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SADA MOSLER Managing Editor 5013 CHANDLERS WHARF #2 CHRISTIANSTED, USVI 00820 Email: smosler@valance.us |
The Center of the Universe
St Croix, United States Virgin Islands
MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.-
MMT: Taxes function to regulate aggregate demand, and not to raise revenue per se.
Warren’s Book:
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"The most important book ever written" -Elizabeth O'ToolRecent Posts
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Internet Life
September 2nd, 2008 at 8:31 am
Sada:
How’s Warren doing?
We’re thinking of him and wishing him a speedy recovery.
Peter and Kiki Karpen
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September 3rd, 2008 at 3:49 am
Sada what has it been like living in hurrican alley? I never realized you lived in such isolation. I used to live in palm beach but insurance rates were too prohibitive and the carrying costs were unbelievable. How much does an 8 oz steak and gallon of milk cost? Thanks.
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September 4th, 2008 at 9:24 pm
Hi,
Yes, prices are higher here, maybe 25% on most things apart from gasoline which is relatively cheap as we have an oil refinery on island.
Power goes off quite a bit, so we have generators. Travel is complicated by limited flights, and merchandise and food in the shops are limited as well.
These all are weighted against the weather, scenery, clear blue seas, and a marginal US income tax rate under 4%.
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September 6th, 2008 at 10:28 am
4% taxes?!? I could live off my vanguard mutual funds and gubbment pensions with such low taxes. With the gubbment primed to raise our taxes soon I am selling all my continental US real estate and moving to your paradise. Thanks! I lived in Hawaii for 3 years and I love island life, but it was just becoming too crowded on Oahu and the other islands were so expensive.
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September 6th, 2008 at 5:33 pm
YOU HAVE TO HAVE AN ELIGIBLE BUSINESS, MOVE IT HERE, KEEP A MIN OF 10 EMPLOYEES, LIVE HERE 183 DAYS A YEAR
AND PORTFOLIO INCOME DOESN’T COUNT
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September 8th, 2008 at 1:14 am
Warren do you have 10 employees working for you? I thought it was just you and Sada? How do you qualify then?
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September 8th, 2008 at 7:40 am
I have a total of 10 or more Valance employees. Busy office! Sada does the blog.
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September 8th, 2008 at 11:45 am
Hey warrent just thought I’d put up a post. A few things. First Seda I do actually enjoy feeding the fish on the main page, it’s more fun than it sounds. Secondly, Warren I don’t understand alot of the lingo in this blog.. would you be able to suggest a book that i could give a good reading so that i may be able to understand the economic language. finally warren send me an email so i can save your email address and get in touch with you about this property.
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September 8th, 2008 at 12:25 pm
Hi Joe!
Start with ‘Understanding Modern Money’ by Prof. Randall Wray. If you can’t find it on line email me at warren.mosler@gmail.com and I’ll find one for you.
Still in normal rhythm although it did seem to fall out Friday am, but by the time I got to the cardiologist’s office it was normal again. Pulse up in the 80′s but the doc’s say that’s ok. Other than that, walking a mile with ease, going out on the boat, etc.
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September 9th, 2008 at 4:39 pm
Warren: I talked to my travel agent today – they say I can take a cruise with Carnival from cocoa beach to st. maarten for about 500 dollars for a 7 day cruise exterior cabin. Is that the best island to see or should I look at another?
Do you know of a cheaper way for me to come visit your island or does that sound reasonable? As to the 10 employees – humm, I know I listened to a jimmy buffet record once about employing the local island people to comply with certain tax laws, I am retired and live off my vangaurd mutual fund returns, but perhaps there is some business I could start and employ some locals. I would need a maid, a cook, a driver, a landscaper, a pool boy, a tennis coach, a massuese etc etc I am sure I can find 10 employees.
Right now I come under the capital gains tax laws and that takes the biggest chunk of my dollars of all my expenses, but I fear very soon that Obama is talking maybe 30% of my cut with new taxes and then my quality of life will go way down and all those people I spend big money on at the restaurants and trips and travel agencies and businesses will not get as much money from me, so I want to do the right thing and keep as much as I can to spend on the locals, I hope to visit your island in the next month or so. Is that a good time?
Joe: I also like feeding the virtual fish – I have spent hours and hours just making the fish move around, I think they are beta fish, in real life my pet store owner friend say beta fish attack each other if you put them too close, but maybe they are not beta fish.
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September 9th, 2008 at 10:23 pm
st martin is about 100 miles away. st thomas is about 40 miles. there are supposed to be some cruise ships stopping here next year but don’t know which ones.
drop in any time!
book a room at the tamarind reef hotel, 340 773 4455
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September 23rd, 2008 at 2:14 pm
Sada,
My new computer runs Windows “Vista” premium.
When I log onto your site with it, the screen goes black and says the pages aren’t compatible with it and it switches to Windows “basic”. Works just fine once it comes back on. You might want to check on that…never saw that before.
Thanks,
Rob K.
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September 25th, 2008 at 3:53 pm
So how do we relay the info to congress that 700 billion to save the banks is actually counter productive? this whole issue is making me kind of nervous… good thing i have job security.
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September 25th, 2008 at 5:04 pm
Hi Joe, I’m trying, but no one’s listening. The program won’t do any harm that I can think of, but not much, if any, good either.
the biggest risk is the let down after it’s in place and nothing much is happening
and now oil is going up again. just what we need!
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September 25th, 2008 at 8:48 pm
From our friend Dr. Galbraith in todays Washington Post:
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092403033.html?hpid%3Dopinionsbox1&sub=new
I emailed the Mosler Plan to my Senators and Congressman (with appropriate edits in the case of the 2 republicans :p, I figured they wouldn’t be too enthusiastic about the full employment program)
Only the Democrat (Sherrod Brown) replied:
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September 26th, 2008 at 7:04 am
Thanks!
It reads like he didn’t even read it.
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September 26th, 2008 at 8:13 am
That tears it. As much as I’m leary about Obama’s background, and particularly the prospect of a piling on of affirmative action at every level of society (look at SA to see how that’s working out), I have to vote for him just on the off chance he’ll actually listen when Jamie Galbraith’s in the room.
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October 9th, 2008 at 5:13 pm
Warren,
Care to elaborate how the payment of interest on reserves changes your work on money? The Fed can presumably buy up any quantity of financial assets and maintain the Fed Funds rate … of course that might completely shut down all lending.
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October 9th, 2008 at 5:14 pm
Warren,
Overall question:
Have we hit bottom?
Thanks!
Rob K.
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October 10th, 2008 at 3:58 pm
yes, though no one answered, I think this morning was the bottom!
can anyone confirm margin calls sent out in the last week caused funds and hedgie’s to reduce leverage caused the decline?
thanks!
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October 10th, 2008 at 9:26 pm
functionally, a tsy sec is an interest bearing deposit at the fed, so functionally paying interest on reserves means the fed doesn’t need collateral to do ‘matched sales’ / reserve drains.
so yes, they can now buy collateral without having the ‘extra work’ of doing some kind of reserve drain to keep the ff rate on target.
Not sure about this being a bottom. might want to wait for the eurozone to shut down. unless it’s going to survive as is and be pulled up by exports. hard to see how that can happen, but agreed it theoretically possible.
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October 15th, 2008 at 5:33 pm
Warren,
You left a comment on Brad Setser’s blog post this morning referring to a “totally confused†discussion following my comment there on the “money multiplierâ€ÂÂ. I wouldn’t disagree.
I’ve scanned your “Required readings – Soft Currency Economics†on the subject, which looks very impressive. If you have time to respond, I’d be interested in knowing if you took exception to anything in particular in my comment on the Setser post (reference below). My first impression is that it is fairly in synch with your paper.
(I did include an overly general point on capital at the conclusion of my comment, which may well have led to some of the ensuring confusion, and would have been better left out.)
Thanks.
My comment at Setser’s:
October 14, 2008 9:59 p.m. JKH
http://blogs.cfr.org/setser/2008/10/13/an-unlimited-guarantee-requires-unlimited-access-to-financing/
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October 24th, 2008 at 7:18 pm
Sada,
The new format is interesting but a little annoying. Is there a way to display on the home page the date/time of the recent post? It’s a little cumbersome to find the ‘new’ posts, or am I just missing something?
Rob K.
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October 25th, 2008 at 1:52 am
Hi Rob,
I noticed that you have just registered for the site. Make sure that you are on the website and not looking at the dashboard. There is a ‘View Site’ button on the top.
The only change on the website is the ‘Recent Comments’ format; the rest is the same as before. The newer posts are listed on the left sidebar under the category ‘Recent Posts’.
Email me if you have any more questions!
-s
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October 25th, 2008 at 11:57 pm
Rob I agree with you, is annoying. The way the comments show now, you don’t just get the new comments, but new comments mixed in with old comments too. IE comments no longer sorted by time posted. I liked the old way better, quicker access to new posts. As Obama says though, time for change eh? Sada – what is up with this registration stuff? My granpappy said rich elitists that started requiring registration were like those bankers who made prices really high so us common folk couldn’t encroach – encroachment by common folk who don’t do as you like really bother some of you folks don’t it? Don’t be like that, Obama gonna be our first black prez – encroachment is a good thing – expands your horizons – censorship and control through registration is for losers that killed socrates – don’t be like that!! Before you know it you will want to be charging for access to this stuff, I can see the $$$ signs rolling in your eyes now! How much money and low USVI taxes is enough?!?!?
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October 26th, 2008 at 1:10 am
Registration is optional.
The new comments are still on top.
Latest 50 are on the left, grouped first by recency, then by post.
Email me if you have any subsequent problems.
Thanks.
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October 26th, 2008 at 2:23 pm
Sada,
A BIG THANKS for dating each post.
Problem SOLVED!
Thanks!
Rob K.
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October 28th, 2008 at 12:55 pm
Hi Warren,
I am leaving comments across the web about the payroll tax holiday.
As long as people are talking about it, why not try to influence the direction of the debate?
http://www.motherjones.com/kevin-drum/2008/10/stimulate_me.html#comments
http://www.econbrowser.com/archives/2008/10/pocketfull_of_m.html#comments
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October 28th, 2008 at 5:21 pm
thanks! hope to get on it tonight. been way too busy!
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November 13th, 2008 at 4:09 pm
Pleased to come upon your site and sounds like there are a few heads screwed on right. I’m USA in Ukraine and have an idea, now that the US national elections are over. Keep and eye on third party Bob Barr. If he picks up on Richard Gage AIA movement and hammers Bush for creating the problem and stalemates Obama & Pelosi in calling for new independent commission with subpoena powers in September 11, 2001 WTC then there will be some fur flying for the next four years. GOTO Gage url Structural Engineers point out that there was a controlled implosion and that building fires don’t melt steel. The 911 movement has spread across Europe – they are apolitical and I’m just a member of the Ukrainian Academy of Science watching the federal reserve note dance its way into oblivion. ÃÂâ€Âþñрыù òõчõр!
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Dave Begotka Reply:
February 10th, 2009 at 11:37 am
Simple, Physics do not change even on 911!
Just think we killed so many on a LIE! And the American Public watches Survivor and eats Cheezy Poofs!
What happens when they wake up? What happens when they get rid of the fed?
What happens to the security markets?
http://www.youtube.com/watch?v=x7kGZ3XPEm4
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November 13th, 2008 at 4:24 pm
Sorry but wisdom of website didn’t print Richard Gage AIA’s website but if you’d care to have Google search I’d recommend that you enter his name plus “911″. There’s over 500 structural engineers, and registered architects calling for a new look at the controlled demolition of twin towers and their questions about the same in the 47 storied WTC-Bldg 7 which didn’t get any debris fall on it or an airplane crash into it.
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November 18th, 2008 at 10:53 am
Hi Warren,
My copy of “Understanding Modern Money” arrived yesterday. It is excellent so far.
“…it is not the issue, but the acceptation, which is decisive.”
I’ve reached page 25, as you can see.
regards,
Mike
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RichW Reply:
February 10th, 2009 at 11:49 am
Got mine this weekend. I’m finding I have to reread parts and then let it sink in for a while before continuing.
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January 4th, 2009 at 9:19 pm
More mainstream mentions of payroll tax holidays. As well as money to the states.
http://online.wsj.com/article/SB123111515309852563.html
Barry Eichengreen (from wsj):
“I would like to see mainly payroll-tax cuts and block grants for states”
“Infrastructure means bridges to nowhere.”
Cheers, learned a good deal from following your site and associated references.
David
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January 5th, 2009 at 11:33 am
Glad Barry is coming around. Maybe he reads this blog or talks to people who do.
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January 5th, 2009 at 12:34 pm
Meanwhile, Krugman is once again worried that household balance sheets might be improved too much:
http://krugman.blogs.nytimes.com/2009/01/05/is-obama-relying-too-much-on-tax-cuts/
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January 5th, 2009 at 4:05 pm
JIM: You got it! Krugman is so pro Government he really does not care what happens to households. God forbid the deficit grows through tax cuts that people might save! It must all happen through higher Government spending, and if people lose their jobs, the lose their jobs.
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January 20th, 2009 at 9:50 pm
Hi Guys,
Where did you find the song/band Ledge/Cave? do they have a web page?
Wish I was there!
Thanks!
Russ
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January 21st, 2009 at 10:54 am
I own the tune- know someone famous who wants to do a cover?
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Russ Reply:
January 21st, 2009 at 6:10 pm
Unfortunately I don’t. Thought it was catchy.
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February 8th, 2009 at 12:21 pm
Warren,
If you have not seen it, there is a huge explosion of talk about the money creation process – by some of the heavy hitters in the blogs.
http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html
http://www.interfluidity.com/posts/1233118501.shtml#comments
Your ideas are taking root.
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February 8th, 2009 at 12:47 pm
Good to see it, thanks!
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February 8th, 2009 at 1:13 pm
Whoever Winterspeak is, he/she has the flex fx paradigm down pretty good. Well done!
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Roger Reply:
February 9th, 2009 at 12:36 pm
Thanks for the links. I’ve read Steve Keen’s website, and he seems to be partially in paradigm, but he also seems to outline that the private debt profile will inevitably lead to either a moderate (best case) or severe (base case) depression. Granted, he makes that case in a flowchart about why the original Paulson plan would be ineffective, but I think it is representative of his paradigm.
His analysis emphasizes the reduction in aggregate demand caused by the private sector repeating its path from high debt obligations to all-time low debt obligations, mirroring the 1930′s-1950′s path.
It appears that the difference between his moderate and severe depression cases is based on whether the govt diverts enough of the income generated from its giant “asset swap” back into aggregate demand.
I’m not enough in paradigm to recognize the strength and weaknesses in his approach. He definitely emphasizes the debt-deflation concerns, but gives little attention to the effect of large fiscal stimulus.
I’d be interested in hearing your thoughts, if you are familiar with his work.
Thanks,
Roger
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February 9th, 2009 at 12:42 pm
the govt buying financial assets doesn’t add demand unless it somehow increases non govt borrowing to spend.
worse, it takes interest income out of the economy. the fed’s 2 trillion portfolio nets them maybe 60 billion a year which is income lost by the private sectors.
they need a fiscal adjustment to directly alter demand
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February 9th, 2009 at 2:37 pm
Hi all:
I dig Mosler! Try to give you lots of credit too, Warren, and am working on spreading your ideas.
Must admit, they are *hard* to understand at first. Keen’s PK piece, which made it to Naked Capitalism, helped though.
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RichW Reply:
February 10th, 2009 at 12:25 am
Winterspeak, nice to see you here.
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warren mosler Reply:
February 10th, 2009 at 3:04 pm
good to hear it thanks! read ‘understanding modern money’ if you haven’t yet
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February 9th, 2009 at 4:08 pm
Winterspeak -
I’ve been following your latest movements “into paradigm”. It’s always refreshing to see someone who might not be idealogically predisposed to “big government”allow themselves to see how finance really works. Of course, now the problem becomes that reading the financial pages becomes even more infuriating than before…
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February 10th, 2009 at 4:09 pm
“understanding modern money” is on my list. Not the easiest tome to get ahold of, though!
And yes, while I am not ideologically “big government” I do believe that government has several jobs to do, and that it should do those jobs well. Managing money is one of its most important jobs.
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February 10th, 2009 at 4:42 pm
Right, I don’t promote ‘big government’ per se either, though many read that into some of what i write. And yes, getting the monetary system right would go a long way to promote stability, useful output, and employment in general.
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February 10th, 2009 at 5:12 pm
I didn’t mean to imply that Warren is for “big govrnment” – only that many of a more libertarian persuasion rebel viscerally against the “state money” approach, no matter what evidence they are presented with…
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February 10th, 2009 at 7:29 pm
Agreed. They are a ‘love money / hate taxes’ group and can’t deal with the fact there is no money as they know it without taxes.
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February 12th, 2009 at 1:53 pm
Hi Winterspeak,
Glad to see you here. Trying to get the word out on these ideas is not easy, as most people look at you like you’ve sprouted horns once you start saying things like “taxes drive demand for money”, or “government surpluses are bad”. My dad literally could not repeat what I said, it was so far from his usual thoughts.
I found Steve K’s treatment to be very good. I was looking at it all last night. I like the matrix he creates, it does very much simplify the understanding. Also, his take on ODE is spot on. Money is best looked at as a flow, and should be modeled as such.
He is a horizontalist, in Basil Moore’s reading, and I think he is really missing out on the vertical component. I will try to expand his matrix model with the vertical component.
I am much more of a big government person, simply because I think markets can be bad allocators of assets for long time horizons, but our society and civilization need long term allocation in some cases. For example, market forces have driven us to a point where we are in an energy trap, where most of our potential GDP will be spent on maintaining our energy. We would have been much better off wasting a trillion dollars on energy research over the last 3 decades. But we did not do that, so we are stuck in a position where we may not be able to grow due to energy constraints.
Plus, I have a soft spot for waste as I look around and see people doing stuff that is wasteful all the time. When I hear libertarians talk about government waste, for some reason I always think of Robert Fripp (an incredible guitar player) who said: “What you call feeling, I call mistakes.” I walked around the Chicago Bean all day Sunday, which was a huge waste on my and Chicago’s part, and loved every second of it, surrounded by hundreds of smiling people who were also enjoying this wasteful public expense that will never recoup the costs of installation. And I think Steve Keen is right when he said that pure profit maximizing behavior would be called sociopathic by a psychologist.
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Scott Fullwiler Reply:
February 12th, 2009 at 2:28 pm
Mike . . . agreed regarding SK and vertical component. He got a very chilly reception a few years ago from us chartalists when he presented a previous version of the simulations in KC largely for that reason. There were also several problems with definitions of terms such as deposits, reserves, and profits . . . the positive response I’m hearing from several in the blogging world suggests these appear to be fixed.
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warren mosler Reply:
February 12th, 2009 at 3:49 pm
Very good!
Last time I saw Basil (Moore) I said something and he asked whether I was a horizontalist or verticalist and he gave me a very perplexed look when I said ‘both, of course.’
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Mike Sankowski Reply:
February 12th, 2009 at 9:45 pm
You know these guys personally! Of course you two do…
I did not see that Steve K has addressed the vertical component, but I do have limited understanding which I am working diligently to correct, so I might have missed something.
Something interesting that is different than the model presented here is that he has net money creation from horizontal component. To be clear, his horizontal component does not net to zero at the end of the cycle.
I think this growth in money supply in his model is due to the combination of relending and the turnover of capital. I follow the logic of the model up to that point, but he loses me on that step. I do not see how the accounting identities can be reconciled with the flow equations.
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Scott Fullwiler Reply:
February 12th, 2009 at 9:57 pm
From what I recall of his earlier presentation, that sounds like its along the lines of the criticisms we were making regarding both H and V. So maybe not that much has changed?
Scott Fullwiler Reply:
February 13th, 2009 at 12:53 am
Also . . . yes … know them both and they’re both very intelligent, very good people.
February 22nd, 2009 at 8:57 pm
Warren, as “Deficit Spending for Dummies’ will be your first material presented by me, do you think we could elaborate a little bit on this introductory phrase to make it sound neutral,let’s say “Understanding Deficit Spending”, or something like that? What do you think?
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February 23rd, 2009 at 9:54 am
Hi, feel free to call it anything you want, thanks!
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March 3rd, 2009 at 6:03 am
Hi Warren,
I was wondering if you had a chance to read the newly released BIS Quarterly Review entitled: “The US dollar shortage in global banking.”
http://www.bis.org/publ/qtrpdf/r_qt0903f.pdf?noframes=1
The thesis that the global dollar shortage was the result of maturity mismatches, as long-term dollar assets were funded by short-term dollar liabilities. The role of the Central Bank swap lines is also explained on pages 58-59.
Also, in taking a glance at our counter-parties (national banking systems) in these swap lines, I noticed these counter-parties have a net long foreign position in US$, with the exception of Spanish, Belgian and French banks. So it looks like the Fed stepped in to fill the gap in short-term US$ funding with these swap lines.
Would you be willing to comment on the data and conclusion presented in this report?
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March 3rd, 2009 at 8:06 am
JUST GOT IT THE OTHER DAY AND HAVEN’T GONE THROUGH IT IN DETAIL YET.
WHAT YOU SAY MAKES PERFECT SENSE AND IS SUPPORTED BY THE EVIDENCE IN THE MARKET PLACE.
THANKS FOR THE LINK FOR THE READERS!
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May 5th, 2009 at 5:32 pm
Warren,
Check out this discussion about private coinage.
http://econlog.econlib.org/archives/2009/05/george_selgin_o_1.html
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May 27th, 2009 at 3:42 pm
Warren, there is no direct link on your home page to view a list of categories in which you file each of your posts. I do realize that I can find the hyperlinks to the category folder(s) in which an individual post may be located, but I cannot view the list of all categories. They used to be located on the left-hand pane. Can you help me locate any category list you may have for easy reference? Thanks,
bforneyiii
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May 27th, 2009 at 11:26 pm
try the search function for now and over to Michael to figure out how to improve navigation thanks
maybe we need a page that lists all the posts by title and by date
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June 8th, 2009 at 7:16 pm
Warren,
I’m still looking to move to STX but can’t find any work. I came down in March to interview with Stanford had my trip scheduled and ended up being a few days after they were shut down…..bummer! At least I didn’t jump the gun, move down and have no job. So I chartered a sailboat instead with the Rose Sail Inn. Any chance you know someone who is hiring? I have the series 7, 24, 55, 63, 3 and 4. I will take any job except cold-calling/stock broker. Also when are you adding more music from the Cave? Do they have a website?
Thanks again, I enjoy your site.
Russ
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Russ Reply:
July 13th, 2009 at 10:41 pm
So what’s up?
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June 10th, 2009 at 8:11 pm
Sada,
I have enjoyed the Mosler Economic website very much. After reading over most of the site I feel well educated in Federal Reserve banking in an academic sense. In a real world sense I have worked in automotive parts sales, branch banking and at a mortgage bank in the bond department where I priced and pooled mortgages for sale in the secondary market.
I have been thinking a lot about the financial crisis / economic downturn and have come to the conclusion that most of it has to do with falling home prices. The primary banks, federal reserve even GMAC have all seen bad loans rise as a result of falling home prices. I also feel that prices of homes are set to rise again if the federal government enacts a program similar in nature to the GI bill that was passed after WWII.
My understanding of this bill was that it allowed returning veterans to purchase homes at a significant discount after they spent time in the armed forces. Let me explain the idea further. Right now a new enlisted soldier might make $10K per year for a 4 yr stint in the military plus they can get education credits toward college. What I propose would be an additional ‘government-owned home buyer credit’ of say $10K per year to buy government-owned homes that the federal government buys out of foreclosure.
The federal government buying foreclosures would provide the banks a way to get bad loans off their books; reducing the need for bailout money. It would help the housing prices bottom. Right now it is assumed that one foreclosure on your street reduces prices on the entire street by an average of 5%. Falling home prices would be eliminated when the federal government buys the foreclosure and sells it to a veteran. It gives returning veterans a chance to buy a house or put down a significant down payment and start a family. This would decrease federal costs of unemployment and veteran related expenses.
The result: bank stocks rally, veterans get the treatment they deserve after serving their country and deflationary pressure in the housing market ends. Ultimately higher housing prices would create jobs in construction, provide consumers with more money to draw on through HELOCs and end the banking crisis.
The US dollar should hold steady on the passage of this bill as these houses have intrinsic value – they just lack a buyer who can afford them. The amazing natural resources this country has was converted into houses unlike any place else in the world. These homes are not worthless so the money the federal government spends to buy the houses is not wasted. The US dollar should be fine with a program like this. It would simply require coordination between veterans affairs and HUD and the federal government in passing a bill that enacts this into law. It would gain significant political clout behind whatever law makers back the plan as the military and banks would be forever grateful as would every homeowner.
Please let me know what you think of this concept and also how I can post to the economic forum instead of the guest book in the future. I am going to send this idea to a few prominent law makers as well.
I hope all is well with you.
Andrew O’Dell
B.A. International Business – Rollins College ’04
M.B.A. – Wayne State ’11
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June 11th, 2009 at 4:00 pm
Hi,
My proposals are for the payroll tax holiday and 1000 per capita revenue sharing to the states which should instantly give working people sufficient increases in take home pay to afford to make their mortgage payments (and car payments, etc.) and thereby end the crisis.
We’ve got the same goal with slightly different approaches.
Mine might be considered ‘more equitable’ as it simply means stop taking funds away from all working people, rather than giving out funds only to home buyers.
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June 27th, 2009 at 6:59 pm
Might be good fo the students to know this: http://mixedink.com/OpenGov
also twitter.com/OpenGov
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August 17th, 2009 at 12:32 pm
If anyone is thinking of moving to St. Croix and does not know what business they could own and run from there do this. Go to the website bizbuysell.com and go to advanced search. M move the selection mark from All US to Alaska then to the right down the page mark include relocatable businesses. Every relocatable business on the website through out the U.S. will come up. Maybe there is a match between the businesses for sale, your skills and your budget you can find.
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August 17th, 2009 at 12:35 pm
The deal with the Earl of L, Tom P owns one of the largest botanical gardens in Ireland and writes and consults on the subject. He would have contributed to the design not merely traveled as a guest.
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August 17th, 2009 at 12:36 pm
Thought
I wonder if perpetual hurricane insurance would be a viable idea.
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September 29th, 2009 at 7:00 pm
http://www.moslereconomics.com/?page_id=32&cpage=1#comment-11601
This link leads to a 404 page.
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September 29th, 2009 at 11:16 pm
Actually, several of your “mandatory reading” links lead to 404 pages.
BTW, is there an online and downloadable edition of “Understanding Modern Money”–free or otherwise?
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warren mosler Reply:
September 30th, 2009 at 5:36 pm
Thanks, Michael will get on it!
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September 30th, 2009 at 3:24 pm
Does anyone at the website ever actually read and answer people’s questions here?
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November 2nd, 2009 at 11:05 am
Natural Gas Bottom?
Could the Natural Gas price in Chicago be bottoming? I think Congress should look at supporting this industry as it is critical to infrastructure and energy security. The BTU price is at an all time low and industries, home building, and energy companies only have upside potential from these levels IMO.
Andrew ODell
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December 3rd, 2009 at 12:51 pm
Mr Mosler,
Tom Greene of William Blair suggested that I contact you. He sends his best wishes to you.
I founded Chicago Weather Brokerage and have worked with the CME to develop snowfall binary options that will begin trading on Monday, December 7th. I have quite an extensive customer base with snowfall exposure. Tom thought you of all people might have an interest in trading this product. I have a couple of existing market makers/speculators to help get the market going but I could use a few more participants. Please let me know if you have any interest as I would greatly enjoy the opportunity to talk with you in more detail.
Best,
Jeff Hodgson
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December 6th, 2009 at 3:07 pm
Hi to Tom!!!
I haven’t been trading directly for many years, so can’t help you there, but call any time.
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December 21st, 2009 at 11:19 pm
I have
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December 21st, 2009 at 11:34 pm
Mr. Mosler,
I have got a problem and need help. I think the USA government could partner with free and clear home owners, (no mortgages) to float a bond for enough money to be able to refinance all homes with better terms, and lower interest rates. Revenue from the loans could pay these home owners a dividend and cover all costs. The trick as I see it would be to balance the desire for lower rates, with the desire for larger dividends. This would rid us of the secondary mortgage market if enough people participated in this type of program would it not? I have been told this is impossible but not have gotten a good explanation why.
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January 7th, 2010 at 10:24 pm
MR Mossler
Do you have any recommendations when setting up an EDC company that will be trading stocks and options as a market maker. Any help would be greatly appreciated Happy New Year.
Thanks
Will
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January 8th, 2010 at 8:47 am
Sounds good! We have good bandwidth from what I’ve heard. And good weather.
email me at warren.mosler@gmail.com anytime.
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January 25th, 2010 at 5:29 pm
Warren.
I’ve been trying to get it. I think what you’re saying is that the government should stop issuing bonds, and simply print the money to keep operating, and to pay off the outstanding bonds. This will eliminate the threat of interest on the national debt snowballing, which is really the root cause of hyperinflation.
Thus the government (may) run a continuous deficit, yet never accumulate a debt. If there is too much money in the system,with too much inflation, it should raise taxes, to control demand, by sucking up excess cash. It can also cut back on expenditures. If there is not enough money in the system, it should lower taxes, or spend more, or some combination of these.
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January 26th, 2010 at 5:22 am
That’s pretty much it, very good!
A few details-
I wouldn’t use the term ‘printing money’ which comes from the gold standard. Govt can simply spend as it always does- by changing numbers up in our bank accounts- and simply not sell tsy secs. A ‘different’ kind of spending is not applicable.
Then, when govt spends more than it taxes, that ‘extra’ spending will show up as extra balances in checking accounts the banks keep at the Fed. No problem there. And if the Fed decides to not pay interest on those balances, which is my preference, so be it.
Some people will continue to call those balances ‘debt’
I don’t much care what they call them.
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January 26th, 2010 at 2:04 pm
Thanks, Warren.
OK So the money ends up deposited with the FED.
So the government has no need to borrow. In fact, spending borrowed money is useless in expanding the money supply. Any borrowed money is first taken out of the economy, before it is put back in. So there is no change in the money supply. So attempts by the government to stimulate the economy by spending borrowed money will have no net effect, except maybe where the money is not being lent in the first place. Of course, the government borrowing it takes away the motive for the banks to lend it to the privat sector.
In an expanding real economy, for the government to limit itself to borrowing leads to a relative contraction in the money supply. So in general the government must run a deficit, and without borowing. To balance its budget, or even borrow, or worse run a surplus, restricts or contracts the money supply.
Do I still have it, or did I lose it?
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January 26th, 2010 at 2:58 pm
“So attempts by the government to stimulate the economy by spending borrowed money will have no net effect”
Not quite. The issue is not whether or not the government “borrows”. The effect of additional spending is on how much additional demand it injects into the economy. Spending adds demand, taxation withdraws it. “Borrowing” merely alters the term structure of interest rates – it has no effect on agg. demand at all (except inasmuch as it leads to additional spending on interest payments)
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February 27th, 2010 at 12:14 am
Warren…
I love your site and philosophy. Thought you might find this of interest.
http://www.theonion.com/content/news/u_s_economy_grinds_to_halt_as
Neal
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March 29th, 2010 at 3:48 pm
Hi Warren-
I don’t think my first message went through to you. It’s Ward as in Ward & Diane from St. Croix, but now in Connecticut (unfortunately). I just got off the phone with Chris Hanley, and he suggested that I get in touch with you. If you need any help with your campaign in the Greenwich area, let me know. Perhaps I could organize an opportunity to speak at the Yacht Club here if you’d be interested. It seemed to have worked pretty well for Jim Himes.
Anyhow, best of luck and let me know if you’re in the Greenwich area.
All the best,
Ward Davol
(203) 979-4650
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March 30th, 2010 at 6:04 pm
I’ve read and heard Warren Mosler claim the IRS shreds cash it receives in payment of taxes. I cannot find any reference to this anywhere other than those quoting Mr. Mosler. (While it is a well known and documented fact the Treasury shreds old, torn, or defective bills to take them out of circulation, this is not what Mr. Mosler is talking about.) Can you give me any proof, documentation or third party reporting on this shredding of cash tax payments?
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July 30th, 2010 at 3:09 am
hi warren. recognize the name from the past?? 11b ambassador dr manchester…in the 70s?? i was excited to see you are running for office here in ct.. please tell me why i should vote for you. i have chatted with your mom a couple of time over the last few months. she sounds great. so happy she is recovering so well from her stroke. looking forward to hearing from you.
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WARREN MOSLER Reply:
August 2nd, 2010 at 10:20 pm
yes, hi!!!
Check out my website and proposals at http://www.moslerforsenate.com, thanks, and feel free to get a group of people together for me to address. Hope to see you soon!
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August 9th, 2010 at 10:00 pm
Two suggestions for publishing your book one is http://www.scribd.com/ and the other is self publish on Amazon Kindle although you won’t get the book publisher’s paying for TV and Radio appearances. I am not sure how Kindle works but Scribed is easy.
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September 16th, 2010 at 5:03 pm
Hi Warren,
Just read your proposals at Mosler for Senate. Was particularly struck by the state vx. federal taxes.
Since this is so, why have federal taxes. Why not let the states drain excess, if any? After all, we are presumably a republic, not strictly a democracy.
Thanks,
Sam
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WARREN MOSLER Reply:
September 28th, 2010 at 10:07 am
it’s a political choice for sure!
problem is states get in races to the bottom, etc.
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October 23rd, 2010 at 12:00 am
Warren, about your $1 million challenge – is it open to all, all congresspersons, all Senators, or just your senatorial opponents? Does the latter include Peter Schiff?
Can you state the challenge more precisely than offered in the blurb on your site? Or is that the extent of the challenge? “Mosler knows as a fact of actual monetary operations that, operationally, there is no such thing as the US government running out of dollars, being dependent on foreign borrowing, or potentially facing a solvency crisis like Greece. Nor is there any financial reason to cut Social Security or Medicare benefits. To make the point, he’s offered to pay $1 million of his own money to any of his Senatorial opponents on the ballot who can prove him wrong.” Is that the extent of your challenge?
To ensure I wouldn’t be wasting my time in proving you wrong, are you suggesting that the US Treasury is not operationally constrained in the current Fed Reserve/FRN banking system, or are you suggesting that the US Treasury could instead create its own currency without debt – like the “Greenback” or a US Treasury Dollar? To confirm, are you relating your challenge to the current monetary system, or a proposed (but hypothetical) monetary system?
As an FYI, I believe I can prove you wrong under the current monetary regime, but not under a hypothetical US Treasury Dollar issuance regime…
Since the election is fast approaching, and I would want some time to put my proof together, the favor of your reply is requested…
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WARREN MOSLER Reply:
October 25th, 2010 at 12:55 pm
under current monetary arrangements ‘the government’ which includes the Fed, Tsy, and all other govt. agencies etc.
Yes, I include the Fed as part of govt. See other posts on that at this website. I did not say specifically/exclusively the Treasury is unconstrained, though they do physically print the money last I checked.
Open to all of Congress. Peter Schiff is included.
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S Thomson Reply:
October 25th, 2010 at 2:31 pm
IF you include the Fed as a part of ‘government’, then it is a truism that the country can never run out of money or go bankrupt. The Fed, and its member banks, can create as many FRN’s as they want (the banks being restricted somewhat for practical reasons), and can use these FRN’s to purchase US Treasury’s (which they are doing). And of course, QE is the purchase of UST’s with newly created FRN’s.
However, I believe it is a fundamentally flawed assumption to include the Fed within government for the purposes of arguing that debt doesn’t matter, and that the country couldn’t run out of money.
The Federal Reserve Act clearly delegates the creation of Federal Reserve Notes to the Federal Reserve. FRN’s are the present currency of the US (yes, the physical FRN’s are printed under contract with the Treasury and coins are ISSUED without debt from the Treasury).
Available evidence makes it clear that the Federal Reserve system is owned by the member banks. Yes, certain governance positions are appointed by the President, but OWNERSHIP rests with private member banks (who earn a 6% annual dividend on their capital investments).
In Modern Monetary Mechanics, printed by the Federal Reserve, the Fed admits that the majority of money is created by the lending of member banks in the fractional-whatever (capital or reserve) banking system.
Ergo, when a Primary Dealer purchases a UST for its own account, it is the PD that is creating the FRN’s in order to purchase a UST. The actual money creation occurred by a private corporation in order to purchase an interest-bearing obligation of the US taxpayers (whether or not you believe taxes pay for the debt). Therefore a transfer of ‘wealth’ occurred FROM the ‘public’ TO the private corporation. You may argue that interest payments are stimulative, but I argue that since this is not an intra-governmental transfer (the debt obligation is now owned by a private corporation) there is an expectation of repayment.
Can you point me to a specific place on your website that discusses your arguments for including the Fed as a part of the government? I looked around for a bit…
Long story short, why would an MMT’er NOT argue for the direct issuance of money from the US Treasury a la the Greenback or the Kennedy dollar? Then money could be issued without debt, and interest would not be paid by the public to private companies where the Constitution clearly requires Congress to issue the currency of the land (why did they delegate it to a private cartel?).
IMHO, having the US government issue more UST’s in order to purchase more FRN’s in order to spend them to stimulate the economy unnecessarily enriches the banks (the real money creators).
Thanks for the response…
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WARREN MOSLER Reply:
October 25th, 2010 at 2:51 pm
start with the ’7 deadly innocent frauds’ to get a lot of your questions answered, and then the rest of the ‘mandatory readings’
The Fed is controlled by congress. member bank ownership carries no management authority or voting on any issues of consequence, just a fixed return which makes it functionally debt.
All profits are turned over to the tsy. it’s run on a public purpose basis, not a for profit basis. And the member banks themselves are functionally public/private partnerships subject to full regulation by the govt.
Tom Hickey Reply:
October 25th, 2010 at 3:00 pm
As you probably know, Libertarians are leading the charge about the Fed being private. Here is Libertarian economist Bill Woolsey putting that to rest, on a Libertarian site no less.
Demystification: Who Owns the Fed?
The “private” Fed being in charge of the US money authority is just a canard.
October 25th, 2010 at 3:44 pm
There is no question that the Fed has both public and private aspects. Tom, from your article:
“However, if one begins with an understanding that the Fed is fundamentally a political operation, then it is unusual in that bankers have an extra avenue of influence. Like everyone else, they can vote, lobby, and make campaign contributions and so influence the politicians. Unlike everyone else, they can own shares of stock in member banks that “own” the Federal Reserve banks and so influence directors, Federal Reserve bank presidents, and the Open Market Committee.” [With the widespread regulatory capture of federal regulators by the MIC, the mega-corporations, and the bankers, it's hard to argue the 'independence' of government anymore, but that is a whole 'nother discussion.]
Of course, the Fed is not responsible for the majority of money creation – which happens when private banks create money through lending (whether you call it fractional reserve or fractional capital). The centrality of my point was the example of the Primary Dealer purchasing a UST with newly created FRN’s. The money creation occurs at the PD, not at the UST. And the PD has created an electronic FRN (which cost them nothing) and in return received an interest-bearing obligation of the United States. IMHO, that is trading something (a UST) for nothing (an FRN).
Again, why would an MMT’er NOT want money creation to occur with the ISSUANCE of a US Treasury currency/money like a Lincoln Greenback or a Kennedy Treasury Dollar. If one is an MMT’er, and therefore debts don’t matter, why issue debt at all? [In today's system, it's because the UST cannot directly issue FRN's - per the Federal Reserve Act - but must borrow them before they can be spent.]
In looking at the fundamental flaws of today’s debt-money system, IMHO, it is that private corporations (banks) create money/credit (really debt-money), instead of it being issued directly from the US Treasury. Again, in my opinion, one cannot have a true MMT system until debt-free money is issued by the government…
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beowulf Reply:
October 25th, 2010 at 4:46 pm
Well Tsy could stop borrowing tomorrow and simply create money (the Secretary of Treasury has been granted unlimited authority to mint coins of any variety, quantity and denomination), that and ten dollars will get you a pizza. The problem isn’t borrowing, oddly enough its actually cheaper to borrow since the 3-month, 6 month and 1 year T-bills rates are all lower than the interest on reserve rate (which the Fed would have to pay in the excess reserves created by new govt spending). The only constraint that matters is that Congress holds the checkbook, Tsy can’t spend money or cut taxes without congressional approval. That’s why the Fed keeps pushing the string on monetary policy, because Congress is asleep (and the President doesn’t want to interrupt their slumber) at the switch with fiscal policy.
See Wynne Godley and Marc Lavoie paper on fiscal policy–
http://www.levyinstitute.org/publications/?docid=911
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WARREN MOSLER Reply:
October 26th, 2010 at 12:54 pm
first you have to identify what your fundamental issue is:
You don’t want banks to be able to make loans?
You don’t want the tsy to spend more than it taxes?
You don’t want the fed funds rate to be above 0?
You don’t want the fed to set interest rates?
When the govt spends more than it taxes, someone has those dollars.
If the gov doesn’t offer some type of interest bearing account for those dollars the
rate those funds can earn is 0, which becomes the minimum risk adjusted return anyone will be able to get for short term funds.
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S Thomson Reply:
October 26th, 2010 at 5:27 pm
I’m ok with deficit spending, a 0% interest rate, etc. As a quick aside, one quibble I have with MMT is that the first person to receive a newly issued dollar receives a greater benefit from it then other citizens (since their currency is diluted, but they did not receive the direct benefit of the government spending) – which leaves open the issue of cronyism and corruption. But as you say, MMT is operational, it does not specifically address policy implementation (I think that is what you say).
In our current private-bank, fractional-whatever system, private banks create the preponderance of the nation’s currency. In my oft-stated example, Primary Dealers create zero-interest currency at the click of a mouse, and then purchase interest-bearing obligations of the US. This is a clear (and unnecessary) transfer of wealth from public to private hands. [There's a reason the banks tend to have the nicest buildings and best compensation...]
In a second example, when banks loan a mortgage, they don’t actually lend the money (as you know). It is merely an accounting transaction. But in return for a couple of mouse clicks, they receive a pledge of collateral of productive assets and a claim on the future labor of a citizen. That does not seem to be a transaction with consideration on both sides. See the (in)famous Credit River case.
I realize I’m treading off-thread, but again it seems to me that in order to truly propose deficits don’t matter, money shouldn’t be created as debt – especially by private corporations and then lent to the Treasury. The money should be issued by the Treasury without debt. While in the current system, future deficits can be repaid operationally with a few clicks of a mouse, it requires an expansion of the money supply (and the national debt) in order to pay for the compounding interest. The expansion of the money supply, all other things being equal, debases savings. [And again referencing the transfer of wealth from citizens to private banks.]
With a Treasury-issued currency, no compounded interest would be required to be repaid, therefore, this would not require an increase of money supply for this particular factor, and avoids the loss of seigniorage for a privately-created currency.
Not totally on point, but from the wikipedia (yes, I know, wikipedia): “When a private bank creates currency, the government cannot collect any seigniorage from it. Since the Federal Reserve has a target for the size of the currency stock, any currency created by private banks is currency that is not created by the Fed and thus constitutes lost seigniorage.[19] Some consider this an illegitimate “privatization” of what should be a public good, with these profits being retained by the government to finance essential social services and capital works.”
Anyway, thanks for the conversation…
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Tom Hickey Reply:
October 26th, 2010 at 7:01 pm
In light of MMT, people on MMT blogs, here and elsewhere have made similar observations and proposals for reform, such as consolidating the cb and treasury functions, eliminating the deficit offset with tsy’s requirement since it is operationally unnecessary and provides a subsidy to bondholders, setting the overnight rate to zero and letting markets determine interest rates and spreads, and reforming the banking system to eliminate economic rent-seeking and cheating. This can all be done under the present monetary system simply by Congress changing some of the restraints that it has placed on the system. The issues you bring up are not operational; they were imposed politically and can be changed politically.
Some consider this an illegitimate “privatization” of what should be a public good, with these profits being retained by the government to finance essential social services and capital works.”
This is incorrect operationally because a monetary sovereign that is the sole provider of nonconvertible floating rate currency has no need to finance itself in that it is the currency issuer and there is no restriction on its currency issuance. Seignorage is operationally meaningless under a fiat system such as the present one; it pertains to commodity money. The US government doesn’t need to get funds from anywhere since it owns and operates the spreadsheet.
There has also been some controversy about eliminating or restricting private banking, too. Some people have been for variations of this, but others have objected that 1) exclusive government banking puts too much control in the hands of the state, 2) government is not expert at assessing risk or deciding which investments will pay off and which won’t, and 3) banking reforms can fix problems that arise. There is a lot of discussion of such issues on Warren’s blog as well as at Bill Mitchell’s.
Matt Franko Reply:
October 26th, 2010 at 8:58 pm
ST,
“In my oft-stated example, Primary Dealers create zero-interest currency at the click of a mouse, and then purchase interest-bearing obligations of the US. This is a clear (and unnecessary) transfer of wealth from public to private hands. [There's a reason the banks tend to have the nicest buildings and best compensation...]”
Perhaps a small point, somewhat related, but a while back I looked into a Primary Dealer and found that they are “Primary” so to speak in terms of their having to readily engage with the FRBNY in setting monetary policy, I didnt take away that they somehow obtained head of the line priviledges at the Treasury auctions (darn!). I took that they are “primarily” required to engage in open market operations with the desk at the FRBNY when policy interest rates need to be adjusted/maintained. This is somehow in itself good for them, (front-running? I dont know). In this interest rate environment it seems to me it would be a tough business right now.
In fact there was a lot of griping by some of the PDs that the Treasury Direct issue program was taking away some significant volume from them at the auctions. With current info technology, I see this trend doing nothing but increasing and the current ZIRP probably is accelerating this trend towards direct Treasury issuance to the non-financial sector as rates are so low that nobody wants to pay a broker as well.
Resp,
ps Of course this all goes away with no bonds, etc…
WARREN MOSLER Reply:
October 27th, 2010 at 2:40 pm
all govt spending is via incurring a liability, whether actual cash, reserve balances, or tsy secs.
October 26th, 2010 at 10:55 pm
@ Tom – thanks for the thoughtful response. I appreciate it.
I was a bit concerned about using the “Seignorage” quote, since many of the web definitions I found referred to commodity money, but a couple referenced the generic ‘profit’ from making money (the cost of creation v. the cost of sale), and one even specifically referred to the profit from printing paper currency (and of course electronic creation is free). It was the latter sense that I hoped the word would come across (the profit of creating any money). That might not be the right interpretation on my part…
“since it is operationally unnecessary and provides a subsidy to bondholders” – that’s my rub (and a significant one in my opinion). The current structure of money/credit/UST creation provides a significant (and unnecessary) subsidy to bondholders. And in that context, makes the comment/concept that “deficits don’t matter” misleading at best, since larger government spending means larger subsidies to bondholders. [And the compounding of interest payments creates an upward influence on the money supply.]
In fact, I would argue the entire bond auction construct was designed to subsidize (illicitly profit) the bondholders (see the many presidential quotes on the issue of money creation and bankers). It also obfuscates the reality of monetary sovereignty. It would be far more clear to all if we didn’t have debt, bond auctions, etc. And I still, whether people agree or not, argue that the Fed has significant private constituencies/ownership/independence. Call me a conspiracy theorist if you will… :)
And as you reference, it’s all political. Of course, once granted subsidies create an entrenched class, and also significant political influence in order to maintain the subsidies. I can’t imagine the bondholders willingly giving up the subsidies, and substantial historical references exist to the battles for and against this model of central banking.
While I don’t consider government banking a panacea, our system of private banking/debt-money creation has arguably created a generation of debt slaves, where people own little but owe a lot. And I’d probably try to forge a definitional difference between banking (holding deposits and making loans) and money creation. Designing a better system and having it implemented is of course a massive issue, but there are some very good ideas out there…
Thanks again…
@ Matt – thanks for your comment as well. As you reference, I was really discussing the PD in the context of the simplicity of explanation of how they purchase UST’s direct. Of course, other people (as you mentioned) can too…
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Tom Hickey Reply:
October 27th, 2010 at 12:49 am
I have suggested making retail banking a government monopoly, using agents. I would see government holding demand deposits in checking accounts, issuing interest bearing time deposits and such matters of retail banking, as well as underwriting owner-occupied residential mortgages at long-term low interest. Government already guarantees this type of banking in the US and it may as well be made explicit, with government paying its agents a reasonable fee for services rendered. Retail banking should be riskless and boring since it is a public utility.
I would then make all other forms of finance including investment banking private and require that they use the partnership model, with close regulation and oversight to preempt systemic risk. There would explicitly be no rescue of private firms, and insolvent firms would automatically be put into resolution, with a plan worked out for doing so that is continually reviewed and updated.
Obviously, this would required revising the present system, and I don’t think that is going to happen without a major crisis that changes the politics drastically.
MMT’ers are presently concerned taking advantage of existing operational possibilities, as well as offering suggestions for improving the present system through reform. This is set forth in the mandatory readings here, for example. Just because they offer recommendation for working within the status quo in some cases shouldn’t be taken as indicating that they endorse it. It is practically expedient to everything possible immediately to reduce unemployment, for example, especially when it possible operationally even under existing political restraints in the US.
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S Thomson Reply:
October 27th, 2010 at 1:19 am
Tom, great thoughts/suggestions. Returning to the partnership model of investment banking would indeed provide an exceptional check on systematic risk-taking.
I hear ya’ in regards to MMT current v. ‘preferred’. At times it’s more important to have a seat at the current table then to twist in the wind waiting for some big and presently unforeseeable shift. I do wish there was a bit of an asterisk behind the comment “deficits don’t matter” – because they do a little in the current construct. They really wouldn’t matter with a Treasury-issued currency.
I do think the marriage of private banking and private money creation is fundamentally flawed, and any improvement would only be a band-aid on a broken model. When any private party can control both lending and the money supply, it means there is both the incentive AND the control to create boom/bust cycles that centralize the ownership of productive assets with the banking elite. => create money for free => loan and take productive asset as collateral => create bust => repossess property => reflate property…
I’m sure you’ve read it before:
“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
Thomas Jefferson, (Attributed)
Cheers!
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beowulf Reply:
October 27th, 2010 at 11:47 am
I agree Tom Hickey’s the partnership idea is an excellent. I think it was David Cay Johnston who pointed out that accounting and law firms used to be general partnerships– every partner personally liable for each other’s actions– but since CPA and law firms are now usually set up as LLPs or LLCs, partners don’t have that personal motivation to keep each other honest and both profesions have been cutting ethical corners ever since (“learned professionals” like CPAs, lawyers and doctors are always personally responsible for their own actions, the LLC is used to shield them from partner liability).
I do like the Jefferson quote, but it sounds too good to be true. There are a LOT of fake quotes about monetary reform floating on the internet (Abe Lincoln quotes in particular). Unless you read something which cites primary sources, I would assume its fake. And I just checked Snopes, the Jefferson quote is fake, first turned up in a congressional hearing in 1937 (the first recorded use of term “deflation” was 1920).
http://www.snopes.com/quotes/jefferson/banks.asp
One quote (actually the whole speech is good) that is legit is Thomas Edison’s “there’s no difference between a dollar bill and a dollar bond” speech. A 1921 NY Times eyewitness account is available at the Times website.
http://prosperityuk.com/2000/09/thomas-edison-on-government-created-debt-free-money/
WARREN MOSLER Reply:
October 27th, 2010 at 2:51 pm
limited liability is a gift from gov- a form of govt protection- that in my book entitles govt to regulate those utilizing it for public purpose, rather than being allowed to abuse it contra to public purpose
Tom Hickey Reply:
October 27th, 2010 at 11:49 am
When any private party can control both lending and the money supply, it means there is both the incentive AND the control to create boom/bust cycles that centralize the ownership of productive assets with the banking elite. => create money for free => loan and take productive asset as collateral => create bust => repossess property => reflate property…
This was a factor leading to the establishment of the Federal Reserve System as the lender of last resort that could provide liquidity to the financial system in a panic, prevening massive liquidation, as had happened in the past, with the suspicion that the bankers had arranged it for their benefit.
So even if we went to a public retail banking and private finance, there would still be a need to provide liquidity in crisis, but under the system I propose there would be a steep price to pay and immediate resolution for insolvency. In addition, under a partnership model, financiers would be lot more careful with their capital risk.
The moral hazard in the present system incentivizes imprudent risk-taking and even cheating, since there are either low or no penalties imposed, just some finger-wagging and maybe a wrist slap. While real reform could fix this, history shows that eventually the financial sector just gets the reforms rolled back and inserts loopholes in the initial legislation and regulation, and subverts oversight, to tide them over in the meanwhile. So I don’t think that reform is viable. The structure and incentives have to change, and all involved, including politicians, need to have skin in the game and pay a price if things go wrong. A system without strict accountability is broken.
WARREN MOSLER Reply:
October 27th, 2010 at 2:45 pm
private lending requires funding in the financial markets which rely on mark to market for solvency.
the public purpose behind lenders having gov guaranteed liabilities is the ability to lend on (govt prescribed) credit analysis rather than market value.
so seems you are not in favor of that, which is ok. it’s a political choice
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October 27th, 2010 at 12:16 pm
ST-If you want to pursue money & banking and finance issues from an MMT perspective, there are two posts at Bill Mitchell’s you may be interested in looking at. There are extensive comments, many from banking industry experts like JKH.
Nationalising the banks
Some myths about modern monetary theory and its developers
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October 30th, 2010 at 4:27 pm
Just wanted to let you know I’m trying to do my part to advance MMT. I posted a short article on Morningstar debunking the “crowding out” argument earlier this month.
http://news.morningstar.com/articlenet/SubmissionsArticle.aspx?submissionid=103085.xml
Thanks for being a leader.
John
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WARREN MOSLER Reply:
October 31st, 2010 at 11:53 am
yes, excellent!!!
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November 8th, 2010 at 4:38 pm
Warren, In your Nov 5th piece you speak of QE effect on Japans Equity markets shortly thereafter w/o mentioning the 9/11/01 effect of terrorists attacks and their ramifications on all the markets?
Best, Jim
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WARREN MOSLER Reply:
November 8th, 2010 at 8:07 pm
right, forgot about that.
Brian Murphy, Greg Richards, Kevin Connors…
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November 10th, 2010 at 12:46 am
Warren: here’s a video I think you might be interested in:
http://video.google.com/videoplay?docid=-2550156453790090544#
“Money as Debt.” He says when a bank makes a loan, it ‘creates’ the money to loan, numbers on the computer. Later, he goes on to show that because of interest, the total money needed to pay off loans is always greater than the money loaned, ie greater than the money supply in ratio (P+I)/P. He goes on to show this implys I/(P+I) share of borrowers will always be unable to pay off their loans. He also shows that this leads to an exponential growth of both the money supply and debt, that only with an exponential growth in real consumption can it be maintained, and that this spiral has no (nice) ending.
But the video explains that, and more, better than I can. I think it’s a little different point of view from yours.
The guy favors a nationalized banking system.
It’s 47 minutes, but if you watch the first 10, I think you’ll want to see the rest.
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WARREN MOSLER Reply:
November 10th, 2010 at 8:58 am
been hearing that ever since i can remember. they forget that the bank’s earnings get spent and those funds pay the interest.
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Charles St. Pierre Reply:
November 14th, 2010 at 3:15 am
The interest pays the banks earnings… But, there is no reason for the banks’ spending to equal their earnings. By retaining some of their earnings, the banks can force there to be more borrowing, and for debt to increase.
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Jim Baird Reply:
November 11th, 2010 at 12:36 pm
Yeah, I usually illustrate by creating a model with just a farmer and a banker. The banker lends money to the farmer at 10% interest, but then uses the interest income to turn around and buy food from the farmer. At the end of ten years, the banker has collected more in interest than existed at the beginning, but the Farmer still doesn’t have any problem making the payments…
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November 11th, 2010 at 1:14 am
Hi
I’ve been reading up on mmt and was wondering if you could explain how treasury auctions create new money within the mmt framework? I understand that new money is created by the fed by marking up treasury’s account and then being spent into the economy. I’ve also read that treasury cannot run a negative balance and therefor must fund their account with auction proceeds before they can spend. However if anyone besides the fed buys the bonds wouldn’t they bought with “old” money already spent into existence leaving net financial assets unchanged? Or does treasury first sell new bonds for new money to the fed and then fed then swaps them for old money with the public? Thanks
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WARREN MOSLER Reply:
November 11th, 2010 at 10:47 am
deficit spending adds net financial assets to the economy
if you include tsy secs in your definition of ‘money’ deficit spending adds money to the economy
yes, fed buying tsy secs leaves net financial assets unchanged.
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Tom Hickey Reply:
November 11th, 2010 at 11:34 am
Bns, when the Treasury spends by crediting accounts, those accounts have to clear when the funds are used. Reserves are used for interbank settlement, so the Treasury has to make sure that reserves are available for clearance of it checks and electronic deposits. The Treasury then has to get the reserves from the Fed, and since by law the Treasury cannot run an overdraft at the Fed it has to issue tsy’s, which the Fed auctions, to obtain the reserves it needs to cover its accounts. The Treasury gives the Fed the tsy’s, the Fed credits the Treasury’s reserve account at the Fed, and Fed sells the tsy’s at auction, since by law it cannot simply exchange the reserves for tsy’s directly. The amount of funds that are used to buy the tsy’s at auction equal the amount that the Treasury has spent, since it is a $-4-$ offset. Therefore, at the macro level (in aggregate) it’s a wash.
The funds Treasury expends are used to buy the tsy’s issued. The Treasury’s deficit spending, which creates additional nongovernment net financial assets (NFA), is converted directly to nongovernment saving of net financial assets. Since the national debt is the accumulated deficits, the national “debt” is actually nongovernment (forced) savings. This is just a monetary operation that drains the reserves created by deficit spending from the FRS so that the Fed can hit its target overnight rate, which would otherwise go to zero with excess reserves unless the Fed paid interest on reserves equal to the desired overnight rate.
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WARREN MOSLER Reply:
November 11th, 2010 at 3:40 pm
right, and interesting that the commercial banks can run overdrafts in fed accounts but the tsy can’t.
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bns Reply:
November 11th, 2010 at 4:23 pm
Hi thanks for the great explanations. They clear up the confusion I was having as I wasn’t sure if the public bought the bonds directly from the treasury or if they were passed to the fed and then sold to the public.
Is it accurate to say then that there are two pathways for vertical transactions, either thru the treasury or thru the fed, but only treasury transactions create/destroy money while vertical fed transactions are asset swaps?
Also does borrowing at the fed window factor into money creation?
Thanks again
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Tom Hickey Reply:
November 11th, 2010 at 5:56 pm
Basically correct, but it is more accurate to say that Treasury deficits create additional nongovernment net financial assets, since expenditures increase nongovernment NFA while taxes withdraw NFA. This is important because only deficits increase the amount of nongovernment NFA, since the funds created by bank loans (loans create deposits) net to zero in aggregate.
The Fed buying and selling tsy’s either through OMO or QE involves asset swaps that change the composition of assets and the term structure of government liabilities.
Borrowing at the Fed window does not create nongovernment net financial assets. The borrowing bank gets an asset (reserves) by putting up collateral and taking on a loan obligation. The transaction nets to zero. Actually, nongovernment net financial assets are decreased by the amount of interest the bank pays the Fed for the loan, those funds being transferred from nongovernment to government (consolidated Fed and Treasury), with the Fed transferring its profit on operations to the Treasury.
BTW, the Fed does not deal directly with the public. It operates chiefly through with Treasury, foreign governments, primary dealers, and member banks. The Fed also operates directly in the fx market and buys and sells gold. The difference is that the Fed deals in chiefly in reserves and the public does not have access to reserves, which requires a reserve account at the Fed. The public is not eligible for reserves accounts, only those qualified as participants in the FRS.
WARREN MOSLER Reply:
November 12th, 2010 at 9:57 am
well stated! (as usual!)
any data on Fed gold buying and selling?
WARREN MOSLER Reply:
November 12th, 2010 at 9:56 am
discount window borrowing is nothing of economic consequence.
govt purchases of non financial assets, including ‘goods and services’, add financial assets to the economy.
govt purchases of financial assets don’t
Tom Hickey Reply:
November 12th, 2010 at 11:22 am
I have no idea about the Fed gold transactions. The cb’s are still keeping their gold dealings pretty secret.
Here’s the latest info I dug up from FT. China has apparently been a large net buyer. Hard to tell from figures through. Saudi Arabia’ s gold valuation doubled, but they are reporting this as due to an accounting change rather than acquisition.
December 3rd, 2010 at 11:01 pm
Hi Warren,
Tom Greene put me in touch with you about this time last year. I dropped you a note in regards to the snowfall market we are developing here in the states. We are now expanding into rainfall as well. Here’s a quick interview I did recently on CNBC –
http://www.cnbc.com/id/15840232?play=1&video=1641730293
Would love to chat next week if you have a moment.
Best,
Jeff Hodgson
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WARREN MOSLER Reply:
December 4th, 2010 at 12:47 pm
Hi Jeff, well done. Happy to chat but not my area of particular interest
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Jeff Hodgson Reply:
December 5th, 2010 at 10:53 am
Thanks Warren. If you get a chance, please email me directly at jeff.hodgson@cwbrokerage.com and let me know a # I can reach you at next week.
Thanks.
Jeff
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December 30th, 2010 at 10:50 pm
The historical self-similar secular bear Coppock Curve pattern implies a bear market beginning no later than spring-summer ’11.
S&P 500 Coppock Curve comparison to the S&P 500 1890s and 1930s, and for the Nikkei 1990s to date.
Coppock Curves around the world, implying that Shanghai, Bovespa, and the Nikkei might already be on the verge of bear markets.
Happy New Year (for the bears).
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January 3rd, 2011 at 4:49 pm
Thank you Mr Mosler. My quest for the answers spans over 30 years discovering bits and pieces of the facts along the way. Your publishings finally put the true functions of the US monetary system together, complete with solutions for all to read from start to finish!
I began another quest in 1980 as a junior in high school. I asked myself what long running event has the overwhelming majority participated in that would allow their soveriegnty to be stolen from them without a fight whatsoever, despite vast differences in social, financial,and religious backgrounds. I concluded that the U.S. government mandated school system had to be the culprit!
After years of researching and uncovering bits and pieces of the facts Mr. John Taylor Gatto published a book, The Underground History Of American Education, piecing the entire scam together for all to finally view! The system is modeled after old Prussian, Germany’s socialist program. Designed, among other things, to mold and control human beings while destroying family values, creating credit consumers, and taking with it our once great sovereignty!
The scarey part, because the populous is so brain washed, all of this tremendous information, when it is noticed, can barely be digested properly in the brain! These two significant publishings rank right behind the invetion of the wheel concerning modern economics, education, and why we are the people we are here in America as far as I’m concerned!
Mr. Mosler I understand this monetary system 100%! I am a man of conviction and passion towards everything I believe in fighting for! I would consider it an honor to work with you in this fight to free American’s from this slavery! Please let me know if you are interested in my help.
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April 12th, 2011 at 12:08 pm
HI Warren,
My blog is up and running.
Note the first link listed; also note the first blog listed.
I plan to increase the MMT content of the campaign shortly.
The link to the blog is
http://mikecampaigns.blogspot.com/
If you know of any MMT supporters in the NY metro area that might be interested in my campaign, please let me know.
I am planning to go to the Levy conference here in NYC Wed – Fri to learn some more MMT economics and to meet some MMT economists.
Regards,
Mike Colen
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April 13th, 2011 at 9:09 am
This website is my island of sanity in a really messed up world. Anytime it just get “too much” with the WSJ and CNBC and the Fox News, I just remember to come here and I have hope…
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April 23rd, 2011 at 3:22 pm
Hi Warren, have you ever heard of the Giacinto Auriti’s theory about money?
He was an italian professor.
and another question:
where can I read a regulation or a document about how banks really works? because I think money-multiplier is completely false.
thanks
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WARREN MOSLER Reply:
April 23rd, 2011 at 5:36 pm
no
start with soft currency economics on this website?
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April 24th, 2011 at 6:04 am
thanks i’ve read. but many professors unfortunately don’t care about the opinion of warren mosler.
I want to do my graduation thesis about the false myth of money-multiplier and I think that
soft currency economics is a good starting point, but they wanted a regulation. they believe in the money multiplier model and they says:
“you see? in every balance the amount of loans is always lower than deposits, so this means that they don’t create money. only the BC create money.”
I think they are stupid, but they have the whip hand, you know.
thanks a lot.
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Tom Hickey Reply:
April 24th, 2011 at 11:24 am
Giulio, remember that doing a dissertation, getting past committee, and defending it are political acts. Don’t make any enemies.
If things get sticky at the end, you can always ask the objector to write down his objection in detail so you can study it and take it into account. Of course, that will be the end of the objection. But it risks making an enemy, and you can only use it once.
Check this out too. Maybe your readers will listen to the BIS.
http://moslereconomics.com/2010/04/25/bis-getting-there-yet-not-fully/
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Tom Hickey Reply:
April 24th, 2011 at 11:31 am
Thinking about it more, I would contact Jaime Caruana, General Manager of the BIS, and if see you can get an interview in which to document his description of how banking works wrt the “money multiplier.” You want to get him to say very clearly that the money multiplier is not an ex ante transmission mechanism, as presumed, but an ex post accounting record.
That would be a real clincher for your argument, and it would also make a contribution. You could do a whole book about it based on your dissertation.
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April 26th, 2011 at 3:21 am
Thank you Tom, I’ve read and it’s very interesting, but there is a regulation where I can read explicitly
“for a bank every loan is a new deposit”?
thank you
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WARREN MOSLER Reply:
April 26th, 2011 at 7:57 am
it’s not a regulation, it’s an accounting identity and at least used to be stated in all the old money and banking books.
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giulio Reply:
April 26th, 2011 at 8:43 am
Ok, a loan reduce the abilities (the income) of the same bank to distribute a new loan?
there is a link between the deposit that the bank has, and the abilities to lend?
In other words, a bank lend more than the deposits that have?
in conclusion, there is a creation out of nothing/ex nihilo?
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Tom Hickey Reply:
April 26th, 2011 at 12:59 pm
Banks create money ex nihilo in extending credit. They loan against capital. There is a capital requirement, but banks are not limited by capital since they can rather easily raise it when they need it, i.e., there are creditworthy borrowers demanding loans that the bank deems it can make a profit on.
Deposits result from loans, and reserves are obtained as necessary to clear drawdowns of deposits. That is to say, when a loan is made, the borrowers deposit account is credited. As those funds are spent, the bank needs to have reserves for settlement in order to clear the checks in the interbank system.
Ramanan Reply:
April 26th, 2011 at 1:22 pm
Tom,
While it is true that deposits come out of loans, banks still need deposits! Haven’t you seen bankers trying to get you to deposit your funds with them ?
Giulio’s question is an excellent question. Banks cannot depend fully on only *one* of the following markets: Fed Funds, CDs, deposits (both transactional and term), bonds, equities, securitization.
How banks do in this game – liability management – is an important aspect of success.
WARREN MOSLER Reply:
April 26th, 2011 at 5:47 pm
due to self imposed peculiarities of current institutional structure, not inherent in banking
Tom Hickey Reply:
April 26th, 2011 at 1:31 pm
The point is that banks do not need either reserves or deposits ex ante to lend. They need reserves to settle and for reserve requirements, and they need deposits for “liability management,” i.e., balancing assets (loans are accounts receivable) with liabilities (deposits are accounts payable).
The actual money creation process is ex nihilo. This doesn’t say that capital, reserves, and deposits are unnecessary to banking. Only to say that they are ex post. Banks make loans based on demand from creditworthy customers and get capital, reserves, and deposits as needed “afterward”. Of course, this is coordinated among the various departments in the actual process.
Ramanan Reply:
April 26th, 2011 at 1:40 pm
Yes, agreed on ex ante.
But when you explain it to someone, the whole process should be explained. Else people will try to dismiss the argument.
MamMoTh Reply:
April 26th, 2011 at 1:56 pm
Why does any particular bank need deposits?
Loans create deposits, but the loan is an asset which is a source of income, and deposits are a liability which have some costs.
It seems to me any given bank would be better off making loans and convincing people to move their deposits to another bank, a bit like Warren did as he tells in 7DIF.
Tom Hickey Reply:
April 26th, 2011 at 2:15 pm
The asset and liability side of the balance sheet have to balance, so the bank does “liability management.” The bank decides on the least expensive way to do this.
Ramanan Reply:
April 26th, 2011 at 2:28 pm
Mammoth,
Imagine a bank with reserves just equal to required reserves. It makes a lot of loans in one day. The persons borrowing from the bank write cheques and the funds flow to another bank. When funds move out of the bank to another bank B, Bank A goes into an overdraft position at the Fed and bank B has excess reserves.
The bank’s ability to remain indebted to the Fed is limited. So the bank has to borrow back funds. It can borrow it back from Bank B itself (to which the funds flew).
You are absolutely right – if banks have unlimited/uncollateralized overdraft at the Fed, banks will be happy to lose deposits. Unfortunately in the real world, they do not.
WARREN MOSLER Reply:
April 26th, 2011 at 5:50 pm
the same real world where a fed that didn’t understand banking or the monetary system fostered the liquidity crisis that didn’t need to happen
Ramanan Reply:
April 26th, 2011 at 2:35 pm
Mammoth,
I just described borrowing from another bank. It can attract deposits as well (from nonbanks) .. in which case the mechanism similar to what happened when funds moved from this bank to another described above happens in reverse.
Sergei Reply:
April 26th, 2011 at 2:41 pm
Ramanan: “How banks do in this game – liability management – is an important aspect of success.”
Do not overestimate the importance of it. Loans create deposits on the level of the banking system and banking system has to balance. Banks with excess deposits will try to get rid of those to banks with the shortage of deposits. In fact one could claim that the game theory says that the winning position for banks is not to attract any deposits, i.e. not to pay anything. However bold this claim can be it has its part of truth.
MamMoTh Reply:
April 26th, 2011 at 2:44 pm
Right, but if bank A pays more for deposits than what it would pay bank B or the Fed for the reserves, then it’s still better off losing the deposit. I think that was the case in Warren’s story which is the funniest part of his book.
Sergei Reply:
April 26th, 2011 at 2:48 pm
“You are absolutely right – if banks have unlimited/uncollateralized overdraft at the Fed, banks will be happy to lose deposits. Unfortunately in the real world, they do not.”
The volume of retained profits can be the collateral and it is veeery significant for any random bank. Each bank decides what to do with those and in particular it can decide to build its portfolio of liquid assets eligible as collateral. It is all about costs and nothing about quantity. Central banks routinely accept even client loans as collateral.
Tom Hickey Reply:
April 26th, 2011 at 2:50 pm
Banks seek customers and depositors are customers.There is a lot to banking other than loans and deposits, like credit cards on one hand and life-long relationships that result in repeat business. Probably the first place most people go for a loan is to their banker, who knows them. So banks have to be full service instead of creaming the top.
WARREN MOSLER Reply:
April 26th, 2011 at 5:41 pm
yes, start with ‘soft currency economics’ on this website.
in the banking system, loans create the bank deposits, they don’t use them up
Ramanan Reply:
April 26th, 2011 at 3:06 pm
“The volume of retained profits can be the collateral and it is veeery significant for any random bank. Each bank decides what to do with those and in particular it can decide to build its portfolio of liquid assets eligible as collateral. It is all about costs and nothing about quantity. Central banks routinely accept even client loans as collateral.”
Yes central banks accept loans as collateral but these are very limited and have to be guaranteed by organizations such as a government.
Plus I do not know how one can post “retained profits” as collateral. Retained profits are not marketable securities.
Yes it is about costs but if banks build portfolios, they do so by issuing liabilities.
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Sergei Reply:
April 26th, 2011 at 4:43 pm
“Plus I do not know how one can post “retained profits” as collateral”
Ramanan, I feel like you are making fun of me. Surely retained profits can not be a collateral. They are a liability. But they need an offsetting asset. Say government bonds. And these can be a perfect collateral. It is upto to the bank to decide what to do with its retained profits.
April 26th, 2011 at 1:54 pm
so, the answer of [i]In other words, a bank lend more than the deposits that have?[\i] is
YES.
and so, a bank lend money that don’t have, and in every balance the amount of loans is always lower than deposits because the single bank consider a loan that he does a new deposit for himself. the single bank, not the banks.
right?
thanks
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Tom Hickey Reply:
April 26th, 2011 at 2:12 pm
An individual bank may loan more than it has in deposits at the time because banks don’t loan ot deposits, as most people think. At the macro level (all banks) loans must equal deposits, because loans create deposits and paying down a loan draws down deposits. The banking system is always net zero.
“in every balance the amount of loans is always lower than deposits because the single bank consider a loan that he does a new deposit for himself. the single bank, not the banks.”
Not following you here. The bank in creating a loan creates an asset for itself, the loan being an account receivable) and also a corresponding liability, the deposit being an account payable. When the borrower draws down the deposit to spend what was borrowed, then the banks assets (the loan) exceed the bank’s liabilities in the amount of the drawdown. The bank that does “liability management” to balance assets and liabilities by, e.g., seeking a deposit not associated with a loan on that bank. This say the system stays in balance overall.
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giulio Reply:
April 26th, 2011 at 2:22 pm
Yeah I was talking about the first question, about deposit and loans and only BC creates money ecc, remember? it’s up.
What I mean is that if the individual bank when lend consider his loan an asset, but also a deposit. no?
The bank, like you have written, don’t lend what he has, but he creates ex nihilo. He lends promises. Ok, generally, the entire system is net zero, but the individual lend money that doesnt’t have. right?
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Tom Hickey Reply:
April 26th, 2011 at 2:54 pm
The individual banks lend money they don’t have in the sense that a loan is a credit to a deposit account. By entering numbers on its accounting spreadsheet, the bank creates money from nothing. Simple as that, although that is not all there is to banking. But it is the basis of creating bank money/credit from nothing.
April 26th, 2011 at 3:00 pm
thanks a lot. last question.
A loan by a bank reduce the abilities (the income) of the same bank to distribute a new loan?
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Tom Hickey Reply:
April 26th, 2011 at 4:02 pm
No. The bank loans against capital and can always increase capital to accomodate rising opportunities to extend credit profitably. As long as the cost of raising capital is less than the profit anticipated from lending, the bank will seek to raise capital to accomodate loans.
Note that banks do not lend capital, they lend against (risk) capital. That is, they risk losing capital if the loan defaults.
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giulio Reply:
April 26th, 2011 at 8:05 pm
excuse me, another question. how banks raise capital? they use bond to obtain capital in BC?
they can use also the mortgage obbligation that he borrower has given for a mortgage loan?
(my english isn’t excellent)
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giulio Reply:
April 26th, 2011 at 8:07 pm
the borrower
Tom Hickey Reply:
April 26th, 2011 at 9:14 pm
“Bank capital is often defined in tiers or categories that include shareholders’ equity, retained earnings, reserves, hybrid capital instruments, and subordinated term debt.” There are different tiers of capital.
What is bank capital and what are the levels or tiers of capital?
WARREN MOSLER Reply:
April 26th, 2011 at 9:47 pm
they sell new stock
April 27th, 2011 at 4:01 am
There was a dispute between me and Giulio.
He said that a bank needs not to raise any capital in order to lend money. He said that a single bank consider a lending also as a deposit so capital is implicitely raised.
I said that when some one ask a borrow, he always takes immediately money from bank account in order to buy what they want (otherwise the borrow would be uselesss). So the bank has always immediately need to raise capital selling stocks, bonds or other ways.
I don’t agree with you when you say
“An individual bank may loan more than it has in deposits at the time because banks don’t loan ot deposits, as most people think. At the macro level (all banks) loans must equal deposits, because loans create deposits and paying down a loan draws down deposits. The banking system is always net zero. ”
I think that loaning on deposits it’s better (because it’s convenient) than loaning on capital.
And when a bank loans on capital, it is not actually creating money. Money is created only when bank loans on deposits. M0,M1,M2, M3 are not affected by “loaning on capital” when capital is retrieved selling new stock.
Am I right? If I’m wrong, please tell me which is the money aggregate raised up by loaning on capital retrieved by selling stock please.
Thanks in advance
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WARREN MOSLER Reply:
April 27th, 2011 at 5:58 am
I’m not sure what you mean by the word ‘on’ as when you say ‘when bank loans on deposits’ thanks
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giulio Reply:
April 27th, 2011 at 6:07 am
Hires means that banks lend what they have, and occasionally they “go out”, they lend money that temporarily they haven’t. but immediately they must to raise capital because “no one can lend what he hasn’t”.
I think he means that.
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Hires Reply:
April 27th, 2011 at 6:13 am
I was referring to your sentence:
So if you say that “banks don’t loan on deposits” you are saying that banks loan on something else..
Suppose a bank has loaned all his capital (exception made for the reserve).
Then a new customer comes and ask for a borrow. He want to buy a house. The bank will need to raise the capital, for example selling new stock. Right?
Well, Giulio is saying “no”, there’s no need to raise capital, because any loan is a new deposit so there is no need for any capital. He says that capital is automatically raised. I don’t agree with him.
Second, I don’t agree with You, when You say that bank does create money when it collects money selling stock and then does loans with that money.
In that case bank is not creating money. M0,M1,M2,M3 are leaved unchanged.
A commercial bank increases M1 only when it makes loan taking money from customer’s deposits.
That is cause of definition of M1.
Excuse me for my poor technical english, I’m not an economist.
I hope I’ve been clear this time.
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ESM Reply:
April 27th, 2011 at 8:40 am
I think you are very confused about what a bank deposit is. A bank deposit is an IOU from the bank. If you give $1MM in cash to the bank, the bank takes the money and gives you a piece of paper with numbers on it that says it owes you $1MM any time you want it. If you take out a loan for $1MM, you give the bank a piece of paper that says you own the bank $1MM plus interest, and in exchange the bank gives you a piece of paper that says it owes you $1MM any time you want it.
The bank can create as many IOUs as it wants. Just as you can. If I am selling something that you want to buy, but you don’t have any money, I can accept your IOU (i.e. promise to pay in the future). Your IOU is a form of money. It just so happens that bank IOUs (i.e. deposits) are more readily transferrable and have better credit than your IOUs (and in most systems, bank IOUs are acceptable as payment for taxes by the government and are even guaranteed by the government up to some amount per person).
The only thing a bank needs reserves for is to clear any net transfers of its IOUs at the end of the day (and to satisfy any government imposed reserve minimum). So for example if you write a check for $500K and that check is deposited at a different bank, and nothing else happens that day, your bank needs to instruct the central bank to pay the other bank $500K out of its own reserve account. If it doesn’t have enough money in its reserve account, it will borrow it from some other bank that does, or from the central bank.
April 27th, 2011 at 4:35 am
ok, and what’s the role of refinancing operations? they serve as a way to raise capital?
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April 27th, 2011 at 8:47 am
That was EXACTLY what I meant to say. I could not find better words.
More, I’ve stated that, in that precise case, (when the bank has not enough money etc) the bank is not creating money, because M0,M1,M2,M3 does not change.
Is it right?
Many thanks.
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ESM Reply:
April 27th, 2011 at 9:24 am
I was never too clear on the precise definitions of the money supply aggregates, but I think M1, M2, M3 all increase when a bank lends money to a customer. M0 generally wouldn’t change. M0 would increase, however, if the bank borrowed from the central bank.
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Hires Reply:
April 27th, 2011 at 9:32 am
If the bank is borrowing from central bank, is the central bank the one creating money (not the private bank).
But if the bank is selling stocks (as you suggested before), M1 is not increasing, cause M1 is substanstially M0 (not those deposited into accounts to avoid a double count) + account balances + some other unrelevant things
and neither M0 nor deposits are increasing.
Same applies for M2,M3.
So I state again, in that case the bank is not creating any money.
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Tom Hickey Reply:
April 27th, 2011 at 12:30 pm
HIres, the cb creates reserves. Reserves are not spendable in the economy. They are only used in the interbank settlement system (Federal Reserve System in the US) to settle accounts among members of the system — the Treasury, foreign entities with FRS accounts, and banks that are members of the FRS. The Fed will exchange reserves for cash with banks, so that banks can meet the demand for cash at their customer windows. All non-cash interbank transactions are settled with reserves in the interbank settlement system.
When the Treasury spends, it credits private bank accounts. This happens by marking up spreadsheets. Same thing when a bank makes a loan. It credits the borrowers deposit account. This is the creation of money from nothing. However, all money is someone’s liability. When the Treasury credits private accounts, it is in effect distributing tax credits into the economy. This is a net increase of nongovernment net financial assets, since ther is no corresponding nongovernment liability incurred. When a bank credits a borrowers deposit account with a loan, it is creating an account receivable for itself and an account payable for the borrower. This nets to zero.
When the Treasury credits private back accounts, it has to have reserves to clear. It gets these reserves from the Fed and incurs a corresponding liability to the Fed, which it meets by issuing tsy securities, which the Fed auctions to recoup the reserves it created for the Treasury.
When a bank makes a loan it has to obtain reserves for settlement when those funds are drawn down. It either gets them from customer deposits or borrows them in the interbank market. The bank may use the reserves that deposit brought in, but it doesn’t loan out the deposits themselves, which are liabilities of the bank, not assets.
If a bank loan is not repaid in whole or part, the bank incurs a loss as a result of the default. This is a charge against its equity. That is to say, the loan as an account receivable is a bank asset. When bank assets decrease, then there must be a corresponding decrease on the liability side. Equity is on the liability side and it gets marked down. If this affects the banks capital buffer, then the bank must acquire more capital.
The monetary base is essentially resevers and currency, while M1 is includes demand deposits. When reserves increase the monetary base increases. This adds nothing to nongovernment net financial assets unless the increase is due to Treasury expenditure. This is how government creates money for nongovernment use in the economy, outside the bank settlement system. When banks extend credit, they do so by crediting deposit accounts (loans create deposits). This is how banks create money for nongovernment use outside the banking system in the economy.
Treasury expenditure creates nongovernment net financial assets out of nothing. The Fed creates reserves out of nothing to clear. The Treasury creates tsys out of nothing to match the resevers. Banks create loans out of nothing which create deposits. This the magic of money.
April 29th, 2011 at 7:01 am
Tom, I understand your argument. but what is really strange is the concept “Taxes function to regulate aggregate demand, and not to raise revenue per se.” nor because it’s false, but I don’t understand why if I see a governement’s balance sheet, there is a heavy spending on interests on debt.
Talk about the balance sheet of Italy, for example, I see that if I remove the expenditure on interests, I haven’t a deficit. Don’t talk about the problem of deficit, what I mean is, why the government pays interests on a debt? is a political choice? Because if we see, 95% of bond are in the hands of banks, so, “common people” don’t earn really nothing.
MMT says that takes don’t raise revenue per se, but why they issue constantly bonds. why? it’s always a political choice? Yes, it’s a political choice, but is so stupid.
Reply
Tom Hickey Reply:
April 29th, 2011 at 1:14 pm
Yes, interest on tsys is a subsidy since it is not required operationally. In the view of some MMT’ers, tsy issuance should just be done away with.
The central bank is only needed for settlement. Treasury could just issue notes directly, as Lincoln did to finance the Civil War without debt.
It’s a political choice to award subsidies to corporations and the wealthy.
Entities that are currency users have to finance themselves with taxing or borrowing, however. This includes US states and EZ nations
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WARREN MOSLER Reply:
April 30th, 2011 at 4:49 pm
MMT says ‘federal’ taxes function to raise revenue.
Italy is not like a US state. It is no longer the issuer of its own currency. Entirely different matter
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PJ Pierre Reply:
July 1st, 2011 at 10:11 am
@WARREN MOSLER,
I believe that the above should read:
“MMT says ‘federal’ taxes don’t function to raise revenue.
Italy is like a US state. It is no longer the issuer of its own currency. Entirely different matter”
Or am I missing something?
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April 29th, 2011 at 3:11 pm
Talk about the situation in US, they are not currency
users, but they have a really big public debt, and also really big private debt. what’s the problem?
It’s a political choice, really Bernanke/Obama doesn’t understand monetary policy? or they knows that debt is a strong weapon to control people? It’s not conspirancy, but I think that isn’t only an ideological view. (mainstream economists against others, ignorance against knowledge ecc).
what do you think about?
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Tom Hickey Reply:
April 29th, 2011 at 3:40 pm
Hard to tell. Could be that a number of issues involved.
A lot of policies are left over from the gold standard days and many people who grew up in that system have not converted their thinking to the new reality of a nonconvertible floating rate regime. That is probably the biggest influence.
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giulio Reply:
May 1st, 2011 at 8:04 am
Tom, have you ever read something about Maurice Allais?
http://www.economyprofessor.com/theorists/mauriceallais.php
if you understand french:
this book: Pour la reforme de la fiscalitè
and this:
http://etienne.chouard.free.fr/Europe/messages_recus/La_crise_mondiale_d_aujourd_hui_Maurice_Allais_1998.pdf
Reply
Tom Hickey Reply:
May 1st, 2011 at 11:56 am
I had heard of him through his paradox, but that’s it.
May 10th, 2011 at 5:49 am
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Reply
May 16th, 2011 at 9:11 am
Tom, Warren
we can consider the document Soft Currency and the others papers by Wray, Mitchell ecc about central bank operations valid to understand Italy before 2002 (Euro)?
I mean, bond that drain reserve, State that isn’t revenue constraint ecc.
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WARREN MOSLER Reply:
May 16th, 2011 at 10:56 am
yes
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Tom Hickey Reply:
May 16th, 2011 at 12:23 pm
@giulio,
From Wikipedia
Stage Three [EMU]: 1 January 1999 and continuing
▪ From the start of 1999, the euro is now a real currency, and a single monetary policy is introduced under the authority of the ECB. A three-year transition period begins before the introduction of actual euro notes and coins, but legally the national currencies have already ceased to exist.
emphasis added.
Legally, EMU countries lose monetary sovereignty at stage three, when they agree to give up their own currencies for the euro.
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May 16th, 2011 at 12:33 pm
Tom, do you speak, or understand italian?
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Tom Hickey Reply:
May 16th, 2011 at 12:57 pm
@giulio,
No
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July 1st, 2011 at 2:20 am
Quick question: I keep hearing on MMT sites that private banks could in theory generate an infinite amount of money if there were not politically-imposed reserve/capital constraints — the only limit would be demand for credit.
This confuses the hell out of me — banks can’t actually issue currency according to MMT, so how would any of the deposits created by such a hypothetical bank actually be something a loanee could draw on? The bank obviously has finite capital, and finite reserves — so how could such a bank ever honor the deposits created by the loans it’s issued?
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Neil Wilson Reply:
July 1st, 2011 at 2:49 pm
@Sam,
Banks create bank deposits. If your bank is big enough and clears most of the transactions internally they literally don’t need anything else other than their balance sheet to pay people.
If you pay somebody at the same bank as you then the numbers just move in the bank computer and the transaction is complete. End of story.
Even with many banks, the amount of reserves required – short of regulation is tiny, since all you need to handle is the change in reserve balances once all the transactions have been netted off.
So if you send $100 from bank A to bank B and somebody else sends £100 from Bank B to Bank A, then no reserves are required to clear those transactions. They are just contra’d in the ledgers.
Even if bank A send $200 to Bank B and only gets $100 in return, bank A can have a word with bank B and see if Bank B will *lend* them the reserves overnight for a fee. That creates another contra in the ledgers and we’re back to all square again.
And all that before we talk about the central bank acting as lender of last resort.
So you can see that you need regulations to prevent banks creating as much money as they can reasonably sell to people at a profit.
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WARREN MOSLER Reply:
July 1st, 2011 at 7:13 pm
unless you have a govt owned bank…
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July 6th, 2011 at 2:57 pm
Mr. Mosler,
I have just recently discovered your work, blog, etc. One link took me here http://moslereconomics.com/2008/04/26/current-proposals
Very interesting and helpful, but you should stick to economics. Recommendations for Congress a) and e) are both out of place and counterproductive. The only real problem with biofuels (so Far) is energy inefficiency. Ethanol specifically doesn’t make sense energetically. As for efficiency, the technology exists to build safe comfortable cars that get >70mpg. Of course that takes longer, but trying to get Americans to drive 30 mph is simply a way to get any of your other ideas rejected out of hand. If you want to be taken seriously, you must drop that kind of recommendation immediately. If I had read that before reading your economic stuff, I would just have taken you for a nut case.
Note – I’m an energy freak and have considerable expertise in energy efficiency.
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Tom Hickey Reply:
July 6th, 2011 at 3:33 pm
@Murray Duffin,
Appreciate your point, and the low hanging fruit is available through conservation. If we focus on energy efficiency, conservation is not only the most simply achieved but also the most cost-effective means.
The problem with most technological solutions is the vested interests standing in the way of any innovation that would diminish their market share. The energy companies are at the head of this line, and so far the automobile industry has opposed by mandate to increase mileage per gallon.
Maybe you have a politically practical solution to offer?
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Dollar Monopoly Reply:
July 6th, 2011 at 4:26 pm
@Tom Hickey,
@Tom Hickey,
Tom – vested interests is right. why would a monopoly oil distributor want to lose market share? one of the ways i am trying to position MMT is by the opportunity costs associated with managing monetary operations at a suboptimal level.
it’s rough but something like
The cost of maintaining suboptimal deficits is…blah blah … also the missed opportunity to invest in R&D that can subsidize next generation technology for the private sector. Technology innovations in energy have the potential for transformational changes to our economy from both a national security and productivity perspective.
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Murray Duffin Reply:
July 7th, 2011 at 4:46 pm
@Tom Hickey,
Nope. Ive tried the political route for a decade. We will need an energy crisis before we get effective action.
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Dollar Monopoly Reply:
July 8th, 2011 at 6:51 am
@Tom
Maybe we need a economic crisis to realize we have mismanaged our monetary operations via fiscal policy so that we can realize the opportunities available to the federal government as the currency issuer. ahh man did i just blow your mind!
Maintaining suboptimal deficits have direct “real” opportunity costs. Can i get an amen people!
Matt Franko Reply:
July 6th, 2011 at 4:11 pm
@Murray Duffin,
” Ethanol specifically doesn’t make sense energetically”
Are you counting the energy input from the sun against ethanol?
Resp,
PS “I can’t drive…thirty-five” either! ;) Warren is not hard over on that one I believe…
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Murray Duffin Reply:
July 7th, 2011 at 4:48 pm
@Matt Franko,
Nope, just the input to planting, cultivating, harvesting and conversion to ethanol. I was referring to the USA and corn. sugar cane in Brazil does better and makes some sense. Ethanol also drives up food prices and requires subsidies, so makes no sense economically either.
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Dollar Monopoly Reply:
July 7th, 2011 at 5:09 pm
@Matt Franko,
I think it’s referred to as the great corn.
http://www.nytimes.com/2011/06/25/opinion/25Rattner.html
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WARREN MOSLER Reply:
July 6th, 2011 at 5:36 pm
It’s just an option
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Murray Duffin Reply:
July 7th, 2011 at 4:54 pm
@WARREN MOSLER,
Not sure what you are referring to. If you mean the 30 mph bit, it is not “just an option”. In the context it was presented its a credibility destroyer. Your central message is too revolutionary and too important to be weakened by such a diversion.
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WARREN MOSLER Reply:
July 7th, 2011 at 6:35 pm
and it would cut our crude products consumption in half…
July 7th, 2011 at 5:09 pm
@Matt Franko,
great corn con that is
Reply
Dollar Monopoly Reply:
July 8th, 2011 at 6:46 am
@Murray and @Franko
Read this and i thought of you two – Ethanol Subsidies Besieged
http://www.nytimes.com/2011/07/08/business/energy-environment/corn-ethanol-subsidies-may-be-in-jeopardy.html
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July 22nd, 2011 at 5:10 pm
I read the Seven Frauds with great interest. I saw a story on CNNMoney stating that taxpayers lost $1.3 gozillion dollars on the Chrysler bailout (http://money.cnn.com/2011/07/21/autos/chrysler_government_exit/) If, as you claim, federal expenditures are not linked to revenue (taxes), then the statement that taxpayers have somehow taken a hit is bogus.
Am I doig it right?
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Chris C Reply:
July 22nd, 2011 at 5:22 pm
@Chris C, – doing, silly typos
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WARREN MOSLER Reply:
July 22nd, 2011 at 7:02 pm
It was a loss to tax payers as that spending ‘used up’ aggregate demand created by taxation.
But it’s not about the exact funds, it’s about aggregate demand/taxation functions to regulate aggregate demand.
And not that I approve of what the govt did re chrysler!
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August 2nd, 2011 at 10:53 pm
Any comments on HR 2768?
H.R. 2768: To cancel public debt held by the Federal Reserve System and to lower the public debt limit by an equal amount.
112th Congress: 2011-2012
Sponsor: Rep. Ronald Paul [R-TX14]
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August 17th, 2011 at 9:36 am
hey Warren,
What value for the economy as a whole, remains in banks being required to match their liabilities (deposits)with their assets (loans) on their balance sheet in a financial system where banks are solely constrained by capital reserves? And in the U.S. and Europe due to the emergence of SIVs even that is no barrier against credit creation. Should there be a shortfall in deposits, the Central Bank will lend overnight funds at the official cash rate. It will never allow a participating banks settlement to fail to clear. Its job is to ensure that they do not.
http://www.samuelbrittan.co.uk/text14_p.html
Its immaterial in terms of determining inflation whether money is used to purchase securities which supposedly “back” the original loan. What matters is the volume of credit issued by banks and the speed at which borrowers retire their debt, which determines the quantity of money available to purchase goods and services. All “saving” does is creates a mismatch between a firm or person’s debt and the funds available to repay the loan. Are my claims legitimate or am I totally off course?
Banks have a vested interest in creating as much credit as there is demand for it, conditional solely on the requirement that borrowers be able to remain solvent long enough to repay the loan. Even that wasn’t necessarily much of a consideration towards the end of the boom years.
I don’t merely seek to provoke a controversy, but I’m looking into setting up a web based microequity platform where people can collaterize credit offered to SME’s without the cost of compound interest or the pretense of backing the loan with deposits. It would be a hybrid of the E.F. Shumacher Society’s SHARE Microcredit provided through traditional bank channels and Web 2.0 platforms such as Kiva and Prosper.
http://www.smallisbeautiful.org/share_microcredit.html
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WARREN MOSLER Reply:
August 17th, 2011 at 10:53 am
liabilities are the accounting record of assets, so they are ‘automatically’ equal
am i missing something?
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Tom Hickey Reply:
August 17th, 2011 at 12:27 pm
@WARREN MOSLER,
He probably means that loans (asset) create deposits (liability) and when the deposit is spent, removing that liability from their books, then banks seek other deposits to match their assets and liabilities?
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WARREN MOSLER Reply:
August 17th, 2011 at 1:53 pm
banks are not quantity constrained. the constraint is credit worthy borrowers who apply for loans.
what matters for the economy is spending, not ‘having money’, whether that spending is from income, savings or borrowing
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August 18th, 2011 at 7:56 am
Thanks for your very prompt reply Warren.
“liabilities are the accounting record of assets, so they are ‘automatically’ equal, am I missing something?”
Yes, if you assume an economy without non-bank financial intermediary’s who offer securities for sale, but can’t issue credit such as government social security funds, pension funds, savings and loans associations, finance companies, insurance funds, credit unions, stockmarket brokerage accounts, private equity funds etc. A research paper written in 1958 showed how non bank finance intermediaries held more capital than commercial banks and I’m sure the state of affairs remains, particularly in the wake of the emergence of Structured Investment Vehicles by investment banks, which allows them to merely collect generous fees and to pass the risk onto intermediaries hungry for slow maturing investments.
This can’t help but produce an asset/liability mismatch as deposits are funnelled into these non bank intermediaries instead of being returned to the issuing banks.
Central Banks will never allow a bank’s balance sheet settlement to fail to clear so it will oblige the bank to lend it “cash” overnight or for a stipulated term at what we in New Zealand call the Official Cash Rate. Banks here aren’t subject to cash reserve requirements, which is what confuses me when Post-Keynesians, MMTers, or whatever they’re called this week, say banks create loans and credit the money to the client’s account, and seek reserves after the fact. Are deposits and reserves being used interchangably or do they refer to different things? If to the latter why aren’t banks legally obliged to equally match deposits with loans when supposedly securities are meant to soak up liquidity?
To make things even more complicated, there are varying lending conditions, repayment time frames and schedules, and deposit matury dates. I don’t know how you bankers can keep up with so many variables.
I’m not asking an idle question. As I explained in my previous missive, I’m in the process of investing the possibility of developing a hybrid community bank/micro-equity web platform. What I’m seeking is confirmation of my view, that demanding that deposits must match the loans on the “community bank’s” balance sheet as a means of soaking up liquity and therefore forestalling inflationary pressures is immaterial.
I know that its become a priority of Central Banks to manage liquidity through rationing demand for money via dictating interest rate movements. In a boom market interest rates are largely irrelevant as long as a particular avenue of investment offers superior returns compared to the alternatives available. But as I said in the previous comment, banks have a vested interest in ensuring that borrowers have as much funds as they wish, and lending standard slacken as the boom procees.
Keynes declared that the propensity to save is greater than that to invest pretty much as a permanent state of affairs, he termed it secular stagnation. I think its due to the structural nature of the modern economy that ensures capital flows upwards towards the wealthy who have an even greater incentive to protect the “value” of their investments by spurring ever higher returns largely at the expense of workers, in doing so undermining the very viability of their own enterprises and the very survival of the economic system. It became so bad in the 1930s, that the wealthy capitalists called on the workers to forego buying the products they themselves produced and instead save and invest their funds in the stockmarket. Hmm. It sounds familiar, thats precisely whats happening here. With the inequalities that bedevil our current socio-economic superstructure and the fact that the wealthy possess an overabundance of “money” there will never be a lack of “savings”.
http://www.salon.com/news/opinion/feature/2010/10/05/lind_america_plutonomy
http://delong.typepad.com/sdj/2009/04/samuel-brittan-worries-about-secular-stagnation.html
I would like confirmation whether my thesis challenging the demand that deposits must match loans legitimate, before being faced with objections from banking authorities here. I plan on consulting with the Reserve Bank and I would feel more confidant giving my view a public airing before an authority on the matter like yourself, before I proceed.
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August 18th, 2011 at 9:25 am
I guess I will have to explain why I insist on hoping to be able to create a financial intermediary that is able to create credit without the requirement that borrowers pay interest on their debt. Myself and many others have philosophical objectives against interest. Credit is merely the provision of “time to pay” Credit has been a defining element in every dynamic and expansionary culture. Innovative individuals have always needed credit to invest in and coordinate economic activy. Commoditity currency has always been a constraint on the availability of capital and hindered cultural and material development. Show me a society dominated by physical currency and I’ll show you a static and stagnant one. I question why people should be rewarded for “backing” through their “savings” the offering of credit which largely originates from someone else assuming the role of a debtor to invest in productive activity. People save for all manner of reasons. Prominently because they have surplus funds available that they don’t need to spend on consumptions, or for a safety net in case of a negative change in circumstances etc.
I also take exception to the imposition of interest on a practical level, because I’m aware of its severely harmful ramifications, because the exponentional growth of compound interest inevitably outstrips the growth of the real economy with its many physical limitations. Historically it has also been used by elites as a form of economic tribute extraction and social dominion against the common folk. In various periods of history, particularly Ancient Israel and Mesopotamia, wise rulers were forced to institute mechanisms to mitigate the worst effects of compound interest through periodically wiping the proverbial slate clean or declaring Debt Jubilees and freeing bonded debt slaves in order to forestall civil disorder.
http://michael-hudson.com/2004/01/the-mathematical-economics-of-compound-rates-of-interest-a-four-thousand-year-overview-part-i/
http://blogs.wsj.com/speakeasy/2011/08/06/how-debt-has-defined-human-history/
The only way a financial intermediary will be able to issue credit without interest, is by being exempt from having to match deposits with the loans on the balance sheet. Very few people are willing to “loan” money without demanding a return and in any case I recognise only being able to supply credit will be able to supply enough capital to fund the ventures I wish to see funded. To ameliorate any inflationary effects of not “backing” the loan, prospective borrowers would have to build a convincing business case that are premised according to the principle of Factor Five, which entails 80% improvement in resource productivity over legacy business and techical processes. The venture would also be formed on a non-profit basis, similar to Kiva.org and would be free from the perverse incentives that bedevil conventional banks which are limited liability corporations.
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August 20th, 2011 at 5:02 am
Hi Warren,
In the case of countries which require no required reserves (e.g Australia), how is the interbank market rate maintained between the upper and low band?
&
In the case of the U.S., if a bank say is required to hold lets say $100 Million in reserves, can that bank loan out that $100 Million and at the same time accomplish the required reserve by using the discount window, or is there restrictions stating that it can not in fact lend out that $100 Million?
Regards
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WARREN MOSLER Reply:
August 20th, 2011 at 1:47 pm
The cb does what amounts to making a market for clearing balances (reserves) offering at rates at or above it target and bidding at or below
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September 16th, 2011 at 3:59 pm
Warren (or somebody),
Could you please provide an explanation of Treasury Tax and Loan (TTL) accounts and how they fit within the framework of MMT?
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WARREN MOSLER Reply:
September 16th, 2011 at 6:35 pm
just regular bank accounts the tsy opens at regular commercial banks, just like you and I might.
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September 22nd, 2011 at 3:47 pm
Hey everyone: Linkedin is collecting questions to ask President Obama on Sept 26 in a “town hall” type setting. I asked this one:
Mr. President, Do you understand Modern Monetary Theory (MMT), and what do you think of it?
Maybe if enough similar questions are asked, we can get his attention.
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Adam (ak) Reply:
September 22nd, 2011 at 6:03 pm
@John O’Connell,
Mr Obama is interested in winning the elections. He is NOT interested in MMT, MTM, TTM or whatever. The survival of the fittest and negative selection are key factors determining who wins power in modern Western democracy. There is no room for complacency. There are real issues facing Mr President that is pretending to be a truly progressive while playing golf.
Look I know for sure how this process works as one of my schoolmates (and later Uni colleagues) is a minister in Poland. He wasn’t smart enough to graduate form our Electronics department. He was smart enough to befriend the Archbishop and play soccer with the current PM.
The person who asks that question about MMT will be escorted away. It is still better than in Belarus where bones are usually broken usually after the intervention. Democracy is about paying respect to ordinary people and Mr Obama is a true democrat. Your bones will not be broken. Are you happy? Will you vote for Change, vote for Hope, vote for Obama (TM)?
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October 4th, 2011 at 2:11 pm
Warren, you talk about trade deficit being a good thing. This article talks about how Keynes was against large trade deficits, and claims the US’ large deficit is the source of our problems. The idea is stimulus money is spent, but winds up in other countries b/c they are actually making the things we buy, or winds up with the ultrarich, which doesn’t help anybody.
I kind of get your idea that we’re just giving away paper for others’ hard work, but doesn’t the US need some work?
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WARREN MOSLER Reply:
October 4th, 2011 at 5:40 pm
read ‘the 7 deadly innocent frauds’ on this website yet? good chapter on all that!
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November 18th, 2011 at 11:29 am
Warren – good job on Schiff yesterday. I am a fan of both of yours frankly, but disappointed with Peter. Rarely are they really debates but he cuts off his guests when he doesn’t agree or takes things to extremes and extrapolates out through his schemas. As an example remember his confusion initially discussing your move/taxes? It took him a long time to adjust. His paradigm is partly correct, but doesnt apply to governments who make their own currency. Unfortunately I think he is the only one for us smaller investors (with investment vehicles) which are close. I wish you had been able to complete your thought/question to him on “what happens when you send cash to the treasury to pay your taxes?” A few thoughts – 1) Ask him that question again 2) Read his book “What makes an economy grow and why it crashes?” and criticize it per MMT (fairly easy – it doesn’t account for more than one fiscal model – govts that really create their own money and other entities that don’t coexisting – the fish analogy is not exactly correct – it is a finite quantity and must be labored for) 3) Regarding MMT – one possibility I feel is that even if you are correct and I believe you are, human nature and psychology may never allow it to work – government will never allow itself to be at an optimal size and spending when (almost all) politicians are looking in the short term. I feel there is alot in behavioral economics re human behavior that may go against your valid economic monetary theory. Keep up the good work.
R,
Steve
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WARREN MOSLER Reply:
November 18th, 2011 at 2:08 pm
thanks, agreed, and note serious Austrians like Ed Harrison are MMT consistent
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November 19th, 2011 at 9:33 pm
Hi Warren. I’m fairly new to MMT and have been sharing it with as many people as I can. Living in the south, I spend most of my time arguing with Austrian folk. After sharing your “Seven Deadly Innocent Frauds of Economic Policy” with one of them, the one critique he offered was:
“The government deficit DOES reduce savings, by (after some lag) diluting the real value of the dollar. Mosler obscures this by talking as if the dollar’s buying power was constant, and totally unaffected by creating money out of thin air. That’s a rookie mistake, to look at nominal dollars than real (inflation adjusted) dollars.”
I found it amusing that he referred to you as a rookie as if reading a little Rothbard and Mises makes him an expert on such matters. Still, I wanted your take, as I don’t trust my own competence at this juncture to provide a good answer. Thanks.
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WARREN MOSLER Reply:
November 20th, 2011 at 1:02 pm
Govt. deficit spending adds exactly that much in nominal savings, to the penny.
The question is whether the value of that nominal savings keeps up with ‘inflation’
That depends on other govt policy. If govt spends on a price constrained basis, as with an elr/jg
employed buffer stock, internal price stability can be sustained as desired.
Furthermore, though a slightly different point, is the idea of the value of ‘a’ dollar vs the value of ‘all the dollars’.
While one dollar buys less than it did 100 years ago, ‘all the dollars’ but the entire year’s real gdp, which is considerably enhanced from what it was 100 years ago, even when population adjusted. And our real consumption and real standard of living is a function of the current real level of gdp.
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November 20th, 2011 at 3:45 pm
But does the GDP figure accurately reflect our standard of living and consumption, when it is “artificially” inflated by Wall Street, rather than representing the “real economy?”
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December 2nd, 2011 at 2:44 am
I just thought I’d share this recent essay from Martin Feldstein who basically is outlined MMT.
http://www.project-syndicate.org/commentary/feldstein42/English#comments
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January 10th, 2012 at 3:57 pm
http://moslereconomics.com/2010/10/04/exchange-rate-policy-and-full-employment/
The link to the document is broken!
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WARREN MOSLER Reply:
January 10th, 2012 at 6:07 pm
michael is on it
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February 6th, 2012 at 12:17 am
Great site and very informative. My question is how does the fractional reserve banking system affect the money supply? I have searched the site and haven’t found any information regarding the topic.
Thanks for all your hard work and providing clarity about the monetary system.
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WARREN MOSLER Reply:
February 6th, 2012 at 6:14 am
what do you mean by fractional reserve banking? read ‘soft currency economics’ yet?
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February 6th, 2012 at 12:12 pm
What do you make of this interesting piece on local currency being adopted in Bristol with a Credit Union behind it and the currency being allowed to pay local rates (and council tax?)
http://www.bbc.co.uk/news/uk-england-bristol-16852326
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WARREN MOSLER Reply:
February 6th, 2012 at 1:46 pm
they’ve been reading this blog?
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WARREN MOSLER Reply:
February 6th, 2012 at 1:55 pm
just posted it on the blog, thanks!
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February 13th, 2012 at 6:04 pm
Hi Warren,
Could I just ask you quickly:
Do you believe that the banking system should be nationalised? Is this an MMT policy prescription?
Thanks,
Philippe.
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WARREN MOSLER Reply:
February 13th, 2012 at 10:28 pm
read this yet?
http://www.moslereconomics.com/?p=8968
it’s a policy option depending on how you want risk priced
Reply
February 14th, 2012 at 8:04 am
Thanks
Reply
February 17th, 2012 at 9:49 am
I suggest we get Warren on Russ Robert’s EconTalk podcast. I mean he had Bill Black on recently. Here is my attempt today:
Hello Russ,
I have greatly enjoyed your podcast over the past couple of weeks
after just discovering it. If I may suggest a guest, could you
explore the MMT (Modern Monetary Theory) school of thought that has
gained a bit of traction over the last few years? It was even
featured in the Economist just last month. I would love to hear a
discussion between a classically trained scholar like yourself and
someone like:
Bill Mitchell – http://bilbo.economicoutlook.net/blog/
Warren Mosler – http://moslereconomics.com/
or some of the scholars from Bill Black’s shop in Kansas City.
James Galbraith is also a follower I believe
In any case, I stumbled across these theories a few years back and
really became fascinated by them. Back in 2008/09 they seemed to be
the only ones really preaching that we were more likely to become
Japan than Zimbabwe with regard to inflation/rates for instance.
To the extent it matters, I come from a center-right background and
what really attracted me was their belief in generally very low
taxation. I also really like the way the deconstruct/demystify the
monetary and banking system and use accounting principles as a base
for their policy prescriptions.
Keep up the good work!
Reply
WARREN MOSLER Reply:
February 22nd, 2012 at 7:26 am
thanks!
Reply
February 23rd, 2012 at 12:51 pm
Warren,
After listening to your podcast on NEP I was tooling around the more remote parts of this site for the first time and stumbled on photos of your catamaran from 2008. With a little help on styling above waterline that could be the boat everyone has to have. Have you considered styling it up for the market? It could be the MT900s of the sea!
Reply
WARREN MOSLER Reply:
February 23rd, 2012 at 2:36 pm
haven’t done that, but feel free to present a design for me!
Reply
john newman Reply:
March 27th, 2012 at 2:52 pm
OK, so here’s a quick stab at it:
http://www.lnarchitecture.com/kestrel.php
Reply
February 27th, 2012 at 9:38 am
Merryn Somerset Webb at Money Week supports a part-time job guarantee!
See the end of her piece;
“guarantee everyone a community-related part time job – but maybe this will end up being a step in that direction. I note that several other commentators are now suggesting it too.”
http://www.moneyweek.com/blog/workfare-a-step-in-the-right-direction-20800
Why stop at a part-time job, why not through in full time with Education for a JET (Job Education Training) Guarantee like in Norway?
Reply
March 13th, 2012 at 5:26 pm
Hi Warren, I have four basic questions. Any response would be much appreciated:
1. Do you think that MMT might be compatible with small government and low taxes, or is it inherently biased towards big government and high taxes? (I’m assuming that MMT would always involve some form of the ELR if it were to be fully implemented).
2. Does MMT require a degree of nationalisation (i.e. of banks/ corporations) and strict regulation, or is it compatible with no nationalisation and a hands-off approach to regulation?
3. Would you say that MMT economists have different political and ideological positions, or are you all more or less the same?
4. Do the main MMT economists have different understandings of what MMT is or of how it could be implemented?
Thanks Warren (and Sada).
Reply
WARREN MOSLER Reply:
March 13th, 2012 at 9:52 pm
1. yes. all of my proposals actually reduce the ‘physical’ size of govt. though with some it writes larger checks even as it does less.
2. see my proposals for the banking system- http://www.moslereconomics.com/?p=8968- which dramatically reduce the need for regulation.
3. Different
4. I don’t have any differences with myself ;)
Reply
March 13th, 2012 at 8:14 pm
Warren,
I’ve fully read your Seven Deadly Innocent Frauds treatise and spent a few days reflecting. Intriguing to say the least, here are my key concerns:
* Long term, a government unconcerned with borrowing large sums in its own currency and focused on prosperity via extensive trade deficits is destined to one day receive a new message from its creditors: Here is your new trade bill and, oh by the way, you will pay in XYZ currency (not the debtor nation’s) and here is the new ratio of your currency to our currency in which you will pay.
In the mid-term the United States, following your prescription, will proceed to lose the US dollar status as the global default currency (as your post on Japanese buying Chinese yuan highlights). Once other countries lose confidence in one’s currency, they will require payment in theirs.
Once the mid-term milestone is met, the long term comes a lot faster than you can change your philosophy. It is doomed to self-interested excess.
* A philosophy devoted to Super-Smart governmental control of the economy is turning the keys over to the most self-interested, bloated, least productive and least efficient or effective sector of our community. Economic productivity growth over the past 30 years is due to the tremendous Information Age revolution, with attendant improvements in every other sector of society (including your auto industry). Government’s role in the Information Age? Their ignorance forced them to ignore it, except when it came time for campaign donations
Bottom line, innovation stops when government takes the lead role in the economy. When innovation stops, productivity improvement stops, and we get calls for hiring folks to dig the ditches to stay employed (which happens to be one of your proposed solutions).
* Inflation can NOT be driven solely by what government is willing to pay. If government gave everyone $100,000 to buy their votes (funny today, wait about five years) and refused to pay any more for required services and goods, what on earth makes you think that prices won’t go up anyway? Once more money is distributed to the economy, forces beyond government control take over, and inflation begins.
And, yes, it starts with expectations. Take today. Folks are waking up to the price of everyday living items going up 8-10% per year. What will be their reaction going forward as the economy slowly trudges forward? Can the government come in and refuse to pay any price other than last year’s price? Sure they can, it’s called price controls. It’s been tried before… disastrously.
* An export-driven economy can rapidly turn to imports and population wealth generation. Witness China as we speak.
——————————————————————————
Really, your philosophy is a great short-term fix, until the self-interest excess becomes obvious to all. Then it’s payback time. It appears to work best for the most self-interested (e.g. the US) until we are no longer the largest bully on the block. Then we are not allowed to buy all our standard-of-living-enhancing export goodies. We won’t be able to pay for them.
Worst of all, your philosophy is based on a slanted business experience, one steeped in debt trading and arbitrage. Debt is good! Excess spending is good! It’s a gift from nationalistic currency heaven! Wow, letting government completely off the hook, allowing complete irresponsibility (the unintended consequence of your philosophy) is the best prescription for long term economic health. Whoever would have tried that before?!?
My recommendation: Spend some time thinking of potential unintended consequences of your philosophy. Write a new book on the “Seven Deadly Unintended Consequences of My Philosophy.”
Then we can sit down and have a balanced debated and discussion.
In the meantime, bask in the glow of the easily led, who will proudly exclaim the superiority of your new modernist theory.
Reply
WARREN MOSLER Reply:
March 13th, 2012 at 10:01 pm
worst case a nation is ‘forced’ into balanced trade by market forces you sort of describe. that’s no reason for it to be a policy goal.
what does your second point have to do with mmt/the 7dif?
your missing the point on how monopoly works- any monopolist is necessarily price setter
yes, you can go from net exports to net imports and enhance your real terms of trade.
in fact, I’d highly recommend it to any net exporter
The 7dif isn’t a philosophy, it’s a description of how it works and available policy options.
And now that you know how it works, feel free to discuss/debate the actual policy options on this website, thanks.
Reply
March 14th, 2012 at 12:20 pm
“worst case a nation is ‘forced’ into balanced trade by market forces you sort of describe. that’s no reason for it to be a policy goal.”
It is an explicit policy goal since it implies an inter-generational transfer – from consumers today who enjoy it now to workers tomorrow who will have to pay for it tomorrow.
Reply
WARREN MOSLER Reply:
March 14th, 2012 at 3:17 pm
if there’s no external debt the next generation doesn’t have to ‘pay’ for current trade deficits
Reply
Sergei Reply:
March 14th, 2012 at 3:28 pm
@WARREN MOSLER,
Warren, I am sorry but you are lost here. Terms of trade is the way future generations will pay for today’s profligacy. Say gasoline will cost double and your kids will have to earn it before they can burn it.
Reply
WARREN MOSLER Reply:
March 14th, 2012 at 3:36 pm
yes, worst case is always balanced trade.
and real terms of trade depend on lots of things but not last year’s trade gap
Sergei Reply:
March 14th, 2012 at 3:58 pm
@Sergei,
Terms of trade also depend on the past. You never start from scratch. To argue that past is irrelevant is dishonest.
Sergei Reply:
March 14th, 2012 at 3:59 pm
@Sergei,
“yes, worst case is always balanced trade.”
No, first you pay for the past excesses and then it will be balanced.
WARREN MOSLER Reply:
March 15th, 2012 at 8:14 am
Note that all the dollars obtained by non residents over the last 50 years aren’t nearly enough ‘buy back’ what they exported to us,
which would have to be bought from willing sellers at market prices.
nor was there ever a promise of any kind that they would.
Sergei Reply:
March 15th, 2012 at 8:48 am
@Sergei,
“Note that all the dollars obtained by non residents over the last 50 years aren’t nearly enough ‘buy back’ what they exported to us”
Warren, you appeal to the claim that the worst that can happen is balanced trade. But if/when such thing happens, you can NOT claim that the exchange rate will be defined by the balanced trade level. Much more likely is that the exchange rate will force you into positive trade to pay for past excesses before it gets to the balanced trade level. And if that is the case then it implies an inter-generational transfer. The burden of proof that it does NOT happen is on you. A claim is not enough. Therefore, “net import is a benefit” is a politically stated goal of inter-generational transfer of real resources. *Personally* you have full right to claim it. But not more than that.
WARREN MOSLER Reply:
March 15th, 2012 at 9:01 am
right, the exchange rate doesn’t matter.
it can’t force you into a trade surplus.
export revenues pay for imports, worst case.
see ‘exchange rate policy and full employment’ on this website thanks
Sergei Reply:
March 15th, 2012 at 9:24 am
@Sergei,
“right, the exchange rate doesn’t matter.
it can’t force you into a trade surplus.”
It can and it most likely will. Because you have a financial liability to foreigners which will put pressure on your “trade-balanced” exchange rate. You can not ignore the existence of the financial sector.
WARREN MOSLER Reply:
March 15th, 2012 at 10:59 pm
the exchange rate alters prices of both your imports and exports, presuming you sell at ‘world’ prices.
so how does it force anything?
MamMoTh Reply:
March 15th, 2012 at 11:30 pm
@Sergei, I think Sergei’s point is the debt will bring the exchange rate down enough to turn the country into a net exporter in order to repay the debt.
WARREN MOSLER Reply:
March 16th, 2012 at 3:50 pm
that can be allowed to happen and most govts would think it a good thing.
but even with a weak currency the nation doesn’t have to net export if the leaders don’t want it to.
Sergei Reply:
March 16th, 2012 at 3:01 am
@Sergei,
“so how does it force anything?”
Because there is an overhang of financial liabilities due to past trade deficits which will be paid for in exports. Once you retire liabilities to foreigners by exporting then you can start talking about balanced trade etc. And not before. If you talk before then you are talking about a politically motivated position of inter-generational transfer of resources. Fine but please stay it upfront :)
WARREN MOSLER Reply:
March 16th, 2012 at 3:55 pm
so in the case of japan/us, they hold over $1 trillion of US tsy secs.
so with time are you saying Japan is forced to sell them and buy US goods and services that get sent to Japan?
yes, they always have the option to import US goods and services, but as a matter of their policy the never net do that.
and may never do that. and if they try to there are all kinds of things we can do to not let it happen.
we can have export prohibitions of anything we want, for example.
Neil Wilson Reply:
March 16th, 2012 at 4:21 am
But there is no valid theory of exchange rates to suggest that will be the case.
So you have no idea where the exchange rate will go – because the economists who study this stuff for a living have no idea where the exchange rate will go.
Interest rates on Government Bonds are but one component. One of the others is the return on business assets.
As one goes down the other goes up if policy is domestically focussed.
Who wins? Nobody knows. That’s like predicting the stock market.
All we can say about the exchange rate is that it will fluctuate, and that if you are working to improve the output in your country that will reflect in the expectations.
Neil Wilson Reply:
March 16th, 2012 at 4:29 am
@Sergei,
“Because there is an overhang of financial liabilities due to past trade deficits which will be paid for in exports.”
Are you guaranteed to get a dividend when you purchase stock in a company? Is that dividend stream *guaranteed*?
No.
There is no guarantee that a foreign central bank hoarding your currency will be allowed to transfer it to anybody else *at all*.
Monopoly power – remember.
Sergei Reply:
March 16th, 2012 at 5:26 am
@Sergei,
Neil: So you have no idea where the exchange rate will go
Then neither I nor you can make any claims in this regard. Agreed? And I did not claim anything. I just question the logic of Warren’s claim which I find unjustified.
Sergei Reply:
March 16th, 2012 at 5:31 am
@Sergei,
Neil: There is no guarantee that a foreign central bank hoarding your currency will be allowed to transfer it to anybody else *at all*
In your defense of otherwise weak positions you sometimes go too far.
You have no power to execute any control on what happens outside of your sovereign borders. Foreigners are free to transaction in your currency at their will. And this act will influence the exchange rate exactly like it happens all the time.
If your position is to close access to the payment system for foreigners then please make such a claim openly. Do not hide behind vague claims. But bear in mind that noone will take such claims seriously unless you are taking about North Korea or something.
Neil Wilson Reply:
March 16th, 2012 at 10:30 am
@Sergei,
How does a foreign central bank settle to a domestic bank in the domestic currency without a transfer at the domestic central bank?
They can’t.
The domestic central bank can restrict the amount of funds that are transferred between its accounts if it so wishes – if that is required to prevent ‘currency dumping’ in the market, say.
In the same way as the domestic government sector can confiscate, via taxation, foreign bank holdings at the central bank.
That is the essence of capital controls – a tool that can and is deployed where necessary to ensure the smooth functioning of the market.
And that means that foreign banks are permitted to purchase exports and permitted to hold central bank reserves. They do not have a God given right and there is no guarantee they will get anything for them (for example if the foreign country went to war with the domestic country).
“I just question the logic of Warren’s claim which I find unjustified.”
I’m sure you do. But you have no basis for that.
The domestic currency is a simple public monopoly – with all the power (and responsibility) that entails.
WARREN MOSLER Reply:
March 16th, 2012 at 3:59 pm
as an example, with euro dollars you can have offshore dollar loans creating offshore dollar deposits which get transferred among offshore agents
Sergei Reply:
March 16th, 2012 at 11:05 am
@Sergei,
Neil, what capital controls are you talking about? Do you really understand what the claim here is? Do you say that fx-rates are established ONLY by trading between residents and non-residents and thus what the central bank can influence with its controls? Most of the fx trade actually occurs between non-residents. And that is non-residents who take the fx-risk and have to be persuaded to take it. The way to persuade them to take this risk can be to offer them what they want. No confiscation or taxation will help you in this. It is very childish to make such arguments if you are a net borrower/importer and thus have no bargaining position against the ROW.
“But you have no basis for that.”
Sometimes I feel that you argue just for the sake of arguing and not argument. You should try to understand the other position and not just relentlessly push for your own one. And I guess I know your position pretty well with all those confiscation, taxation, monopoly, control and so on arguments as I had it before. But then changed my mind. You need to change your tactics and argumentation if you want to convince me that I was wrong to change my mind. Repeating all that stuff does not help. I know it already.
But beyond and above all this … since you can NOT make a clear claim that the resulting fx-rate will correspond to the balanced trade level, that risk alone is enough to expose the political bias of your economic position. Fine for you. But please do not sell it to me. I will not buy it. I will NOT buy an economic theory, whatever its name, which tells me that I can enjoy driving SUVs now because it is not me but my kids who will have to pay for it with harder work.
Sergei Reply:
March 16th, 2012 at 11:09 am
@Sergei,
oh and regarding this question of yours:
How does a foreign central bank settle to a domestic bank in the domestic currency without a transfer at the domestic central bank?
Easy. Asking such questions just shows how dogmatic your views are. They all bank at the Bank of Kiribati which has an account at the Bank of Banana which has an account at the Bank of America. You will never know what has happened behind your back. You will only see your exchange rate falling.
Neil Wilson Reply:
March 16th, 2012 at 12:09 pm
@Sergei,
“Asking such questions just shows how dogmatic your views are. They all bank at the Bank of Kiribati which has an account at the Bank of Banana which has an account at the Bank of America. ”
In which case the NFA are with the Bank of America (which is under domestic regulation) and not locked out of circulation by the foreign central bank.
That may be why you’re missing the point here.
“You will only see your exchange rate falling.”
I see only a pre-conceived viewpoint. Unless you can move that you simply won’t see what Warren is getting at.
Sergei Reply:
March 16th, 2012 at 12:33 pm
@Sergei,
Neil: In which case the NFA are with the Bank of America.
Wow. Are you still on a gold standard?! I am shocked. Neil, check the simple stats like daily turnover in the fx market and daily turnover in the Fedwire. No matter what volume of regulation you put on BoA it will NOT see what is happening. It.will.physically.not.see.it. But the exchange rate will be falling.
fyi the main fx market in the world is in London and the top fx dealers are all non-US banks. Even if these banks have operations in the US they do not report about their operations elsewhere to the Fed and the Fed has no control over them.
Neil: I see only a pre-conceived viewpoint.
Neil, I have seen these things happening in the real world. I.e. I have seen a clueless central bank trying to fight an uncontrollable drop of exchange rate due to dealings of foreigners between each other. Ha. You probably should check with Mr.Soros about how the real world works. Not the pre-conceived viewpoints on what is possible and what not, but the real stuff.
Anyways, if you a net importer with the baggage to carry the only way you can import is to convince foreigners to hold your promises and that your promises including old ones have value. But people are irrational. And people are money-hungry. And they want to be paid for the risk. And the price you will have to pay them for risk they take is part of the inter-generational deal that you want to impose on your kids. That is all what I claim. Very simple. As long as risk is greater than absolute zero there is a transfer happening.
Unforgiven Reply:
March 17th, 2012 at 1:08 am
@Sergei,
Sounds like you’re using constants where you should be using variables.
“I have seen a clueless central bank trying to fight an uncontrollable drop of exchange rate due to dealings of foreigners between each other. ”
Cite, please?
Sergei Reply:
March 14th, 2012 at 3:29 pm
@WARREN MOSLER,
ah… obviously it does NOT matter in which currency the debt is denominated. The devaluation will be the same.
Reply
WARREN MOSLER Reply:
March 14th, 2012 at 3:37 pm
devaluation and relative value changes are two different things
March 21st, 2012 at 10:06 am
Barter networks in Greece using Alternative Units (not money)
http://www.guardian.co.uk/world/2012/mar/16/greece-on-breadline-cashless-currency?newsfeed=true
Reply
March 28th, 2012 at 3:46 pm
Follow up to 132 above:
http://www.lnarchitecture.com/kestrel.php
Reply
April 10th, 2012 at 2:38 pm
Hi Warren,
Two things:
1. Here is a recent letter that I wrote to a large listserv in my neck of the woods vis talk of Post Office closures: “…I don’t have a firm opinion on the Post Office issue, per se. I do have opinions about post office jobs going away while the “top 5%” grow wealthier, but that’s a different conversation. My point is this: A nation that issues its own currency can never technically, and from an accounting standpoint, go broke. Sure, it could experience inflation that may disproportionately hammer the middle class and poor, but it cannot go broke. AND, since the U.S. remains the most powerful economic force in the world, and since the dollar remains the world’s reserve currency, the FED still does have a lot of latitude vis-a-vis monetary policy. The issue, then, is not about the country being broke: it is about how money is created and who has access to that money. The U.S. Treasury could have a TRILLION dollars in loans and obligations (bonds) monetized by the Federal Reserve tomorrow, and those monies could be dispersed to states and municipalities for whatever purposes these entities saw fit. The money is always there: it’s just a matter of hitting a few keys on the appropriate computer and adding those funds to reserve accounts at The FED. BUT, such policies are also inherently destabilizing (if not carried out with great care and forethought) and, by their very nature, inflationary. And in the end, without real and substantive government regulation, as those new trillions are captured by a growing super-wealthy financial class, and as this new class of individuals (for example) bids the price of energy and equities and other commodities to the moon, the rest of us find daily expenses increasingly impossible to manage. So, again, the nation is not broke. In fact, the nation has access to all of the money it wants/needs. The issue is that loose monetary policies perhaps benefit an ever-shrinking circle of corporations and individuals, and if we don’t address THIS issue, our democracy is actually in trouble. Thanks for letting me post…” Dan
2. I have been “invited” by two fairly large AM radio stations to do a weekly program, based upon my ANGRY MODERATE Cable TV show. Since this is my foot in the door, so to speak, I have to pay for air time. I am trying to find sponsors for my shows ($ doesn’t go to me…it goes directly to the stations. I am not trying to make a cent here). The weekly price is $100 for one station, $200 for another. I thought maybe you are some of the folks here might be interested in helping sponsor my shows, as much of what I discuss during the shows is in agreement (to a large extent) w/MMT and debunking the ongoing myths.
Thanks for considering this idea.
Dan W
Etna, NH
Reply
April 22nd, 2012 at 9:10 pm
Hi. I realize you’re probably very busy, but I thought I would ask anyway since I consider you an “authority” on this issue. I was having a discussion with someone who seems to have a good grasp of our monetary system, but a disagreement arose with regard to bank lending and its impact (or lack thereof) on inflation. As I understand it, only federal deficit spending contributes to inflation, correct? Anyways, here is the other guy’s position:
” Loans do not net to zero, as they are money lent with interest, and money + interest is what is repaid (when/if it is repaid). If I get an auto loan to buy a new car, the bank creates the money for the loan out of thin air, and the car is then paid for. This car, once driven off the lot, immediately depreciates in value, so the value of the car cannot be supposed to equal the value of the loan. Every fractional reserve loan is literally an inflation of the money supply (since more money is on the books than there was before the loan).”
” Say I get a $100,000 loan for a $100,000 car. The bank creates the $100,000 (it did not exist before the loan). I pay the auto-dealer the $100,000, and I get a car. I work hard and repay the loan on time with interest, so now the bank has $106,000 (which it did not have before).
In summary, I have a car, the dealer has $100,000, the bank has $106,000, and we started with $0. This is inflation, not deflation.”
” I see what you mean about the banks not being in circulation, but you must see that since the bank did not loan me $100,000 of their money, they put $100,000 into circulation when they made the loan.”
Does the creation of credit itself constitute inflation? Does the profit the bank earns off of interest not contradict the idea that loans “net to zero?” Don’t bank profits end up in circulation eventually?
Thanks.
Reply
WARREN MOSLER Reply:
April 23rd, 2012 at 5:58 am
bank loans ‘create’ equal bank deposits as liabilities for the assets.
some define ‘inflation’ as ‘total bank deposits’ regardless of the actual price level so for these people and their definition loans create inflation.
how are you defining inflation?
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April 30th, 2012 at 8:50 pm
Warren, could you please comment on where, if anywhere, Mr. Hussmann is wrong?
“The willingness of people to hold a given amount of base money, per dollar of nominal GDP, is intimately tied to the rate of return that they could get on an interest-bearing security. Higher interest rates reduce the demand for zero-interest cash. So if there is upward pressure on interest rates, and the Fed leaves the money supply alone, how do you reach equilibrium? Simple – nominal GDP becomes the adjustment variable. If there’s not enough real GDP growth to absorb the excess base money, prices rise to do the job.
“Likewise, expanding the amount of base money per dollar of nominal GDP puts downward pressure on Treasury bill yields and short-term interest rates, but really only if there are no inflationary pressures in the system. Clearly, if inflationary pressures are present (suggesting that the monetary base is already too large), an expansion in the monetary base won’t produce lower interest rates. Rather, it will accelerate those inflationary pressures as nominal GDP is forced to keep up with the monetary base – even if real GDP isn’t growing at all. All hyperinflations are built on this dynamic. That said, it’s worth emphasizing that untethered money growth is invariably a reflection of untethered fiscal deficits (the central bank just buys the government debt and replaces it with money). So significant inflation is ultimately not a monetary phenomenon as much as it is a fiscal one.”
FROM: http://www.hussmanfunds.com/wmc/wmc120423.htm
Thanks!
Reply
WARREN MOSLER Reply:
April 30th, 2012 at 8:52 pm
seems to be reversing cause and effect though the conclusion isn’t wrong?
Reply
May 6th, 2012 at 9:46 am
Hi Warren,
In ‘Full Employment and Price Stability’ you write that “The current monetary system is a classic monopoly with the traditional analysis of monopoly sufficient to describe all aspects”.
In other places you state that the government is the monopoly supplier of ‘its’ currency, or ‘its’ money, but that banks also create ‘money’ (credit/ deposit money) when they make loans. Banks presumably also determine the rate of interest that they charge on their loans.
How is the first statement (that the monetary system is a classic monopoly) compatible with the fact that banks create money, and that the govt only has a monopoly on the supply of certain forms of money (currency, reserves etc)?
Thanks.
Reply
WARREN MOSLER Reply:
May 6th, 2012 at 2:43 pm
yes, the banks are designated agents of the govt that has decided their bank deposits are eligible for the payment of taxes
Reply
jim Reply:
May 6th, 2012 at 4:34 pm
But the banks create those deposits as and when they want to (by extending credit).
A ‘monopoly’ is usually defined as:
“The exclusive possession or control of the supply or trade in a commodity or service.”
How can the monetary system be a monopoly if banks create their own form of money (which makes up most of the overall ‘money supply’)?
The government may regulate the system to a greater or lesser degree, but does not have exclusive ‘control’ over it, does it?
Thanks again.
Reply
imtheknife Reply:
May 6th, 2012 at 8:00 pm
@jim,
Banks have permission from the federal government to create dollars, but only with certain terms. They cannot just create whatever money they want and spend it however they want and have that be the end of it- typically, liabilities are required such that money created by banks must ultimately also be destroyed by banks (that is, an equal and offsetting amount). Only the federal government can do that, and only the federal government can grant that power unto others (such as the central bank, in limited scope, and private banks, through the power of credit creation).
WARREN MOSLER Reply:
May 7th, 2012 at 6:37 am
right, it’s called regulation and supervision
WARREN MOSLER Reply:
May 7th, 2012 at 6:30 am
i say the govt and/or it’s designated agents is the single supplier of that which it demands in payment of taxes.
fed member banks are currently govt’s ‘designated agents’
Reply
May 6th, 2012 at 5:16 pm
Also, by ‘their bank deposits’ do you mean their (the banks’) reserves at the central bank?
Reply
WARREN MOSLER Reply:
May 7th, 2012 at 6:36 am
all the bank’s liabilities that can ultimately be used to pay taxes.
reserves are the fed’s bank deposits which count as well
Reply
jim Reply:
May 7th, 2012 at 8:30 am
Can bank deposits pay taxes? It was my understanding that the actual payment happens in reserves. If I send in a cheque to pay my taxes, that cheque represents a promise by my bank to transfer reserves to the treasury on my behalf.
Only a fraction of overall tax payments actually needs to be settled in reserves however, due to the fact that govt spending to banks usually offsets much of the transfer from banks.
Have I got this wrong?
Reply
jim Reply:
May 7th, 2012 at 9:07 am
Regulation and supervision doesn’t equal ‘monopoly’. Many types of business require licences, and are regulated by govt agencies.
“They cannot just create whatever money they want and spend it however they want”
No, but neither does the govt control banks’ creation of credit. Most businesses face restrictions on what they can and can’t do – that doesn’t make them part of a government monopoly.
“the govt and/or it’s designated agents is the single supplier”
Shouldn’t that be “the govt and its designated agents are the only suppliers”?
Given the above, this would imply at least a duopoly (or oligopoly) of some sort.
Ok, if government wanted to control everything that banks do they ultimately could, but at present they don’t, and they never have. Instead the govt issues charters and sets the rules of the game, as they do with other industries.
Thanks.
WARREN MOSLER Reply:
May 7th, 2012 at 11:14 am
govt controls bank credit extension to the extent it wants to.
and if it messes up a lot of out of control/inflationary consequences can follow.
WARREN MOSLER Reply:
May 7th, 2012 at 11:11 am
you are conflating assets and liabilities a bit.
your bank deposit is fdic insured.
your write a check to the govt. and the fed debits your bank’s reserve account and credit’s tsy’s fed account.
they don’t bounce your check because the bank might not have ‘sufficient’ reserve balance, they just let your banks balance go to where it goes, positive or negative.
if it goes negative, that’s functionally a loan to your bank from the fed.
May 7th, 2012 at 12:22 pm
Thanks for the replies.
On this point:
“govt controls bank credit extension to the extent it wants to.”
We could say the govt controls everything to the extent that it wants to. Or in many cases, to the extent that the population allows it to.
Reply
WARREN MOSLER Reply:
May 7th, 2012 at 12:28 pm
yes, making govt the monopoly supplier of business licenses, etc.
the govt allows its member banks to make bank loans which create bank liabilities called bank deposits which the govt has also decided to accept for payment of taxes.
It regulates/restricts this process and examines and supervises it to ensure compliance.
If that puts ‘supplying the thing demanded to pay taxes’ outside of your definition of a public monopoly fine. You’re entitled to any definition you select.
Reply
May 7th, 2012 at 12:24 pm
“they just let your banks balance go to where it goes, positive or negative”
Is there a limit on how far a bank’s balance can go negative, out of interest?
Reply
WARREN MOSLER Reply:
May 7th, 2012 at 12:41 pm
yes, if your equity capital falls below the regulator’s comfort zone, or your liquidity, or your asset quality, or your management’s capabilities, or your earnings, or your liquidity, the regulators are supposed to shut you down
Reply
May 7th, 2012 at 9:01 pm
“It regulates/restricts this process and examines and supervises it to ensure compliance.”
So what happened leading up to 2008? The govt momentarily lost control of its ‘monopoly’, or what?
Reply
WARREN MOSLER Reply:
May 8th, 2012 at 6:13 am
the govt got taken by lender fraud, where loan officers used fraudulent income statements and fraudulent appraisals to build volume and get paid bonuses.
regulation is a work in progress.
and public monopolies do mess up all the time, but that doesn’t make them any less the monopoly
Reply
May 9th, 2012 at 4:34 pm
Thanks for the replies again.
Re: A discussion over at Mike Norman’s on the question of whether central banks might be compelled under certain situations to issue foreign currency denominated debt in order to manage exchange rates. The argument made by Ramanan was essentially that truly ‘free-floating’ currencies don’t really exist, as there will always be conditions under which CB’s will have to intervene in fx markets. Although this is most relevant in the case of countries with weak or developing economies, a significant fall in the value of the dollar (as the result of balance-of-payments crisis due an out of control CAD) would lead to intervention in fx markets by the Fed, entailing the issuance of foreign currency denominated debt, and then possible problems with repaying that debt.
For example:
“When a nation is a net importer, a nation has to finance this by hook or crook. For the us it is relatively simple because exporters TO the US purchase dollar denominated assets. For other nations it’s not that simple. Let’s say Toyota sells cars in Thailand. Now Toyota will repatriate funds back to Japan – which leaves a Thailand bank indebted in Yen because the Thai bank is acting as a dealer in foreign exchange markets. The Thai bank has to keep refunding this liability but it has to keep its net open position low because of regulatory requirements and self imposed requirements/discipline. So the banking system as a whole has to attract funds from abroad. This of course may be limited by how much foreigners are willing to lend and one strategy is a slightly higher interest rate by the central bank to attract funds.
However many times even this is insufficient and a shift of funds abroad leaves banks with a growing net open position. In the balance of payments language this is seen in the item “other investment”. You can see this mentioned in some IMF research on nations having troubles in the fx markets. This can be quite risky and hence the central bank intervenes in the markets. The central bank is not just preventing the currency from depreciating. It is helping the banking system from acquiring huge open positions. Since the central bank is limited on this by the amount of reserves, the Treasury or the Exchange Stabilization Fund/Treasury issues debt in foreign currency. And these institutions coordinate the activities. By no means is the treasury borrowing funds in foreign currency in order to make expenditures in domestic currency. The objectives are different.
So typically nations’ governments acquire foreign currency debt. Else they risk their currencies being unacceptable in the international money markets. You can’t go and ask them to not borrow in foreign currency.”
What do you think?
Thanks.
Reply
WARREN MOSLER Reply:
May 9th, 2012 at 5:05 pm
Seems he’s saying if your currency goes down making exports too expensive you need to borrow fx to either make the purchases directly or to support your currency so you can use it to buy things.
I’ve never seen that happen apart from Wiemar where deficit spending hit 50% of gdp and was used to sell the mark to buy the gold and fx needed for war reparations.
So even then with the policy of selling one’s currency it would make no sense to buy fx to buy your currency to support the purchase of imports?
And Zimbabwe where output fell 80% and nominal spending stayed the same or rose driving up prices wasn’t ‘too many imports’ considered part of the problem?
In general, when a falling currency results in reduced imports and increased exports that policy is deemed a success, and not something to reverse?
Today, nations get severely criticized for running weak currency problems which presumably to their benefit and the expense of others?
Yes, they are all backwards on the issue, but this is about what a nation might be ‘forced’ to do.
Reply
jim Reply:
May 9th, 2012 at 6:25 pm
“The central bank is not just preventing the currency from depreciating. It is helping the banking system from acquiring huge open positions”
I think the point is that severe currency depreciation could bring a country’s banks down, and that the CB would have to step in to stop this from happening.
Reply
MamMoTh Reply:
May 9th, 2012 at 6:38 pm
@jim,
Indeed. The problem is if those banks made loans in foreign currencies. Then the government must let those banks go bust and customers lose their deposits, or bail them out absorbing the foreign debt, which is what happened in Latin American countries in the 80s.
WARREN MOSLER Reply:
May 9th, 2012 at 6:40 pm
why would it bring the banks down?
MamMoTh Reply:
May 9th, 2012 at 7:13 pm
Because when the local currency is devalued people default on their bank loans in foreign currency.
WARREN MOSLER Reply:
May 10th, 2012 at 7:07 am
I wouldn’t allow banks to make foreign currency loans, particularly if not fully covered by foreign currency deposits of at least equal maturity. It’s playing with fire with ‘public funds.’
Neil Wilson Reply:
May 10th, 2012 at 2:58 am
@jim,
Please remember that for an international transaction to succeed both the physical movement part of the transaction must be in place *and* the financing part.
If the transaction cannot match an import with an export at that point in time *and* nobody will hold the denomination the transaction is in then the transaction *will not happen*.
All you are saying here is that the private banks funded a lot of foreign transactions and get caught with their pants down due to some unanticipated move on the currency market.
Well in that case there needs to be a well oiled administration process to put the banks into administration, bin the bad debts and return the rest of the bank to function.
The key to all this is to ensure that the system can bin banks when they get into trouble without causing too many systemic ripples to the domestic payment system.
Banks have to be allowed to go bust.
WARREN MOSLER Reply:
May 10th, 2012 at 7:17 am
agreed, and no reason for the payment system to malfunction.
MamMoTh Reply:
May 10th, 2012 at 11:59 am
@Warren,
I wouldn’t allow banks to make foreign currency loans, particularly if not fully covered by foreign currency deposits of at least equal maturity. It’s playing with fire with ‘public funds.’
Agreed, but the fact is in most developing countries banks issue loans in foreign currency and people save in foreign currency. And it all works pretty well until it doesn’t.
MMTers should come up with a realistic plan to de-dollarize an economy.
WARREN MOSLER Reply:
May 10th, 2012 at 8:12 pm
no need. just keep the govt’s member and insured banks on a tight leash, and let the rest go bankrupt as needed, supporting full employment with fiscal policy at all times.
May 10th, 2012 at 5:13 am
Ok, thanks.
The discussion was intially about why Mexico, despite issuing its own floating currency, had to borrow money from the IMF in 2009 following the Peso’s sharp drop to a record low.
Ramanan previously suggested that the US (or any other currency-issuing country) could potentially find itself in a similar situation in future as the result of a balance of payments crisis:
“In the scenario constructed, the balance of payments position weakens over the years (and I have mentioned that roughly in 2020 it weakens). In 2022, foreigners are no longer willing to finance the debt. This may be due to a capital flight or due to the inability of the banking system to maintain a low net open position in foreign currency. The depreciation of the domestic currency isn’t sufficient to clear the fx markets and the official sector (either the central bank or the government’s treasury) necessarily has to intervene in the foreign exchange markets by issuing debt denominated in foreign currency. The government is then acting as the borrower of the last resort and the objective is to use the proceeds to partially have more foreign exchange reserves and/or to sell the foreign currency proceeds from the debt issuance to clear the fx markets. The government is then left with a net liability position in the foreign currency. Soon the external situation worsens to the point requiring official foreign help – such as from the IMF – which promises to help and requires a restructuring of the debt both in domestic and foreign currencies.
Free marketers have a blind belief in the markets and the theories are built on the assumption that markets always clear. The recent crisis has highlighted that this isn’t the case. Even for the case of Australia – whose currency can be considered close to being pure float – has had issues in the external sector and the Reserve Bank of Australia had to borrow in US dollars from the Federal Reserve (via swap lines) to help Australian banks meet their foreign currency funding needs during the crisis.”
Any thoughts?
Reply
Neil Wilson Reply:
May 10th, 2012 at 5:31 am
@jim,
It’s just a slippery slope logical fallacy.
“The depreciation of the domestic currency isn’t sufficient to clear the fx markets and the official sector (either the central bank or the government’s treasury) necessarily has to intervene in the foreign exchange markets by issuing debt denominated in foreign currency”
That ‘necessarily’ has to be explained as are the sequence of ‘ifs’ required to trigger it.
Just let those institutions that are underwater go bust and have the systems in place to deal with the fall out from that – primarily the requirement to fully nationalise all the banks that fail, and/or limits on the foreign currency exposure of domestic banks.
All I see here is an issue that is easily designed around – make sure entities with foreign currency exposure can go bust properly.
Reply
Sergei Reply:
May 10th, 2012 at 1:03 pm
@Neil Wilson,
@Neil Wilson,
“That ‘necessarily’ has to be explained as are the sequence of ‘ifs’ required to trigger it.”
Congress has assigned the U.S. Treasury primary responsibility for international financial policy including exchange rate. Similar responsibilities exist in all countries.
As for “ifs” the burden is on you to prove that *nothing* will ever-ever trigger it.
But never say never.
Besides “ifs” there are inter-generational transfer which occur via international trade and debt.
Reply
WARREN MOSLER Reply:
May 10th, 2012 at 7:20 am
Mexico had other options.
and i think they may have done it to get cheaper dollar funding for their banks who were funding in dollars funding their dollar loans.
Reply
May 10th, 2012 at 6:20 am
Thanks Neil,
So, are there any conditions under which you think a persistent and growing current account deficit might be a problem?
Do you think a country like the US could ever face a serious ‘balance of payments’ crisis? What about smaller countries with limited resources, such as the UK (problems with import substitution), or ‘developing’ countries?
Given the extent of international trade, how would you limit domestic banks’ foreign currency exposure?
Also, how do you explain Mexico turning to support from the IMF in 2009 (after a sharp depreciation of the Peso), despite the fact that Mexico issues its own floating currency?
Reply
Neil Wilson Reply:
May 10th, 2012 at 6:46 am
The current account deficit can only grow if there are people willing to save in the currency of issue. Otherwise the transactions that bring about that deficit simply cannot happen.
Since they are standing the exchange risk of that decision, why is there a problem?
It’s just the same as a domestic individual saving in the currency, and the solution is the same. If there is an excess of spending at any point in time due to a run down of savings, tax it away at that time – or if necessary slow the transaction system down with capital controls.
“Given the extent of international trade, how would you limit domestic banks’ foreign currency exposure?”
By separating the domestic arm out and regulating its insured activities. It has to be boring and steadfastly stick to clearing payments.
The other services of a bank are then just the same as any other firm – if they screw up, they go bust and the creditors lose money.
“Also, how do you explain Mexico turning to support from the IMF in 2009 (after a sharp depreciation of the Peso), despite the fact that Mexico issues its own floating currency?”
The UK turned to the IMF in 1976 for no good reason.
Just because you have a Jet Fighter doesn’t mean that the pilot automatically knows how to fly it, or use all its weapons. They have to be trained.
Going to the IMF is always a choice.
The whole excitement about the external sector is based around analysing it as though it is external to the system you are looking at.
The best way to look at it is as two objects each subject to the same real and nominal constraints interacting. There is nothing scary about foreigners.
Reply
MamMoTh Reply:
May 10th, 2012 at 11:45 am
@Neil Wilson,
The current account deficit can only grow if there are people willing to save in the currency of issue. Otherwise the transactions that bring about that deficit simply cannot happen.
That’s totally wrong, backwards, and disproved by reality.
Reply
Neil Wilson Reply:
May 10th, 2012 at 4:19 pm
@MamMoTh,
“That’s totally wrong, backwards, and disproved by reality.”
Except that it isn’t.
Both the financing chain and the physical chain have to both come together at the same time for a transaction to happen.
It must be matched in the opposite direction or somebody must hold the ultimate currency risk. And if they do then there is a risk they will be wrong and lose out.
And holding the currency risk is ‘saving’.
MamMoTh Reply:
May 10th, 2012 at 4:35 pm
Both the financing chain and the physical chain have to both come together at the same time for a transaction to happen.
Nonsense, and timing is totally irrelevant.
It must be matched in the opposite direction or somebody must hold the ultimate currency risk. And if they do then there is a risk they will be wrong and lose out.
Yes, there must always be somebody holding a currency risk.
But what matters is who is holding that risk, and in which currency.
There have been enough CAD crisis to prove the point.
Neil Wilson Reply:
May 10th, 2012 at 5:28 pm
@MamMoTh,
“But what matters is who is holding that risk, and in which currency.”
Which is saving. Which is what I said.
“There have been enough CAD crisis to prove the point.”
All that proves is that the people running the show didn’t know what to do.
That does not prove it can’t be done.
Neil Wilson Reply:
May 10th, 2012 at 5:41 pm
@MamMoTh,
“Nonsense, and timing is totally irrelevant.”
It’s completely relevant. If the timing isn’t concurrent then somebody is saving.
Which is what I said in the first place.
Sergei Reply:
May 10th, 2012 at 6:24 pm
@MamMoTh,
Neil: It’s completely relevant. If the timing isn’t concurrent then somebody is saving.
You definitely do not get it. It is not about saving. NOT AT ALL. There is a nice youtube on that topic.
WARREN MOSLER Reply:
May 10th, 2012 at 8:05 pm
no, it’s totally correct, and as a simple point of logic
MamMoTh Reply:
May 10th, 2012 at 10:46 pm
no, it’s totally correct in the case of the US and maybe a handful of other countries, but it’s totally wrong for the rest of the world where trade deficits are financed with foreign debt.
WARREN MOSLER Reply:
May 11th, 2012 at 6:54 am
govts don’t have to ‘finance trade deficits’ with foreign debt or anything else.
it’s a private sector matter that doesn’t demand govt. intervention,
it’s when govt intervenes that the issues raised here begin.
Sergei Reply:
May 11th, 2012 at 8:09 am
@MamMoTh,
Warren: it’s a private sector matter that doesn’t demand govt. intervention,
Any private matter which creates instability requires government intervention as stability is generally considered to be a public good. You might choose to ignore some types of instability but that is a political decision. It is not an economic argument.
WARREN MOSLER Reply:
May 11th, 2012 at 10:02 am
yes, stability in the real economy re optimizing real terms of trade.
a trade deficit improves real terms of trade, and fiscal adjustments can always sustain full employment
ESM Reply:
May 11th, 2012 at 9:58 am
@MamMoTh,
@Sergei:
“Any private matter which creates instability requires government intervention as stability is generally considered to be a public good. You might choose to ignore some types of instability but that is a political decision. It is not an economic argument.”
Sure, except that the problem with government intervention in this case is that it actually exacerbates instability because it prevents markets from clearing based on participant’s (uncoerced) indifference levels.
Would you recommend that the government intervene in the stock market to reduce its volatility? If not, would that be based on a political argument or an economic one?
Sergei Reply:
May 11th, 2012 at 11:19 am
@MamMoTh,
ESM: Would you recommend that the government intervene in the stock market to reduce its volatility? If not, would that be based on a political argument or an economic one?
And why is this instability bad? You should not read things you want to read (aka pro-blindly-government) which are not there.
ESM Reply:
May 11th, 2012 at 12:53 pm
@MamMoTh,
@Sergei:
“You should not read things you want to read (aka pro-blindly-government) which are not there.”
What a deliciously un-self-aware comment. I did not imply that you were blindly pro-government. My point was that government intervention to reduce instability in the marketplace often creates more instability, in which case an argument against can be an economic one.
In the case of fx markets, I think the painful dislocations actually happen when governments attempt to support the value of a currency. The currency ends up trading far from its equilibrium value, until one day, the pressure is too great to bear and it collapses.
If the fx market were allowed to roam unrestricted like a free-range chicken, then negative feedback mechanisms would help maintain a stable equilibrium. For example, if the dollar weakened, US exports would become more competitive and imports would become less attractive. Also, investors would find investment opportunities in the US to be cheaper at the same time domestic business was booming from selling more goods and services to both foreigners and residents alike.
Sergei Reply:
May 11th, 2012 at 1:16 pm
@MamMoTh,
ESM, I respect your comments but sometimes you just push over the edge. And this is the case here.
Above all we surely understand that nothing is stable. You might say that I was not specific enough to point out about which instabilities I was talking about. I thought it was not needed given the whole previous discussion of persistent CAD imbalances. Please note that I did not talk about fx imbalances. That is the argument typically brought up by opposing crowd saying that Japan or China will never ever sell their dollars at once. So what said I. Instead I mentioned many times that the problem is NOT in China or Japan.
The type of instability I was talking about is the one similar to the global supply chain disruptions caused by the earthquake in Japan. If government could intervene and prevent the earthquake from happening surely everybody would agree with that.
Now transpose the natural disaster like earthquake shaking the global economy into the national disaster due to equivalently *quick* move of the fx-market. Would you intervene to prevent it?
However even this is not the point of instability. It is just a *disputed* consequence. Can you intervene into a consequence? Seriously, what are you talking about?
The discussion here is about the reason and whether intervention is required into the reason so that this reason does not threaten the economy with consequences.
Jim Reply:
May 10th, 2012 at 11:45 am
“If there is an excess of spending at any point in time due to a run down of savings, tax it away at that time – or if necessary slow the transaction system down with capital controls”.
So if a country experiences a severe depreciation in the value of its currency it can counter this by a) stopping people from selling the currency (or financial assets denominated in the currency), and b) quickly raising taxes on those that are selling the currency/assets?
1) Is this really feasible?
It would require the ability to quickly impose controls and taxes in response to a rapidly developing, complex situation. The government doesn’t have the ability to suddenly raise taxes in this way (I don’t know about capital controls).
2) Don’t you think such actions could lead to even worse problems? Wouldn’t such authoritarian actions scare off investors even more?
- Such actions may be necessary in a crisis, but if that crisis was initially created by allowing a CAD to get wildly out of control, then perhaps it would be better not to let that happen in the first place?
In a currency/balance-of-payments crisis, people get scared and start ‘dumping’ the currency (as they do in a hyperinflation), leading to a collapse in value. Ideally it would be better to avoid ever getting to that point – just as it would preferable to avoid a hyperinflation altogether, rather than having having to fight it by ramping up taxes and imposing price controls.
If you find yourself having to do that, then you’ve already screwed up.
First you’ve brought about a fall in the value of people’s money (depreciation/ inflation) by allowing CAD/ spending to get out of hand, then you’ve ‘solved’ the problem by stripping people of their money and imposing controls on them. They might have a good reason to accuse you of theft, among other things!
Such behaviour is unlikely to help a country’s economy overall.
“The UK turned to the IMF in 1976 for no good reason”
In 1976 Sterling was plummeting, inflation was going through the roof and unemployment was growing. Are you saying the solution would have been to put up taxes? Would that really have resolved the situation? (Same question wrt Mexico).
Thanks.
Reply
MamMoTh Reply:
May 10th, 2012 at 12:04 pm
@Jim,
If you find yourself having to do that, then you’ve already screwed up.
Indeed.
Argentina is currently worth looking at. They seem to be clutching at straws to get the situation under control.
WARREN MOSLER Reply:
May 10th, 2012 at 8:13 pm
their mmt people are long gone
Sergei Reply:
May 10th, 2012 at 1:26 pm
@Jim,
“1) Is this really feasible?”
It is not about feasibility. Taxing transactions is a senseless economic policy. Warren said that many times.
WARREN MOSLER Reply:
May 10th, 2012 at 8:17 pm
the point of taxing transactions should be to limit the transactions, not to raise revenue for the federal govt
Neil Wilson Reply:
May 10th, 2012 at 5:34 pm
@Jim,
“So if a country experiences a severe depreciation in the value of its currency it can counter this by ”
Go read what I said again. You have misread it.
WARREN MOSLER Reply:
May 10th, 2012 at 8:08 pm
if i recall correctly the ‘inflation’ wasn’t monetary but caused by crude prices being passed through?
unemployment doesn’t help that, and high interest rates make it worse as well.
the better response would have been 0 rates, fiscal policy to support full employment without govt. chasing price higher with it’s spending policies.
MamMoTh Reply:
May 10th, 2012 at 11:03 pm
@Warren,
their mmt people are long gone
Who were their mmt people? Do you know what happened to them?
I don’t know how to describe the people left, but the situation there is quite bizarre, almost surrealistic.
Last week, the Argentinian government produced an ad of an Argentinian athlete training in the Falklands for the Olympic Games with the slogan “to compete in British soil we train on Argentinian soil”.
The day after, the head of the Argentinian Olympic Committee complained that many athletes couldn’t even train because the gear they needed to import was held by the customs and they were told they needed to export something before they could get authorized to import.
Anyway, the british or kelpers came up with a hilarious spoof of the ad:
http://youtu.be/VetuOlwcmqU
WARREN MOSLER Reply:
May 11th, 2012 at 6:56 am
Daniel Kostzer was my contact at the labour ministry. he’s long gone.
Sergei Reply:
May 11th, 2012 at 2:23 am
@Jim,
Warren: the point of taxing transactions should be to limit the transactions
Great and what is wrong with fx-transactions per se? Why do you want to limit them? People are free to trade or? You keep on saying that imports are good and then you want to tax them? How do you import without selling USD for goods? Selling USD does not kill anybody, does not harm environment, does not do anything bad. It is just an exchange of two electronic records. Why do you want to tax it if *Americans* decide to sell USD and buy say yuan? Not the Chinese selling USD as Neil tries so hard to defend.
WARREN MOSLER Reply:
May 11th, 2012 at 7:06 am
did I state i supported taxing fx transactions somewhere?
Sergei Reply:
May 10th, 2012 at 1:07 pm
@Neil Wilson,
“Since they are standing the exchange risk of that decision, why is there a problem?”
The problem is in the sudden change of assessment of that risk. Stability of any kind is public good. You can not privatize it which is what you apparently want with such fx policy.
Reply
Neil Wilson Reply:
May 10th, 2012 at 5:38 pm
@Sergei,
“The problem is in the sudden change of assessment of that risk.”
And why would it be sudden rather than gradual?
It’s another ‘what happens if the chinese spend all their money tomorrow’ line.
They won’t – and for the same reason a nuclear war didn’t happen.
Sergei Reply:
May 10th, 2012 at 6:22 pm
@Sergei,
Neil, “the problem is not and has never been in China. Warren stated that zillion of times”
that is the second time I say it. Importunately you tend not to read what other say
Neil Wilson Reply:
May 10th, 2012 at 10:43 pm
@Sergei,
I don’t read people who resort to ad hominem no.
Sergei Reply:
May 11th, 2012 at 2:13 am
@Sergei,
“And why would it be sudden rather than gradual?”
Because that is what normally happens.
Sergei Reply:
May 11th, 2012 at 2:14 am
@Sergei,
“It’s another ‘what happens if the chinese spend all their money tomorrow’ line.”
And again you are over-fixated on China whereas the problem is not there and has never been there.
WARREN MOSLER Reply:
May 11th, 2012 at 7:05 am
When anyone spends their spending power by ‘lifting offers’ it tends to drive up prices while it lasts.
Then things tend to settle back, ex govt. ‘interference.’
Neil Wilson Reply:
May 11th, 2012 at 2:34 am
@Sergei,
“And again you are over-fixated on China whereas the problem is not there and has never been there.”
Ad hominem. Naughty.
Let me help you out.
what happens if the Japanese spend all their foreign currency tomorrow.
Or if you don’t like the Japanese either substitute in pretty much any or all of the states in the top 20 or so of this list: http://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance
WARREN MOSLER Reply:
May 11th, 2012 at 7:07 am
if ‘they’ spend all at once by paying offered prices those prices tend to rise until the spending subsides.
remember, they can only buy from willing sellers at market prices.
Anders Reply:
May 11th, 2012 at 4:36 am
@Sergei, surely you can’t discuss CAD (ie flow) risks without looking at the stock concept of the net international investment position (NIIP), and the currency in which claims are denominated.
If a NIIP is big and negative, it is reasonable for foreign investors to ask what might happen if the currency declines. For countries with fixed FX or foreign ccy liabilities, a decline in the FX rate could actually worsen the NIIP. For the US or UK, a decline in the FX rate would improve (shrink) the NIIP.
In other words, the fact of liabilities being denominated in domestic ccy makes FX movements an automatic stabiliser, or a negative feedback loop. Asian USD-denominated debt in the late 1990s led to a positive feedback loop, where Hooke’s Law applied.
It is only with a positive, rather than negative, feedback loop, that there is a special reason for foreigners to fear a fall in the currency, and therefore a potential incentive for foreigners to ‘beat the rush’ by dumping their claims.
Sergei Reply:
May 11th, 2012 at 5:22 am
@Anders,
Do not tell to Neil that he needs to look at something because he will just reply “Ad hominem. Naughty.” His problem is that he suffers from ad hominem himself. Not being able to even admit or consider an even theoretical possibility of a possible problem is a pure sign of logical fallacy. And that is beside other obvious issues like inter-generational transfer of wealth which is a clear political position. And a blind defense of it from someone as smart as Neil looks very embarrassing to me. But whatever.
Anyways not what I wanted to say here.
I wanted to emphasize – do not focus on foreigners alone! fx market needs both foreigners and locals. Remember Warren repeatedly mentioning short USD positions due to QE? Do you think they were *exclusively* foreign originated?! What about Japanese shorting JPY for years? Does it mean that the rest of the world has some strange desire to save in JPY?
Yes, stocks are important. And currency composition. And there are all types of loops. But if there is one thing for sure it is that imbalances are sometimes resolved in an explosive manner with all types of by-side effects. And if there is another thing for sure it is that CAD imbalances are more often than not resolved in an explosive manner.
Anders Reply:
May 11th, 2012 at 7:16 am
@Sergei, I’ll gladly stay out of you vs Neil as I respect you both.
Where I struggle to follow your argument is that I can’t see how or why a CAD imbalance could ever be resolved ‘explosively’ where liabilities are denominated in local ccy. Take the UK: some investors feel the NIIP is a bit big, so they sell some UK assets – GBP weakens – the NIIP shrinks – investors’ nervousness evaporates. I just don’t see why anyone would ever dump UK assets in an uncontrolled manner. Can you sketch out how it would happen?
Best wishes
Sergei Reply:
May 11th, 2012 at 8:04 am
@Anders,
Anders: Can you sketch out how it would happen?
E.g. animal spirits.
Why were investors so confident in Greece until 3 years ago and now Bundesbank runs a 600bn euro plus position. Yes, I know it is eurozone and so on. But hold on! Wasn’t the same eurozone 3 years ago as well? What has changed?! Estonia entered and changed it all? Which “how” changed between now and then? It is not about “how”. It is about “can” like in “can it happen”.
I guess the whole argument is about who has to prove the claims being made. And to make a long story short some time ago I was confident that it was Ramanan who had to prove it. Now I think that the burden of proving is not anymore with him. So I was clearly in the “how” camp back then. Well, generally I am still in the “how” camp. But please notice that if you answer “yes” to the question of “can” then your solution to the problem of “how” might be completely different. It probably can even be a better one! And if it probably can be a better one why do we blindly throw it away?
The world is not black and white of ivory towers as per Neil. The action always occurs in the grey area. And so the argument is not whether 2+2 equals 4 like in imports equal benefits. The argument is about the complex world of all types of possible inter-relationship, pre-existing economic mistakes, institutional structures, geo-political agendas, and so on. In the ideal world Neil is right. And I will sign it as well. But then in the ideal world the problem does not even exist. Noone will export more than import. So what problem do claims like “what happens if the Japanese spend all their foreign currency tomorrow.” solve then? Such claims are meaningless in such world!
But our world is not like that. Unfortunately.
Anders Reply:
May 11th, 2012 at 9:32 am
@Sergei, when you say “can” is the key word, I agree, and construe it as in “a large number of foreign investors selling local currency assets CAN lead to a worsening NIIP and therefore to a crisis and defaults”.
By contrast, if lots of foreign investors started panicking and dumping GBP, the NIIP would narrow sharply to a level where no one could possibly worry. The UK’s NIIP was a negative 25% of GDP in 2007 and shrunk to 7% a couple of years later following a currency devaluation. This strikes me as the definition of a self-righting system.
You mention Greece, but according to ‘my’ narrative, Greece falls into the camp with non-local ccy liabilities, and so is a classic case where it CAN suffer a crisis (even if it may take years for investors to start panicking).
What am I missing?
I did quiz Ramanan on this a while ago but his answers just confused me :-((
Sergei Reply:
May 11th, 2012 at 10:23 am
@Sergei,
Anders, not only foreign investors can dump the assets but also locals. Historically most devaluations were triggered by the local population which in a panicky mode tried to preserve their hard-earned cash. The obsession with China is completely misplaced. Yes they bought dollars and yes they are not likely to sell them all at once. But as Bill likes to say – so what?!
Looking at NIIP is a good thing but arguments that NIIP drive exchange rates are very far fetched. We all understand it. Theoretically you can have a devaluation also with a positive NIIP when your assets are illiquid real assets but liabilities are all liquid financial ones. And obviously you can have an appreciating exchange rate with a growing negative NIIP. Panics come and panics go They are not triggered by NIIP reaching any particular level.
I mentioned Greece for the animal spirits argument. Everybody was happy funding them until 3 years ago at ever decreasing spreads. And I mean it – seriously happy! And in this particular case nothing of substance has changed on the 15th of September 2008. However now everybody is very unhappy. Same world, same eurozone, same greece and same germany, same deficits, same rules and even much easier due to ECB but … Yes, they have fixed exchange rate. But they had the same fixed exchange rate 3 years ago. What has changed?
Anders Reply:
May 11th, 2012 at 11:00 am
@Sergei, I agree that NIIP is one of many factors driving the FX rate, and there is clearly no single threshold of NIIP which constitutes a problem for ‘risky’ countries (or for ‘safe’ countries). NIIP provides a loose rule of thumb, but ‘animal spirits’ also come into it. The more negative NIIP gets for a ‘risky’ country like Greece, the more likely it is that investors will suddenly panic. There was definitely a ‘Wile E Coyote’ period for Greece when animal spirits alone kept yields right to Bunds – but eventually the _possibility_ of an explosive correction in NIIP (ie crisis, default and write-offs) prevailed.
I’m trying to understand your point of view, so I’m trying to see how the same ‘movie’ would play out for the UK.
If UK residents were suddenly panicked by reading too much about how bankrupt Britain is, and started dumping UK assets, they would quickly find that the weakening GBP had not only shrunk the NIIP, but that it had also made foreign assets increasingly expensive. Trying to find bargains abroad would be like running up a slope that got steeper and steeper. Eventually this shift would be self-stabilising at a lower FX level, and a lower NIIP. The devaluation would inject some non-monetary inflation into the economy, but the is no reason this should lead to an inflationary spiral (indeed it hasn’t done in the UK since 2008). (I should also point out that most domestic asset managers are pension funds and insurance companies, which need to hold the bulk of their assets in GBP anyway.)
So considering likely motivations of both foreign and domestic investors, I struggle to see the ‘explosive’ scenario for the UK.
Sergei Reply:
May 11th, 2012 at 11:37 am
@Anders,
How many UK residents or any residents for that purpose know what NIIP is, not speaking of level of NIIP of UK? People would not care less.
But you are again in the “how” mode. I do not know how. Every “how” is different. How do ponzi schemes appear? What is the trigger? There are no rules. There is no “how”. Anything and nothing can trigger that snowball. BUT if you are running a persistent CAD then disruptions can be almost guaranteed. Everybody used to blame the earthquake in Japan for about 6m of disappointing pretty much *global* GDP results. Something that is not sustainable can not be sustained.
Anders Reply:
May 11th, 2012 at 2:58 pm
@Sergei, “something that is not sustainable cannot be sustained”
Presumably you don’t think this principle means that a rising debt/GDP necessarily spells disaster?
Surely one can generalise in this way: in a situation of imbalance, will investor fear make the imbalance more or less acute?
You seem to want to insist that investor fear can worsen the UK’s imbalance – but when asked to justify or explain this, you either (1) simply assert that it can’t be explained (with your ‘how’ vs ‘can’ point) and that the balance of proof is not on you, or (2) cite examples like Greece which lack local currency denominated debt. I think this may be the dead end I reached with Ramanan.
Sergei Reply:
May 11th, 2012 at 4:27 pm
@Anders,
If you ask about rising public debt/GDP then yes I think it is bad. The argument is very simple. Public debt is pre-funded latent demand. A structural break in the private sector behavior can unleash this spending power, trigger raising prices and a positive feedback loop between the two. Neil would say here that raising taxes should do the trick. You would say that raising prices will stabilize the debt/gdp :) And in general I would agree. However I dislike this idea on political grounds for pretty much the same reasons as for the CAD case. Such tax increases constitute an inter-generational transfer. Past mistakes of fiscal management are kicked down the road until those mistakes accumulate to such an extent so as to require unconditional taxing of savings.
The same story is true for CAD. Persistent CAD deficits today and a structural break in behavior trends some day in the future will trigger an inter-generational transfer. As long as the possibility of a structural break is greater than zero, this will constitute a political position of kicking today’s economic problems onto the future generations to solve.
As I said it is not about HOW but about CAN. I think that the probability is definitely not zero meaning my answer is “yes, it can happen”. And it does not matter how high it is. And it does not matter what will trigger the break in behavior. These are secondary questions which we can start considering but only after we agree on the principle question. Even if the probability is non-zero it still does not mean that this crisis scenario has to come true. Lots of other things can happen between today and tomorrow and change that probability tomorrow.
Finally if you say that that the probability is zero, then the burden of proof is on you. Because it is *your* statement which explicitly limits the range of possible outcomes :) whereas I try to consider all possibilities.
WARREN MOSLER Reply:
May 11th, 2012 at 10:39 pm
if you are driving down a road and you know you need to turn left in a few miles you don’t do it early to get it out of the way
Sergei Reply:
May 12th, 2012 at 1:05 am
@Sergei,
Warren: if you are driving down a road and you know you need to turn left in a few miles you don’t do it early to get it out of the way
It is a very bad analogy. Let me try put it this way: in the long-term we are dead anyways so why bother getting good health today.
WARREN MOSLER Reply:
May 12th, 2012 at 8:06 am
First, the currency is a public monopoly, not some endogenous market creation. So govt is necessarily in control of this monopoly it’s created, for better or for worse.
in this context, unspent income isn’t ‘unhealthy’ but a natural desire giving ongoing tax liabilities continuously draining the fish bowl. tends to make you want to save a bit of the water coming in.
A monopolist knows or should know it will, directly or indirectly, necessarily by setting price and letting output/sales adjust to demand.
So as savings desires change, that is, as the demand for net financial assets that can only come from govt spending changes, the currency monopolist makes corresponding fiscal adjustments to meet his goals of full employment and price stability.
But he doesn’t adjust today’s fiscal balance/aggregate demand, boosting unemployment today, because he believes he will need to do it years down the road in response to projected levels of future savings desires.
Of course today we try to balance the budget even with very low long term inflation projections and a very high output gap, with both political parties pushing same.
Anders Reply:
May 13th, 2012 at 2:49 pm
@Sergei, OK – I used a bad example in asking what you thought of rising debt/GDP; I was sure (from previous postings; either I’ve got confused, or you’re a different Sergei, or you’ve morphed substantially) that you would find that unproblematic. This isn’t my main interest in engaging with you here, but in short my own position is that fiscal sustainability is all about managing down the blended interest rate, not necessarily about tax. With a CB putting ceilings on yields, almost any permutation of NGDP growth and primary budget balance can mathematically be made sustainable.
But on the burden of proof point, you’re still talking in abstracts, rather than sketching out a potential, illustrative, chain of events. Any chain of events I can conceive of (that ‘left turn’ Warren refers to) is fundamentally benign. Isn’t the right analogy here climate change? If some scientist comes along and warns of a highly destabilising consequences of climate change that could occur in the future, most people would expect such a scientist to provide a sketch of how such events might ensue, rather than retorting “well since you haven’t proved that climate change won’t have these highly negative effects, you need to treat my account as correct”. And climate change scientists have indeed tried to sketch out in detail various ways global warming could play out.
It’s interesting that you look at both budget and current account deficits, even for countries with monetary sovereignty, as potentially sources of ‘explosive’ adjustment leading to severe crisis. Do you have any non-arbitrary way of determining when a country is in the ‘danger zone’ by your model?
WARREN MOSLER Reply:
May 13th, 2012 at 8:20 pm
it’s notionally mathematically sustainable for the issuer of the currency at any interest rate.
climate change is a different animal
Sergei Reply:
May 13th, 2012 at 3:39 pm
@Anders,
there is nothing I can prove here. And I do not have any model. All I have is certain reservations about far-reaching claims made by MMTers because the whole history of the world proves otherwise. They in the end might be right. I do not know. However such reservations are definitely need to be addressed. But guess what happens instead :)
Countries comes and go. Empires come and go. Political systems come and go. Civilisations come and go. And they all have reasons for being gone. But apparently there is nothing in this world that can shake the fiscal power. Well, the problem is that many of those things that have gone have gone for economic reasons. The fiscal does have the power to paper-over the short-term problem of unemployment. But I am far less convinced that it can solve THE problem of unemployment in a sustainable way. Not just for employment but for a country and its political system. Budget deficit is an indication of an inefficient economic setting. As inefficiency increases so has to increase the budget deficit and/or unemployment. But a blind increase in budget deficit does not necessarily change the trend of efficiency. Budget deficit is always a symptom and a reason at the same time. It might provide some time for the private sector to adjust itself. But I am less than sure that it alone is a sufficient condition. Required – most likely. Sufficient – pouch…
All I have is a doubt. Unfortunately my doubt is an either/or doubt. And my doubt is a long-term doubt. I do not challenge and short-term impacts of fiscal deficits. What is short-term and what is long-term depends on individual countries and their economic positions.
WARREN MOSLER Reply:
May 13th, 2012 at 8:22 pm
when taxing ends the currency ends.
a federal budget deficit is a sign of the other sectors collectively net saving. to the penny
Sergei Reply:
May 14th, 2012 at 2:01 am
@Sergei,
Warren: when taxing ends the currency ends
so what?! I am not obsessed with currencies. In my life I have already lived through a couple of currency reforms and life goes on. I should have added that currencies come and currencies go.
Warren: a federal budget deficit is a sign of the other sectors collectively net saving. to the penny
so what say I again. How does it address my concerns of long-term economic efficiency and sustainability? If there is no long-term solution to sustainability then all your arguments will likely collapse under political and/or economic weight.
There is an obvious need to step over these pre-coded answers and build a model which can answer real questions. Not trying to cope with symptoms of problems after they are realized and it is too late, but coping with the problem itself.
What is the problem of budget deficits? What is behind it? Why does private sector need to save? Does it really need to save? Or maybe WE FORCE IT TO SAVE WITH OUR ECONOMIC POLICIES? Why don’t you tax today most likely *less* than you want to tax tomorrow?
I never say any coherent answer to these and similar questions. All I see it equal to the penny and taxing is king.
WARREN MOSLER Reply:
May 14th, 2012 at 7:08 am
have you read the 7 deadly innocent frauds?
Anders Reply:
May 14th, 2012 at 7:45 am
@Sergei, so ultimately the basis you are providing for your long-term doubts over the sustainability of high budget deficits or current deficits, is that there are many historical examples of currencies coming to an end.
That’s fair enough, and seems a reasonable basis for concern. But MMT has a direct response to this fear: (1) it observes that currency demise has historically only occurred in countries lacking monetary sovereignty, and (2) it sketches out how imbalances are likely to be unwound in practice in a monetarily sovereign country.
You don’t seem to have any retort to this other than to point at the many historical currency crises and asset that monetary sovereignty can’t make a difference.
The analogy here seems to be a serious bacterial infection where suddenly a doctor prescribes penicillin. The doctor says “people won’t die now, thanks to the penicilllin”. You seem to be like someone saying “but look at all those other people who have died of the disease”. If you really think the people are going to die, the right approach should really be to explain why the penicillin doesn’t work.
Sergei Reply:
May 14th, 2012 at 8:57 am
@Sergei,
Warren: have you read the 7 deadly innocent frauds?
Yes, I did. And the best example of full employment with price stability is an agricultural feudal society. How does your solution ensure we go in the other direction?
Thank you.
Honestly, I am tired of it. You probably lost me as an MTT supporter. I guess I am not the first one. Not sure if you care though but I stop caring
WARREN MOSLER Reply:
May 14th, 2012 at 10:50 am
we have already gone in another direction.
problem is unemployment which is evidence the deficit is too small.
but you already know that, so well done!
Sergei Reply:
May 14th, 2012 at 9:16 am
@Sergei,
Anders: If you really think the people are going to die, the right approach should really be to explain why the penicillin doesn’t work.
Exactly. Rather than increasing the doses of penicillin and probably killing the patient from an overdose it is more fundamental to admit that there is a disease, out of possible millions, which should be cured and each disease requires its own treatment if we want to ensure best results possible. Otherwise it all reminds me of QE and similar stuff. If it did not help, then surely the dose was too low. So we need to increase the dose and then wait a bit more. But then Warren himself said many times that QE probably makes the situation worse, not better.
Anyways, as I wrote above I stop arguing. The MMT is adamant in that it has monopoly on being right. I see no value to spend my time any more. So I join Ramanan whether is good or bad. And I am also reconsidering my attitude towards MMT overall. The other MM seems more reasonable to me. At least they seem to be ready to accept that this world is not perfect.
Again, it might be that MMT is perfectly right. But to me it looks like string theory in physics. Super-cool but useless because it can not be proved or disproved with our level of knowledge and technology.
WARREN MOSLER Reply:
May 14th, 2012 at 10:57 am
MMT is ‘true by identity’ which doesn’t ‘prove’ anything but can’t be violated either
like a + b = b + a is true by identity, doesn’t prove anything, but can’t be violated either.
Anders Reply:
May 14th, 2012 at 3:55 pm
@Sergei, how very sad. I know Ramanan has been turned off MMT based on the CAD question but you seem to be even more disillusioned than him (and, frankly, the MMR guys), despite having read 7DIF.
Your attacks on MMT’s positive prognosis on deficits seem entirely superficial, I’m afraid to say. In my penicillin analogy, if you don’t trust a doctor’s positive prognosis, you should discuss how penicillin is claimed to work (and, yes, the proper dose). What you are doing is akin to saying “nothing has worked so far, so this new ‘penicillin’ drug can’t possibly work”.
When you effectively say that large deficits may lead to severe currency crises – but that it’s unclear at what point a government ought to start re-prioritising deficit reduction, it’s frankly just hard to know what to make of that.
You seem more concerned by fundamental economic issues such as why there are insufficient private sector jobs; that’s certainly laudable, but I don’t see why you can’t focus on structural private sector concerns whilst maintaining an MMT approach (ie get NAFA right, solving for inflation) at the same time.
Sergei Reply:
May 14th, 2012 at 4:56 pm
@Sergei,
Anders: I don’t see why you can’t focus on structural private sector concerns whilst maintaining an MMT approach
That is exactly what I am interested in and that is what MMT refuses to do. Just follow the Warren’s and Neil’s comments above. “If all you have is a hammer then every problem looks like a nail”. MMT deprives itself of everything that deviates from its main line.
I have a suspicion that the MMT approach (supply NFA solving for inflation) is misplaced. Demand for NFA is both a symptom and a problem. I do not believe in the “cut taxes whenever there is unemployment” since that is exactly the same as “cut interest rates whenever there is whatever”. And now we are staring at the zero bound with no way further to go while guys like market monetarists gain the ground.
I do not see how the MMT approach solves THE problem. Not A problem of excessive demand for NFA because this demand is by definition always excessive. How can it be otherwise?! But THE problem whatever that is at any point of time. MMT sounds like if your engine starts burning oil just pump some more because oil is what it needs to run. Well, until it starts swimming in oil and breaks down beyond repair.
And the Warren’s response to my example of agricultural society with full employment and price stability is beyond any imagination. MMT clearly owns a monopoly on truth and nothing can be questioned. Instead of answers one gets “have you read that” and “have you read this”.
It is a pity.
WARREN MOSLER Reply:
May 14th, 2012 at 10:50 pm
you could make all savings contributions after tax money instead of the current pre tax money if you want to reduce savings desires.
and altering interest rates isn’t the same as altering fiscal balance. you did say you read the 7 dif?
once your working knowledge of monetary operations is in place we can move on to what remains problematic for you.
Sergei Reply:
May 10th, 2012 at 1:17 pm
@Neil Wilson,
“The current account deficit can only grow if there are people willing to save in the currency of issue.”
That is not even funny any more. You are too fixated on China vs USA with exclusive focus on China. The problem is not and has never been in China. Warren stated that zillion of times.
Reply
MamMoTh Reply:
May 10th, 2012 at 11:53 am
@jim,
So, are there any conditions under which you think a persistent and growing current account deficit might be a problem?
Of course, that’s what happened in pretty much all the recent crisis.
Do you think a country like the US could ever face a serious ‘balance of payments’ crisis? What about smaller countries with limited resources, such as the UK (problems with import substitution), or ‘developing’ countries?
As long as the US dollar is a world reserve currency, the US is pretty safe and can still get a free lunch at the expense of the rest of the world.
Given the extent of international trade, how would you limit domestic banks’ foreign currency exposure?
International trade is not the only thing to look at. Most domestic developing economies are dollarized to some extent.
Also, how do you explain Mexico turning to support from the IMF in 2009 (after a sharp depreciation of the Peso), despite the fact that Mexico issues its own floating currency?
Probably to avoid that a liquidity problem becomes an insolvency problem, again.
Reply
WARREN MOSLER Reply:
May 10th, 2012 at 8:10 pm
disagree with the first half
Reply
May 10th, 2012 at 10:09 pm
I would really love to believe the MMT line that current account deficits are ‘never a real problem for countries that issue their own floating currencies’. However, this discussion leaves me unconvinced – thus far at least.
MMTers are very concerned with controlling domestic inflation within a (hypothetical) closed economy. But at the same time they seem to be completely uninterested in the potential risk/threat posed by an ever-expanding CAD.
If you have a policy dedicated to controlling domestic wage-driven inflation (JG), then perhaps you should also have some similar well-thought out policy for controlling the effects of (possible) substantial fx currency depreciation (as the result of balance-of-payments crises) – especially given the MMT policy recommendation of ever greater budget and CA deficits.
?
Reply
WARREN MOSLER Reply:
May 11th, 2012 at 6:52 am
it’s not about ‘never a real problem’ but about defining the word ‘problem’
they never stop you from sustaining full employment and optimizing real terms of trade, for example.
Reply
Sergei Reply:
May 11th, 2012 at 8:11 am
@WARREN MOSLER,
“they never stop you from sustaining full employment and optimizing real terms of trade, for example.”
Lets assume “yes, they cant”. But why are you sure that such outcome is economically better than any other?
Reply
WARREN MOSLER Reply:
May 11th, 2012 at 10:03 am
it’s half the fed’s mandate, for one thing, so Congress must think it’s for the public good
Sergei Reply:
May 11th, 2012 at 11:16 am
@Sergei,
Warren: it’s half the fed’s mandate, for one thing, so Congress must think it’s for the public good
Yes, and Congress also ordered Treasury to look after the exchange rate. Might not qualify for half of the mandate though.
May 11th, 2012 at 7:17 am
Warren: did I state i supported taxing fx transactions somewhere?
Of course not! And that is exactly what I am trying to tell Neil. And so I used you and your argument to point out that he is wrong.
sorry that I used confusing “you” in my comment. Was not supposed to mean “you” :)
Reply
Neil Wilson Reply:
May 11th, 2012 at 7:43 am
@Sergei,
Switching to Strawman now I see.
If you’re going to have a rant at least read the stuff first.
Reply
WARREN MOSLER Reply:
May 11th, 2012 at 10:01 am
if i thought ‘speculation’ was a ‘problem’ with regards to public purpose I’d consider it.
Reply
May 11th, 2012 at 10:02 am
Warren,
govts don’t have to ‘finance trade deficits’ with foreign debt or anything else.
Governments can find themselves in the need to finance imports with foreign debt, for instance when they import energy which is often a public monopoly.
it’s a private sector matter that doesn’t demand govt. intervention,
it’s when govt intervenes that the issues raised here begin.
This is how the discussion started. It is basically a private sector matter, that is, a domestic banking sector matter that is exposed to fx risk, and the government either bails it out and takes the foreign debt on its books, or lets the banks fail, people lose their deposits, local currency collapses further and things get worse, etc.
In both cases you have a crisis.
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FDO15 Reply:
May 11th, 2012 at 3:04 pm
Sergei and Mammoth are right here and MMT contradicts itself badly in these arguments. Warren likes to say that banks are public/private partnerships, but when it’s convenient he makes them the bad guys. When locals borrow in a foreign currency and cause a domestic problem it is inherently a government problem unless they want to suffer a crisis. So the Mosler solution is either 1) The government shouldn’t get involved or 2) the government should get involved and take on the burden caused by the private sector. In either case you get an inevitable crisis.
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WARREN MOSLER Reply:
May 11th, 2012 at 10:36 pm
I don’t recall specifically supporting those positions?
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Mario Reply:
May 12th, 2012 at 2:35 am
@MamMoTh,
the government either bails it out and takes the foreign debt on its books, or lets the banks fail, people lose their deposits, local currency collapses further and things get worse, etc.
why can’t the government not bail out the banks, let the bad banks fail, AND guarantee people’s deposits?
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Neil Wilson Reply:
May 12th, 2012 at 3:30 am
@Mario,
“why can’t the government not bail out the banks, let the bad banks fail, AND guarantee people’s deposits?”
It can, but that would solve the problem and leave certain people with less outliers to feel anxious about.
I’m coming to the view that half the problem here is with the bankruptcy and liquidation process. We need a ‘pre-pack’ administration process for banks so that a bank can be reset rapidly.
The other half is mistaking a solvency problem for a liquidity problem. I wonder if it would be better to use administration rather than ‘lender of last resort’ in the majority of cases.
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WARREN MOSLER Reply:
May 12th, 2012 at 8:09 am
All good points. Comes back to my criticisms of the FDIC. For some reason pundits go after the Fed when the problem is the FDIC
WARREN MOSLER Reply:
May 12th, 2012 at 8:08 am
It can, does, should in the US. ‘Failing’ means shareholders losing all their funds and new shareholders taking over, as pretty much happened to many US banks over the last few years, including the very largest. It’s about turning over the equity holders, not bull dozing the buildings.
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May 11th, 2012 at 5:37 pm
I am not sure of how to come back on a topic on the website, yesterday it was too late to keep posting for me due to time zone differences, otherwise I would have come back. So if I can add something to the tax bonds for Italy I will try here that seems a thread updated everyday
(By the way, the debate in Rimini will be somehow taped or streamed, but I am not sure of the details, I am not part of the organization per se, just a trader and economic blogger during my downtime (www.cobraf.com). But it will be a big audience in attendance I believe, like 7-800 people and should be fun. So I was gonna summarize the Tax Bond proposal in Italian, on a one page leaflet and distribute it a couple of thousands around the ITforum and I wanted to make sure of the details. Some peopole that were interested forwarded it to Italian economists and it seems the objections come from accounting issues, like the definition of cash in the governemnts income statements… I not was going to address them, because I believe are technicalities that any gov can solve by law. Also in Italy we have already a huge backlog of credits toward the gov (30 billions…) because it is very slow to pay and there is now a discussion about letting companies, that are going under now by the thousands, use them to offset their taxes. Again there is resistance because “experts” claim that the State will have less cash… Did someone make it into a proposal in the Iris Parliament ?
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May 13th, 2012 at 5:10 pm
Hi Warren,
more on this debate from over at Mike Norman’s site. The following comment is by Ramanan, in response to your ‘let the bad banks fail comment (above):
“Really not sure about Warren Mosler’s proposals. He can let banks fail in their international setting but that effectively is losing credibility in front of the whole world. Good or bad, the State is forced to support banks to maintain financial stability. Of course it should regulate more but there is no regulation which can circumvent the problem of foreign funding”
What do you think?
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WARREN MOSLER Reply:
May 13th, 2012 at 8:23 pm
not sure what ‘credibility’ means in this context or why it matters?
what is ‘the problem of foreign funding’?
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Neil Wilson Reply:
May 14th, 2012 at 2:42 am
@WARREN MOSLER,
The credibility of those believing this is a problem, most likely.
The job of the domestic central bank is to maintain the *domestic* payment system – since by definition that is the limit of its power. It should not be to maintain the existence of any particular commercial bank. Maintaining particular banks is one of the failings of this particular crash!
The ‘problem’ that certain people see can be dealt with by making sure that there is a ‘pre-pack’ administration mechanim for banks, and that the commercial banks are left in no doubt that the central bank will use it.
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WARREN MOSLER Reply:
May 14th, 2012 at 7:09 am
the problem is they don’t fathom my proposals:
http://www.moslereconomics.com/?p=8968
y Reply:
May 14th, 2012 at 7:14 am
The argument being made by R, I think, is as follows: when a country runs a current account deficit, its banks necessarily become indebted to foreigners in foreign currency and thus need to attract funding from abroad. If the domestic currency experiences a large and rapid depreciation, this can endanger the domestic banks, who become unable to close their open positions in foreign currency. R argues that in this situation, allowing the banks to fail is not a realistic option, as this would further reduce the confidence of foreign investors and make it even harder to attract foreign funds. Therefore, in such a scenario, the central bank is ultimately forced to step in to avoid a full-blown crisis. This means using its foreign currency reserves, or perhaps engaging in a currency swap arrangement with foreign central banks. In extreme cases, either the central bank foreign reserves are insufficient to the task, or swaps aren’t available or adequate, meaning that the treasury then ends up having to issue debt in a foreign currency.
WARREN MOSLER Reply:
May 14th, 2012 at 10:46 am
pretty weak argument.
the US runs said deficit, and our banks don’t have any fx debt to speak of, for just one example.
banks don’t have fx debt unless they want to. and they can only do what’s permitted by regulation
Neil Wilson Reply:
May 14th, 2012 at 7:56 am
@Neil Wilson,
” R argues that in this situation, allowing the banks to fail is not a realistic option, as this would further reduce the confidence of foreign investors and make it even harder to attract foreign funds.”
Yes that’s the argument. And it doesn’t stack up – given that it inevitably causes the central bank to fail.
It’s a classic slippery slope logical fallacy.
You don’t need to attract the ‘confidence’ of foreign investors. You need to get back to earning foreign currency by selling stuff.
Put the failed banks into administration and those owed foreign currency by them take the hit.
Problem sorted.
Foreign currency reserves are part of the buffering mechanism that government should maintain – along with strategic oil stocks, etc so that it can smooth out supply shocks in essential supplies during an sort of ‘black swan’ crisis.
They should not be there to prop up bank’s gambling habits.
May 14th, 2012 at 8:07 am
“given that it inevitably causes the central bank to fail.”
Would borrowing in foreign currency inevitably cause the government to fail?
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May 14th, 2012 at 9:13 am
I’m thinking, in the above situation, any borrowing in foreign currency by the govt would largely be to help banks close their open foreign currency positions, not to fund any other type of expenditure. As such, why should it necessarily pose a serious problem for the govt?
Mexico was given a line of credit by the IMF in 2009, following a sharp fall in the Peso. The IMF credit line cooled the crisis and led to the Peso gaining in strength. The debt does not appear to pose any repayment issues for Mexico, and the Mexican economy has done ok since then, as far as I’m aware.
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WARREN MOSLER Reply:
May 14th, 2012 at 10:55 am
right, so if a euro bank has made dollar loans to, say, a US company in europe,
and that bank is having trouble borrowing dollars to fund that loan,
the CB could, operationally, help by lending dollars to that bank to fund its dollar loan,
with the CB taking the loan as collateral.
this sort of makes the cb the lender.
but if i were in Congress I’d vote against allowing US member banks making loans in fx in the first place.
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Neil Wilson Reply:
May 14th, 2012 at 11:15 am
@WARREN MOSLER,
But the key point there is that it doesn’t have to, and can only do it to the extent that it has existing dollars.
For a single entity getting into liquidity trouble there is no reason it shouldn’t do that to smooth trade.
But during a systemic crisis that is a dangerous play. The foreign CB likely won’t have enough dollars to go around.
Ireland is awkward because it is in the Eurozone, but the state guaranteeing the banks’ debt was a crazy move. They could have pushed the cost onto Ireland’s creditors by simply resolving the banks (which in effect is what Iceland did).
In some respect it was more important that Ireland resolved the banks – since their system is constrained by the currency peg.
“I’d vote against allowing US member banks making loans in fx in the first place.”
Yep. The entities taking on the FX risk ought to be completely ring-fenced from the domestic payment and lending system.
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MamMoTh Reply:
May 14th, 2012 at 11:41 am
@Neil Wilson,
The entities taking on the FX risk ought to be completely ring-fenced from the domestic payment and lending system.
Impossible. They are part of the domestic payment and lending system.
WARREN MOSLER Reply:
May 14th, 2012 at 4:28 pm
regulators successfully prohibit all kinds of banking activities. this is an easy one to prevent
Neil Wilson Reply:
May 14th, 2012 at 11:57 am
@Neil Wilson,
“Impossible. They are part of the domestic payment and lending system.”
They need to be able to go bust without causing a systemic effect is what I’m getting at.
They cannot be too important to fail. Too important to fail things are public goods.
ESM Reply:
May 14th, 2012 at 12:19 pm
@Neil Wilson,
“They cannot be too important to fail. Too important to fail things are public goods.
At the risk of being tautological (since it’s not clear what “fail” means), I would rephrase to say that nothing is too important to fail. If people believe otherwise, then there will be a moral hazard problem.
This is not to say that the government shouldn’t swoop in and do something to mitigate the collateral damage. This is easily done, however. In the case of a bank, shareholders get wiped out and unsecured creditors (whether they be bondholders, large depositors, pensioners, swap counterparties, or employees) take a haircut.
I can’t really think of a good reason for the government to bail out a bank because of an fx exposure gone awry. Seems like a good opportunity to haircut some (non-voting) foreigners if you ask me.
May 14th, 2012 at 12:37 pm
Warren,
“the US runs said deficit, and our banks don’t have any fx debt to speak of, for just one example.
banks don’t have fx debt unless they want to. and they can only do what’s permitted by regulation”
Ramanan:
“When a nation is a net importer, a nation (note: not the government, but the private sector) has to finance this by hook or crook. For the US this is relatively simple because exporters TO the US purchase dollar denominated assets. For other nations it’s not that simple.
Let’s say Toyota sells cars in Thailand. Now Toyota will repatriate funds back to Japan – which leaves a Thai bank indebted in Yen because the Thai bank is acting as a dealer in foreign exchange markets. The Thai bank has to keep refunding this liability and keep its net open position low, because of regulatory requirements and self imposed requirements/discipline. So the banking system as a whole has to attract funds from abroad.”
- If funds suddenly start to flow out of a country with a large CAD(capital flight), this causes a rapid depreciation of the currency, leaving banks (such as those above) in an increasingly bad situation (a growing net open position in foreign currency).
Under normal circumstances a gradual depreciation is nothing to worry about, but under capital flight/ crisis conditions a sudden depreciation can lead to an even greater outflow of funds, further threatening domestic banks.
At this point the CB has to decide whether to intervene in the market
to stabilise the situation, or allow the currency to keep falling and the banks to fail.
Ramanan argues that typically the central bank ‘has’ to intervene by using its fx reserves, or doing fx swaps, as letting banks fail would just exacerbate the situation. However, in a crisis fx reserves or swaps could be inadequate, and as such the treasury could be ‘forced’ to borrow foreign currency to provide the support needed to stabilise the domestic currency and stop the crisis from becoming a full-blown economic collapse.
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ESM Reply:
May 14th, 2012 at 12:56 pm
@y,
Ramanan always got smacked around when he posted that stuff here. And yet he continues to torment us from beyond the blog :^).
“Now Toyota will repatriate funds back to Japan – which leaves a Thai bank indebted in Yen because the Thai bank is acting as a dealer in foreign exchange markets.”
Ok, so Thai customer pays for car with baht. Toyota gets Thai baht deposit at Thai bank. Toyota wants to exchange that for yen. Why is the Thai bank involved in the fx transaction unless it wants to be? Toyota can sell baht, buy yen from anybody in the world. Maybe the Thai bank makes the tightest market, I don’t know. But that’s a separate issue from importing and exporting. As long as the fx market is free, the rate will be in equilibrium at all times between buyers and sellers of the baht/yen cross. And it doesn’t matter who the buyers and sellers are. Sellers of baht could be (indirectly) a Thai trying to buy a Toyota RAV. Or perhaps a Japanese investor pulling out of Thailand. Or perhaps it’s George Soros. Who cares?
If the sellers of baht are more aggressive than the buyers, then the baht will depreciate. No big deal. And when it goes down, you’ll find (usually) that the sellers of baht become less aggressive and the buyers more aggressive until a new equilibrium is reached. Every so often a panic happens, and the baht might overshoot on the downside. Not so good for Thais who want to buy Toyotas I guess, but it will only be a temporary situation. And in any case, the likelihood of a panic depreciation is much greater if the government has intervened to prevent (actually postpone) the necessary adjustment.
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y Reply:
May 14th, 2012 at 1:17 pm
Thanks ESM.
Any idea why Mexico (which has a floating currency) asked the IMF for a credit line in 2009, following the Peso’ fall to a historic low?
“As the global situation has deteriorated, Mexican asset prices have fallen sharply in line with the global market sell off, and GDP growth has slowed sharply. While Mexico’s underlying fundamentals remain very strong, and the balance of payments position is manageable, the open capital account and close global financial linkages––on top of close trade links with the United States––could expose the country to potential downside risks.”
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y Reply:
May 14th, 2012 at 1:18 pm
http://www.imf.org/external/pubs/ft/survey/so/2009/car041709a.htm
ESM Reply:
May 14th, 2012 at 1:32 pm
@y,
I used to trade emerging market debt, but I’ve been out of the market for a while so I doubt I have any special insight.
That being said, I’ve long considered the IMF to be the most worthless multilateral institution on earth. I suppose the Mexican authorities felt it was worth getting below market interest loans in dollars in exchange for mouthing sweet nothings in the ears of IMF officials. All other things being equal, such loans subsidize the terms of trade for Mexican residents.
Actually, one thing I do remember is that the Mexican government was very aggressive (and savvy) about buying back their own dollar- and euro-denominated debt. So perhaps they liked the idea of having a free credit line to do a little debt arbitrage when and if the $hit hit the fan.
May 14th, 2012 at 12:56 pm
“They need to be able to go bust without causing a systemic effect is what I’m getting at.
They cannot be too important to fail. Too important to fail things are public goods.”
Is that an argument against nationalising the banking system?
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May 16th, 2012 at 3:42 am
Hello Mr. Warren Mosler,
May I know your opinion on the Philippine stock market?
Best regards,
Renzie
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WARREN MOSLER Reply:
May 17th, 2012 at 3:26 am
don’t follow it
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May 17th, 2012 at 8:41 am
Hi Warren,
Do you think QE contributed to higher commodity and energy prices, as lower bond yields and interest rates encouraged more investors to move into those markets in search of higher returns? If so, what does this mean for your preferred zero interest rate policy? Wouldn’t this lead to more speculation in commodity markets, and thus higher inflation?
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WARREN MOSLER Reply:
May 20th, 2012 at 9:36 am
japan has had 0 rates for going on 20 years. has it cause any of this?
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y Reply:
May 20th, 2012 at 9:55 am
what about the yen carry trade?
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May 19th, 2012 at 10:12 am
Hi ~ Is there a place to buy 7DIF wholesale with volume discounts for fundraising sale at OCCUPY events? Thanks. ~ Chris Wroth, creator of the OCCUPY THE SQUARE game
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WARREN MOSLER Reply:
May 20th, 2012 at 9:56 am
yes, email me, warren.mosler@gmail.com
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