just swashes water from one area of the tank to another. But if the whole tank (net private sector) wants to save, that means removing water from the tank and then the only way to increase the water level is to supply more water (government spending) than you take out (tax) otherwise the water level will drop by the net amount the whole tank wants to save.
The above has holes between the analogy and the technical aspects of horizontal borrowing and aggregate demand and sectoral balance but it seems to be a decent framework to get the general ideas of those points across and does it in a simple, easy to visualize fashion.
Thoughts?
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beowulf Reply:
July 18th, 2011 at 12:09 pm
@Crake,
The MONIAC (Monetary National Income Analogue Computer) also known as the Phillips Hydraulic Computer and the Financephalograph, was created in 1949 by the New Zealand economist Bill Phillips to model the national economic processes of the United Kingdom… consisted of a series of transparent plastic tanks and pipes which were fastened to a wooden board. Each tank represented some aspect of the UK national economy and the flow of money around the economy was illustrated by coloured water.
http://en.wikipedia.org/wiki/MONIAC_Computer
hbl Reply:
July 18th, 2011 at 12:15 pm
@Crake,
I’ve been working on implementing a visual MMT tutorial with a water analogy for quite some time, and a few pieces are exactly as you just described :)
I really hope to have a draft online within a few more months… it’s much slower going with the time I’ve been able to commit than the last visualizer was.
WARREN MOSLER Reply:
July 18th, 2011 at 6:33 pm
and you could show how were’re down the creek without a paddle!
Roger Erickson Reply:
July 18th, 2011 at 9:21 pm
@Beowulf,
lemme guess, it didn’t hold water? (until he took the bottles off the old-seal standard?) :)
DollarMonopoly.com Reply:
July 18th, 2011 at 11:55 am
@Crake,
great idea. I had never thought of “Spending precedes Taxes” as being a conceptual stumbling block but your are absolutely right. It’s very counterintuitive and 100% correct. This is a great conceptual frame to incorporate while positioning tenets of MMT. I’ll definitely give this more thought.
“water tank”
i was working on something a couple months ago similar to what your talking about in terms of tanks. Very interesting idea on the stirring piece for horizontal money. give me a little time to update it and then i’ll share it.
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DollarMonopoly.com Reply:
July 18th, 2011 at 1:19 pm
@DollarMonopoly.com,
not sure if the html below will work so here is the direct link to the tank flow visual I was working on
From DM Dam Analogy
Crake Reply:
July 18th, 2011 at 4:26 pm
@DollarMonopoly.com, “I had never thought of “Spending precedes Taxes” as being a conceptual stumbling block but your are absolutely right.”
I think that is the cornerstone. If you can get people to understand that, everything else will easily flow from that – that concept is the bedrock of MMT, in my opinion. Plus, its udnerstanding should stop the ‘houselhold budget’ arguement dead in its tracks.
DollarMonopoly.com Reply:
July 18th, 2011 at 2:08 pm
@Crake,
hey as i’m thinking about it. there is a frame in here that we can tweak a bit for our own purposes. “taxes do not pay for public spending. public spending pays for taxes”. so once you introduce that conversation stopper you follow it up with some of the other bits we’ve been talking about: issuers create and destroy money. users spend, save, and pay taxes.
MMT is counterintuitive initially so any counter intuitive ideas we can pull out and make our own the better. another example may be: A common misperception of our monetary system is that the issuer “borrows” from currency users, such as the US borrows from China. This is not only a complete misunderstanding of our system but leads to catastrophic outcomes when the currency is not managed correctly – just look at the erosion of our middle class. The correct interpretation of “debt” is that the US government produces the currency that China choses to save.The more China saves the more debt our government takes on.
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WARREN MOSLER Reply:
July 18th, 2011 at 6:52 pm
how about this one off my website:
The funds to pay taxes and buy government securities come from government spending.
WARREN MOSLER Reply:
July 18th, 2011 at 6:28 pm
i wouldn’t mind throwing most of congress and the admin into the pool, but does that mean we’d have to raise taxes?
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Walter Reply:
July 18th, 2011 at 7:14 pm
@Crake,
Analogies can often help understanding by simplification, but they are always risky because they are never exactly like the thing analogized and this can lead to confusion. In the water analogy the problem is that the water has to come from somewhere. Critics will rightly say ‘but where did the water come from? The government had to get it somewhere first in order to fill the tank.’ Governments cannot create water out of nothing, but they do create money out of nothing, which must be understood in order to understand MMT.
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DollarMonopoly.com Reply:
July 18th, 2011 at 7:53 pm
@Walter,
true, analogies are risky but also helpful and are ultimately measured by their utility. the water helps represents flow, tanks represent reserves, and yes the water has to come from somewhere. So extend the analogy by saying this water tank model of the economy is constructed on the beach. the currency issuer is managing the system with the ocean standing behind him. if currency users choose to save instead of spend the currency issuer can simply grab a bucket of water from the ocean and add more water (currency) and continue to managing the system. even though water is a real resource for all practical purposes the ocean is a limitless, like wise money as a digital resource is essentially a limitless to the issuer also. bada-boom bada-bing. does that help the analogy. this is how i explained it to my pops at least when i showed him by tank diagram.
July 17th, 2011 at 2:33 pm
The problem with a large debt in my eyes is the interest that comes off the top and out of the working taxpayers pockets and is transferred directly to the pockets of the financiers and already rich. If Capitalism and Corporations were required to fund the Green Awakening Economy before profits there is arguably some justification for interest and increased taxes. Anything less, just digs the hole deeper.
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July 17th, 2011 at 2:35 pm
I’ll just go ahead and copy/paste this into the comments section of any article about the debt ceiling hysterics.
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WARREN MOSLER Reply:
July 17th, 2011 at 5:47 pm
Thanks!
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jason m Reply:
July 18th, 2011 at 9:46 am
@Dan Jiddish, here i come Huffngton Post, ready or not!!!
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July 17th, 2011 at 2:40 pm
That’s about as straight forward and simple as I have seen it put. Right on.
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July 17th, 2011 at 5:06 pm
I agree with your statements but I though I would paraphrase what I have learned. Please feel free to correct or guide as you see fit.
I tell the story in four parts. 1) why treasuries are used 2) what happens when they are used 3) how are the accounts settled 4) What are the effects of these activities.
1) When large accumulations of cash are needing to be invested US treasuries are the safest depositories. Millions or billions of dollars cannot be put into traditional banks (250k FDIC limit per account) whereas great sums of treasuries can be purchased at various terms with little to no risk. This accumulation of cash can be from several places imported goods, large retirement funds, fund managers balancing portfolios, or very wealthy individuals looking for low risk investments
2) When treasuries are purchased the resulting cash is not held but is used buy the government as spending. If the cash was just held in some type of reserve account it would be effectively like destroying the currency similar to a tax. The government puts the cash to use by recirculating the money via spending. When the government spends it creates value in the economy. The amount of treasuries sold is usually indicative of what the government needs to spend.
3) When treasuries come due the payments are made with the appropriate interest. The money that is used to make the payments comes from the treasury as terms come due. If the treasury needs to they can hold auctions to pay off notes that are coming due or if the economy is robust surpluses can be used. There is never a problem meeting payments since the treasury can use many different methods to make any payments that come due. No matter how many treasuries are due the obligation can and has always be met.
4) For times when the economy is lagging, like now with high unemployment, it is natural for the treasury to be in debt. This is because as the federal government spends in order to keep providing both stabilization and stimulus. Additionally, the federal government lacks incoming revenues from taxation. When the economy is healthy the government cuts back on both stabilization and stimulus and collects much more in revenues and the debt can be reduced. Trying to force lower debt with high unemployment and low aggregate demand will continue to depress the economy. Also if the government over spends during times of robust growth it has the potential to push up prices and cause inflation. For these reasons with the current economy the federal government should continue to spend money to both provide stabilization and stimulus lowering unemployment. Lowering the debt can only exacerbate the current economy by either delaying recovery or causing higher unemployment.
Hopefully I added some value and didn’t get too much wrong.
Dan
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WARREN MOSLER Reply:
July 17th, 2011 at 6:07 pm
Too long for me now but let me say that deficit spending itself is a credit balance in total member bank reserve accounts and the banking system can either do nothing with those balances or buy tsy secs which shifts the dollars from reserve accounts to securities accounts.
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Rodger Malcolm Mitchell Reply:
July 17th, 2011 at 7:08 pm
@Dan Furlano, “When treasuries are purchased the resulting cash is not held but is used buy the government as spending.”
The government doesn’t use the cash for anything. Misnamed federal “borrowing” goes like this:
1. Government exchanges T-securities, which are created out of thin air, for dollars, which it destroys.
2. “Paying off” T-securities is exactly the opposite. Government exchanges dollars, which are created out of thin air, for T-securities, which it destroys.
Neither “borrowing” nor taxing provides the government with any money, as all dollars coming to the government are destroyed as credits to a balance sheet.
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Danf Reply:
July 17th, 2011 at 9:07 pm
@Rodger Malcolm Mitchell,
Rodger
I appreciate your comments and I believe I understand what you are saying. First everything is done electronically so at the time when both the treasuries are bought and sold accounts are changed. So as you state “out of thin air” is appropriate.
But isn’t it also true that there is an accounting for all activities? As an example if congress appropriates $12b for unemployment payments at some point the money is sent to the states (or whoever manages the funds) and the treasury is directed to sell treasuries to “fund” the appropriation? I understand the funding is not needed and these activities are not timed but these activities do create a debit and a credit entry somewhere that is tracked?
Thanks
Dan
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Mario Reply:
July 17th, 2011 at 9:25 pm
@Danf,
yes that’s true debit and credit entries exist for all transactions. The Treasury issue the bonds as a means to spend since the Treasury cannot issue dollars (only the Fed can do that). So there’s a treasury song and dance with primary dealers.
The way you have it phrased makes it sound the other way around…i.e. once someone buys some bonds THEN the government can go spend it…however that is not true. It’s the other way around. Whenever the treasury needs to spend, it issues bonds to primary dealers to capitalize its account at the Fed and issue payments out wherever they may need to go through its account at the Fed. The primary dealers insure that there’s always a buyer of their bonds…it’s a requirement to be a primary dealer, and so the wheels of the bus go round and round…until the debt ceiling is hit (ugh).
If the Fed and Treasury merged their balance sheets then the PD song and dance would not be necessary at all and those poor primary dealers couldn’t get their interest income anymore. :( I support that as I don’t like the way it works now…it’s pointless. However I do think we should keep bonds around (1 year minimum bonds and longer) as a savings option for the public. But it has nothing…absolutely nothing…to do with the government’s ability to spend.
At least that is how I understand it.
WARREN MOSLER Reply:
July 18th, 2011 at 2:47 am
Yes
And accounting is after the fact record keeping
luigi Reply:
July 18th, 2011 at 4:49 am
@Rodger Malcolm Mitchell,
But, how Treasury can have a positive balance (a legal requirement) in order to spend, if it destroys dollars?
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WARREN MOSLER Reply:
July 18th, 2011 at 9:35 am
when taxes are paid, the Fed debits the taxpayer’s member bank account, and credit’s the tsy’s account.
the debit is best thought of as ‘destroying dollars’ or something like that
luigi Reply:
July 19th, 2011 at 5:22 am
@WARREN MOSLER,
so, how Treasury can use dollars if they are destroyed? (I think this is the point)
but so, it’s a fiction, no?
WARREN MOSLER Reply:
July 19th, 2011 at 9:55 am
treasury spends by instructing the fed to debit it’s account and credit the recipient’s account
July 17th, 2011 at 5:45 pm
I don’t know. This part of MMT doesn’t have much sway with me. US debt is effectively just so many savings accounts, yes. But US taxpayers effectively pay most of the interest on those accounts.
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WARREN MOSLER Reply:
July 17th, 2011 at 6:03 pm
Only to the extent interest is spent.
Otherwise agreed which is why I’d cut us interest cost to near 0 by keeping fed funds at 0 and not letting the tsy sell anything longer than 3mo bills.
And that means taxes can be that much lower for any given size gov as well
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DollarMonopoly.com Reply:
July 17th, 2011 at 6:25 pm
@Dan,
the reason he says to the “extent interest is spent” is because interest expands the currency supply but only impacts the real economy if the interest is spent (inflationary bias). if the interest income was just rolled back into savings it would just be digits on the fed’s books. (no inflationary bias)
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WARREN MOSLER Reply:
July 17th, 2011 at 8:04 pm
right. why not say ‘numbers’ instead of ‘digits’?
DollarMonopoly.com Reply:
July 18th, 2011 at 9:49 pm
@DollarMonopoly.com,
must be a generation thing – i use the word digits as numbers but your right the concept of “number” is especially helpful when defining what the “national debt” with respect to some of our earlier comments
Rodger Malcolm Mitchell Reply:
July 17th, 2011 at 7:14 pm
@WARREN MOSLER, “Only to the extent interest is spent.” Warren, are you trying to oversimplify this for the masses? I know you know that taxpayers don’t pay for any federal spending, and federal spending has no effect on federal tax needs.
Taxes reduce savings, not spending. But, as I said, you know that.
Rodger Malcolm Mitchell
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WARREN MOSLER Reply:
July 17th, 2011 at 8:07 pm
as per my last reply, it’s about aggregate demand.
Mario Reply:
July 17th, 2011 at 9:38 pm
@WARREN MOSLER,
But interest rates typically track inflation to begin with, so by the time your bond matures, how much inflationary pressure are we really talking about here? I think it’s rather minimal if not non-existent. I mean if it was an issue, then we’d be seeing the issue manifest today as bonds and interest rates exist today already and are being paid out. So where’s the inflation? I just don’t agree that bond interest payments are “inflationary” to the economy at large.
I also don’t see why 3 month bills should be the max…if there’s no more primary dealers and Treasury and Fed Balance Sheets are merged, then why not have 1 years, 10 years, 30 years, etc. simply as public savings options? They’d all be representing inflationary expectations anyway so they basically are moot investments more or less. I’m sure Wall Street would love 0% rates forever as it would bring more “customers” to the investment frontiers. The interest rate should track legitimate inflationary expectations imho. I fail to see the danger in treasury securities regardless of their maturity date.
I also don’t like 0% FFR as my savings rate would be abysmal. I’m okay with monetary policy sticking around along with fiscal policy. To some extent the expectations fairy does play a part in this economic game, but granted it is a far, far smaller part that we deem it plays today. Fiscal is by far more important, but monetary policy has a place I think. I also think it makes MMT an easier sell. In that sense I guess you could say I am a more “conservative” MMT advocate. ;)
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WARREN MOSLER Reply:
July 18th, 2011 at 2:58 am
Issuing log term secs is an upward bias for long rates
And the long end is generally the realm of investment
So lower long rates help lower investment costs and therefore prices for consumers
And why encourage savings? See the 7 deadly innocent frauds on this website
Rodger Malcolm Mitchell Reply:
July 17th, 2011 at 7:10 pm
@Dan Kervick, U.S. taxpayers don’t pay for any federal spending. Whether taxes fall to $0 or rise to $100 trillion, neither event would affect federal spending by even a penny. All money coming to the federal government disappears. It is not spent.
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WARREN MOSLER Reply:
July 17th, 2011 at 8:06 pm
but taxes do function to regulate demand, so you can think of any spending that uses up the demand reduces by taxes can be thought of as ‘taxpayer money’ in the broad sense. and that’s the point Bernanke misses as well.
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Rodger Malcolm Mitchell Reply:
July 17th, 2011 at 11:07 pm
@WARREN MOSLER, Taxpayer money is money owned by taxpayers.
Once they send it in, it ceases to exist. For that reason, the federal government never can spend “taxpayer money.” That is one of the more misleading phrases in a science that is loaded with misleading phrases.
In fact, phraseological inexactitude may be the greatest problem in economics.
“Debt” isn’t debt to everyone. “Surplus” isn’t always surplus. “Owe” doesn’t always mean owe. “Print” seldom means print.
Suggestion: Economists should publish an agreed upon glossary, and distribute it to politicians, the press and every school of economics. Then when someone uses the word “deficit” to describe the federal government’s method for adding dollars to the economy, he can be corrected and sent to the glossary.
As a start, change debt to “Outstanding T-securities” or “T-security savings.”
Change “deficit” to “net dollars created.”
Change “taxes” to “money destroyed.”
Change “federal surplus” to “economic deficit.”
Change “balanced budget” to “no-growth budget.”
I suggest that if we clarify the language, the truth will emerge.
Rodger Malcolm Mitchell
WARREN MOSLER Reply:
July 18th, 2011 at 3:00 am
But govt spending does use up the aggregate demand reduced by taxation, so in that sense spending uses up taxpayer dollars
Mario Reply:
July 17th, 2011 at 9:40 pm
@Dan Kervick,
bond rates track inflation, so by the time they mature the inflationary pressures are likely already priced into the interest payments, nullifying any real concern imho.
Plus we have bond interest today and I don’t see any data to really suggest interest payments are an inflationary threat. Do you?
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July 17th, 2011 at 6:19 pm
@WARREN MOSLER,
the scoreboard is a beautiful analogy but for me it only brought insight after i had adopted MMT. Why? scoreboards keep track of games. people don’t think of the economy as a “game.”
one of the frames i’m trying to build is binary. asset = liability, issuer debt = user savings. so maybe “digital account” is not helpful but maybe a “digital savings account corresponding to the currency users banknotes, deposits, and treasuries.”
the other frame is the idea of the currency being digital. why? how can a digital resource ever act as a constraint? constraints are real resources not digital.
speaking of scorekeeping, Cullen used a good scorekeeper reference the other day. “Think of money as points on a scoreboard. Now you could play the game without keeping score or you could play the game with a scorekeeper. There is no reason there should be a shortage of points to play a game of football. The currency issuer is the scorekeeper of money…because he is the monopoly producer of money.”
i wonder where he got that
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July 17th, 2011 at 7:11 pm
Warren, they won’t hear you. You have to do it yourself.
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WARREN MOSLER Reply:
July 17th, 2011 at 8:06 pm
:(
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selise Reply:
July 17th, 2011 at 8:25 pm
@rvm,
it’s up to the rest of us to try to provide some amplification.
Reply
rvm Reply:
July 17th, 2011 at 9:30 pm
Selise, I agree with you 100. I probably could do more, you probably could do more and Warren could probably do more as well.
Reply
jason m Reply:
July 18th, 2011 at 9:53 am
@rvm, Warren’s doing a lot more than most of us…
rvm Reply:
July 18th, 2011 at 10:17 am
@ Jason M
Absolutely agree, I didn’t say the opposite.
July 17th, 2011 at 7:13 pm
Posted over at John Quiggin
Cheers …
jrbarch
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July 17th, 2011 at 7:29 pm
So does this mean I can endlessly run up my credit card and just make minimum payments for the rest of my life, without any negative consequence down the road? That aside, America can’t run out of dollars, but what about the purchasing power of those dollars? If other nations eventually build their economies enough to make America less relevant, and they become less casual about tossing their money into low-yielding American securities, what then?
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WARREN MOSLER Reply:
July 17th, 2011 at 8:09 pm
yes, if you are the issuer of the currency you are spending. but not when you are spending dollars.
please go through the 7 deadly innocent frauds on this website for a more complete discussion of prices
but yes, excess demand can drive up prices. that’s the risk, not solvency
Reply
DollarMonopoly.com Reply:
July 18th, 2011 at 1:24 pm
@WARREN MOSLER,
to help clarify the difference between the two: the issuer creates/destroys dollars and the users spends/saves dollars.
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WARREN MOSLER Reply:
July 18th, 2011 at 6:47 pm
the issuer credits and debits users accounts on the issuer’s books
July 17th, 2011 at 7:33 pm
But they’re not savings accounts at the Fed.
That’s a fact.
MMT contradicts institutional facts when it says this.
And it’s not the world’s dollar savings.
That’s a fact, too.
MMT contradicts the accepted definition of savings when it says this.
And Treasury can run out of dollars, since it maintains its dollar account at the Fed, without credit or overdraft privileges.
That’s a fact.
And markets set the bond price in auctions.
That’s a fact.
All of which is why none of this will go very far, or as far as it should, malheureusement.
Start specifying what needs to be done to change these facts, instead of contradicting them as facts, and you’ll have a better chance.
See:
http://bilbo.economicoutlook.net/blog/?p=15110&cpage=1#comment-18420
Reply
WARREN MOSLER Reply:
July 17th, 2011 at 8:12 pm
yes they are, just with a fancy name. that’s a fact.
it is the world’s net dollar savings, defined as net financial assets, and that’s a fact too.
i didn’t say the tsy can’t run out of dollars, that’s a fact too.
markets set prices in auctions only because the fed lets them, ‘nother fact.
agreed things aren’t currently going all that far, but making progress. last fact.
:)
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wh10 Reply:
July 17th, 2011 at 9:26 pm
@WARREN MOSLER,
Haha nice. Warren with the smack down.
Could you briefly expound upon this point regarding the Fed letting the markets set the price? How would they not allow markets to set the price? (IOR and overdrafts?)
Or could they actually just offer treasuries at a predetermined price?
Like I wonder, if inflation was high but the Fed wanted to keep the FFR low, could they auction off treasuries with a negative real return?
Reply
wh10 Reply:
July 17th, 2011 at 9:28 pm
@wh10,
Meaning, while recognizing that deficit spending provides the funds to invest in treasuries, would there be enough buyers if it was clear the investment meant a negative real return?
WARREN MOSLER Reply:
July 18th, 2011 at 2:54 am
The fed can cap the tsy curve with bids at specific levels for all tsy secs without regard to quantity
And it could pre announce fed funds for the future.
And since the only two choices are reserves and tsy secs there isn’t any other choice regardless of inflation
wh10 Reply:
July 18th, 2011 at 4:42 pm
@wh10,
Thanks for the reply Warren. You say the only 2 choices are reserves or tsy securities-
My cognitive dissonance is what if we are talking about a non-bank participating in the auction, which can invest in anything that entity wants? Are there always enough reserves balances to buy the treasuries, because people have their money deposited in banks? Are all primary dealers commercial banks with reserves, not just securities firms/ibanks/etc?
WARREN MOSLER Reply:
July 18th, 2011 at 7:14 pm
when a non bank buys something funds shift from his bank to another bank, where the next guy faces the same choices.
so at the macro level total reserves don’t change
wh10 Reply:
July 18th, 2011 at 8:20 pm
@WARREN MOSLER,
Got it! Duh! Forgot that principle. Thanks for the patience and edification.
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July 17th, 2011 at 11:12 pm
Just get rid of the damn Treasuries, and you could end 1/2 the arguments and confusion about our economy.
Rodger Malcolm Mitchell
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WARREN MOSLER Reply:
July 18th, 2011 at 3:01 am
Agreed
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July 17th, 2011 at 11:40 pm
There’s a problem using the phrase “savings account” as if the bonds are term deposits. However, the bonds are tradable in secondary markets, savings deposits (as in term deposits) are not.
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Mario Reply:
July 18th, 2011 at 1:07 am
@Ramanan,
surely we could securitize term deposits too no??? In fact don’t we use a savings account (or at least the money in them) as collateral all the time just like a repo would use a bond as collateral?
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Ramanan Reply:
July 18th, 2011 at 1:36 am
@Mario,
Securitize ??
No, I don’t think anyone pledges term deposits as collateral.
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WARREN MOSLER Reply:
July 18th, 2011 at 3:05 am
Though you can borrow against them from the same bank
Ramanan Reply:
July 18th, 2011 at 3:49 am
Yes, you can borrow against the deposit, but only from the same bank. If I hold a term deposit I cannot place it as collateral to a general financial firm.
CDs are of course traded but not called savings account.
WARREN MOSLER Reply:
July 18th, 2011 at 9:33 am
as i’ve said, normal banks call them savings accounts and cd’s, but the govt gives them a fancy name, treasury securities
DollarMonopoly.com Reply:
July 18th, 2011 at 9:15 am
@Ramanan,
@Ramanan “There’s a problem using the phrase “savings account” as if the bonds are term deposits. However, the bonds are tradable in secondary markets, savings deposits (as in term deposits) are not.”
The property of “tradable” I don’t think is the defining characteristics of savings. The defining characteristic of “savings” is the opposite of “spending” or trading government financial assets for non-government assets (items in the marketplace). Savings can come in different forms (banknotes, deposits and treasuries) and can be converted (or traded) into other types of savings (government financial assets).
i think “savings account” is factually correct in that it is an “account of savings” corresponding to all the users’ savings in banknotes, deposits, and treasuries regardless of what form or mix they happen to exist. thoughts?
WARREN MOSLER Reply:
July 18th, 2011 at 9:45 am
amen
:)
Ramanan Reply:
July 18th, 2011 at 10:17 am
Monopoly,
While I don’t disagree with you, there are some standard terminologies which is common across many countries. It is not right to change them. I cannot prevent you from using new terminologies but it will just confuse President Obama et. al.
Tom Hickey Reply:
July 18th, 2011 at 1:25 pm
@Ramanan,
The point is that if we don’t change the terminology the frame is loaded against us. Many people are complaining that MMT economists are acquiescing in terminology that works against them and that we should call a spade a spade. I have been one of these. Warren, I think, is more willing to do this than the academic economists, since they feel they have to adopt the universe of discourse that dominates the field. And that is how the field stays dominated.
Confucius called this “rectification of names” and said that when terminology does not reflect realty, then social disharmony and disorder prevail. That is exactly what we are seeing.
WARREN MOSLER Reply:
July 18th, 2011 at 3:03 am
Argumentative?
And bank cd’s are freely traded
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anon Reply:
July 18th, 2011 at 3:47 am
@Ramanan,
The phrase “savings accounts” is not the problem.
“At the Fed” is the problem.
They’re not.
If they were, there wouldn’t be any MMT.
But there is, and with it fundamental contradiction.
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Ramanan Reply:
July 18th, 2011 at 3:55 am
@anon,
Agree.
Reply
anon Reply:
July 18th, 2011 at 4:10 am
and similarly for “neither has nor doesn’t have money”, and platinum coins
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Ramanan Reply:
July 18th, 2011 at 4:30 am
@anon,
agree about neither has nor doesn’t have.
Platinum coin is one option for the US Treasury. However, once it is used, it will be banned immediately.
anon Reply:
July 18th, 2011 at 6:27 am
agree platinum is one step removed
but also the same – in that you need neither MMT nor gimmicks if you eliminate Fed independence and combine it with Treasury; that makes MMT moot, with nothing to do
anon Reply:
July 18th, 2011 at 6:44 am
btw, platinum would never be used because it goes against Fed independence
Fed independence is the ONLY issue
every thing else is fluff
ESM Reply:
July 18th, 2011 at 10:41 am
@anon,
“Fed independence is the ONLY issue?”
No it isn’t. I don’t even think it is an issue, at least with respect to MMT prescriptions. Treasury can stop issuing anything longer than 3-month T-bills tomorrow. And it can cut taxes and run up a larger deficit without any problems at all, except perhaps lower unemployment and higher GDP.
WARREN MOSLER Reply:
July 18th, 2011 at 6:25 pm
si
anon Reply:
July 18th, 2011 at 10:57 am
“Treasury can stop issuing anything longer than 3-month T-bills tomorrow”
but it won’t
because Treasury itself has a view of its own exposure to the interest rate risk that comes directly from an independent Fed
that’s interest rate risk on the entire outstanding debt, turning over every 90 days
importantly, this is cash flow interest rate risk, as opposed to marked to market, which has no immediate cash effect on Treasury with respect to its outstanding debt, which is nearly all of its debt, unlike the bill scenario
WARREN MOSLER Reply:
July 18th, 2011 at 6:31 pm
and the people i’ve talked to at tsy have a mandate not to get downgraded
doesn’t mean that if i were tsy sec would’t order them to stop selling anything longer than 3mo bills.
if the fed hikes rates they will know that they will cause savers/holders of tsys to immediately start earning more interest and take that into consideration.
Ramanan Reply:
July 18th, 2011 at 11:28 am
@anon,
“because Treasury itself has a view of its own exposure to the interest rate risk that comes directly from an independent Fed”
Good point Anon.
I believe Keynesians of the 70s did view it that way – inspired by James Tobin (who though was Neoclassical had right ideas – maybe he was a confused genius). However, they weren’t very articulate in putting this across. But the IMF has tried to put this across but in a very neoliberal setting.
Tobin also talked of an extreme case – the Fed monetizing all the debt and talked of coordination between the Fed and the Treasury.
Operational reality is that they have moved in different directions. The “divorce” is the operational reality.
MMTers should interpret the coordination that exist between the Fed and the Treasury (as can be seen in the review articles provided by the Federal Reserve) differently. The operational coordination is different from what Keynesians talked about.
WARREN MOSLER Reply:
July 18th, 2011 at 6:34 pm
why should tsy care about how much interest it pays?
Ramanan Reply:
July 18th, 2011 at 11:30 am
ESM,
“Treasury can stop issuing anything longer than 3-month T-bills tomorrow.”
Sorry, the Treasury will have troubles in finding buyers given the constraint of the overdraft. Its not because people distrust the government, there will be people simply not interested.
WARREN MOSLER Reply:
July 18th, 2011 at 6:36 pm
no way to prove anything, but I don’t agree. with the cost of funds set by the fed bills won’t trade much higher than that without the banks scoffing them up for a free leveraged return on equity.
in fact, most of the time they trade lower.
Clonal Antibody Reply:
July 18th, 2011 at 7:34 pm
@ramanan,
you said
Banning would require 2/3 majority in both house and senate – if the President refuses to sign the bill, and if the tactic is used, it will be with the consent of the President. I do not think that the votes will ever be there, because it (coin seigniorage) is to the advantage of the President’s party.
Clonal Antibody Reply:
July 18th, 2011 at 10:21 pm
@Clonal Antibody,
Just for reference, FDR used the veto power 635times in his 12+ years in office – over 50 times a year. (372 vetoes, and 263 pocket vetoes) only 9 were overridden
beowulf Reply:
July 18th, 2011 at 11:29 pm
@anon,
“Fed independence is the only issue”
But the Fed isn’t independent. The Federal Reserve Act gives the Secretary power to override the FRB when its powers conflicts with his, the President can override the FRB at any time on national security grounds (and should have in 2008 but that’s another story) and of course Congress was careful to include the last section (31) of the FRA, allowing it to alter or abolish the Act at any time. That’s the best case scenario.
Worse case scenario (from the Fed’s point of view); if the issue came before the Supreme Court and the Justices truly thought the Fed was “independent”, they’d very likely strike the FRA as unconstitutional. After all, you can’t have a fourth branch of govt under a Constitution that, for some reason, stopped at three branches of govt.
http://volokh.com/posts/1207512634.shtml
anon Reply:
July 18th, 2011 at 11:40 pm
@anon,
That just says it’s independent until it’s not independent.
So MMT should make it dependent.
That’s the point.
It’s the only issue.
WARREN MOSLER Reply:
July 19th, 2011 at 9:52 am
mmt analyzes, it doesn’t ‘do’
anon Reply:
July 18th, 2011 at 11:44 pm
@anon,
i.e. you make your exceptions to the rule – the rule
do you really want to move forward with MMT always looking for exceptions to the rule to make it relevant?
luigi Reply:
July 18th, 2011 at 4:43 am
@anon,
you say “And Treasury can run out of dollars, since it maintains its dollar account at the Fed, without credit or overdraft privileges.”
It’s like to say that a Magistrate can arrest the Congress and also the FED, because magistrates are independent judicial officers.
Reply
anon Reply:
July 18th, 2011 at 6:46 am
@luigi,
nothing to do with magistrates
its real world institutions and actual accounting
WARREN MOSLER Reply:
July 18th, 2011 at 9:32 am
they are at the Fed, and debited and credited by the Fed, they’re called ‘securities accounts’ and there is any MMT
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anon Reply:
July 18th, 2011 at 10:02 am
@WARREN MOSLER,
Whatever they’re called, that’s the Fed acting as agent, not principal.
And that’s the fundamental difference. The Fed needs somebody else’s money to transact as agent through those accounts, as they now exist and operate in fact.
WARREN MOSLER Reply:
July 18th, 2011 at 6:22 pm
the tsy and the fed are both agents of congress
Mario Reply:
July 18th, 2011 at 12:27 pm
@anon,
if they aren’t held at the Fed then where are they held? I’d like to know what you are thinking. Thanks!
Reply
anon Reply:
July 18th, 2011 at 1:11 pm
@Mario,
the debt is issued by treasury, on treasury’s books
the debt is not on the books of the Fed
treasury acts as principal for debt issuance
the fed acts as payment agent for debt issuance
WARREN MOSLER Reply:
July 18th, 2011 at 6:46 pm
tsy secs are accounts at the fed and the fed accounts for its accounts. the tsy has account statements and all that just like you do at your bank
Mario Reply:
July 18th, 2011 at 1:42 pm
@Anon,
okay yes right. Agreed. I don’t think Warren would disagree with you either on that. The debt is the treasury’s not the Fed’s, but the funds are HELD at the Fed and always executed through the Fed.
What is the significance of this slight distinction you are bringing up? I am not seeing the problem yet nor any “fundamental contradiction.”
beowulf Reply:
July 18th, 2011 at 11:36 pm
@Mario,
“the debt is not on the books of the Fed”
Fed-held Treasuries are on the books of the Fed as assets, no?
Ramanan Reply:
July 18th, 2011 at 11:56 pm
“Fed-held Treasuries are on the books of the Fed as assets, no?”
Obviously the talk here being debt held by the private sector
anon Reply:
July 18th, 2011 at 11:56 pm
@Mario,
“Fed-held Treasuries are on the books of the Fed”
The relevant question here is the booking point for the issuer, not the holder.
Ramanan Reply:
July 19th, 2011 at 12:01 am
“But the Fed isn’t independent. The Federal Reserve Act gives the Secretary power to override the FRB when its powers conflicts with his, the President can override the FRB at any time on national security grounds …”
Maybe in future if you wish. The Fed doesn’t call the Congress to approve international swap arrangements or to do large scale asset purchases. Talk of operational realities!
Its in the power of the US government or any government to call emergency and take away some of the fundamental rights as well – doesn’t mean citizens do not have fundamental rights.
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studentee Reply:
July 19th, 2011 at 1:37 am
@Ramanan,
“Its in the power of the US government or any government to call emergency and take away some of the fundamental rights as well – doesn’t mean citizens do not have fundamental rights.”
trolling
beowulf Reply:
July 19th, 2011 at 2:06 am
@Ramanan,
Ramanan, so the US Code is a wish and the WTO treaty’s mandatory currency exchange is an operational reality? :o)
Basic point is the Federal Reserve is not a citizen, and thus has no “fundamental rights”. Its a government agency. Since it exercises federal executive power, it should be under the control of the President… but even that aside, the Fed certainly will not conduct international debt swaps over the objections of the President. Its a felony for any US citizen (and Fed governors will at least cop to being that) to negotiate with foreign govts without permission of the Administration (Logan Act).
The Federal Reserve, like many other central banks, is an independent government agency but also one that is ultimately accountable to the public and the Congress.
http://www.federalreserve.gov/faqs/about_12799.htm
§ 953. Private correspondence with foreign governments
http://www.law.cornell.edu/uscode/18/usc_sec_18_00000953—-000-.html
Ramanan Reply:
July 19th, 2011 at 2:29 am
Beowulf,
The fundamental rights thing was an analogy. Your statement that “But the Fed isn’t independent.” is incorrect.
We are in a discussion about what is and what is possible and things such as that – anti-blurring those things out.
“but even that aside, the Fed certainly will not conduct international debt swaps over the objections of the President.”
Yes but the President has given it powers to not ask.
One can keep talking of situations where policemen come knocking down the doors of the Fed. Thats different. We are talking of daily operations.
Tom Hickey Reply:
July 19th, 2011 at 4:22 pm
@Ramanan,
The Fed is every close to losing not only its independence in the US but also it’s existence. If the GOP sweeps in ’12, activists that contributed to win will demand repeal of the Federal Reserve Act of 1913. These are the same people that are calling for a default now (“shut’er down”) and they hold the balance of power in the GOP. I’d don’t view this as an idle threat any longer, but rather a real possibility.
Remember, Bush had no problem either invading countries or breaking treaties. Anything that in any way limits US sovereignty stands a good chance of going down, and that includes US participation in the UN. Most of these people are anti-internationalist and anti-global.
These things are nothing new. They have been right-wing goals for years. The GOP was “hijacked” for awhile by the neocons, many of whom were ex-Democrats. That phase is over. The next power cycle in the GOP is going to be way to the right of Barry Goldwater, now that all “voices of reason” are being marginalized. US politics is undergoing a transformation that only occurs at turning points.
While I don’t fully buy into everything in Strauss and Howe’s The Fourth Turning: An American Prophecy – What the Cycles of History Tell Us About America’s Next Rendezvous with Destiny or Ravi Batra’s The New Golden Age: The Coming Revolution against Political Corruption and Economic Chaos, I think that that are correct in seeing this as turning point in history. The rising ulta-conservative faction of the GOP is going to play a principal role in its unfolding and already is.
There is a lot of real rage out there and events in Wisconsin and Ohio, for example, that there is also a lot of rage against imposition of an ultra-conservative ideology on the US. This is catching the US establishment off guard, although much of the Tea Party activity has been bankrolled by “angels” and promoted by Murdoch interests. On the other hand, the extremism scares the financial community and business leaders.
It will be fun watching all this shake out — from a mountain top. These are “interesting” times.
DollarMonopoly.com Reply:
July 18th, 2011 at 10:40 am
@Ramanan,
Making stuff up is exactly what i do baby. Have you heard of the Law of Currency Equilibrium or the Law of Currency Optimization. They didn’t exist this morning but now they do! The text is located at the bottom of this page here.
By the way – neil i stole some of your visual from yesterday’s post. you know i can let eye candy like that past by without grabbing me some. I gots me a sugar tooth.
BTW @ Warren – reaching out to animators to flush out numbers on the “business plan thingy”
Reply
ESM Reply:
July 18th, 2011 at 10:47 am
@DollarMonopoly.com,
Dollar,
I’m not normally a nitpicker, but I think this link will help you in the future.
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DollarMonopoly.com Reply:
July 18th, 2011 at 10:54 am
@ESM,
interesting. did not know that. learn something new every day. i get alot of comments on grammer. what can i say i’m a terrible speller, writer, and proof reader. luckily i’m not smart enough to let that stop me.
Ramanan Reply:
July 18th, 2011 at 10:57 am
@DollarMonopoly.com,
“Law of Currency Optimization” …running deficits at the rate corresponding to the currency users’ rate of savings…
Okay let us analyse this. What is “rate of savings”
In one of the comment, you used savings as in wealth i.e. stock, and now as a flow.
What is “corresponding to” ??? two times, three times, 0.5 times ? constant across time ?
Reply
DollarMonopoly.com Reply:
July 18th, 2011 at 11:25 am
@Ramanan,
see what i’m talking about. i just make this stuff up.
“rate of savings”
yes, i should have my stocks/flows consistent. what would you recommend. maybe start a new comment at the bottom of this post on warren’s site so others can contribute too. a cut and paste with your changes would be helpful.
“corresponding to”
i’m just laying out the conceptual framework to help folks understand the basic MMT concepts it in a manner that the MMT folks are comfortable with. i’ll leave the details to you guys. how would you recommend i change it?
Neil Wilson Reply:
July 18th, 2011 at 11:19 am
@DollarMonopoly.com,
You’re very welcome.
Reply
MamMoTh Reply:
July 18th, 2011 at 2:14 pm
@Ramanan, but Treasuries are still a savings account of the private sector on aggregate.
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Ramanan Reply:
July 18th, 2011 at 2:55 pm
@MamMoTh,
Well savings accounts are accounts at banks which are not tradable and with various restrictions. Trading accounts have no CUSIPs.
As I said, there is nothing to prevent you from defining Treasury securities as “saving accounts” – but why introduce new definitions and confuse President Obama?
The fact that the public debt is a mirror of the net financial assets of the private sector overall is a slightly related but different matter.
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MamMoTh Reply:
July 18th, 2011 at 3:21 pm
@Ramanan, I don’t think president Obama will ever read this.
One of the important aspects of Warren’s description of MMT to me is how he shows how you can think of different things as being functionally equivalent, like Tsys being funtionally equivalent to a savings account at the Fed (even though I am not totally convinced about who sets the interest rate).
Tom Hickey Reply:
July 18th, 2011 at 3:41 pm
@Ramanan, I don’t think president Obama will ever read this.
Ever hear of “six degrees of separation”? (My old friend John Guare wrote a play about it.)
I would say that it is virtually certain that at least one person in or very near the president’s circle already knows about it. The president doesn’t need to read it. This stuff filters in.
WARREN MOSLER Reply:
July 18th, 2011 at 7:04 pm
probably Biden
:(
WARREN MOSLER Reply:
July 18th, 2011 at 6:55 pm
i think that if the president realizes that treasury securities, for all practical purposes, are nothing more than savings accounts at the Fed public purpose will be served. that’s why i wrote it. and i defend your right not to agree.
July 18th, 2011 at 12:13 am
Someone should project it onto congress, at night obviously, the media wouldn’t be able to ignore a giant list projected onto the building. Maybe someone would finally pay attention.
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Mario Reply:
July 18th, 2011 at 1:05 am
@Jacob,
that’s a good idea actually!!!
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beowulf Reply:
July 19th, 2011 at 2:45 am
@Jacob,
Send letters to the editor, nothing gets the attention of a Member of Congress quite like it (except for large checks of course).
Apparently the Obama for America site has this down to a science,
http://my.barackobama.com/page/content/LTEforDADT/
type in zip code, it shows a list of nearby newspapers. It provides a list of talking points to cut and paste into email, then automatically sends it on to selected papers.
A conservative columnist complains…
By my count, that’s 72 local papers in all that were duped into publishing OFA talking points (some more than once).
This campaign, organized by the Director of OFA and promoted by the President himself, is a clear case of Astroturfing (fake grassroots).
http://biggovernment.com/jsexton/2010/03/18/president-obama-promotes-ofa-astroturf-campaign-with-bonus-plagiarism/#more-91566
Clearly, something like this is how Dollar Monopoly can send letters to the editor everywhere. :o)
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July 18th, 2011 at 8:58 am
Warren, you said, “But govt spending does use up the aggregate demand reduced by taxation, so in that sense spending uses up taxpayer dollars.”
How does government spending “use up” aggregate demand? Federal spending increases aggregate demand.
Rodger Malcolm Mitchell
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PJ Pierre Reply:
July 18th, 2011 at 9:31 am
@Rodger Malcolm Mitchell,
I do not believe that you and Warren are as far apart on this as it seems.
In that, in terms of real resource constraints, Taxes creates space for government spending (the private sector can be seen as paying taxes (in real terms) when real resources are shifted from the private to the public domain). Govt spending uses up the spaced that is created by the taxation.
It may be better to say that ‘govt spending’ uses up aggregate supply in the current period.
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Neil Wilson Reply:
July 18th, 2011 at 9:54 am
@PJ Pierre,
Taxes do create space for government spending, but only if the private sector doesn’t create that space for you. there is a situation where that space naturally exists.
If you have a ‘paradox of productivity’ where the private system can generate everything demand but not use up all the manpower doing it then it will naturally fall into an equilibrium slightly lower than maximum output.
In that situation the government has a load of resources available to it that *will not* be used by the private sector no matter what.
So if you have a very productive economy and no exports draining that production then the government had better hire some civil servants or there will be unemployment.
Of course whether you ever get into a ‘paradox of productivity’ situation is one of those theoretical arguments like ‘does an economy quantity expand, or price expand’. We’ll know if it happens.
Reply
PJ Pierre Reply:
July 18th, 2011 at 10:08 am
@Neil Wilson,
While I am pretty much in agreement with much of what you’ve said, I think that you missed the point.
Whether the economy is at ‘full capacity’ or at half, taxes reduce aggregate demand and creates that much more space for the government to spend.
WARREN MOSLER Reply:
July 18th, 2011 at 6:16 pm
first, count bodies in the unemployment line/jg pool.
if it’s deemed there are too many, cut taxes to increase private sector employment. and/or have govt hire for public sector employment
beowulf Reply:
July 19th, 2011 at 1:06 pm
@Warren Mosler,
first, count bodies in the unemployment line/jg pool.
if it’s deemed there are too many, cut taxes to increase private sector employment. and/or have govt hire for public sector employment
Exactly, tax rates should be automatically adjusted in inverse relation to unemployment rate. James Meade proposed this the 1940s (and Keynes quickly endorsed).
http://gregmankiw.blogspot.com/2009/02/mature-keynesian-perspective-ii.html
MamMoTh Reply:
July 23rd, 2011 at 6:24 pm
Exactly, tax rates should be automatically adjusted in inverse relation to unemployment rate.
I don’t think this will ever work. First, taxes are a much more sensitive and political issue than interest rates to be changed every quarter. Maybe that is something we got used to and could be changed.
However, an automatic rule might be self-defeating. For instance, with a rule that will state that taxes will be lowered as long as unemployment is bigger that some threshold, the optimal reaction of the private sector will be to save the tax reduction and therefore trigger further tax reductions.
WARREN MOSLER Reply:
July 18th, 2011 at 9:43 am
yes, gov spending adds aggregate demand, but there’s only so much slack before you hit full employment.
and that output gap is what gets used up/closed by govt spending
Reply
Rodger Malcolm Mitchell Reply:
July 18th, 2011 at 10:47 am
@WARREN MOSLER, I hope I live to see full employment. Heck, I hope my grandchildren live to see full employment.
PJ Pierre said, ” . . . taxes reduce aggregate demand and creates that much more space for the government to spend.”
The only limit to federal spending is inflation. Are you talking about inflation? If so, look around. Where is the inflation? There is plenty of “space” for the government to spend.
Rodger Malcolm Mitchell
Reply
PJ Pierre Reply:
July 18th, 2011 at 8:21 pm
@Rodger Malcolm Mitchell,
I fully understand that there is plenty of room for the govt to spend (in fact I argue that the govt should reduce taxes and increase spending), as does Warren. Hence, my remark that you and Warren are not far apart on this.
The point is that ‘govt spending’ uses up capacity and taxation reduces the private sectors ability to do so.
July 18th, 2011 at 10:43 am
Anon,
You may be interested in this :
http://neweconomicperspectives.blogspot.com/2009/11/memo-to-congress-dont-increase.html
can be read fast – just skip to the second last para.
Reply
anon Reply:
July 18th, 2011 at 11:01 am
@Ramanan,
right, just wave the magic MMT wand and change the institutional facts
frivolous treatment of the central issue
Reply
Neil Wilson Reply:
July 18th, 2011 at 11:18 am
@anon,
Institutional facts are government by the laws of man, not the laws of physics.
They can be changed.
Reply
anon Reply:
July 18th, 2011 at 11:21 am
@Neil Wilson,
then change them
but don’t pretend that they have been changed
Neil Wilson Reply:
July 18th, 2011 at 11:37 am
@Anon,
And because they are the laws of man, they can be ignored when prudent to do so.
There is no law without enforcement.
anon Reply:
July 18th, 2011 at 11:42 am
@Neil Wilson,
“because they are the laws of man, they can be ignored when prudent to do so”
that does seem to capture the MMT approach to problem solving
WARREN MOSLER Reply:
July 18th, 2011 at 6:38 pm
something you ate, maybe?
Neil Wilson Reply:
July 18th, 2011 at 12:14 pm
@Anon,
The classical approach to problem solving is like the chicken scratching at the bottom of the fence perennially trying to get through.
The MMT approach is to move a few yards to the left and walk through the open gate.
WARREN MOSLER Reply:
July 18th, 2011 at 6:41 pm
or like the dog stopped by the underground electric fence
that was turned off in 1934
DollarMonopoly.com Reply:
July 18th, 2011 at 12:24 pm
@Neil Wilson,
chickens are stupid :-)
WARREN MOSLER Reply:
July 18th, 2011 at 6:31 pm
MMT does’t violate any institutional facts.
you been having a bad week or something?
Reply
anon Reply:
July 18th, 2011 at 12:09 pm
@Ramanan,
loved this:
“let them eat reserves”
that’s the same as the required institutional change
it’s the always implicit but rarely explicit requirement of MMT “monetary policy”
http://neweconomicperspectives.blogspot.com/2009/11/memo-to-congress-dont-increase.html?showComment=1262715742615#c390785281806101250
Reply
Mario Reply:
July 18th, 2011 at 12:24 pm
@anon,
“that’s the same as the required institutional change”
“it’s the always implicit but rarely explicit requirement of MMT “monetary policy””
can you explain further what you mean? I’m interested in what you are saying as well as what you think is a more appropriate way to handle this whole issue of bonds/debt ceilings/treasury/Fed/primary dealer/reserve rates/etc. song and dance.
thanks!
Reply
anon Reply:
July 18th, 2011 at 1:07 pm
@Mario,
MMT implicitly requires that the central bank be instructed to issue reserves to fund deficits directly, as necessary or appropriate
“let them eat reserves”, as Wray has said informally
but that requires a formal loss of central bank independence to make it real world
and a formal absorption of the central bank by the treasury function
the rest is dancing around the issue
WARREN MOSLER Reply:
July 18th, 2011 at 6:44 pm
mmt doesn’t require anything. where is this coming from? you getting peterson funding or something?
Mario Reply:
July 18th, 2011 at 1:26 pm
@Anon,
right but as far as I’ve read it, MMT supports the combining of the Fed and Treasury balance sheets. The Fed basically becomes a clearing house or accounting spreadsheet organization that simply oversees all banks while the Treasury directs the spending. The Fed just executes it. Why is that a problem?
WARREN MOSLER Reply:
July 18th, 2011 at 6:49 pm
i’ve suggested the Fed do all of Congress’ spending directly, just like the Fed does when it spends on its expenses
anon Reply:
July 18th, 2011 at 2:29 pm
@Mario,
I’ve seen no unified MMT position that institutional combination is a necessity.
Much more often, they say it isn’t necessary.
WARREN MOSLER Reply:
July 18th, 2011 at 6:52 pm
the only unified mmt position is mine.
what do you want to know?
luigi Reply:
July 18th, 2011 at 2:49 pm
anon
I’ve read Can Taxes and Bonds Finance Government Spending? by Stephanie Kelton and also Treasury Debt Operations by Scott Fullwiler, and I don’t see nothing that seems to be a “dance around the issue”.
I don’t want to do a blind defence of MMT, but there are official documents (paper and others) and blog like billyblog or this, understand what I mean?
Ramanan Reply:
July 18th, 2011 at 3:17 pm
Luigi,
From footnote 1 of the journal version of the paper
Early debates [Modigliani 1961: Blinder and Solow 1973, 1976; Barro 1974; Buiter 1977: Lerner 1973: Tobin 1961] over the optimal method by which to finance deficit spending remain a controversial topic today [Trostel 1993: Ludvigson 1996: Smith and Villamil 1998. Despite differing beliefs about the maeroeconomie consequences of, say, borrowing vs. “printing money,” economists on both sides of these debates clearly accept that the purpose of collecting taxes and selling bonds is to secure funds that are then respent by the government. In other words, it is generally agreed that the role of taxation and bond sales
is to transfer financial resources from households and businesses (as if transferring actual dollar bills or coins) to the government, where they are respent (i.e., in some real sense “used” to finance government spending). This erroneous view follows from an implicit treatment of money in its physical form and can be avoided by considering the balance sheet and reserve effects of taxation and bond sales. This, in short, is the purpose of this paper.
Not sure what she meant there because the Treasury does not have an overdraft at the Federal Reserve! The funds raised by taxes and Treasury securities issuances are indeed respent by the Treasury.
Apart from that, Tobin’s objective was completely different!
—-
The following is different from the theme running here.
Tobin’s objective was the following: A government can take a draft at the central bank and can decide what proportion can be taken as an overdraft and how the remaining can be financed in what terms etc. What is does will have huge implications on economic activity, interest rates, interest outlays, exchange rate etc.
—–
Over the years, central banks around the world have become divorced and independent and the Treasury has to issue securities to finance its deficit.
But instead of being upfront of this divorce/operational reality, MMT tries to hide and describes as if the Treasury has an open line of credit.
WARREN MOSLER Reply:
July 18th, 2011 at 6:57 pm
I’ve never done that. Did i miss the start of hunting season or something? what’s with all the cheap shots?
Mario Reply:
July 18th, 2011 at 3:20 pm
@Anon,
I don’t think so Anon. Most of the time I hear a “no bonds” recommendation as we have seen in this thread by Warren and others already. The idea of going no bonds is essentially the same as a Fed/Treasury combo.
WARREN MOSLER Reply:
July 18th, 2011 at 6:58 pm
yes, there are proposals, thanks.
proposals presume it’s not already being done.
anon Reply:
July 18th, 2011 at 3:21 pm
“But instead of being upfront of this divorce/operational reality, MMT tries to hide and describes as if the Treasury has an open line of credit.”
exactly, Ramanan
oh, those inconvenient facts
:)
WARREN MOSLER Reply:
July 18th, 2011 at 6:59 pm
now it’s a cheap shot tag team?
Ramanan Reply:
July 18th, 2011 at 3:48 pm
@Mario,
“I don’t think so Anon. Most of the time I hear a “no bonds” recommendation”
Well, only recently have the central banks learned about interest paid on reserves. So you can see from various MMT proposals about setting interest rates permanently to zero. (As if its the only way to educate the public that government debt is good).
Now, setting interest rates to zero hardly achieves any trick. Its inviting troubles in the real estate sector, however good your regulation of that sector is.
Even if interest rate control is achieved solely by central bank purchasing all the debt, and all debt effectively in reserves, its not the best way to minimize the risk of interest payment outlays due to interest rate changes.
The optimal policy will always be for the Treasury to not have an overdraft and the *independent* central bank as the guardian of “money”/currency to undertake such tasks by the size of its balance sheet… operationally …
WARREN MOSLER Reply:
July 18th, 2011 at 7:06 pm
like japan’s had a housing bubble problem since going on it’s 0 rate policy almost 20 years ago.
and there doesn’t need to be any interest rate change. fed funds stay at 0, end of story.
Mario Reply:
July 18th, 2011 at 7:40 pm
@Warren,
thank you Warren. That’s what I thought as well in regards to all of this Anon and Ramanan have been saying.
you getting peterson funding or something?
that is hilarious LOL
and net tsy issuance functions as interest rate support
exactly…which exactly further why balancing the budget means lower yields.
congress has directed tsy to sell tsy secs to ‘fund’ it’s net spending. it’s not an ‘automatic’ overdraft but requires someone buying the tsy secs,
and the fed is directed not to buy them directly.
right…I see now. Yes let’s get rid of that. It is unnecessary. And yes I agree the Fed can do the spending for Congress just like it does for its own expenses, however it would only do that at Congress’s discretion and authorization of course. At that point, the Fed is essentially acting as the Treasury….so what’s the point of the Treasury? LOL
i’ve compared it to walking with your laces tied together. it’s not a factor when you are going slow, just when you try to run.
great analogy. Thank you
Mario Reply:
July 18th, 2011 at 3:30 pm
@Ramanan,
But instead of being upfront of this divorce/operational reality, MMT tries to hide and describes as if the Treasury has an open line of credit.
what do you mean by overdraft exactly? Are you saying that the Treasury is revenue constrained?
The Treasury can spend whatever it wants to so long as Congress goes through the necessary process for spending. The Fed just executes the order. What’s the problem? What am I missing here?
Reply
Ramanan Reply:
July 18th, 2011 at 4:08 pm
@Mario,
But it seems that the “proof” that the US government is not “revenue constrained” seems to be given assuming an overdraft.
Yes the Fed executes the auction settlement process, but the proof that government expenditures can be considered independent of the tax inflows is a more complicated proof. The Fed does not underwrite the issuance.
WARREN MOSLER Reply:
July 18th, 2011 at 7:07 pm
no, it assumes Congress is ultimately in control of it’s agents, which it is
Mario Reply:
July 18th, 2011 at 4:12 pm
@Ramanan,
The optimal policy will always be for the Treasury to not have an overdraft and the *independent* central bank as the guardian of “money”/currency to undertake such tasks by the size of its balance sheet… operationally …
okay so essentially keep things the way they are now then is that accurate?
WARREN MOSLER Reply:
July 18th, 2011 at 7:09 pm
Congress votes on tsy’s spending. tsy has no independence from that.
and the Fed is also an agent of Congress.
and net tsy issuance functions as interest rate support, not funding
etc. etc. etc.
luigi Reply:
July 18th, 2011 at 4:19 pm
@Ramanan,
You have to read the entire document, not only footnote.
But really I don’t understand the point. Only Warren and Bill Mitchell are more direct about this matter, but I think and I understand that is for the meaning of the issue, and not to avoid operation realities. Scott and Stephanie, for example, are more accurate.
I repeat, no blind defence, but you are in search of an accurate description in a blog. a blog is really informal.
what official paper have you read?
Mario Reply:
July 18th, 2011 at 4:19 pm
@Ramanan,
the proof that government expenditures can be considered independent of the tax inflows is a more complicated proof. The Fed does not underwrite the issuance.
Who is saying the Fed is “underwriting” anything? Doesn’t the fact that we’re in a deficit prove the Treasury has an overdraft and can spend beyond its revenues? How is this different than a “line of credit” except that really there is NO max point (outside of the debt ceiling)?
What is the point you are trying to make with all of this? I am not following your purpose here. Your comments seem sparse and mercurial. Can you just spell it out fully and up front in a linear fashion as to what you are saying is the problem? I really want to know what your concern is. Thanks!
WARREN MOSLER Reply:
July 18th, 2011 at 7:12 pm
congress has directed tsy to sell tsy secs to ‘fund’ it’s net spending. it’s not an ‘automatic’ overdraft but requires someone buying the tsy secs,
and the fed is directed not to buy them directly.
as previously discussed, this self inflicted constraint by Congress doesn’t interfere with anything but potentially could during times of stress. nor does it safeguard anything
WARREN MOSLER Reply:
July 18th, 2011 at 7:03 pm
As I’ve said from day 1, there are self imposed constraints on monetary operations.
under current institutional structure, as presided over by Congress, the Fed isn’t allowed to let the Tsy go into overdraft.
i’ve compared it to walking with your laces tied together. it’s not a factor when you are going slow, just when you try to run.
same with these self imposed constraints. no problem in normal times, but when things get shaken up they can be big problems, like the debt ceiling.
that’s why I’ve proposed removing these self imposed constraints, while fully recognizing they are there and can be highly problematic.
July 18th, 2011 at 11:55 am
Warren,
You should look at hiring a sky writing plane crew to write some of this in the DC sky. Sky writing would probably be cheaper than a full page ad in a major national newspaper and would make it a news story itself, so it would get free air time as a news event, and after they found you were the source, many would likely want to interview you, then you could hold out for a primetime network news show to deliver your message.
Reply
July 18th, 2011 at 7:41 pm
“the only unified mmt position is mine … i’ve suggested the Fed do all of Congress’ spending directly, just like the Fed does when it spends on its expenses … mmt doesn’t require anything … what do you want to know?”
I agree you have the most unified view.
And I assume all of this means that your suggestion above is desirable, but that it is not necessary, in order to achieve the full vision of MMT – i.e. the vision as expressed in your own view as the primary and original developer of MMT.
So why is your suggestion desirable?
And if it is desirable, why is it not necessary?
I.e. why is it not something you specify as a “must have” rather than a “nice to have”, or however you think of it as the natural leader of MMT?
Because, if it is necessary in your view, I think you are now in fact in agreement with my main point about the necessity of institutional combination.
So I’d like to understand why you are not in agreement with that point.
You can chalk it up to bad food, bad week, or bad Peterson, but all I’m really after is a unified answer to that.
Reply
DollarMonopoly.com Reply:
July 18th, 2011 at 8:10 pm
@anon,
what your forgetting is that warren is a busy dude. he speaks as efficiently as possible in order to answer as quickly as possible. i would suggest if you have specific questions on topics do what i do all the time. do a site-based google search such as “exchange rates site:moslereconomics.com” Vague qualitative questions like your asking are not exactly the summarized in a sentence or two. expecting much more from a dude that busy is not probably gonna get you the answers your probably looking for.
Reply
DollarMonopoly.com Reply:
July 18th, 2011 at 8:11 pm
@DollarMonopoly.com,
spend a little time reading his stuff and you’ll come to realize he’s as transparent as it gets.
Reply
WARREN MOSLER Reply:
July 19th, 2011 at 8:58 am
mmt isn’t something you achieve, it’s an understanding of what is, including re institutional unification, etc.
Reply
July 18th, 2011 at 11:03 pm
@anon,
Where is this so-called central bank “independence” established in the law? I just did a search on the character string >independ< throughout all 31 Sections and subsections of the Federal Reserve act and found a few occurrences mostly related to an outside 'independent' audit, and recognizing the political 'independence' of the Philippines.
http://www.federalreserve.gov/aboutthefed/fract.htm
Is this so-called "independence" established as part of another law, or are we being treated to yet another orthodox economic dogma? If so-called "independence" wrt to the Fed's policymaking is not established thru the law, it doesnt really exist then does it? Or are you saying that the fact that Congress has set it up so that the appointed FOMC can vote by themselves on how to run monetary policy makes these Monetary Policy decisions "independent" from for instance an act of Congess? And then if the FRA establishes the Feds "independence" in conduct of MP, that this means the Fed is independent in any/all other Fed decisions? Such as not allowing an overdraft in the TGA? That is a stretch….Resp,
Reply
anon Reply:
July 18th, 2011 at 11:13 pm
@Matt Franko,
Policy independence is obvious, although somewhat loose.
Operational independence is clearer. It is inherent in the idea of a Treasury deposit account at the Fed with no overdraft, requirement for Treasury to issue bonds, etc.
So Treasury has no power over the Fed for direct “financing” of the deficit through reserve issuance.
You can look at it as the Fed having the power to call the shots operationally on QE, but not Treasury.
The platinum coin is a trick to get around this, since it gives Treasury an effective QE power. This is why it would be resisted even more than Fed QE.
Reply
Clonal Antibody Reply:
July 18th, 2011 at 11:19 pm
@Matt Franko,
The independence came from a later act
See Central Bank Independence
Reply
Matt Franko Reply:
July 19th, 2011 at 7:05 am
@Clonal Antibody,
Thanks.. here are some other observations on “independence”:
http://www.forbes.com/2009/07/31/bernanke-volcker-greenspan-fed-independence-opinions-columnists-john-tamny.html
Excerpt: “Burns shrewdly played on Nixon’s fears of political injury if he quit the gold standard.” Burns pointed out that Nixon would be condemned for “devaluing the dollar,” that “Pravda would hail these developments as a sign of disintegrating capitalism,” (NICE ONE BURNS!)…. plus it would be “hated by business and financial people.” (WHAAAAT?)
I may be ready to jump on the ‘end the Fed’ bandwagon but for different reasons than Ron Paul. It is interesting here that Ron Paul seems to scold Bernanke about leaving the gold standard when it looks like the Fed and the Soviets wanted the US to stay on it, yet the elected representatives (Nixon) led the way to finally get us off the gold standard… resp
Reply
beowulf Reply:
July 20th, 2011 at 8:40 pm
@Clonal Antibody,
The backstory of the Tsy-Fed Accord of 1951 was that Tsy walked before Congress made it run. Congress was in the process of revoking the interest rate cap by legislation. This effort was led by IL Sen. Paul Douglas, whom his colleagues deferred to on economics issues, because his title before Senator (and after his enlistment in the Marines at the age of 50, Colonel) was Professor.
In economics, the Cobb–Douglas functional form of production functions is widely used to represent the relationship of an output to inputs… Douglas presented the results of these findings, along with those for other countries, at his 1947 address as president of the American Economic Association.
http://en.wikipedia.org/wiki/Cobb%E2%80%93Douglas
Reply
July 19th, 2011 at 1:55 am
[...] you want to see a longer, more erudite explanation, you might try Deficit = Savings, or Mosler letter to the President but I think you get the [...]
July 20th, 2011 at 6:29 am
[...] following is x-posted from The Center of the Universe, with the kind permission of the author. Please see note below. — [...]
July 20th, 2011 at 3:30 pm
Anon,
You may be interested in this recent article by Marc Lavoie, where he makes the point similar to what you have been making though in a less persistent manner.
http://books.google.com/books?id=CP0736ovRpQC&lpg=PP1&dq=A%20Modern%20Guide%20to%20Keynesian%20Macroeconomics%20and%20Economic%20Policies&pg=PA53#v=onepage&q&f=false
In particular to the screen which the link above directly takes you to, and in general scrolling up and down in Section 7 of the chapter – in fact in the whole article is nice.
Reply
anon Reply:
July 20th, 2011 at 4:02 pm
@Ramanan,
Thanks very much, Ramanan.
He’s clearly putting MMT in its place:
“clearly part of post-Keynesian analysis”
And recognizes obvious ambiguity when he encounters it:
“Statements such as ‘the Treasury does not need to borrow in order to deficit-spend’ or ‘government spends simply by crediting a private sector bank account at the central bank’ are ambiguous, obscuring the fact that the Treasury account at the central bank needs to be provisioned … as is indeed recognized reluctantly by Bell and Wray”
Note his use of the words “obscuring” and “reluctantly”.
Concluding with a humiliating observation:
“The contribution of the neo-chartalists is that they have enlighted our understanding of the clearing and settlement sytem, an understanding that has vindicated the horizontalist approach”
Whoever doesn’t like this – might acknowledge that I didn’t write it.
I should definitely read Lavoie.
But perhaps MMT’ers should be a little careful in citing him.
Thanks again.
Reply
Peter D Reply:
July 20th, 2011 at 4:35 pm
@anon,
Oh, come on, all he is saying is that there is a difference between the “general” case and the specific institutional arrangements (self-imposed constraints, as Warren likes to call them.)
Reply
anon Reply:
July 20th, 2011 at 4:41 pm
@Peter D,
Do you actually understand the meaning of the words “ambiguity”, “obscuring”, and reluctantly?
This is not flattery.
Peter D Reply:
July 20th, 2011 at 5:10 pm
@anon,
I do and I am not saying that he is using it as flattery at all. What I am saying is that all this “gotchas” are really inconsequential to anybody equipped with more than the most shallow reading of MMT literature. If there are indeed many people “misled” by the “obscure” descriptions of financial operations as presented, say, here or at NEP blog, then I might change my mind. I don’t think that’s the case.
WARREN MOSLER Reply:
July 20th, 2011 at 7:33 pm
and it’s like reading something a student of marx wrote that differed from marx and claiming it means marx was wrong
Peter D Reply:
July 20th, 2011 at 10:02 pm
@anon and others,
Wioth all due respect to Marc and other horiozontalists, it is MMTers tha managed to make a splash in the blogosphere and educate hundreds of guys like myself about all this stuff while Marc and co. were sitting and writing nice, “precise” articles in their ivory towers. Yes, sometimes to catch attention one needs to be provocative. MMT has been the success that it is because saying stong things like ‘the Treasury does not need to borrow in order to deficit-spend’ catches attention.
I told the same to Nick Rowe when he and others on his blog wondered what’s so new about the sectoral balances. Nothing! Except Nick Rowe doesn’t shout from every corner that govt deficit=private sector surplus (despite agreeing with it) while Billy and Warren and others do.
People should be kissing MMTers feet, literally, for what they are doing. All the precise niceties are fine, but they only get you so far. And anybody spending time with Mandatory Readings on this site should not have the wrong ideas in the end.
Matt Franko Reply:
July 20th, 2011 at 5:48 pm
@anon,
I think Lavoie is using a new application for the word “provisioned” there, he’s pushing it a bit. Perhaps a better word there would be “credited”… he’s employing rhetoric with his use of “provision” (always watch their verbs) … ‘provision’ should be used in the context of the supply of something real. These are accounting constructs so you should want to stay within the lexicon of the accounting terminologies…. this is how things get off track/deceptive…. sloppy terminology/rhetoric posing as scholarship….
Sentence should read: “….the fact that the Treasury account at the central bank needs to be
provisionedcredited….”Resp,
Reply
luigi Reply:
July 20th, 2011 at 6:00 pm
@anon,
reclutantly?
there is an entire part about bond in that paper (Can bond and taxes). I mean it’s also in the title. How can be reclutant?
Ramanan, do you remember this?
“But Ramanan, I have always bucked the tendency of many on the MMT side to argue that the Treasury sells bonds ex post, in order to drain “excess reserves”. The Treasury works very hard to prevent the excess reserves from emerging in the first place.”
http://neweconomicperspectives.blogspot.com/2010/11/yes-government-bonds-add-to-private.html
anon Reply:
July 20th, 2011 at 7:07 pm
@Matt Franko,
That’s a well intentioned thought, but MMT does carry with it a strong tendency to create its very own rules on the appropriate use of vocabulary, entirely convenient to the purpose of MMT.
Loan loss provisions, for example, are not real. They are the furthest thing from it in an accounting sense. So I think the provision of funds to the Treasury account in this case passes muster in an unbiased non-MMT sense.
WARREN MOSLER Reply:
July 20th, 2011 at 7:37 pm
why aren’t bank loan loss provisions real?
anon Reply:
July 20th, 2011 at 7:24 pm
Luigi,
The fact that he singled out Kelton show you just how ambiguous he believes the presentation is more generally. She departs from the general position, but apologizes for it rather than disagrees with it. That is quite understandable, but it amounts to reluctance.
WARREN MOSLER Reply:
July 20th, 2011 at 7:35 pm
(French is his first language.)
anon Reply:
July 20th, 2011 at 7:42 pm
not real as in monetary; real versus monetary
anon Reply:
July 20th, 2011 at 7:49 pm
not real as in not a provision of canned goods
WARREN MOSLER Reply:
July 20th, 2011 at 8:04 pm
ok. like most everything else on a bank balance sheet
anon Reply:
July 20th, 2011 at 8:07 pm
@Matt Franko,
Turning a bit more positive, MMT strikes me as a theory of employment, inflation, deficits, and the monetary system. There’s no reason for the slightest bit of ambiguity around the description of the monetary system. The important idea is that bank reserves aren’t inflationary. From that flows what is operationally possible and reasonable in terms of MMT’s view of employment and deficits. You don’t need to frame it in the context that bonds don’t fund anything, for example. You just need to present a coherent argument about what is possible and reasonable to promote full employment using deficits as appropriate. That may involve the option of using bank reserves instead of bonds. But you’ve got to convince the world that the result will be benign for inflation. You may be right, but you’ve got to convince others. That’s way more critical than selling everybody on the idea that bonds don’t fund anything.
Matt Franko Reply:
July 20th, 2011 at 10:06 pm
@Matt Franko,
Anon, Tom and Roger both have PhDs in other fields and they have opined here how loose perhaps the terminology is around the economics academe and this is in my mind when I read something like that from Lavoie… Provision (transitive verb): to supply with needed materials (as food). (A loan loss ‘provision’ is the noun form Lavoie used the verb)… doesnt matter sounds like he doesnt speak English as 1st probably doesnt really know what he is writing… but just to point out that loose words like that is what ends up eventually influencing morons like Ron Paul to start saying things like ‘we need real gold hard money to borrow from the Chinese’ or some such BS and we should be careful, etc…
Anon/Luigi, Went back and read Ms Kelton’s paper that Luigi linked to and she talked about how Treasury has separate accounts (TTL) at banks that the Dealer banks can “provision” ;) with reserves when they buy Treasury securities at the auction and so in effect the reserves are created first by the dealer bank, then put in the Treasury’s TTL account right at the same bank (like a loan) that can be used for payments etc. I think I see there how govt/bank creates the reserves BEFORE the bonds are sold so that makes sense… but what if the PD is not a bank? Like pre-crash Lehman/Bear/Goldman ie those PDs were not banks they were BDs? Treasury could not have a TTL account at Lehman for instance as Lehman was not a bank per se. How did that work? Lehman could not credit a Treasury TTL account with reserves. I guess Lehman could have worked thru a real bank.. but would not have Lehman needed funds in it’s bank account first before Lehman could buy Treasuries at the auction…hard for me to see this scenario …
Resp,
anon Reply:
July 20th, 2011 at 10:41 pm
@Matt Franko,
Yeah, the auctions have been the subject of many discussions. One thing – Treasury can reinject reserves into the system as fast as it withdraws them through auction settlements – by using TTL to drain balances from the TGA. So if the Fed provides reserves to buy the auction, it’s pretty temporary – due to corresponding active Treasury management of it cash. And yes Kelton seemed to suggest that some auction proceeds were settled directly into TTL account, without system reserve effect. The whole auction/reserve thing is a bit confusing as a result.
I don’t see the auction/reserve issue as being terribly relevant anyway. The net result is still that Treasury is managing its cash balances between TGA and TTL. And reserve management by the Fed effectively works around Treasury cash management plans and execution, not vice versa.
Non-bank dealers would transact the same as non-bank non-dealers in terms of reserve settlement of auctions. They maintain a clearing account with a bank.
Ron Paul is indeed dangerous, if anybody actually heeds what he says.
Sergei Reply:
July 21st, 2011 at 1:25 am
@anon,
anon: Loan loss provisions, for example, are not real.
Unreally-unreally? Can not believe that all banks are so stupid to care so much about them.
WARREN MOSLER Reply:
July 20th, 2011 at 7:32 pm
i don’t recall ever saying that stuff in that context?
poor scholarship not to go to my writings and then call what he finds ‘mmt’
Reply
Ramanan Reply:
July 21st, 2011 at 12:07 am
Peter D,
Even Monetarists and the IMF recognize that the Treasury can take overdrafts at the central bank if they wish. Nothing new there.
Tobin recognized as early as 1963 that the the Treasury can finance all its deficit via the central bank!
Because fiscal policy is looked at suspiciously by the mainstream, it has led them to impose these conditions.
Now if you come and challenge what the IMF already knows, its not quite a challenge.
For example, the statement that bond issuance is an “interest rate maintenance operation” is inaccurate because the attitude taken in making such a statement implies that the Treasury has complete control over the central bank for example and as if Ben Bernanke is hiding something.
Next there is a tendency to quote Ben Bernanke from “60 minutes” where he describes how the Fed lend the whole financial system to prevent a contangion. MMTers tend to take this statement as a “confession” on how the Government “spends” – supposedly. That is inaccurate because he himself has made it clear that it is not “spending” but “lending”.
The truth is that not just in the US, but world over, governments have been forbidden from financing themselves via the central bank. Truth is bitter!
As the commentator vjk put it, we are not Gosbank.
Reply
Tom Hickey Reply:
July 21st, 2011 at 12:44 am
@Ramanan,
As I understand it, when NIxon closed the gold window, the agreement that was worked out replaced the discipline of gold with the bond markets, which would control yields, although the cb would control the interest rate. This discipline involved the political restraints of no overdrafts, no direct transfer of Treasury securities to the Fed, and mandated tsy auctions.
The prospect of QE3 in which the Fed would control not only the interest rate with IOR but also the yield curve by setting price and letting quantity float has bond people like Gross practically in apoplexy. There is actually a movement building for returning the discipline of gold, at least partially.
Of course, this is reason that the coin seigniorage work-around of the debt ceiling would drive the “monetary discipline” crowd crazy, since it would thwart not only fiscal discipline in their eyes, but also monetary discipline.
So I think you are correct in pointing out that this is chiefly a discipline issue, Ramanan. In my view, MMT answers this but not explicitly by taking it on as an issue.
Peter D Reply:
July 21st, 2011 at 1:13 am
@Ramanan,
“Now if you come and challenge what the IMF already knows, its not quite a challenge.”
Funny, but 99% of people seem to have no idea! You see, it gives me very little comfort that IMF or Nick Rowe ” know” these things – if 99% of folks on the street don’t and think we can run out of money
Ramanan Reply:
July 21st, 2011 at 2:21 am
Funny, but 99% of people seem to have no idea! You see, it gives me very little comfort that IMF or Nick Rowe ” know” these things – if 99% of folks on the street don’t and think we can run out of money
Thats nonsense. Ask anyone from banking/financial sector and he/she could tell you that “they can print the money right”. Now that is not a sophisticated way of putting it across, but some point nontheless.
Most economists think that “the government can print the money”.
Now if your target audience is some better central bankers, they will immediately point out that the US Treasury has no overdraft at the central bank and can default.
There was a commentator here who wrote to Kotlikoff and got the reply “of course, they can print the money .. will cause inflation”.
Ramanan Reply:
July 21st, 2011 at 3:28 am
“Funny, but 99% of people seem to have no idea! ”
Also lemme rephrase.
To people who talk of “money printing”, you have to talk to them about the crude language they use and fiscal policy versus inflation.
To central bank audience, especially people in the Fed, you have to point out you propose to remove the overdraft limit.
Peter D Reply:
July 21st, 2011 at 8:10 am
@Ramanan,
Ramanan, I am talking about the hoi polloi here. And it is pretty hard to reconcile the idea that everybody knows we can print money with the fact that people think we’re running out of it. MMT does explain it.
Again, you’re talking from your own private bubble. Most people do not know that govt deficit=private surplus, that printing money is an option that doesn’t even need be inflationary etc. All these things are not new or MMT, but MMT is the one responsible for popularizing them.
Ramanan Reply:
July 21st, 2011 at 12:31 am
Peter D,
” Except Nick Rowe doesn’t shout from every corner that govt deficit=private sector surplus (despite agreeing with it) while Billy and Warren and others do.”
Sectoral Balances is not original to MMT. MMT is what it is – describing Treasury’s flows in central banking daily operations.
Reply
Tom Hickey Reply:
July 21st, 2011 at 12:45 am
@Ramanan,
“MMT is what it is – describing Treasury’s flows in central banking daily operations.”
I would say that this is an important aspect of MMT, but not the whole of it. But perhaps you did not mean that.
Peter D Reply:
July 21st, 2011 at 1:07 am
@Ramanan,
That was exactly my point!
luigi Reply:
July 21st, 2011 at 5:30 am
@anon,
“The Treasury’s debt operations occur within the context of timing of its own
spending (as determined in budgets set by Congress and the President) and revenues. The
Federal Reserve Act currently specifies that the Fed can only purchase obligations of the
Treasury in “the open market,” though this has not always been the case. This necessitates
that the Treasury have a positive balance in its account at the Fed (which, as set in the
Federal Reserve Act, is the fiscal agent for the Treasury and holds the Treasury’s balances
as a liability on its balance sheet). Therefore, prior to spending, the Treasury must
replenish its own account at the Fed either via balances collected from tax (and other)
revenues or debt issuance. [...]”
quote from Treasury Debt Operations – An Analysis Integrating Social Fabric Matrix and Social Accounting Matrix Methodologies di Scott Fullwiler (2010)
so, I repeat, what’s the problem with Lavoie?
Reply
anon Reply:
July 21st, 2011 at 5:45 am
@luigi,
It’s Lavoie’s problem with MMT.
Which is that MMT (according to him) couches these facts ambiguously behind an alternative “paradigm”.
luigi Reply:
July 21st, 2011 at 5:55 am
@anon,
yeah, but it’s a lie.
July 20th, 2011 at 11:45 pm
Matt Franko
Provision:
a clause in a legal instrument, a law, etc., providing for a particular matter; stipulation; proviso.
http://dictionary.reference.com/browse/provision
Reply
Tom Hickey Reply:
July 21st, 2011 at 12:16 am
@Ramanan,
Provision (accounting)
Reply
Ramanan Reply:
July 21st, 2011 at 12:24 am
@Tom Hickey,
Yeah, thats what I am saying, not used in that sense.
Reply
Tom Hickey Reply:
July 21st, 2011 at 12:58 am
@Ramanan,
But according to the article the way I read it, “to provision” in accounting is always a credit, (liability). To “provision the Treasury” with reserves involves debiting (marking up) an asset account. I am far from knowledgeable in accounting, but Mario’s use seems technically incorrect accounting-wise.
Does an accountant want to clear this up, not that it is any big deal.
Ramanan Reply:
July 21st, 2011 at 2:28 am
Don’t see your point.
“You should make provision for the old age” is a standard advise give to people – to which you can very well reply “Yes, I am provisioned”.
Anyway changes the topic.
anon Reply:
July 21st, 2011 at 5:32 am
@Tom Hickey,
This is getting quite silly. The original exchange concerned whether the term “provision” might be used in application to real or monetary objects. Obviously it can be used in English for both.
It is used in formal accounting as in “provision for loan losses”. That illustrates one way it is used as applying to monetary items. But it is formal.
Using it in the sense of provisioning the TGA is not formal accounting usage at all. It is an informal use, also applied to a monetary item.
In formal accounting, a provision for loan losses is a LENDER’S credit to liabilities (increase) and a debit to equity (decrease). It is the CHANGE in those items, which also corresponds to a provision expense (debit) on the income statement.
The corresponding balance sheet entry is sometimes called an allowance for credit losses (stock), reflecting the result of cumulative provisions for credit losses (flows).
But that sort of formal credit loss accounting has nothing to do with the way its been used here informally, applied to a monetary item. The central bank is not “provisioning” the treasury account as in a loan loss provision. Rather, Treasury is providing (or “provisioning”) funds to cover its cash management requirements. This is not formal accounting usage, and wasn’t intended to be.
Reply
anon Reply:
July 21st, 2011 at 5:38 am
@Tom Hickey,
–noun
1. a clause in a legal instrument, a law, etc., providing for a particular matter; stipulation; proviso.
2. the providing or supplying of something, especially of food or other necessities.
–verb (used with object)
. to supply with provisions.
so its the supply of a monetary “something” in this case
geez
Reply
Ramanan Reply:
July 21st, 2011 at 6:17 am
@anon,
Yeah getting silly as you pointed out!
I have read most of his articles, and I believe he is always technically correct.
anon Reply:
July 21st, 2011 at 7:17 am
@anon,
this is painful, Ramanan
:)
Matt Franko Reply:
July 21st, 2011 at 6:52 am
@Ramanan, If you look in a dictionary, the verb form of ‘provision’ is to be exclusively/best used in the context of providing for food, yes the noun form can be used in accounting/law, but NOT the verb.
Tom, look at the Wiki page, it defines ‘A provision’ (noun) not ‘TO provision’ (verb). Sample: “We need to establish a provision for bad debt by debiting X-Account and crediting Y-Account…or something like that would be a good sentence. Provision: noun; credit: verb. Lavoie used the verb which should start one thinking of beef jerky, hard tack. This type of thing starts a slippery slope.
If Lavoie’s sentence read: “Statements such as ‘the Treasury does not need to borrow in order to deficit-spend’ or ‘government spends simply by crediting a private sector bank account at the central bank’ are ambiguous, obscuring the fact that the Treasury account at the central bank needs to be CREDITED…” that would be obviously untrue.
Or we would say: ‘no they don’t'… but put the word ‘provisioned’ in there and now it becomes effective rhetoric, and Ron Paul is ready to load up the mule train with canned goods to go out gold mining. This is how it starts.
As far as the noun form: The US Treasury does not establish a PROVISION for ANYTHING.
(possible exception being the moron Social Security “Trust Fund”). Is UST putting aside money in case there is an earthquake? or a war? or a TARP? If those things come up, the govt just does a supplementary appropriation at the time, no worries.
Lavoie trying to slip this word ‘provision’ in there as a verb is deceptive and misleading. Not saying he did it on purpose.
Resp,
Reply
anon Reply:
July 21st, 2011 at 7:13 am
@Matt Franko,
banks regular use “provision” as either a verb or a noun, with respect to provisions for credit losses; listen to their credit officers talking on conference calls with analysts
Reply
Tom Hickey Reply:
July 21st, 2011 at 11:34 am
@anon,
Right, provision for credit losses, provision for old age, but I have never heard of “provisioning” at asset account. As I said, not a big deal, but not precise either. In this case it is provisioning with real resources and debiting/crediting the appropriate accounts to record the transaction. The argument began with a question regarding precision, and it does not seem to me that “provision” is the precise way to put it.
In most disciplines, one is expected to use technical terms precisely. There seems to be a lot of sloppiness is economic writing in comparison, and it seem that the criticism in this thread of MMT involves this very point.
Ramanan Reply:
July 21st, 2011 at 12:58 pm
Tom Hickey,
Like all economists, you are confusing something for something associated with it. Here, the word provision with the word usually associated with it – losses.
Here is from the Banque de France’s annual report:
“French banks proved sufficiently provisioned and capitalized to cushion the impact of financial market turbulence and maintain their credit supply.”
Here’s from a Moodys’ report
“The fundamental credit-trend outlook for the Mexican banking system is negative, Moody’s Investors Service says in its annual report on the industry, but it adds that this conclusion is tempered by the resilience underpinning the banks’ financial strength ratings (BFSR). These institutions are quite liquid and are well provisioned, and their capitalization remains ample, the rating agency states.”
Sorry, you have to find some other “not even a nit-pick”
Tom Hickey Reply:
July 21st, 2011 at 1:16 pm
@anon,
Ramanan, those are loss provisions. Nothing about a bank “provisioning” a client’s account. I still maintains that it is non-standard to say that the Fed “provisions” the Treasury account. The Fed credits the Treasury account (Fed liability) and it debits an asset account into which it records the reserves ir receives from the tsys auctions. Anyway, that is what I assume the accounting looks like. As far as I can tell, the federal government never “provisions” itself with funds. It issues currency, reserves, and tsys to conduct its operations. The government does provision itself with real resources through currency issuance. I think this is Matt’s point.
BTW, I am neither an economist nor in finance.
Ramanan Reply:
July 21st, 2011 at 1:29 pm
Tom Hickey,
I said like all economists…. not that you are an economist.
“Ramanan, those are loss provisions. Nothing about a bank “provisioning” a client’s account”
Losses Provisions are Provisions set aside for losses from loans. Similarly there are provisions for other things in life in such as for other contingencies.
“I still maintains that it is non-standard to say that the Fed “provisions” the Treasury account.”
No, he didn’t claim that the “Fed provisions the Treasury account”. He said the Treasury needs to be well provisioned for expenditures being higher than taxes and .. provisioned in short.
“As far as I can tell, the federal government never “provisions” itself with funds. It issues currency, reserves, and tsys to conduct its operations.”
That is completely wrong. The Treasury keeps funds at the TGA and/or at commercial banks and does short term cash management operations such as lending to financial institutions.
Which part of the no-overdraft rule do you not understand ?
Is this divorce between the Federal Reserve and the Treasury so bitter for you to accept/see ?
If you come back with definitional issues with “Federal Government”, refer you to the Fed’s Z.1 which separates “Monetary Authority” from “Federal Government”.
Tom Hickey Reply:
July 21st, 2011 at 3:15 pm
@anon,
“Which part of the no-overdraft rule do you not understand ?
Is this divorce between the Federal Reserve and the Treasury so bitter for you to accept/see ?”
Not my argument. I am trying get terminology straight. Matt made a criticism of the use of “provision,” and I followed up on it. I have never seen “provision” used in the way you are claiming. But I am not widely read in this. I was hoping that someone who an expert in this field would clear it up. It is either standard usage or not. If it is, no problem. If not, then the possibility for ambiguity arises.
Ramanan Reply:
July 21st, 2011 at 3:50 pm
Tom Hickey,
I quoted for you two technical articles which talk of banks being well provisioned. You seem to associate the word “provision” only with the concept “loan loss provision”.
Its not terminology or jargon. Its a straightforward line in English.
“If not, then the possibility for ambiguity arises.”
Look whose talking of ambiguities!
Tom Hickey Reply:
July 21st, 2011 at 5:16 pm
@anon,
What does “well provisioned” means. To me it means liquidity provisioned for settlement and capital provisioned to meet capital requirements which are loss provisions. Both types of provisioning relate to the liability side.
anon Reply:
July 21st, 2011 at 5:23 pm
@Tom,
Sorry, Tom, where do you see “well provisioned”?
What’s the context?
anon Reply:
July 21st, 2011 at 5:34 pm
Tom,
I’ve said this multiple times now, although its not sinking in, but the fact that a particular word or phrase has a specific meaning in formal accounting terminology doesn’t preclude the use of the same word or phrase in a generic way, in a non-formal context, when such context is obvious. Lavoie is using the generic meaning of the word, as a verb, in a non-formal accounting context. As such, the use of the word is not asset-liability sensitive as per your concern. This is all perfectly reasonable, because the context is perfectly understandable. And it is also in contradistinction to the extreme non-flexibility of MMT in the restrictive use of its own select vocabulary, in such cases as “print money” and various other retentive obsessions about vocabulary.
Tom Hickey Reply:
July 21st, 2011 at 9:57 pm
@anon,
Then it is correct to say that since the Fed is the sole issuer of reserves in the US, it provisions (supplies/provides) Treasury and private banks with reserves for settlement purposes, or alternatively, makes reserves available to… ?
I generally say that the Fed makes reserves available to those with Fed accounts for settlement purposes, While Treasury issues currency through expenditure appropriated by Congress, which provisions the government with real resources, as well as collects taxes levied by Congress. Treasury provisions itself with reserves for settlement by issuing Treasury securities (reserves being a liquidity provision). OK?
WARREN MOSLER Reply:
July 22nd, 2011 at 9:45 am
see if you like the way it’s stated in ‘soft currency economics’?
Ramanan Reply:
July 21st, 2011 at 11:54 pm
“Then it is correct to say that since the Fed is the sole issuer of reserves in the US, it provisions (supplies/provides) Treasury and private banks with reserves for settlement purposes, or alternatively, makes reserves available to”
There’s not too much confusion of behavioral aspects over here.
Ramanan Reply:
July 21st, 2011 at 7:49 am
@Matt Franko,
Amazing where this discussion is headed!
More importantly as Jamie Galbraith once pointed out about economists “They change the topic”
Sorry, there is no error here.
Reply
anon Reply:
July 21st, 2011 at 2:54 pm
@Matt Franko,
Tom, please examine the set of simple dictionary definitions I recorded above.
Lavoie is using provision in the sense of supplying something – that being that Treasury is supplying funds to the TGA account that it needs to cover its outgoing obligations from that account.
This is a description of an action – e.g. issuing bonds to source the funds – it is not a description of an accounting entry with “provision” as a formal accounting adjective.
I for one have no problem with Lavoie electing for such an informal use of the word. I know the difference between a loan loss provision and the provision of funds through a funding action.
This requires flexibility in the use of the English language as per options available for use through standard dictionary menus offering variegated meanings of a particular word. You shouldn’t wrap yourself up in barb wire trying to prove that the use of a particular word is wrong simply because it doesn’t conform to one item out of a menu of standard meanings. MMT suffers from acute restrictive language syndrome in this regard. This is symptomatic in my view of a lack of deeper traction in relevant logic.
Forget the apparent asset orientation that seems to trouble you in this case; the point is that Lavoie is using the word in a generic action sense rather than a particular formal accounting sense. As such, there is no issue of asset or liability orientation in legitimate use.
Reply
Ramanan Reply:
July 21st, 2011 at 11:51 pm
“What does “well provisioned” means. To me it means liquidity provisioned for settlement and capital provisioned to meet capital requirements which are loss provisions. Both types of provisioning relate to the liability side.”
Tom,
Not sure of your accounting. Liquidity is about having liquid assets, not liquid liabilities.
Reply
anon Reply:
July 21st, 2011 at 11:56 pm
@Ramanan,
Right. There’s no such formal accounting item called a provision for liquidity.
But you are allowed to use the word as Lavoie uses it.
Still can’t believe we’re having such a discussion.
anon Reply:
July 22nd, 2011 at 12:06 am
@Tom/Ramanan,
Actually, I didn’t see Tom’s last.
Tom, I wouldn’t go overboard using provision in a parallel sense to how Lavoie used it. I’m just saying he didn’t commit a crime in doing so, since the context was evident, and there was no way he was mixing it up with the idea of a credit provision. Provision is a formal technical accounting term insofar as credit losses are concerned. It’s loose language insofar as liquidity is concerned. No doubt there’s better language to use in the case of liquidity, to avoid potential confusion, especially when you are talking about liquidity and credit together.
Tom Hickey Reply:
July 22nd, 2011 at 12:07 pm
@Ramanan,
Thanks for the clarification, Anon. That is what I was looking for.
Tom Hickey Reply:
July 22nd, 2011 at 12:41 pm
@Ramanan,
R. I am thinking of cash flow in business. Businesses that don’t make provisions for unexpected cash flow squeezes often do not survive. I don’t know whether this is the correct terminology but it is the way I have always thought about it from the cash flow perspective. Of course, a “liquidity provision” is liquid assets committed to a particular purpose on the other side.
July 21st, 2011 at 3:07 am
Peter D,
Let me give you some history which you won’t find in MMT blogs and Nick Rowe knows his history well because IMO he has a good knowledge of literature.
How the monetary system works was first researched by a committee called the Radcliffe Committee in the UK in the 60s. Nicholas Kaldor from Cambrdige was an active participant around it. In case you don’t know who Nicholas Kaldor is .. he was the one who brought Wynne Godley to Cambridge. Kaldor knew both sectoral balances and the monetary system well. He was heavily involved in debated with Milton Friedman and how the monetary system works. You can read about it in his 1985 book “The Scourge Of Monetarism”.
Kaldor understood well the endogenous nature of money and was first to call the money supply curve horizontal. He also knew trivial identities such as Public Debt is a mirror of the private sector wealth etc which you can read from his book.
His work was picked up with Marc Lavoie and Basil Moore and the catch phrase “loans make deposits” comes from Lavoie’s work from 1984.
Back to Kaldor … he figured it is not possible for the public sector to decide on the exact composition of the public debt and such things are dependent on the private sector’s portfolio preferences.
To the answer as to what the short term rates the Bank of England should aim and does aim .. his answer was that it is dependent on demand management, inflation and the balance of payments situation of the UK.
Now, during the 70s, Great Britain had terrible problems with the external sector (and unlike what MMTers tell you, they had a floating exchange rate for a long time). For Kaldor, it was clear that the external sector was a major constraint on fiscal policy. You may not agree with that, but the point being that how the monetary system works was clearly known to people in PKE.
The tricks such as merging central bank with the Treasury and merging the household and the business sector also into another sector also came from the same place.
Nick Rowe knows such stuff and has read the Radcliffe Committee report as well.
Its just that he doesn’t understand the huge significance of these things.
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Neil Wilson Reply:
July 21st, 2011 at 4:29 am
@Ramanan,
“(and unlike what MMTers tell you, they had a floating exchange rate for a long time”
But governments determined to defend it as though it was fixed – which is the bit you don’t tell us.
Floating exchange rates have to be allowed to float to get any buffering effect from them.
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Ramanan Reply:
July 21st, 2011 at 4:35 am
@Neil Wilson,
Takes me back to the Friedman versus Kaldor debates. Friedman argued that central bankers are incompetent in not controlling the money supply etc to which Kaldor replied saying that should be a part of his monetary theory as well!
“Floating exchange rates have to be allowed to float to get any buffering effect from them.”
Wishful thinking. Welcome to the real world.
Reply
luigi Reply:
July 21st, 2011 at 5:10 am
@Ramanan,
so, Ramanan, what’s the point? What’s wrong with MMT?
I’m interested, probably I don’t see, I miss something, so, what’s wrong?
Neil Wilson Reply:
July 21st, 2011 at 6:01 am
@Ramanan,
We’re still waiting for the evidence as to why floating exchange rates don’t work.
Put up or shut up I think.
Ramanan Reply:
July 21st, 2011 at 6:07 am
“Put up or shut up I think.”
!
Never mentioned floating exchange rates do not “work”. It gives the flexibility to the government on setting higher output!
Ramanan Reply:
July 21st, 2011 at 6:10 am
“so, Ramanan, what’s the point? What’s wrong with MMT?
I’m interested, probably I don’t see, I miss something, so, what’s wrong?”
Its not simply a question of wrong or right. Its how you present etc.
I had a chat with Randy Wray on NEP and asked him about auction failures ..I think Anon did, forgot .. anyways … his answer was that there cannot be an auction failure because primary dealers are forced to bid… thats like goofing up trying to cover another goof.
WARREN MOSLER Reply:
July 21st, 2011 at 8:53 am
there can be auction failures in theory, but doesn’t matter, they just have another one, as happens all the time in other nations.
anon Reply:
July 21st, 2011 at 6:42 am
@Ramanan,
Ramanan, I know what Wray is getting at, but I’d be interested in seeing what the formal evidence is for the degree to which they’re “forced to bid”
I suspect his statement is an exaggeration. If it weren’t, it would be front and center in MMT paradigm!
anon Reply:
July 21st, 2011 at 7:24 am
@Ramanan,
btw, Lavoie is a very good writer
Ramanan Reply:
July 21st, 2011 at 7:55 am
Anon,
Yeah and he describes the Fed reacting to the movement of funds in and out of the Treasury’s account well – like you once described.
I learned the trick of shifting government deposits back and forth from accounts at the central bank and commercial banks from his articles.
Tom Hickey Reply:
July 21st, 2011 at 10:30 am
@Ramanan,
Anon: “I’d be interested in seeing what the formal evidence is for the degree to which they’re “forced to bid””
As I understand it, PDs become PD’s with the understanding that they will be brokers and stand ready to take up slack. As brokers, they are the Treasury’s “overdraft facility” on one side and market makers on the other. If banks doesn’t want to do this anymore, they can always get out of the way.
anon Reply:
July 21st, 2011 at 2:59 pm
@Ramanan,
Tom, you’re right on general thrust.
I’m interested in degree.
I doubt an aggregate numerical commitment exists that ensures 100 per cent coverage of every auction.
Tom Hickey Reply:
July 21st, 2011 at 4:15 pm
@Ramanan,
“I doubt an aggregate numerical commitment exists that ensures 100 per cent coverage of every auction.”
I don’t think so either.
What could happen is that the Fed consults with the PD’s in any case of any problematic situation and works out a deal to take some on its books in a reasonable time if they feel like they are choking on it. Later it’s reversed when the bottleneck clears. That’s pure speculation though.
The PD’s act as a buffer, and the Fed has the ability to expand and contract the buffer as it chooses so that markets clear. That is how I imagine it anyway.
WARREN MOSLER Reply:
July 22nd, 2011 at 9:41 am
remember that the primary dealers, when skeptical, get short in front of auctions so they’ll have a bid.
the problem in greece was they couldn’t get short as there were no buyers, so the ecb intervened in the secondary market to provide a bid there for the primary dealers to work off of
Tom Hickey Reply:
July 22nd, 2011 at 12:56 pm
@Ramanan,
From a comment at billy blog
From Fed Primary Dealers Operating Policy (http://www.newyorkfed.org/markets/pridealers_policies.html):
“Primary dealers should participate similarly in support of Treasury auctions: the New York Fed will expect a primary dealer to bid in every auction, for, at a minimum, an amount of securities representing its pro rata share, based on the number of primary dealers at the time of the auction, of the offered amount” (link)
Ramanan Reply:
July 21st, 2011 at 9:19 am
“there can be auction failures in theory, but doesn’t matter, they just have another one, as happens all the time in other nations.”
That is avoiding the issue.
However the standard meme “there will be excess reserves” doesn’t work.
True auctions keep failing – perhaps due to the Treasury not being able to correctly forecast demand in some particular maturity.
“Doesn’t matter” can be used for Euro Zone governments as well. Even Germany had a failed auction recently.
One is talking of catastrophic auction failures.
That statement isn’t supposed to be taken as me predicting one. Neither am I saying US=Greece.
On the other hand, since the Treasury does not want to get into the situation, it does cash management. If it “didn’t matter”, the US Treasury would not be doing cash management.
Reply
Neil Wilson Reply:
July 21st, 2011 at 9:33 am
@Ramanan,
What issue is being avoided. I’ve lost the thread.
The Treasury is operating in the context of current law which requires it to do things it shouldn’t need to do to operate a fiat economy.
What the Treasury needs is an overdraft facility – or the whole system simply sweeping away and replacing with simple mark up and mark down commands to the private banks.
So we have this whole charade which is utterly pointless and doesn’t advance public purpose one little bit.
ESM Reply:
July 21st, 2011 at 11:17 am
@Ramanan,
I think it’s important to understand the point that Ramanan and Anon are making because it gets to the heart of the problem as I see it with the way Warren and others have been presenting MMT to hoi polloi.
At every opportunity, Warren argues that the US is different from Greece, or any country with a currency board or a gold standard, because the US government has not relinquished sovereignty over its currency. But in fact, it has and it hasn’t, to the same extent as Greece or any of those other countries. The US government has tied its hands by creating a quasi-independent central bank which alone has the power to create currency or reserves ex nihilo.
Yes, the US government can always untie its hands. Congress and the President can force the Fed to do what they want it to do, or they can even abolish it completely. But the exact same thing can be said about every country, regardless of the monetary system it has.
A country operating under a gold standard can change the convertibility ratio any time it wants, or break it altogether (as the US has done more than once).
Greece can default on and restructure its debt any time it wants and either continue to use the Euro or revive the Drachma, or both. Countries have full sovereignty at all times unless and until they are occupied militarily.
So these arguments that the US isn’t Greece because Congress can always rewrite the rules or force the Fed to do the President’s bidding aren’t going to satisfy anybody. Greece’s parliament and president can do the same.
So the real question is “what’s different about our system (or Britain’s or Japan’s)?”
I think the answer is that the Treasury can print quasi-money, i.e. Treasuries, in any quantity it wants, and that quasi-money will allows retain its value of approximately par in terms of the dollar. Furthermore, it can do so without breaking any “rules.”
Greece can’t really do the same. If they print too many Greek govt bonds (as they have already done), then the value goes down versus the currency. This creates an unsustainable situation in which the government is forced to “break the rules,” which in Greek’s case means to break the convertability of the Greek govt bond and the Euro. Of course Greece’s government has the power to do this any time in wants, but for understandable reasons breaking rules makes people feel very unhappy, so the government is loath to do it.
In any case, one small thing MMT tells us is that the US government never has to break any rules to run deficits. It should feel unconstrained. The only constraint is inflation. Yeah, sure, in theory people could stupidly refuse to buy Treasuries and an auction could fail. But in practice that’s extremely unlikely.
The bigger thing MMT tells us is that the government has to adjust fiscal policy to account for changes in savings desires. And the best way to tell what adjustments are needed is to count the number of people in the unemployment line.
WARREN MOSLER Reply:
July 21st, 2011 at 1:56 pm
first, i don’t recall using the word sovereignty in that context, and have repeatedly tried to discourage others for using it
second, i use the analogy of lacing your shoes together and saying you can’t run, but i like the hands tied thing, too!
Peter D Reply:
July 21st, 2011 at 11:41 am
@ESM,
Excellent comment, ESM.!
Additional point worth making: the quasi money called “Tsys” pays interest and the cost of this interest os what scares people into thinking that unless the govt cuts its deficit, the whole thing becomes unsustainable (the so called IGBC)
Which our friend Traders Crucible has been debunking for several months right now from one direction:
http://traderscrucible.com/2011/05/03/the-concise-way-to-destroy-the-igbc-and-why-to-destroy-it
and of course also there is the classic Scott’s paper from the other:
http://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf
Peter D Reply:
July 21st, 2011 at 11:49 am
@ESM,
That said, there is still a difference between the self-imposed constraint in the Eurozone and in the, say, US. The Eurozone constraint are more binding than the “no overdraft” constraint. And even for the quasi money called the Treasuries, there is also a self-imposed debt-limit constraint, which is yet even less binding than the “no overdraft” constraint.
Tom Hickey Reply:
July 21st, 2011 at 12:45 pm
@Ramanan,
“And even for the quasi money called the Treasuries, there is also a self-imposed debt-limit constraint, which is yet even less binding than the “no overdraft” constraint.”
Refusing to raise the debt ceiling and the proposed balanced budget amendment are attempts to impose discipline on a fiat system, next best thing, the “sound money” folks think, until they can engineer a resturn to a gold standard. This battle is being fought before our very eyes.
WARREN MOSLER Reply:
July 21st, 2011 at 1:47 pm
difference is, tsy can go to congress, explain the issue, and ask them to wave the no overdraft imposition if they want tsy to spend as ordered by that same congress. so ultimately if congress wants to spend it gets spent
not so with greece. the tsy can go to the legislature if is out of euro, but even if the legislature says spend, it isn’t going to happen if there are no euro in the account.
it’s the difference between a self imposed constraint/discipline and an external constraint
but you know that
anon Reply:
July 21st, 2011 at 3:10 pm
@Ramanan,
ESM, you’re part way there in my view – a good part.
A few things to consider:
a) The ECB is just as capable operationally of funding Greece selectively with reserves as is the Fed capable of funding Treasury. There is no “operational constraint” in the ECB electing to do so.
b) There’s nothing in theory preventing the US from running into the Greek problem if it continues to force its Treasury to issue bonds.
c) Currency depreciation is a relative advantage for the US, but this is a difference of degree, not of kind. The US can focus dollar depreciation for its US Treasury deficit funding effect; the ECB can use Euro depreciation in the same way on behalf of Greece, but the effect is diffused to other Euro users as well. Again, a question of difference in degree rather than kind.
WARREN MOSLER Reply:
July 22nd, 2011 at 9:38 am
self imposed constraints include
they require the ecb to have ‘equity capital’ ‘backing’ it’s lending
the tool for currency depreciation is buying fx which the union is categorically against.
ESM Reply:
July 21st, 2011 at 4:30 pm
@Ramanan,
@Anon:
“b) There’s nothing in theory preventing the US from running into the Greek problem if it continues to force its Treasury to issue bonds.”
I think there is a big difference here between Greece and the US. Every dollar the US government spends has to either find a home in a US government obligation or earn whatever the Fed is paying on reserves (or zero). This is not true about every Euro the Greek government spends. Those Euros can find homes in other Euro government bonds or at the ECB. The additional options (and the relatively small size of Greece within the Euro system) introduces orders of magnitude more auction fail risk.
The Treasury only has to offer a few basis points more interest in order for every bond arbitrageur in the world to grab the free carry. Greece doesn’t have it so easy.
WARREN MOSLER Reply:
July 22nd, 2011 at 9:41 am
true particularly for 3 mo bills
anon Reply:
July 21st, 2011 at 5:09 pm
@ESM,
“This is not true about every Euro the Greek government spends. Those Euros can find homes in other Euro government bonds or at the ECB.”
Dunno. Isn’t the aggregate fiscal deficit for the EZ the sum of the member fiscal deficits? Don’t the pieces of the puzzle add up to the total? Why isn’t the funding for a missing Greek piece forced in the same way as the funding for a missing US dollar piece as you describe?
Just asking.
Also, what do you think, Ramanan?
ESM Reply:
July 21st, 2011 at 5:43 pm
@Ramanan,
There’s always some friction and some money that ends up under the mattress. Some German guy might even prefer the mattress to a Greek government bond. And governments probably do hold Euros in their accounts at the ECB. The French are actually well-known for arb’ing their own yield curve, so it’s possible that they will issue bonds for Euros and not spend them immediately.
When you have a big Eurozone with Greece representing only 5% of government issuance (totally guessing here), the potential for cashflow mismatches is very high. Nowhere near every Euro spent by Greece will be recycled into Greek bonds.
anon Reply:
July 21st, 2011 at 5:52 pm
But if the aggregate EZ fiscal deficit generates the aggregate EZ net Euro financial asset position, it has to be so.
(Proof by contradiction)
luigi Reply:
July 21st, 2011 at 7:34 pm
@ESM,
can you explain your point? I don’t understand,
thanks a lot
ESM Reply:
July 21st, 2011 at 10:02 pm
@Ramanan,
@Luigi:
Perhaps this old post/link will help.
I’m saying that such a mechanism does not work so well for Greece in the Eurozone. If a French bank happens to have an extra Euro of reserves sitting around earning zero, it won’t necessarily accept the Greek government’s offer to trade it for a Greek govt bond. If it had an extra Dollar of reserves (in its US subsidiary), it would have no problem investing it in a Treasury bill earning a positive interest rate. Why wouldn’t it? Both the Dollar and the Treasury bill are IOUs of the US government. The same relationship does not hold in the Eurozone. A Euro is not only an obligation of the Greek government (thankfully! — for those of us who own Euros).
Peter D Reply:
July 21st, 2011 at 9:10 am
@Ramanan,
Ramanan, great, this is very interesting and educational. But I think you might be missing my point. I wasn’t claiming MMT is anything new. In fact, I claimed the opposite! What I do claim is that if it weren’t for MMT (and its sometimes “ambiguous” statements) all this knowledge would be confined to a clique of academics and guys like yourself. The hoi polloi like myself would still be at a total loss, worrying that the govt is running out of money, that our kids will be paying for our profligate ways etc.
“Nick Rowe knows such stuff and has read the Radcliffe Committee report as well.
Its just that he doesn’t understand the huge significance of these things.”
Exactly! I think hear you’re saying what I’m trying to say.
Reply
Tom Hickey Reply:
July 21st, 2011 at 10:37 am
@Peter D,
This is the unique contribution of MMT, I believe. It not only understands these matters but puts them together into a macro theory that shows how to adjust fiscal policy to achieve full employment with price stability without relying on monetary policy. I don’t see anyone else advancing that case.
MMT replaces the discipline of gold, interest rates, or coconuts with balancing full employment with price stability fiscally.
Reply
July 21st, 2011 at 6:20 pm
My God, is this screwed up:
http://ineteconomics.org/blog/money-view/deficits-and-money
give me strength
Reply
Matt Franko Reply:
July 21st, 2011 at 11:31 pm
@anon,
His references to an “overdraft facility”?
“But what if the Treasury does not have a positive balance to begin with? No difference really. In this case, the Fed honoring the Treasury’s check just means granting an overdraft, which means that the Fed’s balance sheet expands on both sides by the same amount, additional reserves on the liability side and additional assets (the overdraft) on the asset side.”
Sounds good to me….. Does this mean Soros’s group is now on board? I take back everything I’ve said! This would be a big hook-up…. Resp,
Reply
anon Reply:
July 21st, 2011 at 11:54 pm
@Matt Franko,
There is no overdraft facility for the TGA. What’s he talking about?
Reply
Matt Franko Reply:
July 22nd, 2011 at 7:05 am
@anon, Right for the TGA that is what has always been discussed here (no overdraft).
But yet the Fed does allow overdrafts by banks:
http://www.federalreserve.gov/paymentsystems/psr_policy.htm#daylightdef
Maybe this is what Mehrling is writing about, but may know/not know that this facility does/does not apply to the TGA?
Ironically banks get better terms if the bank using the overdraft facility pledges Treasury Securities as collateral for the overdraft.
So our illustrious so-called “independent” Fed provides a collateralized (or uncollateralized!) overdraft facility for its member banks, but wont provide an overdraft facility for the entity that guarantees the securities that are used for said collateral? Yeah that sounds fair and makes sense… Resp
WARREN MOSLER Reply:
July 22nd, 2011 at 9:51 am
good point!
anon Reply:
July 22nd, 2011 at 8:28 am
@matt,
right – overdrafts for banks; no overdrafts for Treasury
he’s completely lost on the actual facts of the monetary system
And you’re right, treasury is more restricted in its ACTUAL relationship with the CB than the banks – that’s what makes Lavoie’s referenced MMT “obscurity” and “ambiguity” even more true and ironic
Tom Hickey Reply:
July 22nd, 2011 at 12:35 pm
@anon,
The Treasury’s relationship with the Fed is more restrictive than banks for a specific reason — to give the bond market control over yields in order to impose market discipline on government expenditure by determining rates along the curve, coupled with the supposed IGBC, that caps the deficit. These restrictions are by design to replace the external discipline of convertibility/fixed rate. From this vantage, the regulatory disparity between Treasury and banks is not surprising at all.
Much of the present kerfuffle is about who is in charge, markets or government. The so-called bond vigilantes like Gross are upset because they see the Fed doing an endrun around this with QE and especially if QE3 would target price instead of quantity, effectively giving the Fed control over the yield curve as well as the FFR.
The real issue is, as Bill MItchell wrote, Who is in charge?
It seems to me that we need to confront this head on. The opposition is quite clear on the difference between government being in control and markets being in control and is seeking to isolate government as much as possible — ending the Fed, balanced budget amendment, 2/3 majority to raise taxes, etc. This is not the craziness it may look like from the MMT vantage. It is carefully constructed in order to preclude anything like MMT policy proposals from being implemented by erecting a legislative firewall.
It’s not just a matter of people understanding MMT. They have to understand that this is an economic, political, and social choice about what kind of a country they want to live in and what the consequences of the different approaches are likely to be.
Matt Franko Reply:
July 22nd, 2011 at 4:13 pm
@anon, @anon, I see what you’re saying wrt Treasury is “restricted” (no overdraft) but by what/who? Looks like the Fed is the entity doing the “restricting” because I cant find this restriction in Law…. maybe not so much Lavoie (dont want to go there), but the paradigm seems to me to be that this is “written in stone” somewhere, when the reality is that it is just a capricious policy that the Fed has promulgated on their own by establishing an overdraft for their members and not including the TGA in the relevant FRB Policy Statement ( big deal?).
What is then preventing the Treasury Secretary from just going to the Fed and directing the Fed to likewise provide an overdraft for the TGA (besides lack of testicles)?
So I can see WMs position (if this is what he has said) that: “‘the Treasury does not need to borrow in order to deficit-spend’ or ‘government spends simply by crediting a private sector bank account at the central bank’ “. Those statements are not ‘ambiguous’, the Treasury can certainly do those things (within existing law) if it wants to and WM is not trying to obfuscate anything imo. BUT…. you have to look at it in the paradigm of ‘what is possible/legal’…. or in terms of an environment that is cooperative, with people in charge who actually are well informed on the reality of what is happening.
Like this: If Warren was Treasury Secretary, he could get beowulf to re-edit that FRB Policy Statement in my link above, (which I believe is the operative document that promulgates the ‘no overdraft’ policy for the TGA not by forbidding it, but by not specifically allowing for it) in about an hour (for a reasonable fee I’m sure ;) to add “and TGA” wherever there appears the word “institution”, then he could walk it over to the Fed and get them to sign off on it and its a done deal… Fed would still maintain it’s precious “independence” on Monetary Policy (ie set the policy interest rate) no worries… Treasury would still auction short term securities (some now ex-post) and TGA would have overdraft……and no Laws need be changed…this may all be much ado… please consider that the orthodoxy gives too much heed to an obscure bureaucratic FRB Policy Statement that could just be changed in an hour. Resp,
anon Reply:
July 22nd, 2011 at 6:27 pm
@Tom,
Tom,
The Fed is more restrictive on Treasury because it wants to force Treasury to use bonds to fund fiscal deficits. It’s about bonds per se; not the yield curve for bonds.
The Fed wants to preclude money financing of fiscal deficits. Right or wrong, that’s what you MMT’ers have to deal with.
The Fed is a central bank and is in the business of LLR for commercial banks. It is not in the business of LLR for Treasury.
“This is not the craziness it may look like from the MMT vantage. It is carefully constructed in order to preclude anything like MMT policy proposals from being implemented by erecting a legislative firewall.”
That’s basically right, and yes, you do have to deal with it head on.
The way you do that is to tackle the substantive issues, which include the debate about money and inflation.
The substantive issue is not stuff like “spends by crediting bank accounts”.
anon Reply:
July 22nd, 2011 at 6:33 pm
@Matt,
Matt,
The Fed is the central bank and it is restricting its “customer” Treasury to no overdraft.
That’s more restrictive than the typical commercial bank relationship with a corporate customer – hence the irony.
I doubt very much the Treasury Secretary has the power you suggest.
But Congress does.
luigi Reply:
July 22nd, 2011 at 6:40 pm
@Matt Franko,
good point. If I can, I add another poin about my country. A no overdraft policy is also in this case an ideological choice. I mean, divorce between BC and Treasury in my country is dated 1981, and the main reason was always something about inflation, bad government and bullshit like that. But it’s an ideological view of monetary system that both Treasury and BC have. No hierarchy, collaboration. In my country there was Andreatta at Treasury and Ciampi at Bankitalia, both are neoliberal, both are responsible for Euro propaganda before 2002 and unfortunately only one of them is dead.
So, Lavoie miss the point and talks about an obscure nature that isn’t. Or is less relevant than he thinks.
anon Reply:
July 22nd, 2011 at 6:43 pm
@Tom/Matt,
As a variation on that, while we know the platinum coin will go nowhere practically speaking, I would expect that Congress would contest it if Treasury attempted it. That seems like a fuzzy legal area though.
BTW, has anybody observed that the platinum coin stage one would result in permanent QE – because it leaves the Fed with no marketable assets to swap for reserves?
Ramanan Reply:
July 22nd, 2011 at 7:19 pm
@anon,
I haven’t checked what the US Treasury has been doing over the past several months, I would still imagine it hasn’t run out of options such as one given here
GAO – Debt Ceiling – Analysis Of Actions Taken During The 2003 Debt Issuance Suspension Period
http://www.gao.gov/new.items/d04526.pdf
&
GAO – Debt Limit – Delays Create Debt Management Challenges And Increase Uncertainty In The Treasury Market
http://www.gao.gov/new.items/d11203.pdf
Has the US Treasury run out of ALL these options ??.
Basically, these options are selling assets (including Treasury securities) in government accounts and not paying these funds with the whole thing done as a “Gentleman’s Agreement”.
IMO, Tim Geithner has just said that the “extraordinary measures” he is presently undertaking will be used up by Aug 2. However it doesn’t mean all extraordinary measures have been used up.
Ramanan Reply:
July 23rd, 2011 at 4:08 pm
“The repo collateral is probably ideally the Treasury’s OWN securites! This whole thing is a farce from top to bottom.”
The repo is about the Treasury lending funds not borrowing.
I can choose to lend funds against securities issued by me.
No farce there.
Ramanan Reply:
July 24th, 2011 at 12:14 pm
“Then that means that taxes add to demand leakage just like domestic private and external saving, which means that for the sectoral balance equation to balance either economic potential is restricted (higher unemployment) or private borrowing is making up the difference. The first is politically unsustainable over time and the second is financially unsustainable.’
That is the “shift”.
I understand your point that the private sector indebtedness cannot continue forever etc… but till this point the funds for paying taxes and buying g-secs hasn’t come from the (Australian) government.
WARREN MOSLER Reply:
July 24th, 2011 at 11:33 pm
private sector debt has to be supported by income
Ramanan Reply:
July 22nd, 2011 at 5:46 pm
@Matt Franko,
“The Federal Reserve is prohibited by law from adding to its net position by direct purchases of securities from the Treasury—that is, the Federal Reserve has no authority for direct lending to the Treasury. As a consequence, at most the Desk’s acquisition at Treasury auctions can equal maturing holdings.”
- http://research.stlouisfed.org/aggreg/meeks.pdf, Understanding Open Market Operations, Michael Akhtar.
http://www.gao.gov/new.items/d09118.pdf
“As discussed later in this report, Treasury’s cash management challenges are also complicated by the fact that Treasury needs to hold precautionary cash balances to avoid an overdraft because the Federal Reserve is not authorized to lend directly to Treasury”
Reply
Matt Franko Reply:
July 22nd, 2011 at 9:32 pm
@Ramanan,
Reports produced at the St Louis Fed and GAO reports do not have the force of Law in the US. I have been trying to find the “no overdraft” in Law with no success, the only thing I can come up with is that the FRB Policy on ‘overdraft facilities’ does not include the entity (US Treasury) that ironically guarantees the whole system… whaaaaat?
Section of United States Code citation please? Resp,
PS: less than 300 comments to go here to topple “Marshall’s Longest” ;)
Matt Franko Reply:
July 22nd, 2011 at 9:54 pm
@Ramanan,
Ramanan & Anon, this is the Section 15 of the Federal Reserve Act (12 USC 391):
Section 15. Government Deposits
1. Federal Reserve Banks as Depositaries and Fiscal Agents of United States
The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding national-bank notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.
So there is nothing specifically “prohibiting” an “overdraft” for the Treasury, just as there is nothing in the USC preventing (or authorizing) an overdraft for member institutions at the Fed. The Fed has some freedom in this area looks like, or “independence”.
It looks like this “no overdraft” is all Fed directed by FRB Policy. “Who is in charge?”
Anon, at the risk of starting to “mince words” again, the word “banker” does not appear in the Law the USC uses the words “agent” and “depository”. Both words read like the Fed is subordinate to the Treasury (as should be).. Resp,
anon Reply:
July 23rd, 2011 at 7:15 am
@Matt/Ramanan,
C’mon Matt.
It says:
“disbursements may be made by checks drawn against such deposits”
It DOESN’T say:
“disbursements may be made by checks drawn against such deposits – except when there aren’t any such deposits, in which case disbursements may be made by checks not drawn against such deposits”
C’mon.
anon Reply:
July 23rd, 2011 at 7:17 am
@Matt/Ramanan,
And the entire debt ceiling fiasco is evidence that in actual fact borrowing precedes spending.
WARREN MOSLER Reply:
July 23rd, 2011 at 9:39 am
yes, that’s the current institutional reality- self imposed constraint
man to jewish mother: please, help me, i haven’t eaten in a week
Jewish mother: force yourself
Neil Wilson Reply:
July 23rd, 2011 at 7:39 am
@Anon,
No it isn’t – only in the mind of those who wish to believe that sort of thing.
Borrowing and spending always operate in an unbroken loop once the system is started, not in a linear fashion.
Therefore it is perfectly valid to view that loop from any starting point you fancy, and each of those vantage points give you a different view of the process.
Sticking rigidly to one starting point just demonstrates a lack of vision and understanding. A 2D picture in a 3D world.
MamMoTh Reply:
July 23rd, 2011 at 8:33 am
Neil: Borrowing and spending always operate in an unbroken loop once the system is started.
That’s right, but why then do so many MMTers insist on the fact that spending must precede taxation? Clearly, that must be true to bootstrap the loop, but it is not necessary anymore once there is enough money in the system.
WARREN MOSLER Reply:
July 23rd, 2011 at 9:41 am
if you look at how the accounts clear at the fed, starting from 0 reserves, there has to be a reserve add before there can be a reserve drain.
anon Reply:
July 23rd, 2011 at 8:35 am
@Neil,
In that case, you must also agree that spending doesn’t precede borrowing?
Ramanan Reply:
July 23rd, 2011 at 8:54 am
“Reports produced at the St Louis Fed and GAO reports do not have the force of Law in the US”
Matt, Michael Akthar, the St Louis Fed is quoting a law without giving exact reference to it. He didn’t make or make up the law.
Here’s the neoclassical economics in brief. There is an amount of money M in their model. Government borrowing takes away the supply from M and since governments are viewed by them as inefficient this is bad. The government can “print money” and this would increase M and lead to higher inflation permanently. Hence world over, governments are forbidden from taking overdrafts at the central bank.
To be clear, that is my take on neoclassical theory not my view at any rate.
Now, I understand that the above way of looking at it is nonsensical, but it doesn’t mean you start criticizing this by appealing to an operational reality description which clearly looks like governments spending as if they have an open line of credit, then you won’t be able to get the message across.
Imagine this, you present a bill in the Parliament to remove the overdraft rule in which the argument you give is that “governments are not revenue constrained, governments spend first tax later, the government just credits bank accounts”. You will get a reply, “Why you do then want to remove the no-overdraft rule” ?
More generally, neoclassicals who have moved to become New Keynesians still view fiscal policy as backward and these things have been put in place (divorcing the central bank, debt ceiling etc.) to achieve fiscal restraint.
Its true that the government borrowing and subsequent spending creates financial assets for the other sectors but the same is true for the corporate sector. If the corporate sector deficit spends, the household sector accumulates financial assets. There you won’t argue “spending comes first”.
Neil Wilson Reply:
July 23rd, 2011 at 9:52 am
@Mammoth,
Bill Mitchell uses the line:
‘Government spending capacity is independent of borrowing and the latter best thought of as coming after spending.’
which I think sums it up.
It all occurs concurrently in messy daily life, but the counter-intuitive mental model of borrowing coming after spending shows you where the extra policy space is hiding.
And the currency bootstrap shows the ‘borrowing after spending’ view is unarguably a valid one.
Remember that MMT is a modelling abstraction. Abstractions hide unnecessary complexity while revealing the important essences of a structure so that it will operate on the pathetically limited wetware inside a human skull.
Economics seems to me to be mostly endless arguments about causality direction and this is no different.
Matt Franko Reply:
July 23rd, 2011 at 12:55 pm
@Ramanan,
“disbursements may be made by checks drawn against such deposits”
Also doesnt say “may only”, “may solely”, etc. There is no restrictive languange here, only permissive language related to the FRS, not the Treasury. iow the USC allows the FRS (the agent of the Treasury) to make disbursements on behalf of the Treasury. The FEDERAL RESERVE Act has to do with what the FRS CAN do, not what the US Treasury CANT do.
Ram/Anon, I am trying to expose what I believe is probably a dogma wrt the Treasury being “prohibited” from working with the Fed and employing a Treasury overdraft facility in order to run the payments system and monetary policy if they so choose… there is no law that I can find that prohibits this policy choice. Here is some more on this in Treasury policy:
http://www.fms.treas.gov/ttlactions/gloss.html#federal reserve account balance
“Federal Reserve Account Balance:
This term refers to the balance in the U.S. Treasury’s General Account representing available funds held at the close of business. Currently, this balance is targeted between $5 and $7 billion daily.”
OK, why not 3B?, why not 10B?, why not 0 with the ability to take overdrafts if needed? Sounds like a capricious policy, no foundation in law.
“Notice of Transfers:
This Notice announces Treasury’s intention to invest or withdraw funds from the Tax and Loan Note Accounts in order to meet its target balance in the Federal Reserve Account.”
Here it clearly identifies that it is TREASURY’S target balance. The maintenance of this arbitrary balance is here plainly identified as a Treasury Policy, not a legal requirement, if it were a legal req. it would probably say so here (“in order to meet its statutory requirement”). Balances can either be positive or negative or zero.
“Repo Investment:
This term refers to the placement of excess operating funds through Repo (Repurchase Agreement) transactions for an overnight term. Repo investments typically occur daily. Settlement is delivery-versus-payment. The Repo must be fully collateralized using specified acceptable collateral determined by the Treasury.”
The repo collateral is probably ideally the Treasury’s OWN securites! This whole thing is a farce from top to bottom.
So it is looking more and more like the pre-”provisioning” of the FRA is simply a Treasury policy choice. Resp,
Tom Hickey Reply:
July 23rd, 2011 at 1:21 pm
@Ramanan,
“Matt, Michael Akthar, the St Louis Fed is quoting a law without giving exact reference to it. He didn’t make or make up the law.”
Ramanan, What Matt is saying is true. There are literally thousands of references to the “law” but no one has yet found a citation of it and reported here, to the best of my knowledge.
Do you have the legal citation or are you just repeating a reference to it? The former would be helpful. The latter, not.
Tom Hickey Reply:
July 23rd, 2011 at 1:51 pm
@Ramanan,
We argued this ad infinitum in Marshall’s latest. MMT never claimed that temporally spending precedes borrowing. The MMT claim is that the macro level the NFA government injects are used for two purposes, pay taxes and save in tsys. The correct claim might be phrased, What the government injects through its expenditure is used to pay taxes and the residual increases non-government NFA, because this is the only place the NFA can come from.
People that don’t understand this think that government is getting the financial assets used to pay taxes “to fund government” and “from borrowing to finance government” by crowding out” financial assets created by the private sector. MMT holds that MMT extract nothing from the private sector that it has not already put into it as NFA, and the private sector cannot created NFA because all credit extension does is create a corresponding debt (net zero).
What is so difficult to understand about this. The argument about temporality misses the point that the “before” in “spending comes before taxing or borrowing” denotes logical priority and not temporal priority. Confusing them is a category error. “Logical priority” means that the antecedent conditions the possibility of the consequent. Creation of NFA is logically prior to use of NFA. See “Soft Currency Economics” and “A General Analytical Framework for the Analysis of Currencies and Other Commodities” in Mandatory Readings.
Temporal priority is not a necessity for logical priority in logic. However, in the case of state money there is obvious temporal priority at inception, since there is no state money (currency) until the state creates it, and if the state accepts only state money for taxes, it must create the currency and introduce it beforehand. The currency created that is not taxed away goes into tys securities if there is a debt offset requirement. If there is no debt offset requirement or no tsy issuance, the residual after taxes remains in the form of reserves issued by the cb.
anon Reply:
July 23rd, 2011 at 2:23 pm
@Tom,
How do you interpret the position of a government running both a budget surplus and a cumulative budget surplus?
No prior NFA there.
(please don’t protest that this never happens – i’d like to know your logic)
Ramanan Reply:
July 23rd, 2011 at 3:55 pm
“MMT never claimed that temporally spending precedes borrowing.”
Well, over and over again don’t we see the line … spending comes before…
“…pay taxes and save in tsys. The correct claim might be phrased, What the government injects through its expenditure is used to pay taxes and the residual increases non-government NFA, because this is the only place the NFA can come from.”
Australia has run budget surpluses many times. People still pay taxes. The Australian domestic private sector is highly indebted and has a positive net financial liability.
“People that don’t understand this think that government is getting the financial assets used to pay taxes “to fund government” and “from borrowing to finance government” by crowding out” financial assets created by the private sector.”
Crowding out argument is silly. Taxes do exactly what they are supposed to do … fund expenditures. The US Treasury has no overdraft facilities at the Fed and borrows funds from the private sector. Even if the Treasury were to have unlimited overdraft, it still needs to tax .. and that includes foreigners and foreign resident institutions who may not increase aggregate demand.
“What is so difficult to understand about this. ”
What is so difficult to understand that taxes fund government expenditures!
“the private sector cannot created NFA because all credit extension does is create a corresponding debt ”
The domestic private sector can create financial assets by exporting more than importing.
“for taxes, it must create the currency and introduce it beforehand”
if you follow the historic path of money, you have to prove that the institution called government appeared earlier than the point where people were already using a credit system.
“If there is no debt offset requirement or no tsy issuance, the residual after taxes remains in the form of reserves issued by the cb.”
Hypothetical world.
I understand what you are trying to say over and over again but you will keep describing the reality as if the government has an open line of credit at the central bank.
Ramanan Reply:
July 23rd, 2011 at 4:00 pm
“OK, why not 3B?, why not 10B?, why not 0 with the ability to take overdrafts if needed? Sounds like a capricious policy, no foundation in law.”
Thats the experience of the US Treasury Cash Management. Its like I keep x% of my income in transaction deposits at the bank – in case of unforeseen expenditures.
This inspite of having a non-zero credit card limit!
Ramanan Reply:
July 23rd, 2011 at 4:05 pm
“Do you have the legal citation or are you just repeating a reference to it? The former would be helpful. The latter, not.”
I believe Scott believes that there is no overdraft.
You are missing the point.
There are nations where there no explicit laws and still central bank lending is prohibited or forbidden. Thats operational reality for you!
However, that doesn’t mean you start describing it is having an open unlimited line of credit.
The US Treasury had a “draw authority” was like an the Fed lending the Treasury which expired in early 80s.
Ramanan Reply:
July 23rd, 2011 at 4:09 pm
Sorry posted this at the wrong place… posting it again.
“The repo collateral is probably ideally the Treasury’s OWN securites! This whole thing is a farce from top to bottom.”
The repo is about the Treasury lending funds not borrowing.
I can choose to lend funds against securities issued by me.
No farce there.
Ramanan Reply:
July 23rd, 2011 at 4:15 pm
BTW Tom,
You should read about the 1951 Fed-Treasury accord when they agreed that the Fed will not provide credit to the Treasury.
There was a draw authority for a brief period but that ended as well.
Tom Hickey Reply:
July 23rd, 2011 at 6:04 pm
@Ramanan,
Anon: “How do you interpret the position of a government running both a budget surplus and a cumulative budget surplus?”
I think MMT is pretty clear on that — draw down savings, sell assets, and borrow. MMT never said that a person cannot borrow from a bank to pay taxes. You can now even pay your taxes with a credit or debit care (link). Bank credit is issued in the same unit of account as currency. But settlement is only in reserves and cash and banks can create neither.
What MMT says is that at the macro level financing taxation with credit money not sustainable without resulting in economic contraction or unsustainable private debt.
WARREN MOSLER Reply:
July 24th, 2011 at 11:05 am
it could be depending on how the fed values collateral. if you could borrow against acorns the fed valued at 1,000,000 each, etc…
anon Reply:
July 23rd, 2011 at 6:35 pm
nice shift
no NFA there
Tom Hickey Reply:
July 23rd, 2011 at 6:36 pm
@Ramanan,
R: “I understand what you are trying to say over and over again but you will keep describing the reality as if the government has an open line of credit at the central bank.”
You see it from your point of view and MMT sees it differently. You seem to think that the political restrictions actually change the operational reality that is the general case, so that now there is new genreal case.
MMT disagrees. MMT says the operational reality remains the same, only a special case within the general is created due to voluntary political restraints that can be removed at any time.
Tom Hickey Reply:
July 23rd, 2011 at 6:39 pm
@Ramanan,
Anon: “no NFA there”
Where do the reserves for settlement come from?
Tom Hickey Reply:
July 23rd, 2011 at 6:44 pm
@Ramanan,
“I believe Scott believes that there is no overdraft.”
I don’t care who “says” there is no overdraft. As I said, I have search the net for this in detail and never found a citation of law or regulation.
Even if there is no “law” there has to be some rule prohibiting this unless is its unstated conventional practice (unlikely).
I am not arguing that this is not an overdraft prohibition. I am just asking someone to cite a reference to it in US federal law or regulation. So far it is hearsay for me.
WARREN MOSLER Reply:
July 24th, 2011 at 11:08 am
current policy is that overdrafts at the fed have to be covered with govt collateral. in 08 the fed had some ‘emergency’ programs to accept additional collateral.
anon Reply:
July 23rd, 2011 at 6:46 pm
“MMT holds that MMT extract nothing from the private sector that it has not already put into it as NFA, and the private sector cannot created NFA because all credit extension does is create a corresponding debt (net zero).”
Tom Hickey
anon Reply:
July 23rd, 2011 at 6:49 pm
reserves aren’t NFA, given a cumulative surplus
Tom Hickey Reply:
July 23rd, 2011 at 6:49 pm
@Ramanan,
If the no overdraft rule is due to a Fed-Treasury accord — a regulation and not a law, then it would seem that the Executive can change it without the approval of Congress.
Ramanan Reply:
July 23rd, 2011 at 6:49 pm
Tom Hickey: “What MMT says is that at the macro level financing taxation with credit money not sustainable without resulting in economic contraction or unsustainable private debt.”
Tom Hickey: “The MMT claim is that the macro level the NFA government injects are used for two purposes, pay taxes and save in tsys.”
See the shift ?
anon Reply:
July 23rd, 2011 at 6:52 pm
@Ramanan,
“MMT says the operational reality remains the same, only a special case within the general is created due to voluntary political restraints that can be removed at any time.”
Ramanan, never assume reality is what things actually are -one may have to eliminate what things are in order to achieve reality
Ramanan Reply:
July 23rd, 2011 at 6:53 pm
“I don’t care who “says” there is no overdraft. As I said, I have search the net for this in detail and never found a citation of law or regulation.”
http://www.richmondfed.org/publications/research/special_reports/treasury_fed_accord/background/
Check some documents there.
At any rate – you miss the point again. Someone can become the President and change the rule. However its different from how the Fed and the Treasury act now and have been acting.
WARREN MOSLER Reply:
July 24th, 2011 at 11:11 am
might be about rules requiring collateral for fed overdrafts as well
anon Reply:
July 23rd, 2011 at 6:58 pm
@Ramanan,
“And the entire debt ceiling fiasco is evidence that in actual fact borrowing precedes spending”
anon 7:17 a.m.
“yes, that’s the current institutional reality”
Warren Mosler
9:39 a.m.
WARREN MOSLER Reply:
July 24th, 2011 at 11:12 am
coupled, of course, with the fact that the govt can’t do a reserve drain without first doing a reserve add.
anon Reply:
July 23rd, 2011 at 7:00 pm
@Ramanan,
so, Ramanan, I’m trying to figure out if reality is a put option, or a call option, or what?
anon Reply:
July 23rd, 2011 at 7:01 pm
@Ramanan,
:)
Ramanan Reply:
July 23rd, 2011 at 7:03 pm
Tom,
Anon: “no NFA there”
Your reply: “Where do the reserves for settlement come from?”
Lets do this for Australia. The Australian government debt is around 20-25% of GDP. The Australian domestic private sector’s NFA is minus 40% of GDP.
Australian banks settle easily.
WARREN MOSLER Reply:
July 24th, 2011 at 11:13 am
right, all that’s needed are open market operations or their equiv
Ramanan Reply:
July 23rd, 2011 at 8:12 pm
Tom Hickey,
http://frwebgate.access.gpo.gov/cgi-bin/usc.cgi?ACTION=RETRIEVE&FILE=$$xa$$busc12.wais&start=880073&SIZE=11918&TYPE=PDF
§ 355. Purchase and sale of obligations of National,
State, and municipal governments;
open market operations; purchases and sales
from or to United States; maximum aggregate
amount of obligations acquired directly
from or loaned directly to United States
Every Federal Reserve bank shall have power:
(1) To buy and sell, at home or abroad, bonds
and notes of the United States, bonds issued
under the provisions of subsection (c) of section
1463 1 of this title and having maturities from
date of purchase of not exceeding six months,
and bills, notes, revenue bonds, and warrants
with a maturity from date of purchase of not exceeding
six months, issued in anticipation of the
collection of taxes or in anticipation of the receipt
of assured revenues by any State, county,
district, political subdivision, or municipality in
the continental United States, including irrigation,
drainage and reclamation districts, and obligations
of, or fully guaranteed as to principal
and interest by, a foreign government or agency
thereof, such purchases to be made in accordance
with rules and regulations prescribed by
the Board of Governors of the Federal Reserve
System. Notwithstanding any other provision of
this chapter, any bonds, notes, or other obligations
which are direct obligations of the United
States or which are fully guaranteed by the
United States as to principal and interest may
be bought and sold without regard to maturities
but only in the open market.
(2) To buy and sell in the open market, under
the direction and regulations of the Federal
Open Market Committee, any obligation which
is a direct obligation of, or fully guaranteed as
to principal and interest by, any agency of the
United States.
http://www.federalreserve.gov/monetarypolicy/files/FOMC_OMOReserveBanks.pdf for maturing securities.
Section 270.4 -c-1 for maturing securities.
Matt Franko Reply:
July 24th, 2011 at 10:18 am
@Ramanan,
Yes Ive seen that Section of the USC that permits the FR Banks to buy bonds. Buying bonds is not the same as allowing for a (temporary) overdraft. If I have an overdraft personal checking account up to the amount in my savings account with my bank, I dont have to first sell my bank “Franko Bonds” to be able to access the overdraft feature… if you believe that this Section of the USC says: “The Fed may not allow an operational overdraft in the TGA” then perhaps please give it a second reading.
This part of the Federal Reserve Act is again identifying what the FRS can do, not what the UST can’t do. The law indicates that the Fed Reserve Banks can yes indeed buy USTs, but if they decide to do this, it must be via something called the “open” market (whatever that is). This Section has to do with the FRS buying/selling of govt securities only.
And the Fed-Treasury Accord of 1951 or whatever is again not a law, it’s more or less a policy statement or MOU between these two Executive Branch entities, just a very formal one in this case… can be easily changed with different non-moron personnel in there. Resp,
Tom Hickey Reply:
July 24th, 2011 at 10:29 am
“reserves aren’t NFA, given a cumulative surplus”
Given a cumulative surplus, no tsys are issued and no NFA created as reserves resulting from expenditure. The reserves are those already in the system, added through deficits, unless the Fed purchases some other asset.
When the Fed lends it creates reserves, but normally the Fed lend against tsys. Yes it can do other things in extremis, probably even purchase equities, but it’s normal operations are conducted in tsys.
In fact, the balance budget amendment can be seen as an attempt of the financial sector to eliminate government from finance and make all money creation private. This can be done, of course, even to the extent of making the government borrow from the banks, as it has been forced to do previously.
That doesn’t change the nature of the monetary system (non-convertible floating rate), as President Lincoln proved with direct issuance of notes in extremis. On the other hand, FDR and Nixon changed the nature of the monetary system from convertible fixed rate to non-convertible floating rate.
And I haven’t seen legislation cited showing that the president can’t declare a Fed overdraft facility for the Tsy, too. It is a matter of regulation instead of legislation he likely can.
Tom Hickey Reply:
July 24th, 2011 at 10:37 am
@Ramanan,
“Check some documents there.”
I don’t see any mention of a statue (legislation) that is presently applicable. In the absence of that it would seem that any regulation emanating from the executive branch can be changed at the discretion of the president.
WARREN MOSLER Reply:
July 24th, 2011 at 11:36 am
if there was the tsy could call it the statue of liberty
Tom Hickey Reply:
July 24th, 2011 at 10:40 am
@Ramanan,
“Lets do this for Australia.”
We are not talking about Australia here and I don’t know anything about Australian banking.
Let’s deal with the US, which I am trying to figure out.
Where do the reserves come from in the US in the case of cumulative budget surpluses as far as the eye can see?
WARREN MOSLER Reply:
July 24th, 2011 at 11:38 am
it would have to be overdrafts collateralized by something other than tsys
i’ve been proposing the fed lend unsecured to the banking system
anon Reply:
July 24th, 2011 at 10:42 am
“The reserves are those already in the system, added through deficits”
Not with a cumulative surplus
“I haven’t seen legislation cited showing that the president can’t declare a Fed overdraft facility for the Tsy”
The Fed is accountable to Congress, not the President.
anon Reply:
July 24th, 2011 at 10:58 am
“Where do the reserves come from in the US in the case of cumulative budget surpluses as far as the eye can see?”
government/non-government asset swaps – the Fed holds only financial assets that are liabilities of non government
in ADDITION to that, NFA is negative – i.e. NFL
Tom Hickey Reply:
July 24th, 2011 at 11:13 am
@Ramanan,
“government/non-government asset swaps – the Fed holds only financial assets that are liabilities of non government”
Yes, that is possible and I suspect it is the agenda of the financial sector, which will also lobby to have Tsy continue issuance as a subsidy (as was done in Oz).
We’ll see how that works. Not for long, I expect before there is either an implosion or a revolution.
Ramanan Reply:
July 24th, 2011 at 11:15 am
“We are not talking about Australia here and I don’t know anything about Australian banking.”
Tom Hickey,
No but the funds to pay taxes and buy Treasuries for Australian residents do not come from the Australian government because the Australian public debt isn’t that large.
Ramanan Reply:
July 24th, 2011 at 11:20 am
“I don’t see any mention of a statue (legislation) that is presently applicable. In the absence of that it would seem that any regulation emanating from the executive branch can be changed at the discretion of the president.”
Notice how the discussion is always blurring what can and what is.
Tom Hickey Reply:
July 24th, 2011 at 11:53 am
@Ramanan,
“No but the funds to pay taxes and buy Treasuries for Australian residents do not come from the Australian government because the Australian public debt isn’t that large.”
Then that means that taxes add to demand leakage just like domestic private and external saving, which means that for the sectoral balance equation to balance either economic potential is restricted (higher unemployment) or private borrowing is making up the difference. The first is politically unsustainable over time and the second is financially unsustainable.
Tom Hickey Reply:
July 24th, 2011 at 12:00 pm
@Ramanan,
“Notice how the discussion is always blurring what can and what is.”
Notice how no one can produce a citation to a statute.
Tom Hickey Reply:
July 24th, 2011 at 12:28 pm
@anon,
R: “I understand your point that the private sector indebtedness cannot continue forever etc… but till this point the funds for paying taxes and buying g-secs hasn’t come from the (Australian) government.”
Right, and if you have been following Bill Mitchell on Australian employment, it’s high employment in the certain sector’s like mining that are making the problem in Oz see less serious than it is. Eventually, the conservative government gets through out and a liberal government reverses a policy that has become politically unsustainable. This is the historical give and take of politics and when there is some blockage to correction the result is revolt.
Reply
July 22nd, 2011 at 12:16 am
Anon,
“Dunno. Isn’t the aggregate fiscal deficit for the EZ the sum of the member fiscal deficits? Don’t the pieces of the puzzle add up to the total? Why isn’t the funding for a missing Greek piece forced in the same way as the funding for a missing US dollar piece as you describe?
Just asking.
Also, what do you think, Ramanan?”
I finally comes to the balance of payments problems. The Euro Zone nations had so much balance of payments problems since 30-40 years that they decided on this project after having experimented with many arrangements about pegging currencies with each other etc.
They thought that since there will be one currency, there won’t be balance of payments problems!
The reason the balance of payments problems are important is that the three-financial-balances identities involves the current account of BoP.
Even within a nation such a the US, two states run trade imbalances. Howoever, the US Federal Government makes fiscal transfers without anyone noticing.
In the Euro Zone, there is no such fiscal authority really. The European Central Parliament is kind of such a thing, but its powers are limited and has less taxing powers.
So if you look at data for all 17 nations, the thing that really really really stands out is the external situation.
This is because while the weaker nations are importing more than exporting, there is an outflow of payments and foreigners (even within the Zone) have “imperfect asset substitutability”. So it becomes progressively expensive for nations to finance this and end up where they are.
Reply
anon Reply:
July 22nd, 2011 at 12:24 am
@Ramanan,
not sure why you are connecting US state “current account deficits” (so to speak) with “corrective” fiscal distribution from the US Treasury?
just like national CA imbalances, there must be offsetting capital flows
why the fiscal connection?
Reply
anon Reply:
July 22nd, 2011 at 12:26 am
@Ramanan,
i.e. if i’m in state X, and run a “CA” deficit, that just means somebody from state Y must be lending somebody in state X the money to make double entry balance
why the Treasury fiscal connection?
Reply
Ramanan Reply:
July 22nd, 2011 at 2:19 am
Anon,
Before I begin, let me mention some data …Combine balance sheets of all sectors for every nation and we see … Portugal, Ireland, Greece, Spain having net liabilities of around 110%, 105%, 99%, 87% .. and others are better. Italy is 24%.
So what I am saying is empirically sound, because the four nations (“highly indebted”) have seen more troubles. Its also true that bond holders may do speculative attacks on other nations such as Italy, but the right question is which nation is more vulnerable etc.
Since there is a net liability, it has to be financed day in and day out by hook or crook.
However, there is no mechanism for the debt/income ratios to stabilize except by deflating demand and hence imports.
Here is how I think of two regions within a nation.
Consider a model without growth.
The central government budget is in balance.
The budget balance in North is -3% and that in South is +3%.
North trade balance is -3%, and that in South is +3%.
The private sector balance in both regions is 0%.
The trade imbalance of North is completely financed by transferring fiscal resources for the South!
So one region has “twin deficits” and one has “twin surpluses”.
Debt ratios in either regions are stable and so is the government’s debt ratio.
North has lower income and south has higher income.
Of course this is hardly a correct picture of how the world is in right now and the above is simply a model without growth etc. Also the construction makes it seem that the fiscal transfer is automatic etc.
The important point being regions inside a nation do not face balance of payments financing problems if the government is able to do things well.
However for the Euro Zone, within one nation such as Greece, all sectors are borrowing and the public sector is one of them and it gets more and more expensive to borrow.
Reply
Ramanan Reply:
July 22nd, 2011 at 2:54 am
PS:
I assumed a budget balance but thats just some steady state stuff with no growth etc in that state. One can shift budget balances by some % if one wishes with minor changes in the argument. (Not claiming balanced budgets if someone points out).
Second, the situation looks as if one region is taxed to pay the other region and there is a Robin Hood feel to the whole thing.
Depends how one looks at it. While South is paying higher taxes, its quality of life is higher. More generally since the government has powers to set a higher output by a more relaxed fiscal policy, Southerns will see a greater quality of life and citizens will feel better and not worry about higher taxes. (except lobbyists such as Pete Peterson et. al)
(Tax rates are similar. Total taxes higher)
Also, Government action helps the North region “catch up” to South’s competitiveness.
(In the case of the Euro Zone, at least if the press is to be believed, German’s feel that they will be taxed etc if there is a supranational fiscal authority). However that is inaccurate because tax rates are not being changed .. higher income in general can lead to higher taxes. Plus there is higher quality of life as well.
Third, one can look at it from the reserves perspective for a single nation.
Banks in one region is losing reserves due to citizens making deficit payments to other regions. However if there is a government, it is redistributing the reserves while net spending.
Reply
Tom Hickey Reply:
July 24th, 2011 at 10:14 am
@Ramanan,
You and Anon need to start a blog.
anon Reply:
July 24th, 2011 at 10:44 am
As in:
Ramanon?
Ramanan Reply:
July 24th, 2011 at 11:09 am
:)
July 24th, 2011 at 11:08 am
Matt Franko,
” Buying bonds is not the same as allowing for a (temporary) overdraft. If I have an overdraft personal checking account up to the amount in my savings account with my bank, I dont have to first sell my bank “Franko Bonds” to be able to access the overdraft feature…”
Notwithstanding any other provision of
this chapter, any bonds, notes, or other obligations
which are direct obligations of the United
States or which are fully guaranteed by the
United States as to principal and interest may
be bought and sold without regard to maturities
but only in the open market.
“Direct Obligations of The United States”
Reply
Ramanan Reply:
July 24th, 2011 at 11:11 am
“This part of the Federal Reserve Act is again identifying what the FRS can do, not what the UST can’t do”
If the Fed can’t provide an overdraft, the UST can’t ask for it.
Reply
Matt Franko Reply:
July 24th, 2011 at 3:01 pm
@Ramanan,
What this is saying is that IF US Treasury has issued securities to the public, then the FRS MAY buy and sell them but only in the “open” market. You cannot buy or sell an overdraft, overdrafts do not have ‘maturities’ or principal and interest characteristics for instance.
(btw I think it may be easier to use this Section of USC to show how the Fed acted ILLEGALLY in buying USTs from DEALERS in the QE as this was not an ‘OPEN’ MARKET, it was a ‘DEALER’ MARKET)
This does not prevent the UST/Fed from allowing such a procedure (or others): The Fed could allow an overdraft for some time, then agree with the Treasury to have a UST auction within several weeks to bring the negative balance in the TGA back up zero; or the Fed could ask Treasury to maintain a zero average balance in the TGA across some sort of “maintenance period”. Within existing legislation. If they both thought that was in the best interest of assuring the payments system and/or the conduct of Monetary Policy.
Protection and smooth efficient operation of these systems is what the UST/Fed should be primarily concerned about (financial infrastructure/public purpose). For instance the payments system in the US is not well served by someone like Bill Gross tweeting “who will buy them now?”. If we had a competent Treasury Secretary and FRB Chairman, Treasury agents should have been immediately dispatched and Gross hauled in for questioning, instead these two probably agree with Gross! Gets back to ‘who is in charge?’. Resp,
Reply
Ramanan Reply:
July 24th, 2011 at 3:33 pm
@Matt Franko,
Obligations is more general than securities.
Since the rule says obligations can be be purchased in open markets only and since overdrafts cannot be purchased in open markets, the Fed cannot provide an overdraft.
Because if for instance, the Fed did provide an overdraft to the Treasury, it would have been deemed to have purchased an obligation.
Yes, many countries have overdraft facilities for the Treasury with rules such as the indebtedness created by overdrawing should be cleared within a week or two.
Even in that case, the Treasury would be involved in cash management because unless it does that, there is nothing to guarantee that the conditions on the overdraft can be met.
Reply
July 24th, 2011 at 11:12 am
Warren M.,
Did you see Sumner’s response to you?
“Warren, Yes, I’ve looked at those papers before, and they never made much sense to me. I certainly didn’t see any plausible theory of the price level. One MMTer denied that the price level exists, said it’s just an arbitrary index number.
If MMT is going to succeed they need someone who can explain the ideas clearly to the rest of the profession. A Keynes, or a Milton Friedman. All of the stuff that people send me, including those papers you linked to, have no appeal to mainstream economists. The use of terminology is so odd as to be almost impossible to understand. And I’ve spent my whole life studying monetary economics, including virtually all schools of thought. You need a big name–without one the MMT movements will be ignored in the elite institutions.
The other problem is the strange refusal of some MMTers to consider thought experiments. When I ask about OMPs, I’m told their impossible, the Fed can’t inject money into the economy through an OMP. When I ask why, I’m told it would change the interest rate. And I should care because . . . ?
You said;
“The currency itself, the US dollar, is a simple public monopoly. And any monopolist is necessarily price setter.
So the price level is ultimately a function prices paid by govt when it spends/and or collateral demanded when it lends.”
This is a complete non sequitor. It’s like saying Microsoft is a monopolist, and so the price of Windows is determined by how much Microsoft spends on new facilities. No it’s determined by the number of Windows they sell, interacting with the demand curve for Windows.
The government controls the supply of currency, and a different and unrelated part of the government determines spending. That’s why some countries have high inflation and budget surpluses, and other have huge deficits and deflation (Japan for instance.)”
http://www.themoneyillusion.com/?p=10178#comment-69908
Reply
MamMoTh Reply:
July 24th, 2011 at 8:35 pm
@anon, that is a good point. I asked several times for an explanation of what it means for the government to set the price level, with no success other than the standard the price level is ultimately a function prices paid by govt when it spends/and or collateral demanded when it lends, whatever that means.
Are there countries with high inflation and budget surpluses?
Reply
Tom Hickey Reply:
July 24th, 2011 at 8:54 pm
@MamMoTh,
Scott Fulwiller:
Scott Sumner Agrees that MMT Policy Proposals Are Not Inflationary
Reply
WARREN MOSLER Reply:
July 24th, 2011 at 11:44 pm
public sector wages are part of the govt setting the price level.
the way the govt awards contracts is part of the govt setting the price level
the way govt reimburses for medical is part of govt. setting the price level.
etc.
because they don’t know they are price setter, and think they are price taker, it’s the way it is.
Reply
MamMoTh Reply:
July 25th, 2011 at 12:31 am
@WARREN MOSLER,
It is not clear how the government can be the price setter if it pays markets prices when it spends.
And the government power to set the price level must be different if government spending is 5% or 95% of GDP?
Also, the level of taxation must also play a role in the price level as recognized when you say cutting net spending would be deflationary?
I’m really curious about Sumner’s claim that there are countries with high inflation and budget surpluses. Any one knows which countries he might have in mind?
WARREN MOSLER Reply:
July 25th, 2011 at 11:00 am
the govt has the funds we need to pay our taxes
it ‘tells’ what we have to do to get them, one way or another
July 24th, 2011 at 12:09 pm
Tom Hickey,
“Notice how no one can produce a citation to a statute.”
Once again… below …
http://frwebgate.access.gpo.gov/cgi-bin/usc.cgi?ACTION=RETRIEVE&FILE=$$xa$$busc12.wais&start=880073&SIZE=11918&TYPE=PDF
§ 355. Purchase and sale of obligations of National,
State, and municipal governments;
open market operations; purchases and sales
from or to United States; maximum aggregate
amount of obligations acquired directly
from or loaned directly to United States
Every Federal Reserve bank shall have power:
(1) To buy and sell, at home or abroad, bonds
and notes of the United States, bonds issued
under the provisions of subsection (c) of section
1463 1 of this title and having maturities from
date of purchase of not exceeding six months,
and bills, notes, revenue bonds, and warrants
with a maturity from date of purchase of not exceeding
six months, issued in anticipation of the
collection of taxes or in anticipation of the receipt
of assured revenues by any State, county,
district, political subdivision, or municipality in
the continental United States, including irrigation,
drainage and reclamation districts, and obligations
of, or fully guaranteed as to principal
and interest by, a foreign government or agency
thereof, such purchases to be made in accordance
with rules and regulations prescribed by
the Board of Governors of the Federal Reserve
System. Notwithstanding any other provision of
this chapter, any bonds, notes, or other obligations
which are direct obligations of the United
States or which are fully guaranteed by the
United States as to principal and interest may
be bought and sold without regard to maturities
but only in the open market.
(2) To buy and sell in the open market, under
the direction and regulations of the Federal
Open Market Committee, any obligation which
is a direct obligation of, or fully guaranteed as
to principal and interest by, any agency of the
United States.
http://www.federalreserve.gov/monetarypolicy/files/FOMC_OMOReserveBanks.pdf for maturing securities.
Section 270.4 -c-1 for maturing securities.
The first one is from “US Code”… the same you would have used to argue for the platinum coin.
Reply
Tom Hickey Reply:
July 24th, 2011 at 12:22 pm
@Ramanan,
I don’t see what that has to do with the no overdrafts rule.
Reply
Ramanan Reply:
July 24th, 2011 at 12:51 pm
@Tom Hickey,
Notwithstanding any other provision of
this chapter, any bonds, notes, or other obligations
which are direct obligations of the United
States or which are fully guaranteed by the
United States as to principal and interest may
be bought and sold without regard to maturities
but only in the open market.
Check the “direct obligations” part.
Don’t get me wrong – I am not arguing that the Treasury should not take an overdraft. The Treasury both by the above rule and by arrangements does not spend by overdraft at the Fed at present.
Also, you shouldn’t be the one challenging here. May I ask you to find in the Fed’s Statements of Assets and Liabilities published every week .. where the Treasury has gone overdraft ?
Reply
Tom Hickey Reply:
July 24th, 2011 at 1:26 pm
@Ramanan,
R. I am noat arguing here. I just trying to figure out the basis for the no overdraft rule that everyone refers to and no one cites a statutory or regulatory reference to.
The above look to be the piece that says that the tsys cannot be bought directly by the Fed for its book. But there should also be a piece that says no overdrafts, too. At least, that is the way it appears to me.
Ramanan Reply:
July 24th, 2011 at 2:08 pm
Tom,
No purchases of direct obligations. Crystal Clear.
Because a bank giving you overdraft facility is purchasing an obligation from you when you overdraw.
Plus also 15 which says ” …and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.”
WARREN MOSLER Reply:
July 24th, 2011 at 11:38 pm
so what if we hit the debt ceiling and china demands the imf force the US to convert china’s dollars to yuan???
;)
Tom Hickey Reply:
July 24th, 2011 at 2:40 pm
@Ramanan,
Then what’s that about Beckworth saying that the Fed at gift the Tsy helicopter money? It seems that if this possible it has to be booked as an overdraft to the Tsy or maybe negative Fed equity?
It seems to me that three rules are operative under the present arrangement — no Tsy overdraft, no direct purchases of securities from the Tsy, and no direct issuance of notes by Tsy. This means that Tsy has to get reserves by selling tsys into the market. If all three are not in place, then the Tsy could in theory spend without issuing debt. The platinum coin gambit seems to constitute a fourth.
In other worlds, the MMT picture of the general case of the present monetary system permits direct issuance operationally, since government funds itself. The US has restricted this using certain rules. I am interested in knowing what the basis of these rules is in law or regulation.
BTW, JFK issued Executive Order 11110 allowing the US Treasury to issue silver certificates. This remained in effect until Congress change the law enabling it in 1982.
Ramanan Reply:
July 24th, 2011 at 3:19 pm
Tom,
I don’t know Beckhworth – someone linked to the post and I commented.
He seems to be following up on Caballero’s proposal (linked in his post) where after changing some laws around, the Fed effectively/supposedly monetizes the Treasury’s spending.
I find these proposers confused.
The important thing is that while I have been emphasizing the no overdraft rules etc, I am NOT claiming that the US Government is limited in fiscal expansion. There is no self-imposed constraint.
The constraint rather is in the minds of politicians and economic advisors.
The no overdraft rule and such are just institutional setups.
I understand that it is easier to explain someone the whole thing by setting it up as the Treasury taking an overdraft at the central bank.
This mental model is nice but it shouldn’t take you far into believing the ontology of the story.
Again, the self-imposed constraint is in the minds of politicians, not in the no-overdraft rule.
beowulf Reply:
July 24th, 2011 at 3:19 pm
@Ramanan,
I think you’re right about the overdraft law, if Congress intended Tsy to have permanent overdraft authority, it never would have wasted the time to grant temporary grants of authority between the 1940s and 1980s.
The issue of whether spending precedes borrowing misses the point that Tsy can borrow without spending and can spend without borrowing. But what Tsy must do, in any event, is have USD flow TGA before it spends– that can come from taxing, borrowing or seigniorage (economically, Fed-held T-bonds are in the last category, but legally they’re in the second).
The overdraft may be a good idea economically, but as a legal matter, the Tsy is on stronger authority to launch a hostile takeover of the entire FRS than to overdraft its Fed account. Platinum coinage is the way to go under current law, but going forward, Congress should give the Secretary discretion to issue electronic Greenbacks (US Notes) at the same time he signs any appropriation warrant. It’ll almost be like… spending preceding borrowing except there’s no borrowing (the Fed could use IOR to peg Fed Fund rate). :o)
Ramanan Reply:
July 24th, 2011 at 3:22 pm
Tom,
The US Government can issue coins. Many coins floating around are not in the Fed’s Liabilities.
However, the amount of coins the private sector wants to hold is demand-determined.
beowulf Reply:
July 24th, 2011 at 3:25 pm
@Ramanan,
And who holds the coins the private sector doesn’t want?
ABC News went to one such storage facility, the Federal Reserve in Baltimore, where the coins are in plastics bags and cardboard boxes, stacked one on top of another, creating several aisles of presidential coinage worth millions of dollars.
http://blogs.abcnews.com/thenote/2011/07/1-billion-in-coins-nobody-wants.html
luigi Reply:
July 24th, 2011 at 3:30 pm
@Ramanan,
Ramanan, a law/rule is an ideological official statement. So, a self-imposed is always an ideological imposition, and so no overdraft reflect the sel-imposed costraint in the minds of politicians.
At the end, it seems that you want to find something wrong, not that you have found something wrong.
Ramanan Reply:
July 24th, 2011 at 3:41 pm
“So, a self-imposed is always an ideological imposition, ”
Yes, its a check point to impose fiscal restraint, whether works or not.
“At the end, it seems that you want to find something wrong, not that you have found something wrong.”
Not sure what you mean here, for “just credits bank accounts” carries with it lots of assumptions such as one about open line of credit.
Tom Hickey Reply:
July 24th, 2011 at 3:45 pm
@Ramanan,
I don’t disagree with this but behaviorists look at patters of behavior to uncover rules. We cannot know what people think other than through what they say and do. The question is then whether a rule is implicit, e.g., convention, or it is explicit, e.g., institutional. Then if it is institutional, what kind of rule is it.
Of example, the debt crisis is an artificial crisis rather than a real one. High unemployment is a real crisis, on the other hand. Here is what Michael Hudson has to say about the debt crisis.
Ramanan Reply:
July 24th, 2011 at 3:46 pm
Beowulf,
Good proxy of the output gap. If there were no output gap, incomes would have been higher and the Mint would be running behind schedule on minting them.
The Mint probably just took an extrapolation of the coins demanded in recent years by some econometric analysis.
Ramanan Reply:
July 24th, 2011 at 3:53 pm
Tom,
The Hudson video is here – same I guess
http://www.creditwritedowns.com/2011/07/hudson-redistribution-to-wealthy.html
“Trickle-down Economics” :)
Tom Hickey Reply:
July 24th, 2011 at 4:09 pm
@Ramanan,
““Trickle-down Economics” :)”
Right. This time with a shock doctrine twist. :(
anon Reply:
July 24th, 2011 at 9:25 pm
“And who holds the coins the private sector doesn’t want?”
The difference is that those coins were intended for the purpose of private circulation.
Platinum coins aren’t.
There’s a difference between excess inventory and exclusive monetization.
anon Reply:
July 24th, 2011 at 9:35 pm
lemme help you guys out:
Delong justifies invoking the constitution to borrow without increasing the debt ceiling, using the following logic:
“The structure of Tim Geithner’s testimony to Congress defending his additional borrowing is:
The Constitution forbids me from even thinking about default.
You ordered me to spend.”
… etc.
maybe you guys should use that same argument to justify overdraft (instead of borrowing)
http://delong.typepad.com/sdj/2011/07/what-to-do-about-the-debt-ceiling.html
Ramanan Reply:
July 25th, 2011 at 12:01 am
“WARREN MOSLER Reply:
July 24th, 2011 at 11:38 pm
so what if we hit the debt ceiling and china demands the imf force the US to convert china’s dollars to yuan???
;)”
No China wouldn’t do it still. (China can directly ask the US without asking the IMF). But the US will keep muddling through this.
Tim Geithner has just mentioned that the extraordinary measures he is undertaking will end by Aug 2. I don’t think he has said that all extraordinary measures will be over. There are other extraordinary measures still left such as more sale of assets from other intragovernmental accounts.
Matt Franko Reply:
July 24th, 2011 at 8:53 pm
@Tom Hickey,
As pertains to the “overdraft”:
12 USC 355: Fed authorized “To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.”
So Ram & Anon make the interpretation (sake of argument) that here “obligation” is all inclusive to mean any obligation of the US Treasury. iow ‘obligation’ means ANY govt liability. So that includes an overdraft.
Now pertaining to the “debt ceiling” we have:
31 USC 3101 “The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $9,815,000,000,000, outstanding at one time, subject to changes periodically made in that amount as provided by law through the congressional budget process described in Rule XLIX[1] of the Rules of the House of Representatives or otherwise.”
Now here in Title 31, “obligation” MUST mean issued securities ONLY as ever since May 15th or the day the “obligation” ceiling (let’s stick to the word of law) was reached the govt has been establishing other “obligations” in the form of accounts payable for goods and services that have been ordered by the Federal govt after May 15th, delivered, signed off on, but Geithner has not paid the invoices yet. (I know this first hand).
So which one is it? It cant be both ways. Your interpretation of “obligation” as used in Title 12 is ANY govt liability. But if that is true, then how can the govt be establishing 10s of $billions of accounts payable liabilities after the “obligation” ceiling was reached in May without violating Title 31?
Beo, Can the word “obligation” mean different things in Title 12 vs Title 31?
What a tangled web we weave….. Resp,
Reply
anon Reply:
July 24th, 2011 at 9:14 pm
@Matt Franko,
this is still the one, Matt:
Section 15. Government Deposits
1. Federal Reserve Banks as Depositaries and Fiscal Agents of United States
The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding national-bank notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.
[12 USC 391. As amended by the act of March 18, 1968 (82 Stat. 50). Also, in effect amended by act of May 29, 1920 (41 Stat. 654).
That says what’s allowed, and its consistent with no overdraft.
I think you’d have to find something about disbursements being allowed against credit rather than deposits.
Also note that revenues are deposited. Platinum coins are not revenues per se.
Ramanan Reply:
July 25th, 2011 at 12:08 am
@Matt Franko,
Sorry can’t make sense of the logic you present as I can find no inconsistency.
beowulf Reply:
July 25th, 2011 at 12:24 am
@Matt Franko,
Actually a New Republic commenter, roidubouloi, touched on this very point (his basic point is… overdraft away bros). While I think the statutory authority is pretty hazy (coin seigniorage has a much stronger legal basis) however if Tsy and the Fed try this, no one would have legal standing to challenge it. In theory, Tsy can use the “prenup” to force the Fed to do this, but I can’t imagine the Fed wouldn’t go along willingly due to the exigent circumstances.
the Fed can purchase obligations of the United States in the open market and there is no reason at all why that should not include checks. If the Treasury is authorized to issue a check, the Fed is authorized to pay for it, and to pay for it at par. This would not be the purchase of the obligation directly from the Treasury as prohibited by Section 355.
The Congress appropriated the money and therefore authorized the Treasury to make payment. If the Congress has authorized the spending, the money can be spent, and when the government spends money, it is printing it. When the government receives money, it is extinguishing it. The provisions regarding the management of the money supply are a different matter than payments and include both borrowing by the Treasury, so that as a matter of monetary policy it does not directly monetize its own payments, and open market purchases by the Fed that then do monetize Treasury payments (or rather undo the currency extinction that occurs when the Treasury borrows to offset the money it prints when it pays). Certainly, we do not in general finance our government by printing money, for very good reason. But I don’t see anything at all in the law that prohibits the Federal government from doing so. Not the prohibition on issuance of debt above a face amount and not the prohibition of direct Fed purchases of Treasury securities.
http://www.tnr.com/article/politics/90659/debt-ceiling-obama-congress
beowulf Reply:
July 25th, 2011 at 1:45 am
@Anon,
“The moneys held in the general fund of the Treasury”
Platinum coins are legal tender, in other words, “money”. What’s more the USD reserves exchanged for coinage by Fed would also be money. Since Congress gives the Secretary of the Treasury the duty to mint and issue coinage as he deems “necessary to meet the needs of the United States” (31 USC 5111), the Fed has never refused a Tsy coin deposit and per FRA’s “supervision and control” clause, never will.
The Fed’s Regulation D does contemplate numismatic coin deposits (and yes, the Secretary certainly could make a range of platinum coin denominations available). Since 1 oz $1 trillion platinum coins would be well north of their numismatic or bullion value, there’s no question even Fed would consider them money.
Vault cash means United States currency and coin owned and booked as an asset by a depository institution that may, at any time, be used to satisfy claims of that depository institution’s depositors… Silver and gold coin and other currency and coin whose numismatic or bullion value is substantially in excess of face value is not vault cash for purposes of this part.
http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr;sid=4f2bb92ee36f487a7132d2a340ffa6aa;rgn=div8;view=text;node=12%3A2.0.1.1.5.0.2.2;idno=12;cc=ecfr
Oh yeah, and according to the Congressional Research Service:
If the power of the government is limited to issuing coins, there is still nothing that requires the coins to be “full bodied” — that is, to have precious metal content equal to their face value. The constitutional power to issue coins appears to be unlimited.
http://hiwaay.net/~becraft/FRS-myth.htm
Ramanan Reply:
July 25th, 2011 at 2:03 am
Beowulf,
Are you sure the coin can be purchased by the Fed directly ?
beowulf Reply:
July 25th, 2011 at 3:03 am
@Matt Franko,
Without question. If the Fed allows banks to accept boxes and boxes of dollar coins for deposit from people running the (perfectly legal) frequent flier miles scam, its hard to imagine the NY Fed aor any regional bank not accepting any legal tender US coin for deposit from the Secretary of the Treasury. The terms circulating and numismatic are fluid… the dollar coins mentioned in below frequent flier FAQ are circulating coins issued as numismatic collectibles and you sometimes hear cases of dumb-witted souls depositing (“circulating” if you will) numismatic gold coins with lowball face values.
What’s the trail that the coins take once I give them to my bank?
The Mint produces them and ships them to you. If you deposit them at a branch, they can try to distribute them to other customers, but this is rare in my experience. If the branches don’t distribute them, they go to the Federal Reserve (maybe at stop at the bank’s central vault first). The Federal Reserve stores them in reserves until a bank orders them. They do not go back to The Mint from The Federal Reserve.
http://www.flyertalk.com/forum/milesbuzz/1008566-us-mint-dollar-coin-faq-please-read-before-posting-coin-thread.html
Ramanan Reply:
July 25th, 2011 at 3:20 am
“Without question.”
Be careful. The Treasury directly shipped the coin. The Fed can get coins but it seems to me only from the private sector via banks.
anon Reply:
July 25th, 2011 at 5:54 am
“The Fed can get coins but it seems to me only from the private sector via banks.”
that’s why I think too, because its revenue
Matt Franko Reply:
July 25th, 2011 at 7:20 am
@Matt Franko,
Then I’ll make a deal with Geithner; he can put the coin up for sale at the mint store at 10:00 am, I’ll write him a check for the $1T and quickly run over to a branch and deposit the coin before the mint store does their deposit that day. At my bank, cash deposits are immediately available…
anon Reply:
July 25th, 2011 at 7:54 am
@Matt Franko,
if you can write a check for a trillion
you can make a deal with God
but the coin is not for public distribution
so you won’t get to deal with God
have to find another way
sorry
anon Reply:
July 25th, 2011 at 7:57 am
@Matt Franko,
apart from that, admit my point on revenue isn’t the strongest
the key point is that coins in general are for public distribution, not static monetization at the Fed
parallels no direct dealing in securities between the Fed and Treasury
Ramanan Reply:
July 25th, 2011 at 8:07 am
@Matt Franko,
Yeah public funds can’t be handled so carelessly. Public funds are collateralized – though of course, here you can argue that your bank can put the coin forward as collateral.
There are enough dangers in the transaction.
First if you write a check, the Treasury is allowed to give you the coin only after the check is cleared!
Because (assuming your scenario) suppose the check is under process … takes time .. you could shift the deposit around … exchange it in foreign currency and go out of the country .. (no offence).
Ramanan Reply:
July 25th, 2011 at 12:01 pm
Anon,
Whats this revenue thing ?
anon Reply:
July 27th, 2011 at 6:59 am
Ramanan,
False alarm on revenue. I was thinking that a $ 1 trillion sale directly from Treasury to the Fed doesn’t fall within the accepted definition of treasury revenue, but I guess that’s what they do with the normal coins. It’s the blatant monetization that would be opposed by Congress, the argument being that the platinum was never intended for sale to the public and is therefore an illegitimate transaction from Congress’ perspective.
July 24th, 2011 at 3:52 pm
No, I don’t see this phrase in that way. I mean, “just credits bank accounts” means that treasury just credits bank accounts. It credits banks accounts also if he hasn’t an open line of credit.
So, if Treasury just credits bank accounts, just credits bank accounts. It’s an obviousness, no particular speculation.
you see the point?
Reply
WARREN MOSLER Reply:
July 24th, 2011 at 11:41 pm
the fed credits bank accounts, not the tsy. the tsy gives instructions to the fed for what it wants debited and credited
Reply
luigi Reply:
July 25th, 2011 at 4:09 am
@WARREN MOSLER,
yeah, I know. I’m talkin about general issue. I mean, my understanding is that when you say “just credits bank accounts”, you talk about the debate between fixed budget or budget constraints etc.
Successively we can add all the rules to be accurate.
But you know this more than me.
Reply
July 27th, 2011 at 5:43 am
Felix Salmon raises the issue …
http://blogs.reuters.com/felix-salmon/2011/07/27/can-treasury-just-go-overdrawn-at-the-fed/
And links to CNBC’s John Carney http://www.cnbc.com/id/43899646
Reply
Matt Franko Reply:
July 27th, 2011 at 7:17 am
@Ramanan,
I notice that neither post uses the word “provision”… ;)
Carney was probably reading our exchange here from last week. Salmon apparently still cant understand “the coin” procedures.
btw, I hate to school another lawyer in what the law actually says, but for Carney here is section 2a of the FRA:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
So it’s actually not a DUAL “goal” but a TRIPLE goal (moderate long-term interest rates are never mentioned). And it’s not “price stability” it’s “stable prices”.
When Carney writes: “The United States almost certainly enjoys unlimited overdraft protection from the Federal Reserve because there is almost zero chance the Federal Reserve would ever bounce a check written by the U.S. government.”
Even I cannot agree with him, short of the Treasury and Fed getting together on this and establishing such an overdraft procedure as a formal Policy. Carney uses his own overdraft as an example but I’m sure his bank had a documented policy/terms on how much he could be overdrafted, etc… with the right people at the Fed/Treasury they could hammer it out over a phone call and some emails in an hour or two. But until they do this the Treasury doesnt “have” an overdraft.
Legally such an overdraft is no problem imo, but they still have to find non-morons to write it up and sign off. Resp,
Reply
anon Reply:
July 27th, 2011 at 7:37 am
@Matt Franko,
“with the right people at the Fed/Treasury they could hammer it out over a phone call and some emails”
And you don’t think that would require Congressional approval?
And why on earth would Congress approve such a thing?
Maybe the “right people” would go up to Capitol Hill and present another 1 pager like Paulson did for TARP. That went well, didn’t it?
Reply
Matt Franko Reply:
July 27th, 2011 at 9:22 am
@anon,
I believe the press reports indicate Paulson was asking for an appropriation (TARP ) after getting rejected by Bernanke. Paulson had proposed that the Fed create a facility for the banks themselves, and Bernanke told him no, then Paulson had to go to Congress.
Bernanke could have just said “ok”. In fact Congress probably would have preferred the Paulson approach as Congress generally tries to avoid direct responsibility for anything, Congress does not “approve” such things. If Paulson and Bernanke could have worked it out among themselves, then Congress wouldnt have been paid the political price of the “bailout”. It probably would have been looked at in oversight hearings but so what? Nothing ever really comes out of those hearings anyway. Resp,
Tom Hickey Reply:
July 27th, 2011 at 11:25 am
@anon,
If there were a do-over, Bernanke would definitely have given the go ahead knowing what he knows now. His refusal was an unmitigated disaster and he realizes it. The solvency problem could and should have been dealt with later through resolution and restructuring.
Ramanan Reply:
July 27th, 2011 at 9:52 am
@Matt Franko,
“I notice that neither post uses the word “provision”… ;)”
Matt,
You will regularly find securitizers using the term “provisioned”.
Check the Cash draw authority which was operational for a few years at the end of 70s.
Page 8 of the pdf where Section 14 of FRA (USC 12) was proposed to be modified:
http://fraser.stlouisfed.org/historicaldocs/house/download/67589/house_frtd1979.pdf
Reply
Matt Franko Reply:
July 27th, 2011 at 10:56 am
@Ramanan, Rather reads like they were trying to set up/reestablish a 6 month repo facility with the Fed?
Also to re-emphasize, establishing an overdraft Policy is not trying to circumvent the appropriations process, or the “debt” limit in other law (the actual law reads “obligations” limit)… just provides operational flexibility. resp
Ramanan Reply:
July 28th, 2011 at 2:01 am
“Rather reads like they were trying to set up/reestablish a 6 month repo facility with the Fed?”
Matt,
They were establishing a facility so that the Treasury effectively takes an overdraft at the Fed.
The way it would happen is that the Treasury borrows securities from the Fed and sells them in the market to receive funds in the TGA.
I think they did and it expired in 1983/1984 or so.
Matt Franko Reply:
July 28th, 2011 at 8:14 am
@Ramanan, I would not think a repo facility is technically the same as an overdraft facility in this case. Perhaps back in the 60′s and 70′s, the Treasury and Fed were limited in how they constructed their arrangements due to the state of IT systems. Today with IT systems it is just easier to run the account in a negative balance and perhaps charge a fee against a negative balance vice the convoluted/archaic process of entering into agreements and exchanging securities, etc…
Let’s have the govt sector take advantage of the current advances in IT and just do an overdraft facility, no securities need be exchanged, no law would be violated. Resp,
WARREN MOSLER Reply:
July 28th, 2011 at 12:48 pm
the fed requires overdrafts be collateralized which makes it functionally identical to repo
Ramanan Reply:
July 28th, 2011 at 9:21 am
“I would not think a repo facility is technically the same as an overdraft facility in this case. Perhaps back in the 60’s and 70’s, the Treasury and Fed were limited in how they constructed their arrangements due to the state of IT systems.”
Yes the repo and overdraft are not the same. The draw authority was supposed to imitate an overdraft by a repo.
Tom Hickey Reply:
July 27th, 2011 at 11:21 am
@Matt Franko,
Matt, if Bush/Cheney could get opinion making torture legal, this should be no problem.
Reply
beowulf Reply:
August 3rd, 2011 at 12:58 am
@Tom Hickey,
The secret is to ignore legal precedent to the contrary. :o)
George W. Bush’s Justice Department said subjecting a person to the near-drowning of waterboarding was not a crime and didn’t even cause pain, but Ronald Reagan’s Justice Department thought otherwise, prosecuting a Texas sheriff and three deputies for using the practice to get confessions.
Federal prosecutors secured a 10-year sentence against the sheriff and four years in prison for the deputies. But that 1983 case – which would seem to be directly on point for a legal analysis on waterboarding two decades later – was never mentioned in the four Bush administration opinions released last week.
http://pubrecord.org/torture/278/reagans-doj-prosecuted-texas-sheriff-for-waterboarding-prisoners/
August 3rd, 2011 at 12:11 am
Anon,
You may be interested in this article on fiscal transfers inside the US (found the link in Matias Vernengo’s blog)
http://www.economist.com/node/21524887
The graph looks nice.
Reply
August 21st, 2011 at 1:24 pm
Guru Masterclass…
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