Hugo’s gold

The latest run up may be due to Chavez’s move to bring home a couple of hundred tons being held for him overseas.

Many gold bugs are convinced the world’s CB’s don’t actually have any gold, and that this move will expose that presumed fraud.

We’ll soon find out.

chart

This entry was posted in CBs, Comodities. Bookmark the permalink.

89 Responses to Hugo’s gold

  1. Alex says:

    …the question is the people, through congress, shall coin money and regulate the value thereof.

    It is NOT the type of monetary system we have: floating fx, fixed fx, gold standard, silver standard, whiskey bottles, …

    It is WHO CONTROLS our monetary system, and it is not controlled by democratic majority.

    Reply

    Zaid Reply:

    @Alex,

    Alex, I recommend you go through the Required Readings. It will change your mind about what the Fed really controls. They’re pretty much powerless right now at zero-bound interest rates. The only way to reduce debt of the private sector is for fiscal policy to take over by increasing deficit spending.

    Reply

    RJ Reply:

    @Zaid,

    Agree. Read the recommended reading on this site

    This comment (posted by me on another thread) might help

    There is a huge amount of misinformation and half truths on the internet and in many popular books about the money system.

    I was initially fooled by many of them. I became a true believer for years but something didn’t quite fit together.

    Questions like these below were only finally answered when I sat down and worked through all the bank, Govt and non Govt credit and debit journal entries arising from money transactions.

    1 What really is debt free money?
    2 Is the interest problem real and how can it be solved?
    3 What is money?
    4 Where does the other side of the Govt’s debt liability (called Govt debt) end up. (as an exactly equal asset for another entity must be generated)?
    5 Is Govt debt really bad in a sovereign currency country?
    6 Why pay interest on bank reserves.
    7 Why is debt currently so high?

    The answers were surprising? MMT or chartalism (that I then searched to find) brilliantly explains it all.

    Reply

    WARREN MOSLER Reply:

    Congress has full control over the Fed and Treasury, both of which do its bidding or face dismissal.

    Keep reading!

    Reply

  2. Alex says:

    Today’s debt based system:

    The Federal Reserve creates debt (prints money) on the people’s behalf and then we pay interest on our own money.

    We the people get screwed, it is like lending our money to someone and then paying THEM INTEREST on our own money!

    The new non-debt, end the Federal reserve, based system:

    We the people (congress) print money directly, we pay no stinking interest because we printed our own money out of thin air, just an accounting entry as Mr. Mosler points out.

    Let interest rate be set by the free market and the true lending rates between banks, not the fake banking cartel LIBOR rates that we have today.

    Reply

    WARREN MOSLER Reply:

    You need to read some more, thanks

    Reply

  3. Alex says:

    Ron Paul correctly states that the problem is the current Federal reserve financial system.

    A system were we have given away our right to print our own currency to an elite global banking cartel, lead by the federal reserve.

    This is the issue that needs to be the political issue of our time.

    The MMT people are correct and thank you Mr. Mosler for you great effort to explaini how the current Federal financial system really works.

    The only question in TODAY’S SYSTEM is inflation or deflation.

    The problem is that the PEOPLE OF THE UNITED STATES CONGRESS are not in control of that decision as per the constitution.

    I believe in the people making the correct monetary decisions over a 1,000 Phd economists anytime.

    Now we the debate is about the Federal Reserve monetary system itself, lets all spend our energy electing Ron Paul in 2012 so that we can change END the current Federal Reserve monetary system.

    Reply

    RJ Reply:

    @Alex,

    “I believe in the people making the correct monetary decisions”

    So who do you think make these decisions now??? Either the Govt, companies or people. It is not as detailed on this money reform blog

    Positive money blog post

    http://www.positivemoney.org.uk/2011/08/uk-banks-fund-deadly-cluster-bomb-industry/

    “This is how: Banks have a complete monopoly on creating and allocating money in the economy. That means they get to decide what gets funded – and what doesn’t.”

    There are many examples of this type of unbelievable nonsense on the internet (my reply politely pointing this out was deleted)

    Here’s another way of looking at banks and money. Its a strange misunderstanding about what banks do, and who controls the allocation of money, that has lead to lots of confusion IMHO.

    Money is nothing more than the credit balance of debit and credit accounting entries to mainly record a transfer of real goods, services or an asset (including investments) between two parties.

    A bank records and guarantees credit balances. It also requires prior approval before a customer has a debit (overdraft) balance.

    Example. I have a $100,000 credit balance and wish to purchase $200,000 of gold. The bank approves this purchase with security being the gold held
    The banks then debit my account (dr 200,000 balance now -100,000) and credit the sellers account (balance increases by $200,000)

    So banks do not really create the loan and deposit. Rather they just record a debit and credit entry in their accounting records to record or allow an exchange of goods, services or an asset. It may seem they create a loan (and deposit) but the 2 parties transaction (or desire to trade) really does this. Where a loan is no more than an approved minus credit (debit) balance to allow trade (or the transaction) to occur. And a deposit the credit entry.

    Reply

    WARREN MOSLER Reply:

    you need to read a bit more here, thanks.
    For the most part, Fed policy has pretty much nothing to do with inflation.
    It’s all a myth.
    The Fed is the kid in the car seat with a toy steering wheel who thinks he’s driving

    Reply

  4. Zaid says:

    This is not the gold standard. Hoarding cash does nothing to reserves under the current system. All that happens is that the Fed buys government securities on the open market to bring back bank reserves to the desired level. Other laws/restrictions about withdrawing that much cash is irrelevant to the actual monetary operations.

    Reply

    WARREN MOSLER Reply:

    with a gold standard the convertible currency is always and necessarily ‘reserve constrained’

    with floating fx it is never operationally reserve constrained

    Reply

  5. Adam says:

    Really, is supplying Federal Reserve Notes that hard? No.

    Federal Reserve will just supply as many notes as the private sector wants.

    The reason that Sumner will not get a 5K loan from the bank in cash is because it wouldn’t be profitable for the bank to do so. Also they would look at it suspiciously from a money laundering standpoint.

    Reply

  6. macrosam says:

    Gold start looking like the CHF/USD chart from two weeks ago.

    Reply

  7. Greg says:

    Ask Mr Sumner to try and take a 100,000$ loan out in cash. They wont allow it likely and it wont be because they dont “have” the reserves.

    Reply

    Winslow r. Reply:

    @Greg,

    If he was successful, and let everyone know, he’d have Hugo’s problem of providing security. Reason enough to not do it. Pretty stupid to tell eveyone know you’ve withdrawn bank reserves from the banking system and you’re walking around with $5000 in cash, let alone $100,000.

    To take his experiment a step further, his next step would be to create the inflationary spiral he talks about by inceasing his spending since he is holding hot potato cash. Does he realize he has to pay back the loan decreasing his future spending?

    Scott S. seems to be looking for inflation in the wrong places.

    Reply

    Greg Reply:

    @Winslow r.,

    “Scott S. seems to be looking for inflation in the wrong places.”

    Yes he cant get those visions of wheelbarrows out of his head.

    Reply

    MamMoTh Reply:

    @Greg, Do you mean Sumnet is right but loans in cash are such a small part of total loans that they can by and large be ignored?

    Reply

    Winslow r. Reply:

    @MamMoTh,

    Banks exchange deposits and cash on demand from the public.

    In my mind, it helps me see each bank as creating their own ‘currency’. Bank of America creates BofA deposits and loans. Bank of America will exchange it’s BofA deposits for US dollars if a customer demands US Dollars. If Bank of America runs short of US dollars it will borrow them from other banks or worst case, the Fed.

    What is interesting to me is how the government chooses to limit Bank of Ameica from producing infinite amounts of BofA ‘currency’, or BofA deposits and loans.

    Reply

    MamMoTh Reply:

    @Winslow r., that’s my understanding as well. That is why I think Sumner is right in a way: when a BoA makes a loan in cash it is loaning out US dollars, not BoA dollars.

    Neil Wilson Reply:

    @Winslow r.,

    Each bank has a cash float which is separate from their reserve position (ie it is a separate account on the balance sheet subject to separate cash management operations).

    They buy cash from whoever prints the cash but that is generally a different department from the one managing bank reserves.

    So I’d see it as buying it in the normal way they would any other commodity. They send in a cheque on a bank demand deposit, that gets exchanged for the ‘real’ cash which arrives in a truck from the printers and the department in question clears that through the clearing system which then swaps out reserves in the usual way.

    But because it is a government department it becomes a vertical transaction and reserves in the private sector reduce.

    So when somebody says ‘banks lend out reserves with cash’ it is a childish response in the same way that you can point to a slightly yellow leaf in response to the statement ‘tree leaves are green’.

    You can also say ‘banks lend out reserves with houses’ as long as you are talking about those repossessed by the IRS.

    Neither point adds anything new to the model.

    Winslow r. Reply:

    @MaMoth.,

    Hopefully you understand now that

    1) first a loan creates deposits (BofA currency)

    2) second the customer may/may not exchange the deposit (BofA currency) for cash (US currency). Customer choice.

    @Neil

    Thanks this fits in my framework that cash withdrawals lower bank reserve levels which the fed may or may not address to target interest rates.

    MamMoTh Reply:

    @Winslow r.,

    I do understand that. However I would say taking a loan in cash is functionally the same as borrowing reserves. And MMT is the first to make this kind of comparisons at the functional level between things that are not operationally identical (e.g. tsy’s = savings account).

    Greg Reply:

    @MamMoTh,

    If by right you mean does his thought experiment disprove MMT?….. of course not. He seems to think “reserves” = cash. Thats my impression of his thinking.

    He’s right that one can get loans up to a certain level in cash but not every “reserve” in the bank is immediately convertible to cash. I think the Sumners of the world think that increasing the reserve levels of banks is the same as driving Brinks trucks around with cash to fill some reserve vault in all the banks.

    He seems to think that when a bank makes you a loan they are in effect saying ” Hey we’ve got that amount of cash here”

    Reply

    MamMoTh Reply:

    @Greg, if a banks makes a loan in cash is because the have that amount of cash there.

    So as far as I can see, Sumner is right in the sense that banks can loan reserves.

    Does MMT reply that Sumner is wrong and never loan reserves, or that he is right but it doesn’t matter for some reason?

    It’s a very simple point. It shouldn’t take 40 comments to settle it.

    Clonal Antibody Reply:

    @Greg,
    Also, people confuse a “dollar note” with a dollar. A dollar note is “not” a dollar. Only a dollar coin is a dollar. Even a “US Treasury dollar note” is “NOT” a dollar. All of those are bank notes “convertible” to dollars. A trillion dollar platinum coin would be a trillion dollars, but not a trillion dollar bank note (whether a treasury note, or a federal reserve note) These may be used interchangeably, but are not the “same things!”

    Clonal Antibody Reply:

    @Greg,

    I am of course saying the above quite tongue in cheek. This would be the “anti Federal Reserve” “true gold bug” response!

    Clonal Antibody Reply:

    @Greg,

    I know for a fact that my bank had a limit of $3000 of cash a day per account at least in 2009. You could get larger amounts, but after jumping through hoops. They were happy to write cashiers checks for large amounts, but would not give out cash. Cashier’s checks would still be BoA or Citi currency, while cash would be US currency. Yes I believe that this has to do with maintenance of cash vault, but not necessarily to do with reserves. The bank can always get more reserves from other banks and the Fed.

    WARREN MOSLER Reply:

    Govt spending and/or lending adds exactly that many net financial assets to the economy which are held as cash, reserves, and tsy secs

    The fed controls the mix

    Greg Reply:

    Mammoth

    “if a banks makes a loan in cash is because the have that amount of cash there.

    So as far as I can see, Sumner is right in the sense that banks can loan reserves.”

    As I understand it, your first sentence is obvious and somewhat trivial but your second sentence still assumes that a bank looks to its reserve position first before extending a loan, which from all Ive gathered from MMT the last three years is false.

    Saying a bank CAN loan reserves is an awkward way of thinking about it in my view. Its completely “out of model” as I understand the MMT model

    WARREN MOSLER Reply:

    My point is put this way: bank lending does not reduce reserve balances.

    Bank loans in the first instance create bank deposits in the normal course of business.

    Deposits can be exchanged for cash on demand.

    The desire to hold actual cash vs bank deposits is generally not considered a function of bank lending

    RJ Reply:

    @Greg,

    The way I see it is the banks can not loan reserves

    They can however use reserves to

    Buy notes and coins
    Buy treasury securities
    Settle with another bank

    WARREN MOSLER Reply:

    Bank loans ‘create’ ban deposits so start with that

    MamMoTh Reply:

    @Warren,

    Bank loans ‘create’ ban deposits so start with that

    Not necessarily in the case the loan is in cash which is what Sumner mentioned.

    Unless we see it as deposit that has been created and instantly withdrawn. Is that what you mean?

    WARREN MOSLER Reply:

    yes. a loan creates a bank liability in the first instance

    RJ Reply:

    0@Greg,

    @ MamMoTh

    Bank loans always (without exception) create a deposit.

    The banks initial accounting entry is

    Debit Customer bank loan (BANK LOAN) =customer liability bank asset
    Credit Customer cheque acc (DEPOSIT) =customer asset bank liability

    The credit balance is then transferred by the buyer to the seller in exchange for goods, assets or services. One bank settles with another when required (the seller and buyer bank at different banks) using reserves.

    If the loan is then converted to cash. The credit is converted into cash (a Govt guaranteed monetary asset) and then used instead. The seller could convert the credit balance into say gold and then use this instead.

    beowulf Reply:

    @MamMoTh,
    (a)(1) Deposit means… (i) The unpaid balance of money or its equivalent received or held by a depository institution in the usual course of business and for which it has given or is obligated to give credit, either conditionally or unconditionally, to an account, including interest credited, or which is evidenced by an instrument on which the depository institution is primarily liable…
    (k)(1) 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 and that meets the [physical location] requirements of paragraph (k)(2)(i) or (k)(2)(ii) of this section….

    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

    Reply

    Tom Hickey Reply:

    @Greg,

    “Ask Mr Sumner to try and take a 100,000$ loan out in cash.”

    First thing that they would do is alert the IRS and probably the FBI as well. :)

    Reply

    Greg Reply:

    @Tom Hickey,

    Indeed

    Reply

  8. RODNEY RONDEAU says:

    MATT,

    GOOD POINT. VERY NOT AUTODIDACT! I DO BELEIVE THAT YOU HAVE TO HAVE A RESERVE ACCOUNT WITH THE FED TO HOLD RESERVE BALANCES.

    Reply

    WARREN MOSLER Reply:

    And why do they care.

    It’s like trying to find a typo to prove it’s wrong

    If they had any sense they’d get on this train instead of getting run over by it as they are all doing

    Reply

  9. mdm says:

    Off topic:

    Scott Sumner over at moneyillusion has a number of interesting comments, on banking and on the general attitude of autodidact MMTer’s:

    “BTW, FYI Krugman is not a monetarist–not even close. His point was that banks can get rid of reserves through either loans or asset purchases; which technique is used is not important. The banking system as a whole can get rid of reserves. But the economy as a whole cannot get rid of base money–only the Fed can do that.”

    “An academic really ought to be able to explain ideas to other academics in a paper. If they can’t, then having a “conversation” won’t solve the problem. MMTers need to learn how to communicate more effectively . . . All this nonsense about banks lending or not lending reserves is no way to explain a theory . . . Coming here with an attitude that everyone is stupid who doesn’t agree with them. “Krugman doesn’t even know that banks don’t lend reserves, nah nah nah” That’s the attitude. They don’t even realize that all he’s saying is that banks can get rid of reserves if they want to. Whether they lend it out or buy securities doesn’t matter. I could go to my bank tomorrow and borrow $5000, and take the loan in cash–and disprove all of MMT. Maybe I’ll do that, just to show them.

    I think he is right about the general attitude of autodidact MMTer’s. Some of the comments I have read are absolutely disgusting. At the same level of hostility and arrogance as autodidact Austrians. I know it’s very easy to get angry at various comments, but this shouldn’t mean that you go down to their level. I think that if NOT an MMT economist then you should firstly, provide a disclaimer at the end of your post and secondly, tone down the level of hostility. Because it is reinforcing this idea that MMT is somehow a cult, it is leading people to conflate MMT economists with autodidact MMTer’s.

    /end rant.

    Reply

    RJ Reply:

    @mdm,

    They can not beat the logic and evidence of MMT. So come up with stuff like this. MMTers need to communicate more effectively etc.

    Don’t fall for it.

    http://www.washingtonsblog.com/2011/05/twenty-five-rules-of-disinformation.html

    2. Become incredulous and indignant. Avoid discussing key issues and instead focus on side issues which can be used show the topic as being critical of some otherwise sacrosanct group or theme. This is also known as the “How dare you!” gambit.

    MMTers need to go in hard but only with evidence and logic. It’s the only way to defeat people with entrenched but flawed beliefs.

    And the MMT article’s and explanations are outstanding. I use them as required to explain points in my battles with deficit hawks.

    Reply

    mdm Reply:

    I’m not falling for it, I’m just saying that we should try and maintain a level of civility.

    And the MMT article’s and explanations are outstanding. I use them as required to explain points in my battles with deficit hawks.

    I agree. Some of Fullwiler’s papers are the best I have read. breaking down complex institutional arrangements and operations into an clear and understandable manner.

    Reply

    Clonal Antibody Reply:

    @mdm,

    Papers have been pointed out to them. They will not read the papers. At most they will read the abstract, and then fire back. When you point that fact to them, they will say “I do not have the time to read long complex papers.” But they do have time to write blog articles and do other things.

    Avoidance of cognitive dissonance is a very powerful motivator not to engage in an honest dialog.

    Philip Pilkington Reply:

    @mdm,

    This shows only one thing: that the argument has reached a certain level. Everyone is going to be ‘arrogant’ when they’re trying to make a point. Krugman has come off as remarkably arrogant in his slating of MMTers as ‘John Galt types’. And Sumner’s response is arrogant insofar as he writes:

    “I could go to my bank tomorrow and borrow $5000, and take the loan in cash–and disprove all of MMT. Maybe I’ll do that, just to show them.”

    As if this would truly disprove MMT. As if those who put together MMT didn’t realise that people can go to the bank and take a loan out in cash.

    I think MMT is going down exactly the route it should. It’s bypassing people who don’t engage properly with it (Krugman, Sumner etc.) but using their established reputations as a marketing tool to reach a younger audience.

    Reply

    mdm Reply:

    This shows only one thing: that the argument has reached a certain level. Everyone is going to be ‘arrogant’ when they’re trying to make a point.Krugman has come off as remarkably arrogant in his slating of MMTers as ‘John Galt types’. And Sumner’s response is arrogant insofar as he writes

    The way that the MMT economists and Post Keynesians have been treated by other economists is disgusting. I have seen barely any references to their actual work in the academic literature. Most blog are complete straw persons (how long has Krugman run with the same argument) and most show a complete lack of understanding of the MMT and Post Keynesian literature. But it doesn’t mean we have to be like that.

    The parts I quoted by Summer show he is either very clumsy with his terminology or he has no idea about banking. I want to believe the former, but I have my doubts. If he really wanted to disprove MMT and Post Keynesian views on banking he start by familiarising himself with the literature from the last 40 years, because his supposed ‘test’ shows a complete ignorance of the theory.

    I think MMT is going down exactly the route it should. It’s bypassing people who don’t engage properly with it (Krugman, Sumner etc.) but using their established reputations as a marketing tool to reach a younger audience.

    I hope you’re right. I just don’t want MMT and Post Keynesians to be perceived in the wrong way because at times and understandably we can come across as very aggressive, even cult like; almost to the point of sounding like autodidact austrians.

    Reply

    studentee Reply:

    @Philip Pilkington,
    and keep going after krugman’s audience…

    Reply

    Unforgiven Reply:

    @Philip Pilkington,

    I think we need to give reps to Paulie on this ponderous thread (over 1400 posts). Many more to mention who laid the groundwork. Anyone wishing to contribute, please keep it respectful. There are many pages of chest-beating and it really doesn’t add to anything except the post count. Earlier on, there was lots of that (one can expect it, to be sure), but the discussion now seems to proceed on a more productive level. Indeed, I think that most now some inkling that it boils down to the resources available. Way to carry on, Paulie!

    http://www.americasdebate.com/forums/index.php?s=bf178292198968a374f0ba8eeebdd3b5&showtopic=20318&st=1420

    Reply

    Matt Franko Reply:

    @mdm, I think Sumners basic mistake is using the phrase “get rid of reserves”. This phraseology indicates that Sumner (and Krugman I guess) thinks reserve balances are some sort of tangible entity that one can “get rid of” so his problems start right there. This is further evidenced by his then projection that walking out of a bank with FR Notes is the same as walking out of a bank with reserve balances.

    You can’t walk out of a bank with reserve balances in your pocket, but yes Federal Reserve Notes.

    Sumner may say “same thing”, but no it is not. These types of distinctions may seem trivial but they are key to understanding what is really going on. They are supposed to be the PhDs but seem to be lacking wrt their respect for terminology and nuance.

    Same thing with saying “we can always print the money”: sophomoric and incorrect, yet I hear it all the time from PhD’s in the various media. We dont print “money” anymore, balances are changed on computer information systems under a regulatory regime, etc..

    Have to agree with RJ, Sumner is trying the indignation retort. And btw there are many, many scholarly papers out there by the MMT academics for intellectual consumption… Sumner and Krugman just dont want to read them it seems.

    And I dont know where you get that MMT proponents comments are sometimes “disgusting”? What do you mean by that? Ive read the comments at the various Krugman blogs at the NYT and Ive not seen anything there that I would call “disgusting”. To the contrary… Resp,

    Reply

    mdm Reply:

    Summer is being very vague. As I said above, I want to belief that he is just being clumsy, but I have my doubts.

    And I dont know where you get that MMT proponents comments are sometimes “disgusting”? What do you mean by that?

    By disgusting I’ve referring those occasional comments by myself and others which are overly aggressive and imply that the economist or blogger is an idiot. I think these comments are contributing to the image problem that MMT has in certain circles.

    I think the majority of our comments are very polite and civil. But when the discussion starts getting heated it’s easy to become overly aggressive.

    I’m not saying that the other side is any better. The other side has been very disrespectful towards MMT economists and Post Keynesian economists. for starters, the complete ignorance of the academic literature. Krugman’s supposed rebuttal shows he lacked any familiarity with the literature. His post implies he has somehow found that glaring hole in MMT framework that has been completely overlooked. You’ve also go Thoma’s (in)famous comment where anyone who doesn’t believe in the money multiplier is living in a fantasy land. Unfortunately this is the way that most mainstream economists treat heterodox economists. I’ve watched and heard of many conferences where orthodox economists bully non-orthodox economists.

    I just don’t want us to end up sounding like autodidact austrians.

    Reply

    RJ Reply:

    @mdm,

    “By disgusting I’ve referring those occasional comments by myself and others which are overly aggressive and imply that the economist or blogger is an idiot. I think these comments are contributing to the image problem that MMT has in certain circles.”

    Sometimes debate can become robust. This is not a problem. And is sometimes necessary to make the desired impact.

    MMT threatens reputations. As MMT becomes more accepted and continues to grow the debate will become even more heated (or if you like aggressive).

    Philip Pilkington Reply:

    @mdm,

    I don’t see any alternative. It’s quite obvious that they’re not going to engage with the literature. Seems to me like a pure power-struggle, really. You say that the Orthodox ‘bully’ those who don’t agree, well that’s probably an apt characterisation. So, the only thing to do is slate them right back.

    It’s been effective so far. Have Krugman and Sumner changed their minds? No. Will they ever change their minds? Probably not. But now they’re becoming the ones on the receiving end of the criticism. And, at the very least, they’re responding.

    To be frank, civil discussion is overrated when it comes to a paradigm shift — which I believe MMT is. It was when Copernicus made his assertions, when Kant tried to overturn Orthodox German philosophy and, to a lesser extent (because scientists tend to be less emotional), when Einstein published his ideas. The ideas will only gain force as a new generation gives them a chance, which is why marketing and general propagation is key.

    As far as ending up looking like Austrians is concerned, I doubt it. Austrian economics is a political ideology — like Marxism. It always has been. The Austrian hoards don’t argue about nuances such as bank reserves, they argue about government and efficiency and capitalist Utopia and all that crap. Just as Marxists shout about surplus-value and the proletariat and Communism and all that crap.

    Austrian and Marxist theory is, in essence, geared toward agitation. They are political ideologies and in that they come across as cults.

    MMTers will never come across as the Austrians do for the simple fact that MMT is not a political ideology, nor could it be.

    Philip Pilkington Reply:

    @mdm,

    By the way, it should be pointed out that Keynes was long seen as a radical. Indeed, he essentially made his name insulting people. But it was when a new generation of economists integrated his ideas (and bastardised them, but that’s another day’s discussion) that they became accepted.

    mdm Reply:

    Thanks for the replies Philip and RJ.

    But it was when a new generation of economists integrated his ideas (and bastardised them, but that’s another day’s discussion) that they became accepted.

    That’s my other worry. Most economists seem unaware of Hick’s later apology of ISLM. I also don’t know how you can remove the equilibrium fetish of economists.

    If paradigms change when the older generation dies (Planck), then we’ve still got a while to go. The current generation is already being infused to spew out highly highly abstract DSGE models with no basis in reality, and if the past is any guide they will have many decades to carry the reigns and eventually die.

    Philip Pilkington Reply:

    @mdm,

    Well, I’d hope that anyone in the younger generation with any curiosity whatsoever will not accept equilibrium models amidst the current environment. Cognitive dissonance and all that. They’ll also be more inclined to try to come to terms with anything that grates with what their professors teach them because of youth’s innate inclination to rebel (that’s how the monetarists won) — but they need to be aware of it’s existence, hence why marketing is so important (which Friedman and his acolytes knew well).

    And the sheep? Who on earth would want them?

    Also there’s the fact that market practitioners are increasingly coming to see the value of MMT for looking at the real world. This is very important. I can only imagine it’s a bit like when engineers stopped using principles based on equilibrium (principle of constancy) models of thermodynamics because they were seen as increasingly ineffective. Don’t doubt the power MMT can have over the practical mind and how important this will be in the future.

    I reckon MMT to stick to reasoned criticisms of everything that those that engage with it write. Don’t lower ourselves to the Krugman ‘John Galt-type’ level — that’s too low — but don’t fret about being aggressive. While I don’t agree with him on most things, it seems apt to quote Friedrich Nietzsche here:

    “My idea is that every specific body strives to become master over all space and to extend its force (its will to power) and to thrust back all that resists its extension. But it continually encounters similar efforts on the part of other bodies and ends by coming to an arrangement (“union”) with those of them that are sufficiently related to it: thus they then conspire together for power. And the process goes on –“

    WARREN MOSLER Reply:

    For example, my call to buy bonds on the downgrade

    And that qe if anything works against the real economy

    Art Reply:

    @mdm,

    Re practitioners coming around, no doubt. I thought my macro was pretty good beforehand, but getting my head around MMT has taken it much, much further.

    Also agree w/ your assertion that younger people are more open to it. In academia, no one wants to admit that the textbooks students have been paying three figures for for decades have a few serious errors in them (and while bloody unlikely, think of how large any potential civil liabilities would be!!!). And in finance, few of the folks who’ve made money over two or more decades relying on neo-classical/liberal frameworks show much interest (in my experience) in reconsidering fundamental assumptions, esp if they’re nearing retirement (as Warren noted recently, a lot of reputations are increasingly at risk; given their ages, it might not matter all that much; though personally, I’m trying to hasten Bob Rubin’s fall from intellectual grace: http://symmetrycapital.net/wordpress/wp-content/uploads/2011/08/20110818_wimpy-and-shoulderbob.jpg). :)

    MMT still has an uphill battle, esp in the media, until the powers that be start to give it a green light, and/or people on the street start doubting what economists and policymakers believe (or pretend to believe…*ahem*, Dr. K).

    pebird Reply:

    @mdm, If Summer would treat those that agree with him, but also display a similar “attitude” to that of MMT supporters alike, then you might have something. Bloggers have been filtering out comment noise for years now, Summer should be able to handle it.

    I just hear frustration with the unability to refute something, if we are off the wall, there should be an easy, straight-forward response consistent with their training. And it isn’t withdrawing cash after receiving a loan.

    Who wrote that Krugman was a monetarist anyway? I strongly agree we should not use obscenities when engaging in debate.

    Reply

    MamMoTh Reply:

    @mdm,

    I could go to my bank tomorrow and borrow $5000, and take the loan in cash–and disprove all of MMT. Maybe I’ll do that, just to show them.

    In a way he is right. Borrowing in cash is functionally equivalent to borrowing bank reserves.

    I don’t think that disproves MMT when it says that banks don’t lend reserves in the sense they don’t consider their reserve position prior to extending a loan.

    Maybe I’m wrong but I tend to ignore any criticism based on cash. A modern monetary economy could do without it given our current technology.

    In any case his remark should be addressed. That’s another example of what should be in the non-existent MMT FAQ.

    Q: What if I take my loan in cash? Am I not borrowing reserves which means MMT is wrong?

    Followed by a short clear answer that will settle it.

    Reply

    Matt Franko Reply:

    @MamMoTh, What Ive taken in from JKH over the years is that reserves are technically only balances exchanged inter-bank and between banks and central bank for regulatory purposes. I could be misinterpreting (I hope not), but if not, this distinction has been critical in my reaching a fuller understanding of how things really work… so to be very precise, it is not correct to say that borrowing in “cash” is equivalent to borrowing “reserves”. There is an accounting relationship and an accounting causality between a loan in cash and a change in reserve balances that I see, but I dont see it as a direct relationship. Resp,

    Reply

    MamMoTh Reply:

    @Matt Franko,

    They are also exchanged between banks and CB for cash right?

    They are both liabilities of the consolidated government (CB+Tsy).

    That’s why I think you can say that if a bank makes a loan in cash, then it is functionally lending out reserves. If the bank has no cash available it has to exchange reserves for it and then hand out the cash (not that this will happen in this way).

    On the other hand you can always say that functionally the bank always creates a deposit when it makes a loan, but the deposit could be immediately withdrawn.

    So I really wonder what difference can it make, but still that Sumner’s point should be addressed.

    Winslow r. Reply:

    @Matt Franko,

    Matt, a few years ago Warren explained reserves include cash held in bank vaults. When the cash is withdrawn by the public, it reduces reserves from the banking system, potentially leaving it short short reserves.

    When referring to lending, banks lend reserves to other banks, not the public.. They exchange reserves/cash for deposits only if the public demands.

    Tom Hickey Reply:

    @Matt Franko,

    Matt, as I understand it there’s no such thing as a reserve in a non-convertible floating rate currency. The term is a hangover from when there were physical reserves. Now “reserves” are just numbers on a spreadsheet used for accounting purposes in settlement. That is to say, there is no object corresponding to reserves. They could be given a name that reflects their accounting function.

    While this may seem like a small point, it is responsible for a lot of confusion. For example, ti is at the basis of the “printing money” misunderstanding. When the Fed credits reserve accounts it is not printing currency but rather just adding some points on the scoreboard in a particular column. Yes, a bank can exchange those points for currency to meet window demand, but the fact is that this is no longer the way most transactions are carried out. Banks don’t ever loan cash. They credit deposit accounts and the customer is free to withdraw cash as matter of preference. Relatively few do, since most transactions are now conducted either digitally or by paper check. Nowadays, only poor people and criminals (among whom I include tax avoiders) use cash or than for inconsequential transactions.

    Neither reserves nor deposits are directly related to saving, investing or spending, which people do for other reasons than having or not having a particular degree of liquidity in asset/portfolio composition. That is confusing direction of causation. People are not motivated by liquidity, but rather the prefer liquidity for specific reasons depending on mindset and context. Being able to withdraw cash from a deposit account created by a loan proves nothing, even if everyone did so, which they patently don’t.

    This is like the argument for free will in philosophy in which someone scratches his nose and says, “See?” It is irrelevant to the larger issue.

    JCD Reply:

    @Matt Franko,

    I think the issue is not whether any one borrower takes a loan in cash, it what happens with the cash after he gets it. If he usses it to buy pizza and beer, and then the pizzaria deposits the cash back at it’s account, then what difference does it make?

    If however he uses it to buy cocaine, and the cocaine dealer exports the Benjamins to Mexico where they find there way into a drug dealers hoard of cash, well that’s a reserve drain.

    So the real issue is demand for cash holdings, and at a global level, not at the level of a single borrower.

    I don’t really know of anyone who borrows money just to hoard the Benjamins.

    Philip Pilkington Reply:

    @MamMoTh,

    “In any case his remark should be addressed. That’s another example of what should be in the non-existent MMT FAQ.”

    Oh, it exists. But don’t ask me where it came from:

    http://mmtwiki.org/wiki/Main_Page

    Reply

    Philip Pilkington Reply:

    @MamMoTh,

    I think quite a few folks have been led down a wayward path by Sumner’s imprecise use of language (or maybe it was the MMTers in the comments section, I don’t know).

    To put this accurately: ‘Bank lending is not reserve-constrained’. Therefore they can loan out reserves if they want — although, I imagine this will be something of a rare occasion, who takes out cash loans apart from dope dealers? — but they will not take their reserve position into account in making this loan. They’ll make the loan if the prevailing interest-rate etc. favours it and then they’ll borrow on the interbank lending market to make up their reserve position at the end of the accounting period.

    So the big question is: ‘Is giving a cash loan out straight from the vault loaning reserves?’. Yes and no. Physically, yes. But operationally, no, as the amount of reserves has no bearing on the loan.

    Maybe Sumner was confused by the didactic statement ‘Banks don’t lend reserves’ in his comments section, but as an economist he should have seen what this meant. He should have realised that people were speaking from an economic or operational perspective and no ‘physically’. That is why I suspect he was engaging in crude rhetoric (as usual). Which, given his statement about MMTers being ‘arrogant’, is remarkably ironic.

    (P.S. Don’t know where Sumner made those comments. Will someone clear this up with him. Cut and paste this or whatever. [Unless I have gotten something wrong -- but I don't think I have...])

    Reply

    Greg Reply:

    @Philip Pilkington,

    “So the big question is: ‘Is giving a cash loan out straight from the vault loaning reserves?’. Yes and no. Physically, yes. But operationally, no, as the amount of reserves has no bearing on the loan.”

    So I guess that MISTER SUMNER is guilty of being a little too literal minded himself.

    http://www.themoneyillusion.com/?p=10178

    Philip Pilkington Reply:

    @Philip Pilkington,

    Hahaha! I didn’t realise the title of the post. Talk about psychological projection!

    P.S. As Warren just pointed out below: the decision to hold cash by the consumer is separate from the bank’s decision to make a loan. So, Sumner’s conflation is even more wrong-headed in its ignorance of banking operations.

    WARREN MOSLER Reply:

    the real problem is the whole thing is a disgrace to the mainstream economics profession for its total failure to recognize the dynamics of state currency.

    Neil Wilson Reply:

    @Philip Pilkington,

    And of course he’s being American.

    Here in the UK if you take a loan out from the Royal Bank of Scotland in Scotland and ask for cash you will indeed get Royal Bank of Scotland notes.

    Now those notes have a reserve requirement, but again the RBS can correct that after the fact by paying interest to whoever has the reserves at clearing time.

    WARREN MOSLER Reply:

    And when did I ever suggest you can’t borrow from a bank and get cash?

    Reply

    Zaid Reply:

    @WARREN MOSLER,

    This whole discussion makes me realize that even MMTers forget basic monetary operations. Converting whatever amount of reserves to cash does not alter reserve balances on the Fed’s balance sheet. It expands the balance sheet because the Fed’s holdings of government securities has to increase by the same amount to maintain FF Rate at the desired level. Take an extreme example of a bank run, in which all reserve balances are converted to cash; interest rates would spiral out of control if the Fed does not replace reserves by buying securities on the open market. I’m amazed at how difficult it is to explain this simple operation.

    Reply

    WARREN MOSLER Reply:

    unless the ‘starting position’ is a ‘reserve excess’

    Zaid Reply:

    @Zaid,

    True, that’s why I wrote: “all reserve balances are converted to cash…” Meaning, if both excess and required reserves are converted to cash, the Fed will have to replace the required reserves if it wants to hit its Fed Funds Rate target.

    Scott Fullwiler Reply:

    @Zaid,

    When did we forget that? I never did.

    And, as Warren said, this is ridiculous–we’ve always said currency is completely endogenous. That would obviously mean you could take out a loan and then convert deposits to cash. The problem is, SS doesn’t realize it works both ways–you can’t force currency on people, either. There’s no “hot potato effect” since I can always convert to a deposit, and then to a time deposit if I want to earn interest.

    Not to mention the fact that even if I couldn’t why would I spend it if I wanted to save? As if converting my retirement portfolio to cash means I would go out and spend it–strange how such completely irrational behavior is the cornerstone of a theory that claims to assume people are perfectly rational.

    WARREN MOSLER Reply:

    an in any case, the policy remains the same- count bodies in the unemployment line and make fiscal adjustments accordingly

    Mario Reply:

    @Zaid,

    @Scott Fullwiler

    strange how such completely irrational behavior is the cornerstone of a theory that claims to assume people are perfectly rational.

    BINGO!! Jackpot!!! Ding! Ding! Ding!! I think this one just hit the nail on the head!

    Class dismissed boys and girls…

    Neil Wilson Reply:

    @ Scott F,

    It seems to me that the others focus on the seller of a bond, which is entirely the wrong place to look.

    A seller of a bond will always sell the bond for whatever purposes they had in mind. The question in aggregate is who did they sell it to.

    By definition if the government/central bank is buying then to buy that bond they must have outbid the next guy. So the real question is ‘what did the next-guy do instead?’.

    It’s the actions of the outbid buyer that matter, not the sellers actions – which are the same in either case.

    Now the outbid buyer was predisposed to save – otherwise why would they have had any interest in safe government bonds. They also aren’t interested in risk assets – otherwise why would they have had any interest in safe government bonds. And they clearly aren’t interested in spending – otherwise why would that have had any interest in safe government bonds.

    So what is the next safest place? Cash at interest probably.

    Zaid Reply:

    Hi Scott,

    I was posting a general comment with regards to postings by MMT-advocates that are not entirely accurate when it comes to accounting for cash and reserve balances.

    Without mentioning names, I refer to “MMTers” as all advocates of MMT, including newcomers who may not yet see the all the accounting identities clearly.

    Mario Reply:

    @Zaid,

    unless its the end of our society all together and it’s not just a run on the banks but literally a run out of the entire country (and probably the earth too then…maybe they’re going to the moon?) then people will be putting their money back into banks. I don’t think we’ll ever become a society where banks do not exist and are not being utilized to hold cash assets.

    WARREN MOSLER Reply:

    doesn’t matter to banks if people ‘put there money in’ or not.
    nor to the economy. what matters is the lending side

    Mario Reply:

    @WARREN MOSLER,

    right! The idea that they need deposits goes back to fractional reserve banking. Thank you and really quite fascinating.

  10. beowulf says:

    “At the same time when Comrade Chavez is hoarding gold in the country where George Soros was born (Hungary)”

    That’s a counter-intuitive place for Venezuela to hoard gold.
    :o)

    Reply

  11. Adam (ak) says:

    At the same time when Comrade Chavez is hoarding gold in the country where George Soros was born (Hungary) and where his former protege Victor Orban is now in power the public debt reduction hysteria have reached new limits of insanity. It is used to frame the Orban’s political opponents.

    “Government officials and MPs from the ruling right-wing Fidesz party are calling for legal action against three former Socialist prime ministers, Péter Medgyessy, Ferenc Gyurcsány and Gordon Bajnai, for allowing the state debt to spiral from 53% of GDP in 2002 to 80% in 2010.”

    http://www.economist.com/blogs/easternapproaches/2011/08/another-row-hungary

    That’s why I think that going heads-on against these global austerian idiots is waste of energy.

    Attack them from the flank and from behind.

    Reply

  12. John Zelnicker says:

    The CB’s and the bullion banks from what I have read.

    Reply

  13. jaymaster says:

    All that gold might actually INCREASE the chance of invasion.

    Reply

  14. I still remember 1980, when gold and silver were up limit for several days, and no one could trade, then in one tick they were down limit — and no one could trade.

    Reply

  15. Mattay says:

    It’s showing that classic going-ever-more-parabolic pattern that bubbles show right before they burst. The trouble is, it’s impossible to tell how high it will go.

    I shorted gold back when it was at 130 earlier in the year.

    Fortunately, I did that in a stock simulator rather than in reality.

    Reply

  16. Winslow R. says:

    So far this move has had little to no impact on Venezuelan bonds.

    Reduced transparency, increased probability of invasion, possibility of internal fraud all given as possible reasons for market moving against their bonds. If total global chaos erupts, the gold could come in handy.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>