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

ECB bond buying for next year

Posted by WARREN MOSLER on December 30th, 2011

For the coming year I’ll be watching to see if the ECB buys bonds
only on rate spikes to keep them from rising further,
or on a continuous basis regardless of yields.

I suspect the former.

It’s the difference between watering a flower only as it’s about to die,
or on a regular basis to keep it continuously perky.

29 Responses to “ECB bond buying for next year”

  1. Frederik van Wijsbergen Says:

    Unrelated question: Why did the Hungarian bond auction fail, and why do they pay 9% interest on bonds when they own their own currency? Any thoughts on this? http://articles.businessinsider.com/2011-12-29/markets/30567356_1_bond-sale-hungary-moody

    Reply

    macrosam Reply:

    @Frederik van Wijsbergen,

    May have something to do with IMF imposed austerity that would compromise Hungary’s ability to issue/spend the forint in order to comply with IMF, also may have expected interest rates to rise, and/or further depreciation versus the Euro which many Hungarian mortgages are denominated in.

    Seems to have been somewhat responded to today: http://www.bloomberg.com/news/2011-12-30/hungarian-lawmakers-approve-central-bank-law-in-snub-imf-european-union.html

    Just my take.

    Reply

    Geoff Reply:

    @Frederik van Wijsbergen,

    I would guess that Hungary has a significant amount of foreign currency denominated debt.

    Reply

    Kristjan Reply:

    @Frederik van Wijsbergen,
    CB is hiking rates and government thinks they are becoming the next Greece. They think the interest rates are too high and cannot afford government deficit spending at such high rates.

    http://www.bbc.co.uk/news/business-16362662
    “The government wants to keep interest rates low to boost growth – but last week, Hungary’s central bank increased rates for the the second month in a row, to 7% from 6.5%.”

    CB has done everything to create higher interest rates expectations and they are not sky high of course.

    Reply

  2. rodney Says:

    I love your analogies.

    Reply

    WARREN MOSLER Reply:

    thanks!

    Reply

  3. jonf Says:

    My take: just enough to keep it from dying.

    Reply

  4. Talvez... Says:

    Sadly, I think you’re right!

    I mean, they can save the whole thing from collapse, but their “moralisms” are blinding.

    Can’t they seem economics doesn’t care about those moralisms?

    Reply

  5. jcmccutcheon Says:

    But, what if austerity finally pushes a member over the edge? Say Greece or Italy leave the Euro? What then?

    Reply

    Talvez... Reply:

    @jcmccutcheon,
    Greece and Italy are run by committed eurocrats. It was Papademos who devised the NAIRU in ’75 and who cooked the books when Greece entered the euro.

    Mario Monti served in the European Commission and is a member of several pro-European groups. He supports austerity with whole his heart, it seems.

    Reply

    WARREN MOSLER Reply:

    we may soon find out.

    Reply

  6. Walter_R Says:

    That reminds me. I have several plants that need watering.

    Reply

  7. Dave Begotka Says:

    Brondo’s got what plants crave

    http://www.youtube.com/watch?v=-Vw2CrY9Igs

    Reply

  8. Talvez... Says:

    News!
    Hungary seems to have ended with the Central Bank “independence”!!
    http://www.bbc.co.uk/news/business-16362662

    Reply

  9. roger erickson Says:

    BMHOTK!

    Ever have the feeling that productivity would explode if everyone over, say, 50, instantly retired & went fishing?

    Sure, we’d lose some geniuses, but 99.98% of the others would be brain-dead weight removed from the planet’s policy apparatus. Regardless of the spectrum of reactions, tempo alone would pick up. With tempo, diverse options get exposed sooner.

    I’m for more fishing, less “stabilization” policy.

    Reply

  10. Andy Says:

    Hi Warren

    Just wondered if you had seen and responded to this article that references your work.

    U.S. Facing Insolvency by Ignorant Choice

    Happy New Year

    Reply

    WARREN MOSLER Reply:

    just checked it out. daunting challenge to respond. letting it go

    Reply

    jonf Reply:

    @WARREN MOSLER, Surely, one or more of your buds could mount a defense of MMT.

    Reply

    WARREN MOSLER Reply:

    MMT is on the offensive!

    kkken530 Reply:

    @jonf, Why would you need to mount a defense of MMT ? He’s not Disputing MMT works with Fiat Currency,he’s saying it doesn’t work with debt money,which thanks to our ignorant congress,we have..The problem with debt money{for the borrower} is compound interest…We need to issue some platinum coins and pay down the debt,then issue more to put “REAL” money to work..The problem with interest is covered very throughly in the works of Edward Kellogg..http://www.yamaguchy.com/library/kellogg/kellogg_index.html

    Talvez... Reply:

    @Andy,
    Isn’t that the old dichotomy credit money approach vs state money approach? I think I read something on that on CFEPS website.

    Reply

    Andy Reply:

    @Talvez…, The main point he seems to be making is that Govt money is not fiat money, by definition, because they are ‘legally’ required to borrow or tax an equivalent amount of their spending even though he recognises the power exists to issue fiat currency should they choose to.

    Looks like pedantic point scoring to me. He obviously gets it but chooses to try and make a point about something that could be argued either way i.e. it is fiat money but we have this law blah blah. Not very helpful.

    Reply

    Unforgiven Reply:

    @Andy,

    It’s an interesting read, in any case. Seems that the structure of the Fed and the fact that the Fed’s profits get swept in to the Treasury’s account kind of torpedoes his theory.

    In all, it sounds like he’s on our side and wants to see us throw aside the myth.

    kkken530 Reply:

    @Andy, All money the government makes legal tender is FIAT. That includes gold and silver. But gold standard was not a pure commodity system,and debt money is not a pure token system. Read Edward kellogg’s work,or Arthur Kitson’s work.

    Arthur Kitson

    WARREN MOSLER Reply:

    rather than the mandatory readings on this website?

    kkken530 Reply:

    @Andy, @Warren. In addition to..

  11. jonf Says:

    Why can’t the government simply credit bank accounts with money it wants to spend? Do we need to issue those special coins first? Does that eliminate the need to issue debt? So first we have the treasury with a debt to the fed and the fed with a credit deposit to the treasury. At this point everything eliminates to zero. Now the Tsy spends it and the fed credits the bank. All accounts still net to zero on the government side? The tsy now has an account at the bank and can spend it. No debt. Too bad we have to issue those special coins.

    So the govt has its shoelaces tied and the tsy has to issue debt. they use an intermediate. But the fed buys it back. That debt is now held at the fed and it nets to zero with the treasury liability. It’s like treasury stock of a corporation. It should not be considered outstanding. In fact a corporation can retire treasury stock if it chooses.

    Finally, when the fed buys bonds on the market, the same thing happens.So in that way I suspect the fed could buy up all the debt and leave the banks with cash or deposits at the fed.

    I’m sure this is wrong. But then I’m not the economist.

    Reply

    beowulf Reply:

    @jonf,
    “So in that way I suspect the fed could buy up all the debt and leave the banks with cash or deposits at the fed.”
    It certainly could. The Fed is part of the govt sector but is treated as if it were the private sector Tsy can take advantage of this structural by selling coins to the Fed at face value and crediting seigniorage revenue to TGA, which can then be spent executing appropriation warrants*. Of course this is just the roundabout equivalent of Tsy simply spending money into creation. The singular advantage of Tsy using coinage is that its permissible under current law, while marking up reserves or otherwise “printing money” is not.

    *A cool if little-known term, “The [appropriation] warrant is the official document issued, pursuant to law, by the Secretary of the Treasury that establishes the amount of money authorized to be withdrawn from Treasury for payment of obligations”.

    If Congress did allow Tsy to spend money into creation, the logical way to do so would be to enact a statute deeming each appropriation warrant as lawful authority for the Secretary of the Treasury to create US Notes (on paper or electronically) in an amount sufficient to satisfy that warrant (US Notes are printed by Tsy directly and have the unusual status of public debt not subject to debt ceiling. They’re presently capped at $300M in circulation).
    To keep the books more or less straight, you’d have to do this in three steps, 1. Create US Notes per appropriation warrant, 2. Deposit US Notes into TGA, 3. Spend money out of TGA by marking up private bank accounts. With all these new newfangled micro-computers and telefax machines I’ve been reading about, I imagine steps 1, 2 and 3 could be automated and carried out with a single keystroke.

    Reply

  12. kkken530 Says:

    @jonf,

    Edward Kellogg

    Don’t know why it wouldn’t let me post this under the post I made that didn’t turn the URL into a link.

    Reply

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