Home » Soft Currency Economics Soft Currency Economics Now available for download in the kindle book store. Click here Soft Currency Economics Latest Comments Feb 14 2013 Andy Grundrisse I just want to say that many years ago I had the honor to work for Warren Mosler when he was a fixed income money manager in West Palm Beach. He was the most brilliant and successful fixed income money manager I ever met, and I met lots of them. He never cheated, or took unfair advantage, he succeeded through sheer mental acuity, he was simply smarter than everybody else. And he was totally a stand up guy. Unfortunately for me, he didn’t suffer fools, so I didn’t last very long. And I am not smart enough to understand all of his monetary theories, but I am smart enough to know never to take the other side of a Warren Mosler trade. Oct 27 2012 SMOB How can other governments and citizens of a net export economy with a currency pegged to the US Dollar learn from this? WARREN MOSLER Reply:October 28th, 2012 at 3:05 amgood question. most just suffer from lower real terms of trade Oct 10 2012 Dan Warren, I’m trying to understand the ‘impossibility’ of future debt monetization. Here’s where I’m confused… “However, fear of debt monetization is unfounded, since the Federal Reserve does not even have the option to monetize any of the outstanding federal debt or newly issued federal debt. As long as the Fed has a mandate to maintain a target fed funds rate, the size of its purchases and sales of government debt are not discretionary. Once the Federal Reserve Board of Governors sets a fed funds rate, the Fed’s portfolio of government securities changes only because of the transactions that are required to support the funds rate.” This seems to ignore quantitative easing and a zero interest rate policy. “The Fed’s lack of control over the quantity of reserves underscores the impossibility of debt monetization. The Fed is unable to monetize the federal debt by purchasing government securities at will because to do so would cause the funds rate to fall to zero.” Right. And now we have a fed funds rate that is effectively zero. “If the Fed purchased securities directly from the Treasury and the Treasury then spent the money, it’s expenditures would be excess reserves in the banking system.” Right, excess reserves have grown dramatically in the last 3 years. The Fed would be forced to sell an equal amount of securities to support the fed funds target.The Fed would act only as an intermediary. The Fed would be buying securities from the Treasury and selling them to the public. No monetization would occur. That is exactly what is NOT happening as the Fed increases its balance sheet. WARREN MOSLER Reply:October 10th, 2012 at 6:58 pmthat was in the context of an interest rate target above 0 and a fed that didn’t have permission from congress to pay interest on reserves. i think that was specified in the paper somewhere? Jun 04 2012 Erik V Hi Warren, Just got done reading SCE. One question that comes to mind is if we lived in a world run like you propose, could you see a situation where firms are operating at/near full capacity and need invest in additional capacity, but are restrained from doing so in the amount necessary by too high interest rates or too low equity valuations? Thanks WARREN MOSLER Reply:June 4th, 2012 at 10:09 amnot to worry, market prices work to ensure that investment ‘crowds out’ consumption. Jun 03 2012 JT Warren- If as you say – our FED and Govt both dont understand how a true fiat system works – does that truly mean that we can pay the debt off any time we want? Just by creating the asset? I never quite got the savings / investment equals debt issue. To much living in a asset backed world of yesteryear perhaps? Seems if you are correct, all we need to concern ourselves with is inflation. Deflation should never be used as a tool. WARREN MOSLER Reply:June 3rd, 2012 at 10:18 pmfirst, read the 7dif on this website? second, funds spent and not taxed ‘rest’ in the economy as some combo of cash (Fed notes), reserves (balances in Fed accounts), and tsy securities (also balances in Fed accounts). spending adds to one or more of those three, taxing results in a reduction. Together these constitute ‘net savings of dollar denominated financial assets in the economy’ That is, the ‘debt’ = the economy’s savings of net dollar denominated financial assets. To the penny. So in that light, what does ‘paying off the debt’ actually mean? etc? Jan 28 2012 Erik V After reading this, there are some questions about saving and investment that come to mind. 1) Do you view a GDP composed of more investment and less consumption as a good or bad development? (I believe productivity growth comes from investment so I would have to say good.) 2) If more investment is good, what policies get us moving in that direction if increased saving may actually decrease investment? 3) Does the cost of capital matter at all in this theory for the level of investment? Don’t saving decisions, the tax code etc have an effect on the cost of debt and equity? WARREN MOSLER Reply:January 28th, 2012 at 7:24 amthe point of the economy is consumption directly or indirectly, so the decision of the nature of the desired output to at some point consume is the driver. the real cost of real capital is the real goods and services that go into producing the capital goods. Sep 13 2011 Luigi So, the definitive difference is that relations between taxpayers and EMU nations, are horizontal relations, and relations between ECB and member nations, are vertical relations. I mean horizontal and vertical in the MMT/chartalist way of describe. So pay taxes it’s like to pay another person via banks, functionally. reserves are “shifted”. no? WARREN MOSLER Reply:September 13th, 2011 at 8:13 amyes, however taxes also remain as coercive, non market events that ‘distort’ accordingly Luigi Reply:October 8th, 2011 at 8:19 am@WARREN MOSLER, Warren, deficit spending by member states in Europe, can create problem to ECB to set interest rates? I mean, excess reserves in the system that drive overnight rates below the central bank’s target etc WARREN MOSLER Reply:October 8th, 2011 at 11:00 amno, they set the overnight rate with the same tools all cb’s have Luigi Reply:October 8th, 2011 at 3:07 pm@Luigi, sorry, I haven’t formulated very well my question. Deficit spending by member states, add (or shift?) reserves in the system, so they are in excess and so could potentially be a problem for the CB. ECB set the overnight like all CB, but there is a potential problem? or there is not the same relation between deficit-reserves-interest rates, typical of USA and others? WARREN MOSLER Reply:October 8th, 2011 at 11:49 pmsame as when the us states borrow to spend. a non issue for monetary policy Sep 12 2011 Luigi “The difference is the state/euro member nation is not the issuer of the currency, so it’s constrained by its ability to fund itself through taxing, borrowing, asset sales, etc.” Yes, I understand the difference, but technically it seems the same. I mean, taxes don’t go nowhere also in EMU (reserves are destroyed, so technically they don’t fund nothing, they are just bit), but the difference is that they are forced to have a positive account, while sovereign government choose to have a positive account, but it’s only a congress choice. I understand right? “think of the issuer of anything of spending that thing first, and then collecting it via the likes of taxing and borrowing” could you explain this point? I don’t understand (probably I have problem to translate). Thanks a lot. WARREN MOSLER Reply:September 12th, 2011 at 9:21 pmif a tax was paid to the ECB the reserve balance would be eliminated. but if you pay a tax to a member nation, your bank’s reserve account is debited and the gov’s is credited. and yes, net financial assets of the non gov sector are reduced by your payment, if you include that nat gov as ‘government’ which isn’t wrong to do. the issuer, the ecb, like the Fed, is best thought of as spending first, and then ‘funding’ itself/accounting for what it did in one form or another. Sep 08 2011 Luigi Warren, in Mundell-Fleming model there is a form of crowding out that act on exchange rates. In the example about a government’s deficit they talk about a “raise in interest rates after a deficit spending, so a raise in interest rates persuades people to invest in national economy, so there is a great capital inflow, and the inflow makes the local currency stronger compared to foreign currencies. Strong exchange rate also makes foreign goods cheaper compared to local goods. This encourages greater import and discourages export and hence, lower net export.” So, in this model and in this view deficit spending is useless. What I don’t understand is the raise in interest rates after a deficit spending, why? it’s the same model that see “deficit spending=raise in interest rates” or there is something? I mean, this model seems wrong. WARREN MOSLER Reply:September 8th, 2011 at 11:21 amyes, it’s fixed exchange rate stuff. doesn’t apply to current floating fx/non conv. currency policy John O'Connell Reply:September 8th, 2011 at 11:22 am@Luigi, It could be explained as a simple supply/demand thing. Increased selling of bonds would drive down the price (= higher interest rate). There is an assumption that selling the bonds is required when there is a deficit, and that the selling by one branch of government (Treasury) is not offset by buying by another branch (Federal Reserve). Luigi Reply:September 11th, 2011 at 8:29 am@WARREN MOSLER, Two things: Do you know about papers or document by MMT that confute/talk about some model like ohlin-heckscher or Stolper-Samuelson? —- I’ve linked your documents and many other by Scott, Stephanie etc to my professor. He says “interesting, but there is no math. They make assumptions, but there isn’t any mathematical demonstration”. I think that some documents don’t need a mathematical demonstration, but they are only some facts. Anyway, what’s your view? Why he asks about some “mathematical demonstration”? Tom Hickey Reply:September 11th, 2011 at 10:10 am@Luigi, Ask him if he is familiar with Godley & Lavoie, Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth (Palgrave Macmillan, 2007) on the basics of SFC modeling. Hereis Bill Mitchell’s short encapsulation of SFC modeling. Bill also has quite a bit of criticism of mainstream models. You could also point him to Scott Fullwiler’s “Interest Rates and Fiscal Sustainability,” Working Paper No. 53, July 2006 here. WARREN MOSLER Reply:September 11th, 2011 at 6:57 pmPavlina’s math model is at http://www.mosler.org Luigi Reply:September 11th, 2011 at 7:24 pm@Luigi, Thanks Tom, and Warren. I don’t think that he knows Godley, he has a general neoliberal view of economics. I know SFC and I have read many times billy blog on this matter. But it’s difficult to persuade someone to study other documents. When I linked him some MMT documents, he says something like “they write in economic journals that nobody read, you know, this heterodox economics is very strange..” etc etc. anyway, thanks, I have a doubt that is not on topic, can you help me? If government spending creates reserve balances, and taxes and bond sales destroy them, how europan nations can collect taxes in order to spend euro? I mean, the result of taxation is the same, no? WARREN MOSLER Reply:September 12th, 2011 at 11:26 amgood question. it’s just like the US states. When they spend, their account is debited, and the counter party’s account is credited This adds balances to the ‘non govt’ sector is you count the states as govt. And the reverse happens when a state taxes. The difference is the state/euro member nation is not the issuer of the currency, so it’s constrained by its ability to fund itself through taxing, borrowing, asset sales, etc. PJ Pierre Reply:September 12th, 2011 at 1:50 am@Luigi, Federal taxes destroy (uncreate) RB in the sense that RB are a Fed Govt liability. When an IOU is returned to the issuer it ceases to exist. An entity can not be liable to its self. In contrast, the euro is not the issued liability of the euro zone governments. It is the issued liability of the ECB. In the sense the euro zone nations are users of the euro and must collect them to spend. Luigi Reply:September 12th, 2011 at 5:38 am@PJ Pierre, Thanks PJ, another doubt that I have is: How rolling over to pay for the redemption of maturing securities, can be a way to have funds on the account (not because spending is constrained by revenues, but because they have to have a positive account), if new “revenues” are used to pay maturing debt? I mean, it’s a sum 0, no? So, how could this “finance” public spending? (I know that issuing debt is a monetary operation, not a fiscal) And so, there is really some operational relation between Treasury that redeem its maturing debt and Treasury that issues new debt? WARREN MOSLER Reply:September 12th, 2011 at 11:44 amthink of the issuer of anything of spending that thing first, and then collecting it via the likes of taxing and borrowing Sep 07 2011 John O'Connell Warren, With respect to your statement that the government must spend “first” in order to create financial assets with which the people will pay their taxes: Before there was a fiat system, there was money and the people were able to pay their taxes. When the government ran a surplus, the people were able to pay their taxes, even though the taxes exceeded government spending. Clearly there is money in the system that is there even when government does not spend. I think the main point is that government deficits create (additional) financial assets in the private sector, but I don’t see a chronological dependency. Because our experience tells us that there is no such dependency, I think it is confusing and distracting for you to say so, and detracts from the credibility of your message. Is there another way to make the point without the chronological implication? Matt Franko Reply:September 7th, 2011 at 8:27 pm@John O’Connell, “Before there was a fiat system, there was money ” Can you expand on that? Resp, John O'Connell Reply:September 8th, 2011 at 11:15 am@Matt Franko, In 1970, before we went to fiat in 1971, there was money and people paid their taxes. Taxes were < 20% of GDP, so even with no government spending at all, we could have continued paying taxes for at least 5 more years before we ran out (assuming GDP dropped by 20% a year due to the recession). Yes, it's eating our seed corn, but we did have seed corn. We did not create a fiat monetary system from zero, there was a functioning monetary system before fiat, and we inherited all the elements of it, including all its financial assets and ability to pay taxes (and, unfortunately, some of its economic "laws" that were no longer true). WARREN MOSLER Reply:September 8th, 2011 at 11:22 amyes, on a gold standard you can dig up gold and pay taxes with it. same with other fixed fx policies. not applicable to fiat WARREN MOSLER Reply:September 8th, 2011 at 7:51 amwhen the gov is the unique issuer of its currency how else can anyone, from inception, get any to pay their taxes? how can you get bus tokens until after the bus company issues them? only if ‘money’ is something that can be had ‘externally’ can taxes be paid first? John O'Connell Reply:September 8th, 2011 at 11:17 am@WARREN MOSLER, All true, but we did have money, gotten externally, before fiat. The bus company was in existence and accepting gold nuggets in exchange for tokens, before they decided to accept only tokens and no longer convert gold nuggets. People already had a supply of tokens left over from the “old days”. John O'Connell Reply:September 13th, 2011 at 12:16 pm@WARREN MOSLER, By “from inception”, do you mean that a government arises and issues fiat currency in a society that previously had no government and no currency? Like the baby-sitting co-op? I agree that in such a case the government must spend “first”, because the society had no currency at all prior to fiat. But when has that happened? All primitive societies, as far as I know, devloped hard currencies before they had formal governments. If they transitioned to fiat currencies, they did it somewhat in the same way as the US, first issuing a convertible currency, and then eventually making it non-convertible (fiat). But when they went fiat, they already had a quite ample supply of currency in circulation, and that remained currency (money) and was accepted for tax payments. Countries in the real world aren’t like the baby-sitting co-op, which had to issue a supply of scrip before the first baby was sat for. I think your insistence on the use of “first” implies a time relationship that clearly does not exist, and is confusing, when applied to the activity of any single time period. It would be better for you to focus on CHANGES in money coming about only by the relationship of government spending and taxation, and allowing that taxes in one period can be paid using money that existed from prior periods (i.e., tax in April, spend in December). Tom Hickey Reply:September 13th, 2011 at 12:46 pm@John O’Connell, But when has that happened? All primitive societies, as far as I know, devloped hard currencies before they had formal governments. David Graeber, Debt:The First 5000 Years Book Description Publication Date: July 12, 2011 Before there was money, there was debt Every economics textbook says the same thing: Money was invented to replace onerous and complicated barter systems—to relieve ancient people from having to haul their goods to market. The problem with this version of history? There’s not a shred of evidence to support it. Here anthropologist David Graeber presents a stunning reversal of conventional wisdom. He shows that for more than 5,000 years, since the beginnings of the first agrarian empires, humans have used elaborate credit systems to buy and sell goods—that is, long before the invention of coins or cash. It is in this era, Graeber argues, that we also first encounter a society divided into debtors and creditors. Graeber shows that arguments about debt and debt forgiveness have been at the center of political debates from Italy to China, as well as sparking innumerable insurrections. He also brilliantly demonstrates that the language of the ancient works of law and religion (words like “guilt,” “sin,” and “redemption”) derive in large part from ancient debates about debt, and shape even our most basic ideas of right and wrong. We are still fighting these battles today without knowing it. Debt: The First 5,000 Years is a fascinating chronicle of this little known history—as well as how it has defined human history, and what it means for the credit crisis of the present day and the future of our economy. See also L. Randall Wray, Understanding Modern Money. Sep 02 2011 Ross Jackson Warren, I am relatively new to this site, and I find your ideas quite thought-provoking. I have a few questions. 1. You state that “Insolvency is never an issue with inconvertible currency and floating exchange rates” (“7 Deadly…”, p. 97), with which I agree. But why would it be an issue with a fiat currency that was “pegged” to the US dollar rather than floating? Secondly, I should think that in both cases an additional condition of no insolvency would be that there is no net foreign currency debt (that could not be paid off with money created in the domestic currency.) 2. You write that, in a deficit situation, the Fed need not sell exactly the amount of T-Bills necessary to mop up the excess funds, although selling less would mean an increase in money supply with the accompanying risk of inflation and a zero Fed funds rate due to excess reserves in the banking system. (Incidentally, would the zero Fed funds rate apply only at the margin or to all the Fed loans at a bank with an excess?). Do you have any examples of this actually being done to stimulate demand (i.e. government spending not fully covered by borrowing or taxation)? In the absence of such examples, it is difficult to demonstrate that the mainstream claim that it is necessary to have borrowing or taxation before we can spend is wrong. Instead we have just a difference of interpretation of the accounting, and frankly, their interpretation seems more credible in the absence of a “falsifying” example. 3. I find it difficult to get my brain around the discussions about savings and investment, both in mainstream discussions and in MMT discussions. It would seem to me that, in a fiat world as you describe, business investment is not dependent on savings at all, as it is financed primarily by bank loans that create new money by issuing credit. This would seem to be true even if all the “private and corporate” savings in a deficit situation went into T-Bills to satisfy the Fed’s condition of no change in interest rates. The classical accounting balance states: G-T = S-I (assuming the current account is in balance for simplicity of presentation). (G=government spending; T= taxes; S= Savings; I= Investment) Assuming a deficit, (G-T) >0, this equation implies (incorrectly) that all investment comes out of savings, which was certainly true under a gold-based currency and an exogenous money supply. But when dealing with a fiat currency where banks can create new money as required, it is not so. It would help understanding if we defined a new variable, B, for net Bank-created new money, in every way equivalent functionally to government expenditures, and if we split savings into 2 components, STB +S1, where STB is the amount placed in T-Bills in order for the Fed to maintain interest rates at current levels (according to MMT theory) or necessary to “finance” the debt (according to Mainstream economists). Let us also split investment into two components, I1, which is real investment financed by S1, i.e. net savings after satisfying the T-Bill requirement, and IB as investment financed by new bank money. (IB=B). Thus: G-T = STB + S1 –I1. Under these assumptions, since STB = G-T, this leaves us with: S1 = I1, which is a tautology stating that the net savings remaining within the banking system (after satisfying any Fed open market operations, STB) equals the investment financed by the savings remaining within the system. Note two things that are not intuitively obvious from the original equation. (i) In the original equation, I does not represent total investment at all, as we are missing what may well be the major part, that part financed by new bank money, IB. We could, for example rewrite the original equation as follows: G+B-T=STB+S1 –I1 +IB. (where IB =B and STB=G-T). The total real investment is IB + I1.. Now, in the real world, when economists talk about savings, they are usually (but not always) referring to S1, the “amount available for real investment” (i.e. T-Bills are not real investment). Since S1 is, by the above accounting, independent of the size of the deficit or surplus, the mainstream has a point when they reject the MMT claim that an increased deficit means increased savings. Warren is, however, right if we define savings as S1 + STB, which increases with a deficit and decreases with a surplus. So, in a way, both sides are right. However, the mainstream is wrong if it claims S1 decreases in a deficit and increases in a surplus (as Rubin apparently claimed). What increases in a surplus is the cash from the public’s sale of T-Bills that allows taxes to be paid. Confusion arises due to lack of clarity on whether we are talking about S1 + STB or S1. (ii) S1 is not affected by a budget surplus or deficit under the assumption of Fed sterilization of deficits and surpluses. Anyway, the above arguments help me to get my brain around “savings and investment”. Does this way of looking at it make sense to others? I would be glad to hear any comments. Roscoe WARREN MOSLER Reply:September 2nd, 2011 at 12:24 pmYou write that, in a deficit situation, the Fed need not sell exactly the amount of T-Bills necessary to mop up the excess funds, although selling less would mean an increase in money supply with the accompanying risk of inflation and a zero Fed funds rate due to excess reserves in the banking system. If i said that last part i was mistaken. It just sits as reserve balances with no further effect on anything beyond a possible modest effect on the term structure of rates. As for savings, you may be attempting to ‘answer the question that isn’t being asked’ real savings comes from real output not consumed. Nominal savings is a measurement of financial assets, which are ‘offset’ by financial liabilities as a matter of accounting, so they grow endogenously. Net financial assets for any given sector must originate from outside that sector, as a matter of the same accounting Aug 09 2011 Ppmax I’ve read 7/frauds and lots of other stuff here, other blogs, Wikipedia, etc, and my head literally exploded with the simplicity and elegance of your ideas. Full force of logic indeed. The thing i am having a hard time finding is how these ideas morph from theory to practice. Perhaps my ignorance about the mechanics of the fed and treasury and how they function in relation to spending approved by congress is to blame…for example, if Warren was head of the Fed, can these ideas be implemented without legislative approval/changes? Would the full employment plan be possible by decree? Practically, the tax side of the equation appears the most difficult to change, given that our current tax policies are for the most part incomprehensible to the average person…and legislator. On that note, I don’t believe I’ve read any position on changes to the tax code: does this operational model resonate most closely with, flat, consumption based, or other tax model? At brass tax level: how to divide the burden of taxes most equally? (or is the assumption that taxes are progressive in nature?) would a consumption based tax, similar to sales taxes paid at the tiller, retard spending if income, capital gains,etc were eliminated? Perhaps this to broad a brush to influence specific behaviors (eg buying solar panels–how to incent). Lastly, suggestion for your campaign: you need a series of viral Internet videos to promote these ideas and gain mainstream exposure. An honest, elderly, retiree, tired of the chaos, politics, and bickering, who can explain in simple metaphors why sovereign currency nations are not like households re budgets and spending. I explained all this to mom by explaining the economy is like a bathtub with a faucet and a drain. The goal is to fill the bathtub, then let the water drain at a rate such that water doesn’t overflow (inflation). This bathtub is special in that it can grow if you get the faucet and drain to work in harmony. With this simple metaphor I also was able to convince a tea partier of the necessity to radically increase spending now! Lastly, one of the appealing aspects of this model Is the apparent manageability of the system. Surely this is also a selling point… Kindly, and good luck WARREN MOSLER Reply:August 10th, 2011 at 12:37 amthanks, use the tub imagery myself, but i like the extension to the tub growing Jul 20 2011 Thomas Bergbusch Thanks, Mssrs Mosley and Hickey. I’ll look through the other blog posts for more guidance on how best to augment the existing stabilizers. Jul 19 2011 Thomas Bergbusch Hello Mr. Mosler! I love your work and your book. Your pithy aphorism “Taxes function to regulate aggregate demand, and not to raise revenue per se” works for me, but it also raise two concerns (if I am just muddled in my thinking please correct me). One implication of this statement is that, at times, taxes will have to be raised to lower aggregate demand. Now, this to me seems to come close to traditional 1960s style “fine tuning”, which is all very well in theory, but hard to effect politically. Does that not expose us to the danger of having policy makers resort to the “atom bomb” of high real interest rates, when fiscal policy is rendered ineffectual by politics? Second, as a Canadian civil servant, I am aware that one of things that drove senior policy makers here away from policies of demand management in the mid-1980s was their skepticism, based on operational experience, of the capacity of government to time fiscal interventions appropriately (so that counter-cyclical policies often ended up having pro-cyclical effects). This was somewhat overstated as a concern, but a real one nonetheless. If I understand correctly, you and Randall Wray are not basing your arguments on theory, but on the accounting identity: Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0. But that said, can you offer an argument to allay the fears, say, of our Deputy Minister of Finance about the capacity of government to manage aggregate demand effectively through fiscal policy? WARREN MOSLER Reply:July 19th, 2011 at 3:41 pmyes, most ofter the gov tries interest rate policy first. and, equally unfortunately, they have that backwards, and make things worse there is no operational limit to nominal capacity of the Canadian govt. in $C. as you stated, the limits are political. Everything in Soft Currency Economics and the rest of the ‘mandatory readings’ applies to Canada, as do the 7 deadly innocent frauds. thanks for tuning in! Tom Hickey Reply:July 19th, 2011 at 5:09 pm@Thomas Bergbusch, As Randy Wray point out in his MMT Primer blogs at New Economic Perspectives, the domestic private balance and the external balance are non-discretionary and are the given. It is deficits that need to adjust to changes in these balance to offset domestic and external propensity to save. As non-government saving increases, then the deficit rises to balance the equation. It must do this to offset changing saving desire, and if the offset is not large enough or fast enough, then contraction ensues and unemployment rises. The way to structure the offset institutionally so that ad hoc political measures are reduced to the minimum, automatic stabilization must be put into place with respect to both taxes and expenditures. There are already automatic stabilizers in place but they have proved to be insufficient and need augmentation. Tax policy is automatic in the revenue falls with falling incomes and rises with increasing incomes, but this can be adjusted to work more appropriately than it does now. There are a number of ways that have been proposed in the comments to various other blog posts. Jul 11 2011 Robert Cogan The Figures referred to in the text aren’t visible. Can you supply link(s) to them? Thanks Jun 27 2011 luigi I have a doubt, when a bank sell bonds in order to have a reserve in BC, they have to refund the loan by the BC? if yes, when and how? Apr 15 2011 jack Warren, When I first read this years ago, there were mentions of “endogenous” and “exogenous” money. Am I mistaken or is there another version of this paper possibly for academia? If so, where can I find it. Thanks, Jack WARREN MOSLER Reply:April 15th, 2011 at 12:36 pmHi, this is the only version. You might go back to Basil Moore’s 1988 ‘horizontalists and verticalists’ for more discussion on what used to be those two schools of thought. what it now comes down to is exogenous money would apply with fixed exchange rates and endogenous to floating fx (non convertible currency) and part of the old problem was trying to define ‘money’ as well. I haven’t heard it discussed in quite a while. and have you seen this paper on this website? A General Analytical Framework for the Analysis of Currencies and Other Commodities jack Reply:April 15th, 2011 at 1:44 pmYes I have read through that. It’s probably time for a revisit and new visit to Basil Moore’s ideas. Thank you. Oct 17 2010 Osita Okonkwo very well said mr. mosler. been a devotee ever since i read “the natural rate of interest is zero” via a an invite from mike norman. i try to read one of the mandatory reads per month. clears my head of all the frippery that clogs it due to too much MSM consumption. WARREN MOSLER Reply:October 17th, 2010 at 11:22 pmthans! Sep 23 2010 John Hunter The parent might decide to pay (support) a high rate of interest to encourage saving. Conversely, a low rate may discourage saving. In any case, the amount of cards lent to the parent each night will generally equal the number of cards the parent has spent, but not taxed — the parent’s deficit. Notice that the parent is not borrowing to fund expenditures, and that offering to pay interest (funding the deficit) does not reduce the wealth (measured by the number of cards) of each child. I have a problems with this analogy, and by implication the view that deficits do not reduce our wealth. In this example, the ostensible reason the parents issue cards is to get their kids to do chores, and the cards obtain value in the eyes of the children to get things back from the parent (food, shelter, punishment avoidance). Essentially, the parents can compel the kids to use the cards by the control over resources and power they have, and in the case of the government the argument is that the government can coerce the services it needs from the populace (eg, armed service) by requiring the use of dollars to pay taxes. This begs the question of why the parents need cards in the first place — they can just compel the services from the kids — but that is not my central problem. Rather, if we save those business cards from our parents, and loan them back to the parents with interest, and plan to use them later so we don’t have to do our chores, then the parents will not have anyone doing the chores later (unless they have more kids). The only way the government can use the cards to get the kids (in the absence of new kids) to do the required chores in the future is to raise the tax, requiring more of our business cards each month for the services we need from the parent. So while it is true that the parent’s borrowing is not reducing our wealth measured by the number of cards, it does seem that the card savings and interest are reducing our expected real wealth, because we know the parents are going to have to tax us more heavily to get the services they need. Or else they are going need to have some kids, and presumably there are going to be even more chores to do since they are now feeding a larger family, which makes more dirty dishes and laundry, and the older kids aren’t doing many chores because they’ve saved up those excess cards the parents issued, and are getting them back with interest. WARREN MOSLER Reply:September 28th, 2010 at 10:40 amagreed. and I also support not paying interest on the cards or on dollars Apr 21 2009 George Thanks for putting this site together. You mention figures a few times in this article, but there are no figures up on the page. I think it would be very helpful to take a look at those figures. I also think just a simple flowchart of the transactions you describe would often be helpful. I find myself scribbling them down as I go, and I doubt I’m alone (at least when considering the lay people reading this page). Mar 16 2009 warren mosler what happened to the thread? Thanks for the kind words about being rational! I more than agree getting the nomination is a long shot at the moment. Hopefully, how the monetary system actually works gets into the public debate. In the early 70’s I was told I was the first or at least one of the first to recognize implied yields of calendar spreads in GNMA’s, and one of the first to make spread markets while at Banker’s Trust. I was perhaps the first to recognize the options embedded in the delivery rules for the Tsy bond contract when it first came out, as well as the dynamics of the 10 year note future. The ‘mtg’ swap was my creation in the mid 80’s. Probably a few more along the way. Mar 15 2009 Curious since this thread has been already hijacked… (feel free to delete/move my post) Warren, you are a rational man. What, in your opinion, is the likelihood that the Democrats will nominate you in 2012 over Mr. B. Obama, who will surely seek reelection? On a separate issue, your bio here http://seekingalpha.com/author/warren-mosler talks about your pioneering efforts in the investment world. Can you share some insight or detail on what those were? Mar 11 2009 Arun Dubois Hey Scott, Great stuff. Thanks. I used to poke around for Japanese data and it was always a major headache. On a similar note, I’m wondering if you know of any good sources for lending data by the Japanese private banks? Seems to me that if we could demonstrate that lending didn’t budge in Japan despite extraordinary and sustained “quantitative easing,” — i.e., demonstrate your statement, then we could really make a dent in the claim that “quantitative easing” somehow drives loan expansion in a money multiplier way. Would certainly help in my attempts to convert the great unwashed! An aside: The Bank of Canada is actively contemplating “quantitative easing” in the near future (target for the overnight rate is currently 0.5% so we’ll be at zero probably by May). It’ll be interesting to see how they describe the purpose and effects of this policy in their next Monetary Policy Update (due April 23 I believe), although every indication is that they see the policy like everyone else (merely using the term “quantitative easing” is suggestive). Mar 11 2009 knapp Keynes on How to Create a Liquidity Trap March 10, 2009 by Mario Rizzo “What is particularly interesting to me about this is that illustrates once again that policy regularity and predictability ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ in this case permanently low long-term interest rates ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ are key to KeynesÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s mature analysis of the macroeconomy. Discretionary countercyclical monetary policy can be ineffective, not because it is monetary policy, but because it generates uncertainty.” full post here: http://thinkmarkets.wordpress.com/2009/03/10/keynes-on-how-to-create-a-liquidity-trap/#more-1151 Mar 11 2009 Scott Fullwiler Thanks, Arun (BTW, I’m a fan of PEF–it’s a nice coincidence to hear you watch this site). Didn’t realize people actually read that research . . . generally puts me to sleep when the time comes to edit it for publication and I haven’t looked at it for a while, so I don’t know how others make it through! Regarding Japan, I’ve seen this statistic several times. I recall a BOJ member giving a speech in 2003ish when the ratio was about 17%. I’ve probably cited it somewhere. Anyway, so I thought I’d look to geth the real data. Well, unlike getting such data in the US, the BOJ’s website is much less user friendly. I was able to find the following after a bit of a search: In 2005, the last full year of quantitative easing (so called), Monetary base: 113,046,600,000,000 Yen (from BOJ’s long-term time series … again, not user friendly) GDP: 498,328,400,000,000 Yen (from econstats) Monetary base / GDP = 22.69% Also, you probably knew this, but my quote in your post was referencing US monetary base at about 4% of GDP last fall (typo there when I wrote USE instead of US). Scott Fullwiler Reply:March 11th, 2009 at 12:51 pmMisspoke a bit there. MB in US reached about 10% of GDP last fall. US reserve balances were about 4% of GDP. Mar 11 2009 Arun DuBois Scott, First off, love your posts (and your academic work, esp. your JEI stuff). Always lucid, enlightening and respectful. In one of your posts here, you wrote: IN JAPAN UNDER ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œQUANTITATIVE EASING,ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â RESERVES GREW TO ALMOST 20% OF GDP (IN USE, THEY ONLY GOT TO ABOUT 4% LAST FALL), AND STILL LITTLE TO NO GROWTH IN BANK LENDING. Sounds about right to me — intuitively — but I’d like to back that up with something more detailed and/or academic. Can you point me to a source? This would help me tremendously in my ongoing conversations with the unwashed. Txs kindly, Arun Mar 10 2009 warren mosler IT’S THE ONLY ROUTE I CAN AFFORD, AND I CAN PURSUE ANY AGENDA I WISH. Mar 10 2009 manny valesco “Looks like running as a Democrat” You being a white male, I realize now how out of touch with many voters you are if you think running democrat is going to work for you. Many americans I talk too are tired of both parties. http://archive.redstate.com/blogs/haystack/2006/oct/05/declaration_of_independence_from_the_two_party_system With our concept of majority rule, it makes it nearly impossible for a viable third party to last for long. The only way you will get a multi-party system is if you move away from our Presidential system and adopt a Parliamentary system with proportionate representation. Good luck convincing 2/3 of Congress and 3/4 of the states this is a great idea. Mar 10 2009 warren mosler Thanks, all. Looks like running as a Democrat makes the most operational sense- it’s a lot less restrictive regarding running in the primaries and getting on the ballots. And no doubt I’ll be redefining the party views on many of the issues. Mar 10 2009 RichW re: Randall Wray. I’ve written the host suggesting he would be an excellent guest to have back and help people understand deficit spending and govt debt. Also provided a link to Warren’s site. Of course Scott could easily swing up from Iowa for a visit ;-) Mar 10 2009 Dave Kieffer Warren, you have my vote too! Mar 10 2009 GeorgeR Congrats on Mosler 2012…You’ve repositioned yourself from an “economist” with some ideas to a presidential candidate with a Platform that should get a completely different kind of reception from media, politicians and citizens. Likewise greater fund raising potential for communication of your ideas. You’ll build your Team….Your vision, “The Return to Public Purpose” is something to which I can relate. Visions are interesting things. They allow you to enroll teammates and must be BIG ENOUGH to devote the rest of our lives to achieve! At any rate congrats again on Mosler 2012, I’ll be contributing and getting your information in front of my community….tell me when your website is set to go.. Mar 10 2009 Dave Begotka Warren, are you going to have any kind of party affiliation? Mar 10 2009 The Interest “30-to-1” Scott–Okay, that makes sense on the equity versus reserves that make up the $1. What about “mark-to-market”? I’ve read that mark to market was put in place so that banks could “lever up” based on the asset prices in the loans they were providing. Mark to market made great sense for the bank when real estate was bubbling up which allowed banks to make more and more loans. Now the banks want to suspend mark to market so they don’t have to write down these loans. Where does that increase in asset price in regard to an existing loan on the book fit in relation to the leverage of “30 to 1”? (Assuming I understand that mark to market works that way.) Mar 10 2009 warren mosler thanks! just started working to get on the state ballots Mar 10 2009 Jill Regarding “Do I have your vote? http://www.mosler2012.com” Yep! And my first campaign contribution will be in the mail tomorrow! Mar 10 2009 Scott Fullwiler Another point. You cannot have capital =0, because then you’re insolvent. But you can have reserves = 0 (again, as in Canada), because that just means that you have a very efficient method of achieving an interest rate target set above the remuneration rate (again, as in Canada). Mar 10 2009 Scott Fullwiler No. Fractional reserve banking (which doesn’t apply to the US or any other non-gold standard or non-currency board monetary system) is where you have $X in reserves for $Y in deposits, and X<Y. Reserves are on the asset side of the bank’s balance sheet, equity is on the liability/equity side. Completely different things . . . reserves are balances held in the bank’s account at the central bank, equity is money invested in the bank by its shareholders + retained earnings (and long-term debt, in some instances). Mar 10 2009 The Interest FRB=fractional reserve banking. The “30-to-1” where $1 is equity and $30 is loans. Isn’t that fractional reserve banking? Mar 10 2009 Scott Fullwiler NO WORRIES AT ALL . . . FEEL FREE TO ASK AWAY Was the ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œ30 to 1ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â³, that say Fannie Mae was dealing with in regard to lending, a reference to having 1 dollar in the vault and 30 dollars in loans? IT’S IN REFERENCE TO $1 IN EQUITY FOR EVERY $30 IN LIABILITIES. FANNIE MAE’S CAPITAL WAS ABOUT 3%-4% OF IT’S BALANCE SHEET. CAN’T QUITE MAKE OUT YOUR LAST SENTENCE . . . TYPO? Mar 10 2009 The Interest Sorry, I’m confused and need to go back to the mandatory readings I’m sure. Was the “30 to 1”, that say Fannie Mae was dealing with in regard to lending, a reference to having 1 dollar in the vault and 30 dollars in loans? I’m trying to figure out where this disconnect is in the idea that FRB isn’t supposed to still exists, but yet it sounds to me like it does when people refer to the 30-to-1 talk. Mar 09 2009 Scott Fullwiler leverage in the sense of “30 to 1” or “80 to 1” always refers to liabilities vs. capital (or equity), not liabilites vs. reserves (which are an asset for banks). You can thus have leverage without any reserves, which is actually the case in Canada (though, the banks there do hold vault cash, but nothing in their reserve accounts overnight). Mar 09 2009 The Interest When you say Today, however, banks make loans independent of their position, what does that mean in relation to the buzz of the 30-to-1 or 80-to-1 leverage that commentators and other economists refer to in regard to bank lending for mortgages and other products? If there are no reserve requirements then how can there be any “leverage” in the system? Or is the reserve at the bank different then the reserves you are referring to? Mar 09 2009 Scott Fullwiler My goodness, that guy on the radio from George Mason is clueless. Appears he learned nothing but free market cliches in grad school. Randy was great, as always. Mar 09 2009 warren mosler thanks! Will archive it. Mar 09 2009 RichW Entirely unsure where I could post this, but Randall Wray was on my local public radio station (Minneapolis) this morning discussing our current economic situation. Sadly, the time was too short and I don’t think the “host” really understood many of his points. Here’s a link. Randall starts half way through. Mar 09 2009 Scott Fullwiler As with anything that affects AD, what matters is AD in comparison to capacity. What type of deficit you run can have as much affect as size, too. As Warren says, govt spending to build the Panama Canal reduced prices, while govt spending to destroy the Panama Canal would increase prices. This is why the focus on this site is on employment . . . offer a govt financed job to anyone willing/able to work at a minimum wage + benefits and you will end involuntary unemployment as defined and not raise inflation (aside from an initial increase in the price level, possibly). The deficit will rise as private sector AD falls and unemployment there rises, and vice versa . . . which will have a stabilizing effect on inflation (see full employment and price stability in mandatory readings). The appropriate “size” of the deficit is then set automatically, as long as institutionally you have set up an appropriately flexible “buffer stock” of workers in the program. Again, the focus on “hiring off the bottom” is far better for creating jobs and keeping inflation low and stable than traditional “pump priming” expenditures; as Randy Wray once put it, “how many bombs would you have to build before you created 1 job in Harlem?” Of course, this isn’t to say there aren’t supply effects on inflation (strength of labor, etc.), but we’re just looking at demand side here. Mar 09 2009 Curious One more question if I may. Scott said: “Bottom line . . . whether a deficit results in NFA held as deposits or Treasuries is irrelevant to whether the deficit is inflationary or not. The only thing that matters is the size of the deficit.” At what size starts deficit spending be inflationary and why not at less than that? Mar 08 2009 Scott Fullwiler Thanks Scott, re your point 2. NO PROBLEM! I read the Deficit spending for dummies, which appears to revert the order of governmentÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s actions. The government has to spend first, before it can borrow, not the other way around, no? TRUE, BUT THE NET BALANCE SHEET EFFECTS ARE THE SAME REGARDLESS OF THE ORDER. WARREN SEEMS TO HAVE EXPLAINED IT FOR THE GENERAL PUBLIC AND THEY THINK IT’S THE OTHER WAY AROUND (BONDS FIRST, THEN SPENDING). SOME MAY DISAGREE WITH THAT APPROACH, BUT IT’S A NEVER ENDING DEBATE . . . STAY WITH THE MODEL VS. BEING ACCESSIBLE. AGAIN, FOR NET BALANCE SHEET EFFECTS, WHICH IS WHAT WARREN’S AFTER, IT DOESN’T MATTER. And spending that is not followed by borrowing increases reserves. Reserves (the vertical component of money) + loans (the horizontal component of money) = total money chasing after all goods and services. VERTICAL COMPONENT OF MONEY IS RESERVES + CURRENCY + TREASURIES – LOANS TO THE PRIVATE SECTOR. THE NET PUBLIC SECTOR DEFICIT. BOND SALES SIMPLY TRADE A TREASURY FOR A BOND, NO CHANGE TO VERTICAL COMPONENT. THEY ARE A MONETARY POLICY OPERATION, NOT A FISCAL OPERATION. So increasing reserves without subsequent government borrowing will cause the total amount of money to grow larger (inflation), no? NO. AND REMEMBER, QTY OF RESERVES HAS NOTHING TO DO WITH “TOTAL AMOUNT OF MONEY THAT CAN BE CREATED.” IN CANADA, THERE ARE 0 RESERVES, AND HAVE BEEN FOR YEARS, BUT STILL “MONEY” GROWS. IN JAPAN UNDER “QUANTITATIVE EASING,” RESERVES GREW TO ALMOST 20% OF GDP (IN USE, THEY ONLY GOT TO ABOUT 4% LAST FALL), AND STILL LITTLE TO NO GROWTH IN BANK LENDING. Also, could you give more detail on this please?: ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œÃƒÂ¢Ã¢â€šÂ¬Ã‚Â¦.even with a bond sale, the deposit is the NFA if the bond is purchased by a bankÃƒÂ¢Ã¢â€šÂ¬Ã‚Â¦..ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â Why is a bond sale to a bank not a simple asset exchange (reserves for treasuries). How does it affect deposits? I’M TALKING ABOUT NET BALANCE SHEET EFFECTS AFTER BOTH THE DEFICIT AND BOND SALE HAVE OCCURRED. IF YOU RUN A DEFICIT AND SELL A BOND TO A BANK, REGARDLESS OF ORDER, THE NET EFFECT IS THAT THE BOND SALE IS AN INCREASE ON THE BANK’S ASSET SIDE (BOND SALES DRAIN RESERVE BALANCES, DEFICITS ADDS TO RESERVE BALANCES, NET IS A RISE IN BONDS) AND AN INCREASE IN DEPOSITS ON ITS LIABILITY SIDE, SO NO CHANGE IN ITS NFA. BUT FOR THE NON-BANK PRIVATE SECTOR, THEY’VE RECEIVED THE DEPOSITS FROM THE GOVT’S SPENDING, SO THIS IS AN INCREASE IN THEIR ASSETS, WITH NO RISE IN THEIR LIABILITIES . . . OVERALL CHANGE IN NFA IS AN INCREASE IN DEPOSITS FOR THE NON-BANK PRIVATE SECTOR, NO CHANGE FOR THE BANKS (EQUAL INCREASE IN BOTH ASSETS AND LIABILITIES). Mar 08 2009 Curious Thanks Scott, re your point 2. I read the Deficit spending for dummies, which appears to revert the order of government’s actions. The government has to spend first, before it can borrow, not the other way around, no? And spending that is not followed by borrowing increases reserves. Reserves (the vertical component of money) + loans (the horizontal component of money) = total money chasing after all goods and services. So increasing reserves without subsequent government borrowing will cause the total amount of money to grow larger (inflation), no? Also, could you give more detail on this please?: “….even with a bond sale, the deposit is the NFA if the bond is purchased by a bank…..” Why is a bond sale to a bank not a simple asset exchange (reserves for treasuries). How does it affect deposits? Mar 08 2009 Scott Fullwiler Mike S Sorry . . . didn’t see your post till now. The one I did about 4 years ago on fiscal sustainability is on the EPIC site (PP are posted) and the working paper is on the cfeps site. There’s one on cb operations on the valance site (PP) from the conference last year. You may also be thinking of a speech by Cliff Viner that Warren posted several months ago (???). Mar 08 2009 Scott Fullwiler Agree with Warren. 2 more points. 1. The Fed wasn’t able to hit the target rate even with interest payment for 2 reasons. First, it set the remuneration rate too low to start, which as Warren says shows their lack of understanding of operations. Second, Congress doesn’t allow some non-banks (like GSEs) with Fed accounts to earn interest (showing their lack of understanding, too), so the effective rate quotes for, say, November 2008 that are well below the target reflect these institutions trying to find a place to invest their overnight funds. In the context of the crisis, not many banks were willing to offer much return (flexibility for banks was at a premium, according the NY Fed’s report). I think there will be some research in the future on whether the rate falling below the target during this period has any real economic significance, since banks were so awash in excess balances they had little use for a fed funds mkt anyway (as shown by the fact that non-banks couldn’t find anyone willing to take their excess balances). 2. Curious questions whether selling bonds reduces inflation. The answer is “no.” ANY deficit raises net financial assets (NFA) for the private sector whether there is an accompanying bond sale or not (see deficits for dummies in the mandatory readings). If there is no bond sale, then the NFA created are deposits. If there are bonds sold to banks, then the bonds drain reserve balances–which don’t funds bank lending anyway–and the NFA created are deposits for the non-bank private sector. If there are bonds sold to the non-bank private sector, then the bond sale drains both deposits and reserve balances. Banks still can lend as much as previously, since reserve balances donÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t fund loans, and the NFA created are Treasuries held by the non-bank private sector. Two things here. First, note that with bond sales whether Treasuries or deposits are the NFA depends on who buys the bonds, not whether a bond is sold; that is, CuriousÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s point about inflation is suggesting that with deficits bonds are less inflationary than deposits, but even with a bond sale, the deposit is the NFA if the bond is purchased by a bank (almost nobody recognizes this). Second, NOBODY was ever financially constrained by the fact that they held a Treasury . . . ever heard of the repo market? These are the most liquid, most sought after assets for safety and for collateral, and therefore not really different from having a deposit. Bottom line . . . whether a deficit results in NFA held as deposits or Treasuries is irrelevant to whether the deficit is inflationary or not. The only thing that matters is the size of the deficit. Mar 08 2009 warren mosler Good points. The Treasury continues to issue debt for the same reason we have a debt ceiling- self imposed constraints by a govt. that doesn’t fully understand its own monetary arrangements. It’s always possible the Treasury won’t find buyers for its securities, but operationally that should not be a constraint on spending unless Congress decides it’s a constraint. The Fed started asking Congress for the authority to pay interest on reserves maybe 6 years ago. (I’d like to think it was in response to my urgings back then, but probably not.) After the ‘financial crisis’ started the Fed probably became concerned about ‘running out of Treasury securities’ used to offsetting the operating effects of buying/funding financial assets other than Treasury securities. By paying interest on reserves the Fed could buy any financial assets it wanted to and not have to ‘offset’ the buildup in reserves with reverse repurchase agreements or security sales to (attempt to- Geithner never figured this out either) hit their fed funds targets. This is what happens with leadership that doesn’t know how their own monetary arrangements work. Do I have your vote? http://www.mosler2012.com Mar 08 2009 Curious “The government spends money and then borrows what it does not tax, because deficit spending, not offset by borrowing, would cause the fed funds rate to fall.” Since 10/6/2008 the government pays interest on reserve balances, so the fed funds rate is not going to fall. Yet the government continues to borrow. Why? (To prevent inflation would be my answer, but someone please correct me if I’m wrong) “Fear the government will be unable to sell securities overlooks the mechanics of the process itself. The imperative of borrowing is interest rate support.” Since the banks can now earn interest on reserve balances, is it possible that the government will not attract any lenders in the future? Finally, can I have anyone’s opinion on the reason why did the Fed started to pay interest on the reserve balances? Gregg Reply:September 25th, 2009 at 8:31 pmSo they (the banks) would take the (TARP) money. — TARP in the case of the USA. Mar 02 2009 Mike Sankowski Scott, I remember there being another mandatory reading where you were giving a speech, but I cannot find it now. Do you still have a link or copy of this somewhere? Feb 26 2009 Curious “Nevertheless, as the funds rate rises higher and higher above the discount rate more banks will go to the window” Why does the funds rate rise higher and higher? Once it is above the discount rate, wouldn’t the banks immediately start borrowing at the cheaper discount rate, thus bringing the funds rate down to equal the discount rate? Scott Fullwiler Reply:February 26th, 2009 at 10:36 pmThis was written when the Fed had the discount rate set below the fed funds rate target, but also “frowned” on borrowing at the discount window, which is essentially a “non-monetary” cost . . .since you’d prefer that your regulator not “frown” at you. So, if banks were in danger of ending the day in overdraft because the net balances supplied were insufficient in the aggregate, then the fed funds rate could be bid up well above the fed funds rate until banks would eventually go to the window to replace the overdraft with a collateralized loan. Regarding current practice, you’re right, fed funds rate usually won’t go above the rate the Fed lends at (now set above the target rate) since the “frown” costs were eliminated in 2003 (though many say they’re still there to some degree). Feb 25 2009 jcmccutcheon Scott,Warren, Question on the “The Myth of Debt Monetization” Why does the fed need to buy treasuries securities from the treasury department in the first place? jcmccutcheon Reply:February 25th, 2009 at 1:43 pmI think I figured it out. When the fed holds treasury securities on its balance sheet and they expire, the fed “purchases” a new one from the treasury to roll-over the expiring one. Feb 23 2009 warren mosler yes, they might accept other things, but valued in the local currency, right? So in a sense that’s the govt purchasing those things with local currency for their determined values. second. legal tender laws have nothing to do with value. the euro dropped any mention of legal tender after determining same, for example. third. yes, even with a tiny gov a tax driven currency will still function to transfer real resources from private to public domain. Seems the interesting part about the Z currency is that it indeed still does purchase goods and services to the degree it does. Those pesky dictionaries! If everyone agrees that’s the definition of ‘fiat money’ I’ll have to find another word to describe the US currency. I agree that the value of the currency is a very weak and indirect function of interest rates at best. That would better read they determine the ‘price’ rather than the ‘value.’ In 1993 I seemed to have given more weight to the theoretical possibility that savings desires were functions of interest rates. I still think they are to some degree, taken in isolation. Yes, the kids don’t need the parent to set an interest rate. In which case the ‘risk free’ rate would be 0, and what they charged each other would reflect a risk premium. This is in the various writings on the website as well from time to time. thanks! Feb 23 2009 Ralph Musgrave Re the ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œIntroductionÃƒÂ¢Ã¢â€šÂ¬Ã‚Â section of Soft Currency Economics, I agree, plus there is an article by Samuel Brittan in the Financial Times making similar points. See http://www.samuelbrittan.co.uk/text321_p.html Now for the ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œFiat MoneyÃƒÂ¢Ã¢â€šÂ¬Ã‚Â section. I donÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t agree that fiat money derives its value from the fact that governments demand said money in payment of tax (though doubtless this enhances its value). First, in the UK, people do not need to pay tax with the UKÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s fiat money, i.e. the pound sterling. The tax authorities will accept anything in payment of taxes: land, houses, valuable paintings, etc. Shows how desperate the tax authorities are! The latter form of payment is unusual because of the sheer inconvenience, but it occurs from time to time. Second, is it not more accurate to say that fiat money derives value, first, from the fact that the law states that such money is legal tender, and second the general view that government will administer the currency in a responsible way, e.g not expand the supply of such money in a totally reckless manner? To illustrate the validity of the ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œgovernment declaresÃƒÂ¢Ã¢â€šÂ¬Ã‚Â point, imagine a country where government spending was a negligible proportion of GNP, i.e. where there was precious little tax. Would fiat currency be impossible? I donÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t think so. As long as the government was regarded by citizens as reasonably responsible, it should work. Re the ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œgeneral view of citizensÃƒÂ¢Ã¢â€šÂ¬Ã‚Â point, the Zimbabwe dollar may be required for payment of taxes in Z, but the general view of citizens is that Z dollar notes are little more than useless scraps of paper. So thatÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢s what they are: useless scraps of paper. AFTER writing the above, I looked up the definition of fiat money in ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œA Dictionary of Economics and CommerceÃƒÂ¢Ã¢â€šÂ¬Ã‚Â by J.L.Hanson. This confirmed my above two points, i.e. 1, the state declares something to be legal tender, 2, this declaration by the state will not work unless generally accepted by citizens. Para starting ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œIn the U. S., the 12 members…..ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â I donÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t agree that ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œovernight interest rates……determine the value of the moneyÃƒÂ¢Ã¢â€šÂ¬Ã‚Â. If interest rates drop to zero, what of it? Interest rates have been pretty well zero in Japan for some time. I like the hypothetical ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œparents, children and bank cardÃƒÂ¢Ã¢â€šÂ¬Ã‚Â economy. But I donÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t agree that ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œThe reason for the borrowing (by parents) is to support a minimum overnight lending rate by giving the holders of the business cards a place to earn interest.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â The children donÃƒÂ¢Ã¢â€šÂ¬Ã¢â€žÂ¢t need the parents in order to engage in borrowing and lending: they can do that amongst themselves if they want. For example one child might be too busy to perform services for parents during a particular month and might borrow from another child who had plenty of surplus time in the same month to perform services for parents. The children would sort out the interest rate amongst themselves. Feb 23 2009 warren mosler Is that still in there? Need to modify it and/or take it out, thanks! I edited Mark McNary’s writing when he was at Laffer as part of the arrangements for them to publish it. Let me try to sort it out: Buy spending govt or anyone else supports prices. One way to increase consumer spending is to encourage borrowing to spend. In the late 90’s consumer spending was sustained by the private sector increasing its debt annually by something like 7% of gdp. While ordinarily unsustainable, it works to support output and prices while its happening. govt can do other things to encourage borrowing, like the housing agencies offering low rates to increase mortgage borrowing which, at the micro level, does ‘work’ to do this. (the idea that lower rates lower income to savers is a separate matter) As for ‘indirectly by lowering interest rates’ that’s as above as well. While it’s not wrong, I agree it’s not written the way i’d write it today. Feb 23 2009 Curious “Inflation is the process whereby the government causes higher prices by creating more money …. indirectly by lowering interest rates or otherwise encouraging borrowing.” Every loan is a real wealth. It is a present value of real wealth to be created in the future. Whether I built a house yesterday and put it on the market today or whether I will build it tomorrow and put it on the market today is not important, is it? Every loan is a new asset and a new liability. So it seems to me that inflation cannot be created by new borrowing, only by government deficit spending. Am I way off on this? William Reply:January 7th, 2012 at 2:13 am@Curious, I think this depends to what purpose the loan is put. If it is spent on productive purposes, inflation will not be a problem. But if it is spent on unproductive purposes or gambled away then I would think inflation could be a serious risk.