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- Soft Currency Economics
- Full Employment AND Price Stability
- A General Analytical Framework for the Analysis of Currencies and Other Commodities
- The Natural Rate of Interest is Zero
- 2004 Proposal for Senator Joe Lieberman
- An Interview with the Chairman
- What is Money?
- The Innocent Fraud of the Trade Deficit: Who's Funding Whom?
- Innocent Frauds
- Mosler Palestinian Development Plan
January 13th, 2009 at 5:04 pm
Warren,
Curious to hear your take on the recent documentary “I.O. USA” that aired on CNN a couple of days ago. The main premise behind the documentary clashes heavily with your last point in the article regarding the U.S. not ever having to face a day of reckoning from borrowing abroad to fund imports. Additionally, the documentary touches on the pending unfunded liabilities totaling over 50 trillion USD in the form of social security, medicare, etc.
Of course the Govt can always “pay” these debts by churning out the printing press. As you yourself say, the govt is the scorekeeper and the scorekeeper is never short of points (brilliant analogy by the way). But the obvious side effect of putting a lot of points on the scoreboard is each point means less… in other words inflation.
How do you reconcile the differences between your views and the views of such a documentary, while keeping inflation in the forefront of the discussion?
Thanks for your help. Your articles have been very helpful.
Reply
January 13th, 2009 at 5:56 pm
They are a bunch of ‘deficit terrorists’ that imply there is a solvency problem, rather than just an inflation problem.
In fact, most of them don’t think there is an inflation problem.
All govt spending is via data entry. there is no distinction between printing money and any other kind of govt. spending. They act as if there is a choice and govt. usually spends one unspecified way and gets in trouble when it relies on the printing press- total nonsense.
The reason why there’s so little inflation given the level of deficit spending is ‘savings desires’ meaning desires to not spend income.
this comes from the tax advantaged savings plans- pensions, ira’, corp reserves, etc. that act as ‘demand drains’ and unless offset by deficit spending from some sector result in excess capacity/unemployment, etc.
see ‘soft currency economics’ at this sight under ‘mandatory readings’ thanks!
Reply
Floccina Reply:
November 10th, 2009 at 5:29 pm
“this comes from the tax advantaged savings plans- pensions, ira’, corp reserves, etc. that act as ‘demand drains’ and unless offset by deficit spending from some sector result in excess capacity/unemployment, etc.”
Most of the money in pensions, IRA’, corp reserves, etc. are in the economy e.g. if I buy stocks or bonds someone gets that money. The way that I see it is the real savings are paid down loans. Paying down loans is contractionary because of fractional reserve banking.
It seems that most economists agree that the goal should be to keep spending on a steady growth path. Monitorists prefer quantitative easing to keep spending up in times like these, having the Fed buy assets that can later be sold if inflation comes. The Keynesians and most post-Keynesians seem to favor government spending and you differ a bit preferring a tax cut for the poor; a FICA cut (I also favor the FICA cut) but you seem to saying that quantitative easing cannot get the job done, why?
As an aside I think that monitorists prefer quantitative easing because they think that Government is already too powerful and allowing Gov. to spend more gives them even more power. They want the state to be forced to tax to spend so that the people see the cost of Gov. clearly. (I understand their position, who wants to give more power to people who put young men in jail for selling drugs to willing customers?)
Reply
Warren Mosler Reply:
November 11th, 2009 at 8:35 am
It’s all about aggregate demand, not ‘quantities of static balances’
So look at each of the above discussions that way and see if it now makes sense, thanks
Reply
January 14th, 2009 at 8:00 pm
Thanks for the response…. helps shed some light, but also raises a few more questions.
On the topic of inflation… I read soft currency economics and I like what you have to say about the tax advantaged savings plans. But, if there is a lot of “extra” money being printed/spent/lent into society by the govn’t, and if a lot of that money is going into tax deferred plans, then wouldn’t that cause some “artificial” inflation aka a bubble in the stock market? Additionally, there are some critics like Peter Schiff who say that inflation figures are far understated by the govt as well. Lastly, it is my understanding that a lot of extra US dollars that are abroad are now funneled into US Treasury securities, effectively lowering the amount of USD in circulation? What happens if foreigners decide they don’t want to invest in a security that is denominated in a currency that will devalue?
Your take on all these points regarding inflation dynamics would be appreciated. Thank you.
Reply
January 14th, 2009 at 8:45 pm
Yes, there’s net spending that you call ‘extra’ best I can tell.
It’s not a lot, just a few % of gdp most years. In fact, from the general employment and capacity utilization data the better case is that the deficit is too small most of the time.
Yes, funds directed by ‘law’ into tax deferred plans with legally limited investments as well is part of the pricing for those investment assets.
Also, hard to say exactly what ‘inflation’ is with non convertible currency on a purely academic basis. The definitions commonly used have ‘further purpose’ such as indexing social security payments, etc. and are therefore political decisions.
Not sure what you mean by the amount of USD in circulation. probably not the actual cash?
Foreigners net sell goods and services to the US because they want the USD. It’s all voluntary and they know what currency they are getting paid in. The next question is what they do with those $ regarding the choice of $US financial assets- cash, tsy secs, corp bonds, stocks, etc.
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January 18th, 2009 at 3:06 pm
Thanks again for the response. So I guess the last logical extension of my questions is – can you envision a scenario where foreigners do not want to be paid in USD or invest in anything that is denominated in USD?
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January 19th, 2009 at 10:06 am
“…can you envision a scenario where foreigners do not want to be paid in USD or invest in anything that is denominated in USD?”
mmmmmmm…let’s see, China would have a lot less “reserves” and the U.S. would have to build and produce everything it buys from China at home (less lead in children’s toys?).
The Oil producing countries would have a lot less “reserves” and the U.S. would have to find alternative ways to produce fuel at home (Natural Gas?).
The ECB countries would have a lot less “reserves” and the U.S. would have no more , Mercedes,Veuve Qliquot etc, instead we will have Fords, Chevrolet”s and Korbel.
Get the picture?
As for the past, we keep all the “stuff” we bought from them and they take all the dollars and shred them , bad trade for them.
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January 19th, 2009 at 10:00 pm
right, we would at best have a balanced trade account, as our export revenues would be the only thing we could use to buy imports.
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January 20th, 2009 at 5:53 pm
Which is why the people who are so concerned about trade deficits are like the Sheriff in “Blazing Saddles” who threatens the townsfolk who want to kill him by putting a gun to his own head…
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February 22nd, 2009 at 11:36 pm
“The reason why there’s so little inflation given the level of deficit spending is ’savings desires’ meaning desires to not spend income.”
Saving = spending on capital goods (investment)?
If so, then there must be inflation in capital goods, no? Logically thinking, the government cannot just print money, get real goods for it and everybody else’s prices remain the same. It doesn’t add up, does it?
Every time the government collects back in taxes less than what it previously spent, it must be inflationary (assuming real wealth unchanged and no government borrowing).
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February 23rd, 2009 at 8:23 am
nominal Savings of financial assets includes holding of govt securities which doesn’t have anything to do with real savings.
Correct in that if there is no excess capacity or excess inventory additional spending tends to drive up prices.
this could have been more clear as well, thanks!
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February 24th, 2009 at 1:18 am
Okay, I admit I haven’t read ‘soft currency economics’ yet. Just got down with natural rate of interest is zero.
“The reason why there’s so little inflation given the level of deficit spending is ’savings desires’ meaning desires to not spend income.” Is this the only reason? I think that our offshoring of cheaper labor has had an even larger share of why we don’t see price inflation. Our savings rate is near zero (before the crash) which tells me we have no ‘savings desires’. And in effect, we’ve offshored our inflation to other countries. (Yeah, that’s a Peter Schiffism.) Thus, I’m not certain that just because we don’t see price inflation that deficit spending doesn’t cause inflation. In my opinion there may be other factors that got in the way of this showing up on our shores.
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Scott Fullwiler Reply:
February 24th, 2009 at 1:39 am
If I may, I would suggest that this is a theory of aggregate demand inflation, which is pretty much universally viewed as THE source of long run inflation by mainstream economists. Of course, even mainstream economists grant that there can be supply side factors, such as the ones you’ve mentioned, and certainly many others (oil prices, etc.). But mainstream economists see these as not sustaining inflation in the long run. Non-maintreamers are all over the map regarding whether supply side factors matter in the “long run.”
Regardless, though, the point here is to counter the mainstream approach to taming aggregate demand inflation, which is to increase the buffer stock of unemployed workers, and which is viewed as inefficient and downright destructive to overall well-being. The alternative view is, as you state, that aggregate demand inflation is driven by fiscal deficits relative to net savings desires. These two are the M and (inverse of) V, respectively, for a modern re-writing of the quantity theory of money. The implications of such a re-writing are enormous, as Warren lays out here, in SFC, and in Full Employment and Price Stability.
Also, while there have most obviously been supply-side factors driving inflation over the past few years, note that as aggregate demand turned down signicantly we are now hearing more about deflation, while household net saving just had its biggest spike in 40 years in the fourth quarter.
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February 24th, 2009 at 1:27 am
“..in order to actually collect taxes, the government, as the monopoly issuer of the currency, must, logically, spend (or lend) first.”
What about the private banking sector? And maybe I’m missing a part of this. It is my understanding that outside of government spending (which is well described by this paper) through the fractional reserve lending practices of our banking system, private banks in effect have the ability to create money supply. Is that not correct? This ignores the other aspect of velocity which can increase nominal supply of money too. Thus, is there really only a limited amount of money for paying taxes since the private sector and the constant changing of money between parties can “create” this new money? Are we really dependent upon our government (I’m speaking of treasury) to deficit spend to create supply?
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Scott Fullwiler Reply:
February 24th, 2009 at 1:48 am
1. We don’t have a fractional reserve banking system. Loans create deposits.
2. When you pay your taxes, your deposit account at the bank is debited, and your bank’s reserve accouht is debited. Though it is no longer your liability if you have a positive deposit balance when the Tsy presents your check to your bank, the overall tax liability is not settled until your bank has debited its reserve account.
3. If you want to buy a Tsy security, you can only do so with reserve balances, because final settlement of Tsy’s occurs only on the Fed’s book-entry settlement system. So, your bank, or its clearing bank, will debit your account, and then have its own reserve account debited to purchase the security.
4. The only way reserve balances come into circulation is from deficit spending (when Fed does an open market purchase, it purachases a bond that resulted from a previous deficit) or borrowing from the Fed.
5. So, in order to pay taxes or buy a Tsy security, there must first have been a deficit to create the net savings, or you must go into deficit yourself. There’s no other way.
Hope that helps.
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The Interest Reply:
February 24th, 2009 at 2:36 am
“We don’t have a fractional reserve banking system. Loans create deposits.”
So, in order to borrow $10,000 for a car, the bank has to have this amount at the Fed before it can loan me the money? And in order for the Fed to have $10,000, the government had to have deficit spent to create this?
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warren mosler Reply:
February 24th, 2009 at 7:30 am
No, the loan of $10,000 carries with it a deposit of 10,000 that in the first instance the bank gives to the borrower.
so the bank has an asset and a liability- the loan and the deposit.
that’s how all lending works under close examination
the question is what does the lender do if you want to ‘take your money out’ of that institution.
with today’s nonconvertible currency regime, taking the money out means the fed debits your banks reserve account at the fed, and credits the reserve account of wherever you redeposit the funds.
the means a negative balance at the fed for the first bank and an equal positive one at the second bank.
a negative balance at the fed is ‘automatically’ a loan from the fed and is booked as one if that overdraft is left unattended by the first bank
The Interest Reply:
February 24th, 2009 at 10:44 am
Then at the bank I originate my car loan from created the money out of thin air and didn’t rely on the government (treasury) to create that money first, correct? Or am I still missing something? So far all this sounds like are accounting entries between my bank and the Fed and the my bank and me. Treasury (government) hasn’t been a part of this exchange yet. Right?
Reply
Scott Fullwiler Reply:
February 24th, 2009 at 11:22 am
You’ve got it!
Scott Fullwiler Reply:
February 24th, 2009 at 11:28 am
To be more precise, until you put reserve balances into the analysis, or currency, you don’t go to the Fed’s balance sheet, which means you didn’t refer to a previous deficit.
Of course, this is very different from saying you didn’t need a tax liability and a deficit in the first place for transactions to be occurring in “dollars” at all.
The Interest Reply:
February 24th, 2009 at 12:19 pm
Then back to my original point on this sub-thread, tax dollars don’t have to come from government spending first. Only that government spending and taxation made me enter the system using the state created currency. I may have confused the logic where I thought money only gets created by the government, when to be more precise, currency is created by the government and I have chosen to use that currency for my money when I transact with my bank. Right?
RichW Reply:
February 24th, 2009 at 12:46 pm
Scott in point 2 you’re talking about definitive money vs accessory money (from Understanding Modern Money)? Definitive money being that which the govt accepts as payment for taxes.
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Scott Fullwiler Reply:
February 24th, 2009 at 1:40 pm
That sounds right.
People sometimes confuse “transactions using dollars” with “transactions using reserve balances.” For instance, anytime someone says “chartalism makes no sense because I don’t hold money to pay taxes,” they are making this mistake.
February 24th, 2009 at 1:46 am
“Taxes do not finance spending, but taxation serves to create a notional demand for state money.”
Well put. Do we have an income tax only because it effectively forces anyone (most everyone) to pay this tax, where other taxes like gasoline taxes could be voluntary since I could ride my bike instead of drive my car to work? Isn’t this a little outdated of a concept? Since we trade and can charge import taxes or other fees, can’t this drive the usage of state money?
One more quick question. Does this mean that SS, medicare, etc. are never “in the red” and thus we don’t even need to have a tax on these services?
“Note that if one pays taxes or buys government securities with actual cash, the government shreds it, clearly indicating operationally government has no use for revenue per se.” AND “…when the U.S. government receives a check in payment for taxes…it does not enhance the government’s ability to make payment…”
Do you mean that when we pay our taxes in April this goes in the bit bucket? Thus, we’re living in a shroud of falsehood believing we really have to pay taxes and that this is somehow benefiting our government (or maybe someone on the inside is pocketing this money). Hmm. Great. Maybe Wesley Snipes was right. : )
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zanon Reply:
February 24th, 2009 at 1:04 pm
The Interest: You’re really getting close.
As others have said, banks can create money ex-nihilo by expanding both sides of their balance sheet, which is what they do when they make loans. But every private sector asset must be matched by a private sector liability, so net, the entire private sector must zero out.
The Government can run deficits in perpetuity, so this is where you get the “seed” money from. Some people call Government deficit money creation “vertical” and bank money creation “horizontal”.
Since you pay taxes to the Govt, the money for those, net, have to come from the Government. Paying taxes uncreates money. Only Government spending can (net) create money. Whether or not banks create (net) money depends on whether you think loans are money.
If the Govt creates more money (higher G, lower T) and that money is saved, then you don’t see a change in CPI (dollars are not chasing goods). Money in the bank really does not do anything. It certainly is not required to fund investment.
Scott’s right in that we don’t have an FRB system, except of course that we do. Scott’s point is that the bank does not need to loan out a deposit, the bank just makes the loan (out of nothing) which then becomes a deposit somewhere else.
Banks do have reserve requirements, but in essence, these have no impact on anything. They certainly do not constrain lending. They are a convoluted way for the Fed to set short term interest rates (the Federal Funds Rate).
The Government needs to tax to 1) create demand for its currency, and 2) control inflation. It does not need to tax to spend. But hey — demand for currency and controlling inflation is important too!
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Scott Fullwiler Reply:
February 24th, 2009 at 1:33 pm
Perfect.
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Scott Fullwiler Reply:
February 24th, 2009 at 1:43 pm
Interest . . . you might want to check out “A General Analytical Framework for the Analysis of Currencies and Other Commodities” in the mandatory readings. That’s where you will find the “horizontal” and “vertical” distinction Zanon is making. Sorry about all the reading suggestions . . . but you seem to have an interest (no pun intended!) in working your way through the paradigm.
The Interest Reply:
February 24th, 2009 at 2:03 pm
Awesome. I’m trying to use the Internet to test what I’ve learned. And this info is exactly what I’m looking for. Thanks for your help!
Unforgiven Reply:
August 27th, 2011 at 12:44 am
@zanon,
Would increased reserve requirements sour the deal for new loans? If NINJA’s are sold in to the secondary market, do the new holders have to comply with the same reserve requirements?
Reply
February 24th, 2009 at 9:01 am
Interest -
“we’re living in a shroud of falsehood believing we really have to pay taxes and that this is somehow benefiting our government”
Pretty much. It’s not that taxes don’t serve a function. They just don’t serve it in the way people think they do, and other things could accomplish the same function. All taxes do is reduce private demand to make room government spending. A program which forced people to save could reduce demand just as much, and give them financial assets instead of sending it to the bit bucket. There might be some problems with such a system, and it might not be better than the bit bucket, but it’s one of the policy possibilities (like a permanent zero interest rate, no goverment borrowing model) that becomes possible once you have a true understanding of the monetary system.
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February 24th, 2009 at 1:54 pm
Interest, not sure if you’ve run across this site or not. Has many excellent articles from multiple sources that provide additional info about the topics discussed here. It’s been very helpful to me.
Reply
February 25th, 2009 at 11:37 am
Scott, or Warren, or other. What is the accounting sequence of operations that occur when the treasury department pays a private citizen, say A, an amount, say X to A’s bank, say B. We know the treasury credits A’s account at B, +X. Since the treasury pays out in reserves and we know that A’s account is bank money is the sequence as follows:
1) add +X bank money to A’s account?
2) add +X reserves to B’s reserve account at the FED?
If this is the case, can we also conclude that not only do loans create deposits, but government spending creates deposits as well, but with no matching asset?
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Scott Fullwiler Reply:
February 25th, 2009 at 12:05 pm
Let me just go through it here for you and others that might be interested . . . .
Person A’s Bank’s Balance Sheet
Assets: + reserve balances
Liabilities/equity: + to A’s deposit account
Person A’s Balance Sheet
Assets: + deposits at Bank
Liabilities/Equity: + net worth
So, for bank, changes to assets and liabilities net to 0. For person A, only add to deposit on asset side, but no matching LIABILITY (I think you might have meant to say liability when you said “no matching asset”). This is what we mean when we say that a deficit raises “net financial assets” or “net savings” of the non-government sector, since that is what net worth is.
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September 20th, 2009 at 1:52 am
Taxation serves to create demand for government currency.
Why does the government want to create this demand? It doesn’t need currency to get what it wants, the government can just take whatever it wants.
So there must be some other reason, why the government wants to be currency issuer, no?
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September 22nd, 2009 at 8:28 am
yes, it could somehow just take what it wanted, if it could maintain a military without a monetary system, which many nations have done in the distant past.
the monetary system is one way to move real goods and services from private to public domain. there are a few others of the ‘command’ type as well that we don’t choose to use.
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September 22nd, 2009 at 12:48 pm
The government not issuing currency doesn’t mean no monetary system, it just means no vertical component of money.
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September 23rd, 2009 at 9:29 am
without a tax liability (or fines, fees, etc) denominated in the govt’s currency there is no such currency
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October 17th, 2009 at 5:29 pm
“Taxation serves to create demand for government currency” . . . but not necessarily federal taxation, which could (and I suggest should) be reduced to zero.
State and local taxation presumably would be sufficient, so long as all government entities are required to collect taxes in federal currency and are precluded from issuing their own currencies.
The issue of what to do about inflation seems to center on money supply. While reducing money supply may reduce inflation, it also can adversely affect economic growth. Wouldn’t increasing the demand for money also reduce inflation, while have a less negative affect on economic growth?
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October 18th, 2009 at 9:41 pm
yes, state and local currencies result in some residual ability for the federal govt to spend without federal taxes, as we’ve previously discussed and agreed.
however the issue of inflation has nothing to do with the ‘money supply’ also as previously discussed. changing interest rates, which is all the fed does, has little, none, or even reverse effects regarding inflation.
‘inflation’ comes from ‘too much spending power chasing too few goods and services’ in a competitive economy, and is directly related to fiscal policy, not monetary policy, along with other aspects of institutional structure.
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November 9th, 2009 at 11:54 pm
if the banks are public-private partnerships whose loans are required to be issued in the government currency…
then taxes are unnecessary to establish the currency because demand for bank loans will establish the currency.
right? there’s a lot of demand for those ‘out-of-thin-air bank loans’ creating those ‘FDIC-insured deposits’. why would that demand disappear just because the govt. stopped collecting taxes? why would the supply of profitable bank loans dry up?
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Curious Reply:
November 10th, 2009 at 2:23 pm
Yes. We had a discussion about “loan driven” money under this article
http://www.moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/
and nobody presented any rational argument why it wouldn’t work. So I agree with you.
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Matt Franko Reply:
November 10th, 2009 at 4:30 pm
Perhaps you two are confusing “money” with the currency unit?, as getting a loan in a foreign country (in foreign currency) with FFNC (Free Floating Non Convertable) also creates deposits over there. Resp,
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Curious Reply:
November 10th, 2009 at 11:13 pm
No Matt, I’m talking about money.
If I borrow $1 from the state, I have a $1 debt to the state.
If the state tells me that I owe $1 in taxes, I have a $1 debt to the state.
What’s the difference?
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Warren Mosler Reply:
November 11th, 2009 at 8:32 am
Depends on the penalty for not paying your loan to the govt.
if it’s unsecured and non recourse, and you can just walk, there’s a big difference. (those are the terms the Fed gave the foreign cb’s for their swap line advances)
if the loan from the Fed is collateralized the obligation is more like a one time tax than not.
That’s why I state in my papers the price level is a function of prices paid by govt when it spends and/or collateral demanded when it lends.
Matt Franko Reply:
November 11th, 2009 at 9:52 am
C, Perhaps if they had debtors prisons to enforce. Here’s an excerpt from Wiki: “A paradise for speculators: In the last decade of the eighteenth century the United States had just three banks but more than fifty different currencies in circulation: English, Spanish, French, Portuguese coinage, scrip issued by states, cities, backwood stores, and big city enterprises. The values of these currencies were wildly unstable, thereby making it a paradise for politically indifferent currency speculators thriving on uncertainty. In addition, the value and exchange rate was almost always outdated or unknown by the party agreeing to receive it, especially the farther it moved away from the coast; and because of distances, primitive roads, and absence of communications technology, values were not only unknown but unknowable as well. Speculators in the United States bought up bonds for about 15 cents and through Hamilton’s plan were paid their face value of one dollar.
Supporters of the bank argued that if the nation were to grow and to prosper, it needed a universally accepted standard coinage and this would best be provided by a United States Mint, aided and supported by a national bank and an excise tax.”
So it would be like going backwards IMO, we could still use sharpened bird feathers and inkwells too, or Warren could could faciitate the info exchange on this blog with a team of carrier pigeons,etc..ie it may work in some fashion, just not as well as with today’s modern info. technology. (btw I observe that advances in information technology generally are not given enough credit in their facilitation of modern money systems, they were truly the “game changer” to enable transition to FFNC currency IMO.)
Curious Reply:
November 11th, 2009 at 3:58 pm
That makes sense Warren.
Warren Mosler Reply:
November 11th, 2009 at 10:23 pm
because there wouldn’t be any goods and services for sale in exchange for that currency.
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Curious Reply:
November 11th, 2009 at 11:07 pm
Of course there would be.
As long as the state is as vigorous in enforcing debt repayment as it is in enforcing tax collection, there is no difference.
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Warren Mosler Reply:
November 12th, 2009 at 10:21 am
right, a tax is a debt payable to the state.
but debt follows taxation
if there were no taxes, no currency, and the state announced loans in a new currency, why would anyone borrow it? there would be nothing to buy with it.
want to borrow my business cards?
borrowing is for further purpose than just to have a loan to pay back. with interest.
Curious Reply:
November 12th, 2009 at 3:18 pm
The moment I borrow your business card, I have an obligation to repay it.
That gives your business card value.
Why would I borrow it? Because I want something that someone else has and I have nothing to trade for it.
In effect, I am trading my future production, because I will have to produce something in the future, to get the business card back and return it to you.
Unforgiven Reply:
August 27th, 2011 at 12:59 am
@Curious,
You have to assume that someone else would want the card in exchange for goods/services. Otherwise you would be “left holding the card”.
November 10th, 2009 at 12:07 pm
wrong.
‘establish’ means create sellers of real goods and services who want to exchange them for that currency.
I can call my business cards my currency, and offer to lend them at low rates, but that doesn’t mean they’ll buy anything.
see ‘turning litter into money’ on this website
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Curious Reply:
November 10th, 2009 at 2:26 pm
Warren, could you post a link to the article you’re referring to? I can’t find it. Thanks.
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November 10th, 2009 at 2:36 pm
taxes and money
Posted on Friday, October 23rd, 2009
[Skip to the end]
you are addressing a room full of people.
you tell them taxes turn litter into money.
you try to sell your business cards to the group for $5 each.
probably no takers.
you offer your cards to anyone who stays to help clean up the room
no takers.
you then point to the man at the door with [...]
Read the rest of this post…
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November 12th, 2009 at 11:13 pm
Curious Reply:
November 12th, 2009 at 3:18 pm
The moment I borrow your business card, I have an obligation to repay it.
RIGHT.
That gives your business card value.
YES, TO YOU, AS YOU OWE THE CARDS, BUT YOU ALSO HAVE THE CARDS YOU BORROWED, SO ALL YOU NEED IS ANY INTEREST DUE. SO YES, YOU WOULD SELL GOODS AND SERVICES TO GET THOSE EXTRA CARDS YOU NEED.
Why would I borrow it? Because I want something that someone else has and I have nothing to trade for it.
WHY WOULD SOMEONE ELSE GIVE YOU ANYTHING FOR MY BUSINESS CARDS?
In effect, I am trading my future production, because I will have to produce something in the future, to get the business card back and return it to you.
WHY WOULD YOU BORROW THEM AND PUT YOURSELF IN THAT POSITION IN THE FIRST PLACE UNLESS YOU SAW THINGS YOU COULD BUY WHERE THE SELLER WOULD TAKE MY CARDS?
SO LET’S REALLY DO THIS.
DO YOU WANT TO BORROW MY CARDS AT 5% INTEREST? I’LL LOAN THEM TO YOU IF YOU AGREE TO THAT IN WRITING. YOU CAN’T SPEND THE CARDS AFTER YOU BORROW THEM. AND YOU HAVE TO GIVE ME WHAT I WANT TO GET THE ONES YOU NEED TO PAY ME BACK, BECAUSE NO ONE ELSE HAS THEM.
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November 13th, 2009 at 12:36 am
“YES, TO YOU, AS YOU OWE THE CARDS…”
No, to anybody. In effect, I become a slave to anybody in possession of that card.
“WHY WOULD SOMEONE ELSE GIVE YOU ANYTHING FOR MY BUSINESS CARDS?”
Why are foreigners willing to trade goods for Uncle Sam’s business cards? Same reason.
“…UNLESS YOU SAW THINGS YOU COULD BUY WHERE THE SELLER WOULD TAKE MY CARDS?”
That’s precisely the reason why I borrow them. The seller knows that I will have to get them back from him, which gives them value, which is why he accepts them.
“…YOU CAN’T SPEND THE CARDS AFTER YOU BORROW THEM…”
If I can’t spend them, why would I borrow them?
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Scott Fullwiler Reply:
November 13th, 2009 at 1:30 am
People in the US are willing to ship goods and services to other countries for Uncle Sam’s business cards, so to get the goods and services, foreigners will accept US business cards. But nobody has to pay taxes in Warren’s business cards, though, so nobody will accept them from you.
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Curious Reply:
November 13th, 2009 at 4:09 pm
Nobody has to pay taxes in Warren’s business cards, but they have to pay their debts to him in his business cards.
As long as the government enforces debt repayment as vigorously as tax collection, I don’t see a difference.
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Scott Fullwiler Reply:
November 13th, 2009 at 4:22 pm
“but they have to pay their debts to him in his business cards.’
You are assuming they are borrowing his business cards. Why are they doing that if they can’t buy goods and services with his business cards? Who else NOT IN DEBT with Warren would accept his business cards as payment in the first place to make borrowing his business cards something anyone would want to do in the second place?
Until you can answer these questions (and we’ve been at this for a few months and you still have not, by the way) then you aren’t getting it. I’m not blaming or accusing there . . . it could be that we haven’t posed the question in the right manner yet . . . still trying to get it right.
Best,
Scott
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Scott Fullwiler Reply:
November 13th, 2009 at 4:23 pm
I think you should just borrow some of his business cards . . . that’s probably the only way to make the point. Best, Scott
Curious Reply:
November 13th, 2009 at 11:20 pm
Yes Scott, I will try that, as soon as I can persuade Warren to stand at the door with 9mm and really shoot anybody who tries to leave without returning the cards they borrowed. :-)
November 14th, 2009 at 6:32 am
no man at the door needed.
you can borrow my cards any time at 2% interest, payable in more cards, and agree that if you don’t pay the cards back you’ll pay a $100 penalty.
How many do you want to borrow?
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November 14th, 2009 at 2:29 pm
Thank you for proving my point Warren, or do you still doubt that they would have a value?
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November 14th, 2009 at 3:55 pm
I’ve said from the beginning that if you were foolish enough to borrow my cards they’d have value to you.
But the larger point is that no one would borrow them, not even you, in which case they remain valueless, right?
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November 14th, 2009 at 5:03 pm
OK, so you agree that the cards would have a value to me.
If they have value to me, then whoever has them can trade them to me for something else. So the cards have value to anybody.
Now, why would I be foolish to borrow them?
I need food. If I had a choice of dying of starvation or borrowing your cards, would I borrow? What do you think?
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Scott Fullwiler Reply:
November 14th, 2009 at 10:08 pm
Who else has them that would trade them to you?
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Curious Reply:
November 15th, 2009 at 2:52 am
I am trying to explain why do the cards have value in someone else’s possession.
Of course, others have to trade something to me first, in order to get them.
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Scott Fullwiler Reply:
November 15th, 2009 at 3:09 am
They’re trading the cards TO YOU and getting goods, services, or $ in return. You’re getting the cards.
Why did you borrow cards in the first place to give away your goods, services, or $?
And, before any of this happens, how did THEY get cards? Were they, like you, willing to give their goods, services, or $ away? If so, why?
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Curious Reply:
November 15th, 2009 at 2:33 pm
Example:
You are a merchant and you want to sell a book. I want the book, but I have nothing to trade for it.
So I borrow Warren’s business card.
If you trade me the book for that piece of paper, you will be able to trade that piece of paper back to me later for goods/services, because I will need the business card back, to return it to Warren. Will you trade?
If you agree and trade, that’s how you get the card into your possession.
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Scott Fullwiler Reply:
November 15th, 2009 at 2:39 pm
Borrow Warren’s cards and see how well that works for you.
Scott Fullwiler Reply:
November 15th, 2009 at 2:45 pm
Forgot to ask . . . where will you get the additional cards to pay the interest?
Curious Reply:
November 15th, 2009 at 4:41 pm
The extra cards for interest will come from Warren. Call it Warren’s deficit spending.
Scott Fullwiler Reply:
November 15th, 2009 at 5:12 pm
OK, then, borrow a million business cards at 1% interest. Why not 10 million?
November 14th, 2009 at 9:20 pm
there would be no food for sale that anyone would give you for my cards, so why borrow them?
borrowing them doesn’t cause anyone to sell you food to get them who wouldn’t have given you credit to buy his food to begin with.
try it. try borrowing my cards at 2% interest and see if you can get any food for them
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November 15th, 2009 at 3:01 am
You agree that the cards have value.
Anything that has value can be traded. Would you agree?
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Scott Fullwiler Reply:
November 15th, 2009 at 3:15 am
They don’t have EXCHANGE VALUE if you’re the only one that wants them and you’re the only one that has them. Of course, anything can have value . . . a pile of rotten garbage can have value to someone. Who cares? We’re not talking about subjective value . . . we’re talking about objective value in exchange. If the cards are valuable to you but worthless to everyone else, you haven’t proven anything; certainly no credible definition of money is consistent with such an example.
You still haven’t explained why anyone but you has these cards in the first placek, which you are so sure you’re going to be able to obtain . . . and how, even if this is true, it is even the slightest bit rational for you to borrow cards from Warren so that you can give your goods, services, and/or $ away to obtain cards from them so that you can pay your interest to Warren.
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Curious Reply:
November 15th, 2009 at 2:11 pm
So US dollars have no EXCHANGE VALUE to foreigners, because Americans are the only ones that want them and Americans are the only ones that have them, right?
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Scott Fullwiler Reply:
November 15th, 2009 at 2:44 pm
Apples and oranges. You are setting up a completely ad hoc story to try and create exchange value where one person initially and fairly irrationally borrows business cards that nobody else has or has any need for to that point, whereas 300 million Americans (and many foreigners earning income in the US) have to pay taxes in $. If you got rid of the need to pay taxes in $, then it would not have exchange value here or most anywhere else rather quickly.
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warren mosler Reply:
November 15th, 2009 at 4:35 pm
more important, people borrow dollars in response to things they see for sale where the sellers already want dollars.
and foreigners do same- collect dollars because they can see things for sale where the sellers already want dollars
i’m dropping the rate to borrow my cards to 1%. want to borrow any?
if not, figure out why not and you independently have your answer.
Curious Reply:
November 15th, 2009 at 5:02 pm
Thanks Warren, I have my answer.
The fact, that I haven’t heard a single rational counter argument to my idea, certainly doesn’t prove that my idea is valid.
But the fact that an economist of your caliber couldn’t do it, speaks volumes.
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Scott Fullwiler Reply:
November 15th, 2009 at 5:11 pm
The fact that you can’t understand the counterarguments to the point you don’t think there has been one speaks volumes.
warren mosler Reply:
November 15th, 2009 at 4:49 pm
i’m offering to loan you my cards at 1%, payable in more cards.
want to borrow any? if not, figure out why not, and you have your answer.
Hint: if you do borrow them and sign a note to pay them back you are putting yourself in a very ugly position while you try to trade them for something. your only selling point to try to trade them would be that you might need them if i press you for payment
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Curious Reply:
November 16th, 2009 at 12:45 am
Warren, I levied a tax on all my family members payable in my business cards, so they have value, correct?
Can I send you some business cards and please, try to purchase something with them in your neighborhood.
If you can’t purchase anything with them, does it mean that tax driven money is an unrealistic concept?
If not, then why will no merchant in your neighborhood accept them?
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November 16th, 2009 at 1:18 am
Because you aren’t the government so you can’t levy your tax on anyone else, your family members make nothing the rest of us need or want. We can’t even trust you to collect that tax.
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November 16th, 2009 at 7:16 am
i’d have to see the contract between you and your kids, enforceability, what they are offering for sale in return for cards, etc.
i agree my cards would be worth something if you agreed to borrow them at any rate of interest.
that’s why i’m trying to lend them to you. it would be a case of you voluntarily taxing yourself to give my cards value at your personal expense.
and that’s why you don’t want to do it.
and that’s why it taxes taxes to drive a currency in any non trivial way.
taxes are a debt imposed by govt.
people can’t be counted on to impose debt on themselves for nothing in return directly
like president Bush said in response to Buffet and Soros saying they favored higher taxes- ‘send it in, we’re not stopping you!’
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Scott Fullwiler Reply:
November 16th, 2009 at 9:52 am
Exactly.
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November 16th, 2009 at 11:43 am
Hello Mr. Mosler,
I posted an exposition of inflation and its causes over on Nick Rowe’s weblog and after he deleted my comment you offered a response. Where would be a good place to discuss my argument and your terse and uninformative response?
Regards,
Gary Marshall
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warren mosler Reply:
November 16th, 2009 at 6:17 pm
right here?
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November 16th, 2009 at 2:49 pm
“…it would be a case of you voluntarily taxing yourself to give my cards value at your personal expense.
and that’s why you don’t want to do it.”
Am I not voluntarily taxing myself when I borrow US dollars?
“and that’s why it taxes taxes to drive a currency in any non trivial way.”
I’m not sure I understand what do you mean by non trivial way.
“taxes are a debt imposed by govt.”
Yes!
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Zaid Reply:
November 17th, 2009 at 3:12 am
“Am I not voluntarily taxing myself when I borrow US dollars?”
That’s not the same thing as giving Mosler’s business cards value at your expense. You can be sure that your borrowed dollars will be accepted for something of value because they have enforceability by the IRS under the threat of imprisonment.
Who’s going to force you to pay back Mosler’s cards? How can we be sure you won’t default?
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November 16th, 2009 at 7:13 pm
Hello Mr. Mosler,
I posted the piece well below on Nick Rowe’s weblog Worthwhile Canadian Initiative. He deleted the entry and posted a rather cryptic response from you that appears directly below.
You say,
****************
the currency is a simple public monopoly
the price level is necessarily a function of prices paid by govt when it spends (and/or collateral demanded when it lends)
****************
You say that the currency is a simple public monopoly. But currency only makes up about 4% of the stock of money. I assume the other 96%, created by the commercial lenders, is not?
The meaning of your comments on the price level escapes me. For example, if the price level of homes is x, then this price is a function of prices paid by government when it buys a home?
Regards,
Gary Marshall
Hello Mr. Rowe,
In your comment to Winterspeak you mention inflation being the effect rather than the cause of too much money floating about. I agree.
You also mention the cause of too much money floating around as too much lending. I agree, but with a proviso. Inflation would require a general rise in prices.
We have seen periods in which people and firms have taken on far too much debt to purchase the things they desire. Unfortunately, when such borrowing has moved beyond reasonable there has always been recompense for the overeachers. Debts are restricted to one’s income or revenue or worth. There is always a limit to which one can borrow. The current housing crisis in the States and to some extent here confirms this. With lenders plentiful at modest interest rates, borrow they did for homes sending housing prices soaring. When prices reached inordinate levels, borrowers, viewing their diminutive incomes and the incredible prices, ceased to buy. We all know the results. The prices of homes moderated and in some places collapsed forcing lenders and householders to face the consequences in the ruthless markets. The price inflation for homes was followed by a rapid price deflation.
Those who could not buy before and wisely or luckily waited have seen the rewards.
So a few items in the consumer’s basket rose in price and subsequently declined in price. Surging stock markets and home prices are not general price rises.
But what if the inflation endures without any correction? What sort of borrowing would stifle corrections or cause general price increases?
One could not point to individuals or firms. Individuals borrow conscious of the possible results. Firms borrow to increase wealth or lower costs, intent upon a return. If the benefit does not arise, then perhaps they will survive, perhaps not.
Well, what organization out there can borrow without such petty considerations of income and revenues? What organization can squander $billions on the most worthless enterprises without penalty and without regard to the rate of inflation?
Only one I know of.
Which brings me to my point. A general rise in prices, not just home prices or stock prices, is almost always caused by excessive Government borrowing without any perceived benefit. And a general price rise is what is exactly how inflation is defined. You did make the point to some extent, but I thought I would add a few details.
Regards,
Gary Marshall
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November 16th, 2009 at 8:20 pm
Gary, please review the ‘mandatory readings’ on this site that I’d only be retyping to give you a complete answer.
Start with ‘soft currency economics’ and then ‘full employment and price stability’ and let me know what you think
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November 16th, 2009 at 10:55 pm
Hello Mr. Mosler,
After reading only several articles, I find your beliefs about the financial system resemble those of Mr. Bill Mitchell. Am I correct?
Mr. Mitchell believed that a government does not have to raise money for its expenditures before they are made. I find this incredible.
You have said, “The federal government, on the other hand, is able to spend a virtually unlimited amount first, adding reserves to the banking system, and then borrow, if it wishes to conduct a reserve drain. ”
Mr. Mitchell refused to comment on a question related to the clearance of Government cheques issued to pay its bills. Perhaps you may.
****
The following is an commonplace example of a government cheque clearing.
The Government spends money handing out cheques. The Government cheque is deposited by a recipient in his account at the Bank. The Bank records a liability to the depositor. The Bank must now offset this liability with a corresponding asset. It submits the government cheque for clearance to the central bank. The central bank will then deduct money from the Government account, reducing the central bank’s liabilities. The central bank will also see its assets drop as it transfers the funds to the Bank. The Bank receives its money and marks the corresponding asset to the liability of its depositor official.
****
How does this operation cohere with your statements about Government expenditures?
Regards,
Gary Marshall
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Scott Fullwiler Reply:
November 16th, 2009 at 11:36 pm
Hi Gary
In your example, it goes like this:
Bank:
Liabilities increase as deposits increase for the spending recipient.
Assets increase as the bank’s reserve account is credited upon presenting the check to the Tsy (actually, it could be credited via Fed float temporarily).
Total: Both assets and liabilities have increased by the amount of the Tsy’s check to the recipient.
Fed:
Liabilities increase as the bank’s reserve account at the Fed has been credited by the amount of the check.
Liabilites decrease as the Tsy’s account is debited by the amount of the check.
Total: No net change to the Fed’s liabilities. Assets unchanged.
As an aside, the vast majority of the time, this is done by direct deposit, so the intermediate step using a check is skipped. End result is the same.
Best,
Scott
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November 17th, 2009 at 2:26 am
Hello Scott and Mr. Mosler,
That is fine. But the Fed is not usually, different these days, paying interest on the deposited funds, so the funds kept in the reserve accounts at the Fed are transferred out quickly. So the Bank’s asset side will change with a decrease in its Reserve holdings and an increase elsewhere. The Fed or one of its Reserve banks will then record a corresponding decline in assets and liabilities.
Now my main point – for the Treasury cheques to clear, there must be money in the accounts upon which the cheques are written. Otherwise, they do not clear. That money arrived through taxes and perhaps by the borrowing before disbursement, not subsequently.
How does this accord, Mr. Mosler, with your statment that, “The federal government, on the other hand, is able to spend a virtually unlimited amount first, adding reserves to the banking system, and then borrow, if it wishes to conduct a reserve drain. â€
Regards,
Gary Marshall
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November 17th, 2009 at 6:37 am
Yes, the Treasury, under current institutional arrangements, is not allowed to run an overdraft in its Fed account.
This is one of many of what I call ‘self imposed constraints’ that are legislated by the US govt. but are not inherent in the monetary system. These include debt ceilings, budget limits, etc.
That’s why I always state it this way- ‘govt spending is not operationally constrained by revenue.’
(all this is in the literature under ‘mandatory readings’ on the website)
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November 17th, 2009 at 7:54 am
Gary
I don’t think you followed Scott’s explanation. The central bank’s total assets/liabilities do not change when the government spends – only the composition of it’s liabilities alters. There is simply an exchange of a non-monetary liability (treasury account) for a monetary liability (bank reserves). The Fed balance sheet does not contract as you suggest.
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November 17th, 2009 at 11:08 am
Hello Paradigm,
When the US Treasury adds to its account at the Fed, do the Fed’s assets and liablities rise equally, a rise in the liability to the Treasury matched by a rise in the Fed’s money holdings?
So the money comes into the Fed, and it also leaves when the Bank to which the money is transferred draws down on its Fed account or takes a wire transfer. Is this not correct?
Regards,
Gary Marshall
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November 17th, 2009 at 11:40 am
Hello Mr. Mosler,
I was a little unclear to your meaning. What you mean is that Governments are constrained by the funds in their bank account, but they can always count on tax revenues or turn to the financial markets, assuming they are compliant, to raise more capital when taxes are not enough.
I am glad that has been cleared up.
Regards,
Gary Marshall
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November 17th, 2009 at 2:31 pm
Gary,
It’s a little more fundamental than that. Since a central bank in a floating rate currency regime is not subject to any demands to convert it’s liabilities to anything else, those liabilities are simply entries on a spreadsheet, that can be increased or decreased without any external constraint.
Think of it this way: if you have an account at your bank that says it contains $1M, implicit in that is that you can show up, at any time, and demand either $1M in cash or a check that you can then deposit in another bank which would require a transfer from your bank’s reserve account. Since your bank faces this constraint, it can’t just mark up your account willy-nilly – it has to have either cash, reserves, or the ability to get them quickly, in order to be able to fulfill any such request.
But if you take a $100 bill to your local fed bank and demand “payment”, the only thing they will offer you is a nice shiny new $100 bill. If you were a bank and had a reserve account, they could also credit your account $100. But that’s it – the “money” for the Fed is purely notional – like I said, numbers in a spreadsheet.
Since the Treasury spends directly out of it’s reserve account at the fed, and the fed is not subject to convertibility, the only limits on Treasury spending are self-imposed. When the Treasury writes a check and it’s presented to the fed for payment, there are no external limits (like there would be on a normal bank) on it’s ability to honor it. If the Treasury didn’t have enough money in its’ account, the Fed could just cash it anyway and mark it up as an overdraft. The money doesn’t “come from” anywhere in any case, and no matter what what numbers it enters into it’s spreadsheet, it’s never subject to any external demand for payment.
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November 17th, 2009 at 5:05 pm
Hello Mr. Baird,
Though the central bank certainly has unusual powers, it is a bank and it is subject to the rules that apply to all banks.
If the Fed wishes to credit the Treasury’s account in absence of funds, fine. The Fed can charge the Treasury accordingly. The liabilities will shift with an increase to the Reserve account of the Bank submitting the Government cheque and a negative sum attributed to the Treasury account. But the claimant Bank may still demand a transfer. The Fed is going to have to draw down on its money reserves to complete the transaction. Its assets (money reserves) will drop with its liabilities (decrease in money sitting in the Bank’s Reserve Account).
Is this not correct, Mr. Baird?
Regards,
Gary Marshall
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November 17th, 2009 at 6:12 pm
Gary
There are two ways in which an increase in the treasury account at the Fed can be accommodated on the balance sheet. The way this typically occurs, e.g. when funds flow in via taxation, is via a liability swap (debit bank reserves, credit treasury account). This causes the base money supply to drop.
The other way is via direct Fed purchase of government debt (credit treasury account, credit asset side of Fed balance sheet with treasuries). This has no effect on the base money supply, but does cause the Fed balance sheet to expand.
BTW, reserves are not Fed assets, they are Fed liabilities, although they are simultaneously assets to commercial banks. The Fed doesn’t transfer any of its assets to commercial banks when banks gain reserves from treasury spending, it simply credits a liability (reserves) and debits another liability (treasury account).
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November 18th, 2009 at 12:22 am
Hello Paradigm,
The Fed can certainly debit member bank reserve accounts, if the money is there with which to debit them. Usually, the member bank reserve accounts do not contain much money. So the member banks will have to transfer the funds. The Fed’s money reserves, Fed money assets, will rise, along with Fed liabilities as the members’ bank account balances rise. Then the money is transferred from member bank accounts to Treasury account.
Your third paragraph addresses an error. When I said that the Fed will draw down on its money reserves, I meant that the Fed would have to draw down on its money assets or its holdings of electronic funds as the member bank withdrew funds from its Reserve account. The Fed asset decrease matches the Fed liability decrease. Is that a little clearer?
Your second paragraph contains a bit of a dilemma. I do not believe the Fed can go out and purchase Government bond holdings if it does not hold sufficient funds. On this point I run into a lot of resistance among economists. In fact, it is probably the source of trouble in all my debates with them on monetary issues. I make a distinction between currency and what I call ethereal money and others call bank created money or inside money.
The Fed is certainly able to credit the Treasury account for the Government securities it takes directly from the Treasury office, but, unless it has electronic or ethereal funds to transfer, it cannot pay out claims against the Treasury account as Government cheques arrive for clearance, or at least it cannot transfer those funds to the claimant bank upon request.
The Fed could certainly pay with currency that it alone has the right to distribute, but that currency, issued on a demand basis only, would come right back to the Fed with the claimant demanding ethereal money in return for the notes. (I am also ignoring for the moment the long delays created in gathering, counting, conveying, and delivering the notes to the claimant Bank.) So either the Fed takes the currency in, sells the Government security in the financial market, gathers the electronic or ethereal funds, and debits the Treasury account, or it refuses to accept the currency. If the latter, a virulent type of inflation results.
I use the example of the Bank of Canada, but it may as well be the Fed.
My reasoning for this conclusion, which you may have seen on Bill Mitchell’s weblog or on Rowe’s weblog, goes as follows…
Hello Mr. Rowe,
All these scenarios are wonderful, but before running through them I must ask if the central bank has the powers which you attribute to it?
The central bank does not have the breadth or vigor to manipulate those weighty financial levers and it never has. So until the matter of central bank power is resolved, there is little point in going any further.
The Bank of Canada is a bank like any other, with several differences. It is comparatively small when measured against Canada’s big commercial banks. It does not pay interest on deposits and its lending is negligible. So it really is not much of a lending institution or rather market player.
The source of the BofC’s assets and liabilities lies chiefly in one prerogative, the issuance of currency. It alone supplies and meets the demand for Canadian currency. Those notes, assuming a small cost of production, provide all of its power. I think we are agreed on this point.
There is about $50 billion in currency in circulation amounting to about say 4%-5% of the stock of money of say $1 trillion. So one might say that just 1 out of every 20 financial transactions requires currency. The markets determine the usage of currency, not the central bank. If demand rises or falls, the commercial banks will adjust their currency holdings by requesting additional notes or returning the excess.
When the commercial banks receive those new currency notes, they are paid for with that money I call ethereal, intangible and existing only in bank records. Currency is outside money created by the Bank of Canada, and ethereal money is inside money created by commercial banks in the lending process. The Bank of Canada may also create ethereal money, but rarely ever does, often in small quantities, and only for brief periods. So to obtain currency, a BofC created liability, the commercial banks surrender ethereal money, a commercial bank created liability.
The BofC invests this windfall generally in Government of Canada securities from which it earns interest. The interest, after deducting a large agency fee for its operations, is then reinvested or returned to the Government of Canada.
It is safe to say that when currency is issued or returned, there is mutual redemption in that a currency dollar note goes one way and an equivalent ethereal dollar goes the other.
Imagine that the commercial banks discover an excess of currency of about $200 million in their system. They convey it back to the BofC. Upon acceptance, the BofC will have to return an equivalent amount of commercial bank liabilities. If the ethereal money is fully invested, the BofC will have to sell a government bond. If not, then it can draw down its ethereal money reserves.
I have said in previous postings that currency is an inferior form of money, comprising only 4% of the total. It has a physical state and earns no interest. For these reasons currency is used for immediate purposes, passed as quickly to another.
If the Federal Government were to have the BofC print up $50 billion in notes to pay its bills, which consist of about 40% of the GDP, it would not get very far, perhaps about 2 month’s worth of expenditures. The BofC would then print up and distribute currency to match the Government’s returning cheques, deposited by recipients in member banks and submitted for clearance. The BofC would now have $100 billion in liabilities and only $50 billion in government securities covering them.
The commercial banks would return most of the currency immediately having use for only a small fraction of it. To redeem the notes, the BofC would have to sell all its government bonds. Or it could compel the Government to come up with a $50 billion dollar bond to balance its liabilities. The BofC would then have to sell the bond on the financial markets in exchange for ethereal money to redeem the notes.
The BofC could just refuse to accept the notes. However, this would generate inflation of 100%. The market established balance between currency and money is 4% or about 1:20. Doubling the currency supply to $100 billion without reason will double the entire money supply to $2 trillion as banks rid themselves of the excess of currency by making loans to restore the formerly established equilibrium.
But why would the Government create such havoc, destroying the value of existing financial assets and transforming expectations for the fleeting pleasure of avoiding 2 months of disbursements? All it really had to do was float a bond and obtain the same results without the financial chaos.
In attempts to influence the exchange rate or the interest rate by printing up currency notes the result would be the same. Though the Bank of Canada has this privilege, it is severely restricted in its ability to use it.
The only method of profit in currency issuance comes from the receipt of commercial bank liabilities, i.e. ethereal money, which is used to buy interest bearing government securities. With these bonds, about $50 billion in total, the BofC can influence the exchange rate or interest rates in the medium, overnight or long term markets, but only to that amount and only in actually doing so. Empty threats will not bring about enduring changes in either. One must move out into the markets to create the desired effects.
But even $50 billion dollars will not go far against much larger competitors and in financial markets in the $trillions. It will not control interest or exchange rates when the other market players can draw upon sums far more immediate and ponderous.
Now all of this may be required reading for any economics novice, but I never saw a word of it. And had I, there would not now be a field of study in economics known as monetary policy.
Regards,
Gary Marshall
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November 18th, 2009 at 4:47 am
I’ve probably said this before, but thanks to Warren for creating this site. It’s great.
There was a witty/bad tempered argument above between posts 12 and 35 (or thereabouts) involving Curious, Warren etc on why Warren’s business cards can be made to have value in a hypothetical economy where there is no tax.
I agree with Curious that tax is not necessary to give value to a fiat currency. I disagree with Curious (and agree with Warren) that Warren’s business cards cannot be made to have value simply because Warren prints them and says “Hey, these cards have value – gimme that car in exchange for these cardsâ€. (I also agree with Warren that inflation is the big constraint on how much money can be printed, not how much is collected in tax.)
So how come cards (or dollars) ever have value? Answer is in the economics text books: money is whatever is GENERALLY accepted as performing the function of money. Once anything becomes GENERALLY ACCEPTED as money, that’s it. People and businesses have a desire to trade, and to trade with money because that is normally better than barter. And as long as the money issuer behaves responsibly the money concerned will work.
There are other systems that are difficult to boot, but once booted, normally run smoothly – you’re using one right now. There are also products other than money, which have a critical mass: insufficient general acceptance results in the product being uneconomic.
Why does Monopoly money in a game of Monopoly have value? Because the players want to trade, and most participants agree that the Monopoly money has value. That’s all.
Why did the currency in Krugman’s Washington D.C. baby sitting economy have value? Not because of taxation. It was because, 1, participants wanted to trade, 2, the currency was issued in a responsible manner, 3, the currency was generally accepted.
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JKH Reply:
November 18th, 2009 at 7:41 am
I think fiat issued currency is a specific example of “general acceptanceâ€. Taxation leverage would drive out any currencies that competed against it. Fiat currency thus is the “most generally accepted†among competing paradigms. I don’t recall Krugman’s model, but if it had included a taxman, the currency issued by the taxman would have won out.
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Curious Reply:
November 18th, 2009 at 4:29 pm
Ralph,
the baby sitting currency was convertible (pegged to babysitting hours). I think that’s where it’s value came from.
For a currency to be generally accepted, it has to have value first, otherwise, why would the very first person accept it?
As far as the discussion on Warren’s business cards, I agree that they can’t get value, just by Warren saying so. I didn’t think I suggested that, but if I did, obviously that doesn’t make sense.
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November 18th, 2009 at 1:50 pm
The “Krugman baby sitting economy†is here:
http://www.slate.com/id/1937/
For anyone who likes seeing economic theories and ideas illustrated by reference to ultra simple economies (like Robinson Crusoe and about three other people on a desert island), the baby sitting article is an enjoyable three minute read.
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November 18th, 2009 at 8:22 pm
those types of currencies- ithaca hours, etc- have value because people are willing to take a chance on losing their expended labor hours.
that is, they will do work for someone on the non enforceable hope that someone will do work for them in return. this happens where unemployment is high and it’s perceived there isn’t much to lose.
it’s ok as far as it goes
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November 20th, 2009 at 4:31 am
Re Warren’s point that Ithaca hours currencies only work given high unemployment, I agree.
That is because such currencies are in competition for the purchase of all goods and services with the national currency. And given an adequate supply of the latter, the Ithaca currency is driven out of business.
A game of Monopoly and the Krugman babysitting economy are different because the respective currencies are dominant: they purchase all goods and services in the economies concerned. And such currencies work without taxation which suggests to me that a fiat currency could work in a full scale economy without taxation.
Plus what gave the baby sitting economy added realism was that it suffered a recession, and the latter was cured by doing exactly what Warren quite rightly wants to do for the US economy: issue more money.
I also think that tax is irrelevant in that in a democracy people will only elect governments that supply them with goods and services they would have bought anyway: schools, health care, etc. To this extent, tax is just an alternative way of paying for things. In some cases tax is MUCH THE BEST way of paying for things, but that point is not dependent on whether a country has a fiat or commodity based currency.
Having said that, there IS one way in which tax greatly assists running a fiat currency: given a bout of irrational exuberance or inflation, it is desirable to reduce private sector net financial assets. Tax is a quick effective way of doing this.
Curious: I agree that it is difficult getting a fiat currency going in the first place without the initial units being based on some commodity. That was why I likened fiat currencies above to booting a PC.
Re the baby sitting units being pegged to one hour of work, this is an example of getting the currency going. After it has started, the peg can be removed (though I don’t think they actually did remove the peg in Washington). This “peg removal†happens in Monopoly: the price of houses and hotels is fixed initially, but thereafter players can buy and sell stuff for whatever price they agree to.
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December 21st, 2010 at 6:42 am
I think, you have to distinguish between interest on savings and interest on credits. The natural rate of interest on savings is zero, but the natural rate of interest on credits has to be positive. The interest that the government pays for treasuries is interest paid for saving and not borrowing, when I understand MMT correctly.
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Tom Hickey Reply:
December 21st, 2010 at 10:58 am
The natural rate of interest in the overnight interbank market is zero.
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WARREN MOSLER Reply:
December 22nd, 2010 at 2:42 pm
I don’t follow what you are getting at?
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Mario Reply:
March 15th, 2011 at 12:19 pm
I think he’s asking if you are referring to the interest rate of bonds as being naturally zero of the FFR being naturally zero…I think the answer is both, b/c you feel that bond rates are set by the FFR no?
Personally, I am still trying to figure out the ramifications of the fact that interest rates are naturally zero….in other words…what does this mean for our economy and why is it important?
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March 15th, 2011 at 11:26 am
Great paper Warren. Quick follow up question for you. Since the currency issuer poses no credit risk it seems the natural interest rate should be zero. however, over time wouldn’t cheap money result in overinvestment both in real assets (overproduction) and financial assets (asset bubble) . Isn’t that the business cycle?
Eventually, as the economy grows, it generates money, more than the economy can readily consume. A surplus of money chasing assets such as homes, stocks, or bonds causes prices to rise and interest rates fall. Eventually prices reach irrational levels and then they collapse. Money becomes scarce and inefficient businesses are forced to shut down. Efficient businesses survive, and the cycle starts again. This has been repeated over and over since modern capitalism arose.
If interest rates stay at 0% how are asset bubbles avoided?
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Tom Hickey Reply:
March 15th, 2011 at 12:03 pm
Tax away economic rent?
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Mario Reply:
March 15th, 2011 at 1:04 pm
I checked out economic rent and if I am understanding it correctly it’s basically opportunity cost at work.
As an example when a worker gets paid ABOVE the standard rate for their work the employer is paying economic rent. They do this so as to secure that worker so that the worker’s opportunity cost doesn’t force them to leave their current job. Just as a side note…we now have an excess supply of workers so the situation is reversed now where wages are dropping to find a “market equilibrium”…even if that equilibrium lies below the standard of living of most people.
Do I have this right about economic rent Tom?
It would seem now that workers are paying the economic rent in that they need to pay the price of a lower wage so that an employer’s opportunity cost of replacing them doesn’t happen. Except that at some point the worker’s wage doesn’t really match the worker’s labor let alone a standard of living that is reasonable and/or support sustainable economic growth for everyone (the rich need for the rest of the people to have money so they can spend at the businesses the rich own–aka consumer growth).
My question to you Tom is how would taxing this economic rent really do anything to solve that problem? I don’t see how it would. In other words, minimizing the amount of economic rent being EARNED by employers is not the way to really solve the issue. Wouldn’t it be better to minimize the amount of economic rent BEING PAID by laborers? This way the worker’s wages can actually get better, consumer spending pick up, and businesses get back to gaining profit margins.
Isn’t the idea of taxing economic rent more of a reaction to Reagan’s “trickle down effect”? I suspect it would be more viable to just replace that “effect” altogether with a new “effect”…namely the trickle UP effect!! Get consumers money in their pockets and they will spend it and business (the rich) will profit. That seems to have more evidence than the former no?
thoughts?
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Tom Hickey Reply:
March 15th, 2011 at 1:49 pm
Economic rent is unearned gain as opposed to gain earned from production. Economic rent is unproductive and parasitical on the economy. It’s chief sources are land rent, monopoly rent and financial rent. Economic rent is basically wealth extraction that gets hoarded as savings and drives up assets. Economic rent goes mostly to the top and is saved as financial and real assets.
With FIRE constituting such a historically large % of US GDP, economic rent relative to productive gain is historically high. Financialization is rent-seeking behavior. Not only it is basically non-productive, but it has also turned out to be economically detrimental (Ponzi finance). Financial innovation has contributed little and extracted a lot.
Moreover, gain from speculation — trading in secondary financial assets instead of direct productive investment in ventures, or in materials for exchange instead of use, or flipping RE — is also economic rent. Revenue in excess of what it would take to maintain production in a competitive market is also economic rent. Interest income is economic rent. Legacies are a form of economic rent.
Most of what the elite — the upper 5% of the population that controls over half the wealth — receive in revenue is economic rent. Most of what ordinary workers receive in wages is from production. Taxing economic rent instead of workers’ wages would reduce the leakage to saving and thereby control asset price appreciation. Discouraging economic rent also encourages productive investment by entrepreneurs, original investors and venture capitalists — the people responsible for innovation and growth from productive contribution.
The current political push is to exempt economic rent from taxation and to tax workers’ incomes while reducing workers’ benefits instead. It’s not so playing well in Wisconsin.
Mario Reply:
March 15th, 2011 at 7:59 pm
Hey Tom,
today seems to be the day (first ever possibly) where I am finding myself not agreeing with you.
I am weary to concede that the financial markets and real estate markets are economic rent based upon your logic. If I am understanding you correctly you are saying that there is no “productive value” that comes from trading crude oil for example or from flipping a house and so therefore it is economic rent. However I disagree with you here on two fronts.
“Not only it is basically non-productive, but it has also turned out to be economically detrimental (Ponzi finance). Financial innovation has contributed little and extracted a lot.”
The first is that it is productive. Trading oil (or stocks, bonds, etc.) for example creates jobs in that market and industry. It is producing liquidity first in that market itself…whether it be price options for a commodity or stock valuations for a company, etc. However it also creates a market for those that work at the exchanges, market makers, brokerage firms, and all that comes with all of that. My commission fees create industries…they actually do produce something. Financial speculation in and of itself is a neutral, innocent party. The applies to flipping homes or renting properties, etc. They are all viable markets and most definitely produce something. The only difference between a person that flips a home in 2 months with the family that buys a home and sells it 30 years later is simply time. Difference values of time don’t make something more or less “productive;” they just make it faster. I see no problem with this whatsoever. Also note that flipping houses definitely creates and produces many jobs and industries as well as we can all see today in the lack of a housing market, etc.
Also all financial speculation is not a ponzi scheme. If it is then by definition whenever I transfer my assets from me to someone else or vice-versa then that too is a ponzi scheme. If a buy a widget for $5 and then sell it for $10 to someone else is that a ponzi scheme? Real assets were exchanged just like when one person’s account losses money while others gain money in a trade….no difference whatsoever except in the relative value of the exchange, but that is not what constitutes a ponzi scheme. Now this is not to say that there can be ponzi schemes in financial speculation…sure there can but let’s not throw the baby out with the bathwater as the saying goes. I can’t conceive of anything that can be done physically that doesn’t produce something physically…I think that’s impossible by mere definition.
I do agree with you however that monopolies are economic rent and should always be abolished. I am personally in major support a low entrance competitive market environment where producers are basically as much price-takers as possible. So I totally agree with you there. In fact this point actually contradicts your argument b/c you can have a monopoly that actually “produces something” in the way you seem to be attempting to define that (like say cars for example) and they can still be charging economic rent. “Producing something” as you seem to be defining it does not mean that you cannot have economic rent and vice-versa not “producing something” as you define it does not mean that you do have economic rent…as least as far as I see it.
You may be defining economic rent differently than me. I personally have no problem with a small minority of people owning a large portion of the wealth so long as they got there based upon a competitive market and are price-takers and the market is functioning for all and open to all. That’s not my issue…my issue is opportunity to play the game and take a shot at going for it. A blind government as Marx would say. Monopolies, lobbyists, bailouts, media sway, etc. don’t support that and I don’t like that. If anything, like I say above, rather than do a company bailout…why not do a public bailout! It would make more economic sense as far as I can see…give the people more money, they get spending again and doing more business and BOOM things are back up and running again. It makes no sense if you want to increase spending to give more money to the spendees and none to the spenders and hope to get more spending going on!! That’s economic rent as I see it and we are paying dearly for it (economic profit for the speendees is our economic rent).
Tom Hickey Reply:
March 15th, 2011 at 9:47 pm
Mario, production is defined economically as actually making stuff with exchange value — consumer goods or capital goods. Colloquially, economic rent is gain in addition to what is needed to bring a product to market and maintain it against the competition. This presumes a competitive market in which price discovery is based price taking rather than price setting.
Peter D Reply:
March 15th, 2011 at 11:02 pm
Mario, I myself wonder about these things. There is a powerful argument that breaking windows so that a windowmaker has employment is not really helpful, to say the least. And I guess a lot depends on the horizon under consideration. For example, WWII pulled USA out of depression – was it a good thing then (in this respect only)? The real resources destroyed (not even to mention human lives)? This is kind of an Austrian argument: they say that any wealth created without productive output going up is illusory and I tend to agree (it is just that they seem overdo it, thinking about everything in cosmic terms and also believe that best outcomes can only be achieved by free markets.)
Mario Reply:
March 15th, 2011 at 11:56 pm
hmmm those are good points peter indeed. I like what you’re saying about breaking windows to create jobs critique and wars, etc. and I completely agree with you on those terms.
But do you really think that flipping a house is analogous to breaking a window? If so where who the broken window in this analogy? Market rates for homes? The implication in that case would be that that flipping homes manipulates the market prices…and my experience tells me that’s just not true. Market-value is still market-value…that’s why home flippers hunt for good deals with repair costs imbedded in the price. I think lending money to a shit ton of people who can’t afford the loans to begin will mess up market prices though. But still that has nothing to do with flipping homes or not. Flipping homes seems innocent to me. The same goes with the financial markets as far as I can see. Where’s the broken window?
Please note this does NOT mean I am against “making things” like cars or computers or what have you. I am just including more in that picture that’s all. I mean if financial speculation is economic rent then aren’t universities economic rent too? They don’t “produce” anything. You might say they make people smarter but they also make them more in debt too. And their education from a university is also no guarantee that they will go out and produce something later on either…believe me…I have a degree in English Literature!!! Also remember you can lose money in an attempt to “produce something real” too so the argument that b/c people lost money in the markets makes financial speculation economic rent just doesn’t hold up to muster in my book…not at all. Again I admit the markets can be manipulated to some extent but just as much as a “producing market’s prices” can be manipulating too by like GE or Boeing or something like that.
Just what exactly defines “producing something” anyway? B/c as far as I can tell the real estate and the financial markets are price-takers as much as any other market is to the extent that such a thing can occur in a society. Note that a perfectly competititve market really isn’t attainable so there will always be some give and take between supply and demand, just like we don’t have a free market nor a centrally planned market either…we have all sorts of things put together…very little is “purely” anything in America (no pun intended!!!).
So who is the broken window in all of this?
Mario Reply:
March 16th, 2011 at 12:00 am
in fact couldn’t be argued that financial speculation is one of the purest “price-taking” mechanisms we have?
Mario Reply:
March 16th, 2011 at 12:28 am
I would say that monopolies are the issue and area for real economic rent, b/c they would control the opportunity cost by definition.
An in particular monopolies of inelastic goods/services are the most dangerous of all…can we say oil and food anyone?!?!?!
Tom Hickey Reply:
March 16th, 2011 at 12:37 am
Mario, taxing economic rent rather than gain from production, i.e., direct investment and worker income, doesn’t imply that rent-seeking is “bad.” It just is non-productive. Of course, capital markets are necessary and traders supply liquidity, which is a useful service. The point is that economics is chiefly about production, distribution, and consumption. This is what one want to encourage and taxation is a disincentive. Makes more sense to tax what is not non-essential instead of what is essential. What yields economic rent may be useful but it is not essential to an economy in the way that production is.
The problem we were discussing initially is that when government injects NFA to increase demand, a lot of that may work its way toward driving up asset and commodity prices, creating unwanted distortions. Those distortions can be reduced by taxing what creates them, which is rent-seeking.
There is the further problem in modern economies of wealth getting funneled to the top, and there is evidence that extreme inequality is deleterious both economically and politically. Again, taxing worker incomes does nothing to address this because the top does not make much of its money from income subject to taxation. As Warren Buffett famously said, his tax rate is lower than his secretary’s.
Craig Reply:
March 16th, 2011 at 1:26 am
i agree with tom but would approach it from a different perspective. a healthy financial sector should manage risk effectively. When credit markets fail and big banks seize up, like our most recent financial crisis, it is a result of private market failure. Systemic risk is private market failure. Making matters worse is the general notion that the financial elite are undermining the interests of the general public – privatize profits and socialize the costs. Our economy is becoming more dysfunctional because accumulating wealth is being decouple from producing value – value in terms of physical goods and services.
how much value is the financial sector really providing? MMT says govt issued money is risk free. Private sector banking lends risk free money (vertical money) and then sells off loans to pass off the risk to a third party? give me a break. no wonder we had a crisis – why would a bank care if the loan defaults? they aren’t holding the bag.
WARREN MOSLER Reply:
March 23rd, 2011 at 1:00 am
mmt (mosler monetary theory) says the financial sector is a lot more trouble than it’s worth. check out my proposals for the financial sector on this website
Mario Reply:
March 16th, 2011 at 12:52 pm
Hey tom,
yeah I agree with you that the money can very easily find its way to the “top” but I really don’t have a problem with that myself so long as the ways and means it gets there is economically legitimate. Bailouts and monopolies and lobbying aren’t legit imho. But providing a productive service or good to the people and the corporate owners who are the ones taking the most risk to do that (that is of course if they’re not bailed out!!!) have every right in my mind to be compensated for that at whatever rate they want to be compensated for that. Now in a world where monopolies are regulated and prevented so that one company (or even a few companies) cannot take over and basically destroys opportunity cost, then I see no problem with different industries getting compensated differently. It bothers me not at all. As long as the workers have other companies in that industry to compare wages to then opportunity cost is at work and companies will compete for the best labor with the best wage. All good to me. I also think that the range and average for all wages of jobs should be reported by the BLS for public use by each public company on the market as well as the industry at large. Maybe they already do this I don’t know…but workers need to know the real going rate for wages across the board, company to company, so they have actual negotiating leverage for their wages.
I still can’t agree with you that the financial sector “produces nothing.” B/c they do…they produce alot…and I see nothing wrong with that. Of course I see problems with politics and finances getting mixed up and scandals and illegal activities, etc. but that’s more of a political and regulatory issue not an economic one.
Just b/c a bank is FDIC insured doesn’t mean that their loans are risk free. They still need to make a profit. Many banks are closing their doors right now. It’s a legitimate business with spreads and margins that need to be met. Even if rates are at zero they still have a spread to meet to cover costs, etc.
Yes I agree we have to regulate the commodities market appropriately but I personally think that by requiring margins, capital upfront at the clearinghouses, and limiting the size of any one player particularly in the food and energy comms would allow those markets to function reasonably well as history pre the 2000s shows. It is possible that an increase in big players would by volume alone increase prices so in those cases then put a cap on the amount of total money allowed in the game as well as limiting the amount of each individual player. It’s more a regulatory issue than a tax-incentive issue at least in my view.
I think using taxes as punishment instead of as a deflationary lever is not advisable and a misuse of their function. Instead you use regulation and law in those instances. And if you want more people to actually get the funds from the government, you either write them a check or just drop their taxes (that’s easier imho) so they can increase in NFA through government spending too.
Just my thoughts. We may disagree on these point and I think that’s awesome…it makes discussion all the better!
I still don’t see who is the broken window either, although I completely agree with the premise.
Cheers!
Craig Reply:
March 16th, 2011 at 1:28 pm
yes financial markets produce value, yes owners take the most risk for business ventures – but do all the financial innovations and deregulation increase systemic risk? obviously not considering our latest crisis. which is mind boggling considering risk management is info gathering. look at the tools we have for info gathering today. all this computational and processing power and the financial elite still crash and burn the financial sector. obviously there are structural problems within the system. is systemic risk avoidable? i think so and i think warrens banking proposals are a good start.
In the new documentary “inside job” ferguson interviews Raghuram Rajan, chief economist for IMF, who’s paper is “has financial development made the world risker”
http://www.frbkc.org/publicat/sympos/2005/pdf/Rajan2005.pdf
WARREN MOSLER Reply:
March 23rd, 2011 at 1:10 am
i don’t agree that the financial sector produces real value
at least I’ve never seen any come out of it in the last 40 years
Tom Hickey Reply:
March 16th, 2011 at 1:42 pm
The basic principle behind taxing economic rent is “no free lunch.”
If government improves land by constructing roads, schools, etc., the private land value appreciation is a free lunch. That’s land rent.
If a company or companies dominates a market to the degree it can set prices above what a competitive market would bear, that is is free lunch. It is called monopoly rent.
If financial companies “innovate” without providing any recognizable contribution and increase their revenues and valuation from it, that is a free lunch. This is an aspect of financial rent.
If personnel are paid in excess of what a competitive market would set, that it a free lunch, too. Many CEO’s essentially set their own pay with no shareholder recourse.
If anyone gains from an extraordinary situation they had nothing to do with creating, such as a natural disaster, that’s called a windfall profit. It is also a free lunch that counts as economic rent.
Taxing economic rent can be viewed as the reverse of penalizing negative externalities. The inent of both is to increase economic efficiency by focusing on production > distribution > and consumption, instead of unproductive or parasitical activities.
Areas that are clearly logistical, i.e., essential to support the production cycle, are included in the production cycle and are not taxed as economic rent. Obviously, there are going to be grey areas. But many matters are pretty black and white.
Mario Reply:
March 17th, 2011 at 11:13 am
“If government improves land by constructing roads, schools, etc., the private land value appreciation is a free lunch. That’s land rent.”
Really? So you are suggesting to tax home owners b/c their neighborhood has improved? That’s backwards to me man. If the value of the properties go up in a tougher neighborhood b/c a new school or park is created…what’s wrong with all those homes going up in value? So in April you want to tax those people b/c their neighborhood is better now?!!? I’m sorry man but that makes zero sense to me. I mean that is basically negating the desire to pursue wealth creative measures in your community. Why would we ever want to do that?!?!! I want better schools and nicer neighborhoods for everyone…and I can’t imagine you don’t either from knowing you around the web. I can’t agree with that at all.
“If a company or companies dominates a market to the degree it can set prices above what a competitive market would bear, that is is free lunch. It is called monopoly rent.”
agreed completely. no question. the more competitive our markets are the better for everyone.
“If financial companies “innovate” without providing any recognizable contribution and increase their revenues and valuation from it, that is a free lunch. This is an aspect of financial rent.”
I agree with you here…to an extent. If their innovation is creating dark pools then yes I agree…that’s not legal. But if their innovation is creating new quants or computers to run things and strategize better…then that’s totally legit imho. Again…we cannot tax progress…that’s not the purpose of taxes at all imho. It’s also not a “free lunch” b/c nobody knows if the innovation will work until after it’s all paid for and practiced. It’s a risk those guys are taking…why would we ever tax progress?!?! I can’t agree with you there…but dark pools, insider trading, etc. absolutely agree. Illegal innovation is still illegal. Part of the nature of the markets is about how technology increases and keeps some people ahead of the game and others behind…it’s centuries old now. So do you think brokers should have been taxed b/c of online and desktop trading platforms and the innovation that came from that? This all seems so backwards to me. Do you see what I mean?
“If personnel are paid in excess of what a competitive market would set, that it a free lunch, too. Many CEO’s essentially set their own pay with no shareholder recourse.”
Do competitive markets put ceilings on wages? I didn’t think they did that. Why do we care what a CEO is being paid? I don’t. They have a huge job. Why not get paid for it? And why do shareholders have any say in the salaries of employees in a company? That’s beyond me. Do you want shareholders to tell J&J how much a doctor is to get paid? Or how much a worker at MCD gets paid? Or even a manager at Coke to get paid? That’s so silly to me. If anyone is a parasite in this scenario I think it’s the shareholders! They are just along for the ride and don’t do jack to get there. Plus most investors of a business venture are told up front what the salaries and expenses are before the investment is made. They know what they are getting into and most of the time want a hands-off approach to start…they are investors. They are not a part of the operation in most cases. If they don’t like the deal then they won’t put down the money and go somewhere else or they’ll negotiate the rates and salaries accordingly. Again I just can’t agree with putting caps on this stuff. Sure put in a base for wages…but why in God’s name would we put a cap on our progress? If the company is doing well and the market is competitive and wages in the industry are transparent then everyone has a fair shot and can negotiate accordingly. If you want to get more people more money you don’t do it by taxing the high paid professionals…I think you’d do it by getting a more competitive market where companies have wage opportunity cost they need to find against and workers know the average wages for their jobs and can make informed negotiations based on their performance and ability. It happens all time and can keep on happening. Putting a cap on the top does NOT mean the bottom will rise. It usually means the top just finds another way around and that usually means the bottom gets bitten into even further. It’s not productive imho. Help the bottom, support the top = a really wealthy economy imho.
“If anyone gains from an extraordinary situation they had nothing to do with creating, such as a natural disaster, that’s called a windfall profit. It is also a free lunch that counts as economic rent.”
Unless the company has contributed to the cause of the disaster what you’re suggesting is not fair. So if your toilet blows up, and you need a plumber, you’re saying you want to tax him for doing his service? If you’re getting audited by the IRS and you need an accountant you want to tax the accountant for his service? WTF is that!?!? Where’s the “free lunch” here man…people are working and have costs to pay and a business to run…it’s not like these jobs just happen out of thin air or something…people work to get it done and they get compensated for it. I’m so glad that there are people out there to handle disaster situations…why in the world would we tax them for that! Again, unless they contributed either directly or even indirectly to the disaster they then go and clean up (like Haliburton cleaning up 9-11 and destroying all the evidence…man what a crime that was!!)…but unless that is happening there’s no free lunch at all!! It’s called work!! I’ve worked in construction and gone to carpentry school…no free lunch there man.
So again I still respectfully disagree with you here man for all these reasons stated. I don’t see these as “free lunches” b/c I see work and production and value and wealth being created in every one of these examples…except the monopoly one. That’s where there’s economic rent…that’s where there’s deadweight loss. If they break the law or aide in their own profit at the expense of others then that is another story altogether but has nothing to do with productivity or taxes…that has to do with the law and it needs to be enforced.
I still think taxes should be used as a deflationary lever not as a punishment program…use the law for punishment…and I also think that taxing progress is the worst idea and frankly that itself is more parasitical than anything else…especially when the money just goes right back to the government who didn’t need it anyway!
Just my thoughts man and thanks for sharing!! :)
Craig Reply:
March 17th, 2011 at 12:49 pm
“Unless the company has contributed to the cause of the disaster what you’re suggesting is not fair”
what caused the subprime crisis? Manipulation and fraud were abundant but the underlying cause was a plethora of conflicts of interest – not caused by any one group of individuals.
the big banks took home windfall profits because they made bad loads, bundled and sold them, pass the risk on to the market, paid off the credit ratings agencies, and then bet against the loans they created – ie credit default insurance. the banks knew government would bail them out because a real economy without a financial brain can’t function.
bad incentives apply collectively and on a individual level. for example, home owner’s insurance is a great for a home owner but leads to terrible incentives when people can buy insurance on their neighbor’s house. if 50 people buy insurance on one house in the neighborhood the probability of that house burning is going to skyrocket. you’ve just created an incentive for other’s to burn somebody else’s house down.
the financial sector provides value but their value needs to align with the common good – the real economy.
Obsvr-1 Reply:
March 27th, 2011 at 4:03 pm
The broken window in the Global Financial Crisis is fraud and misrepresentation of material information.
The sub-prime and Alt-A expansion was not only due to volume created by the banks, but the perverse incentives created by the banks to pay more for loans with lower standards knowing that the loans would be securitized into MBS, diced and sliced into CDO and CDO squared instruments. The originate to distribute model utilized by the FIRE industry with underlying fraud and misrepresentation throughout the “value” chain created the Mother of all Financial Weapons of Mass destruction (wealth transfer).
It is high time that jails be filled with the perpetrators, however the pervasive argument coming from the gov’t and wall street that no laws were broken. This is meaningless since the laws are created by the FIRE sector and their cozy relationship with Washington, through lobby and campaign contributions (bribes) and the incestuous revolving door.
Mario Reply:
March 18th, 2011 at 1:36 am
“what caused the subprime crisis? Manipulation and fraud were abundant but the underlying cause was a plethora of conflicts of interest – not caused by any one group of individuals.”
I agree with you that the corruption was rampant…all the more reason to execute with the law not with taxes..b/c where there’s a will there’s a way…especially with the rich when it comes to taxes. The glass-steagall act shouldn’t have been altered…that’s really what did it…it gave the green light to banks to loan away and they did legally then. I know it’s a tough scenario and hard to fix…which is why I’ve said elsewhere on this blog that this type of greed is very dangerous b/c there’s no seeming reason or rhyme to it and the only way to eradicate it requires extreme measures that our society doesn’t exactly allow…no bailouts would have been a good start though! Regardless this still doesn’t prove that increases taxes would have done anything to solve the problem…it seems to me that has only fueled the problem further.
The sub-prime issue is not so much an issue with the financial markets themselves but rather the laws, regulations, and individuals involved in them…and that all needed to change yester-year. Do you honestly think “taxes” would solve such an issue? You don’t think they’ll just find another way to deduct it off their books somehow?
Also that type of activity…the sub-prime lending stuff…I do agree that is economic rent too…for sure. But that’s NOT the financial markets at large.
Again just my thoughts.
Reply
Craig Reply:
March 18th, 2011 at 2:03 am
i agree with you these structural problems would be better addressed by law than taxes. i think warren’s banking proposals are a create start: keeping lender/borrower in tact, real assets as collateral to limit credit expansion, etc..
Mario Reply:
March 18th, 2011 at 10:45 am
Yes I was going to say the same thing about Warren’s banking proposals…particularly no secondary lending market on home loans.
Tom Hickey Reply:
March 18th, 2011 at 1:14 pm
I never stated or implied that taxation is the only way to reduce or eliminate negative externalities like economic rent. It is one means, along with legislation and regulation. Some things are better banned outright (drastic), some controlled through regulation and oversight (expensive and generally avoidable), other through taxation (unpopular with those taxed and also avoidable). There is no perfect solution, and there is no permanent solution. This part of a dynamic economic policy.
WARREN MOSLER Reply:
March 23rd, 2011 at 1:35 am
the expansion phase of the sub prime goings ons was caused by loan officers and others being paid on volume
one of my proposals is that banks not be allowed to pay on volume
March 15th, 2011 at 2:13 pm
Thanks for the feedback Tom & Mario. The reason i ask how asset bubbles are avoided with 0% rates is because i thought federal deficits served a purpose…absorb private savings to reduce asset bubbles. Likewise, i thought issuing money as debt served a purpose- incentive private investment. Why? Loans make demands upon the borrower – repayment. Since loans can only be used for investment or consumption – debt repayment requires investment. Since government loans must be repaid, private banks must invest (lend) wisely to businesses and customers in order to make a profit and service their loans. Money issued free and clear of any loans, on the other hand, makes no demands and does not require investment.
So I guess my point is … yes the natural interest rate could be 0% since there is no risk of non-repayment from a currency issuer but i thought a higher interest rate served other purposes – ie. absorb private savings, the issuance of money and incentivizing private investment, etc..
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Tom Hickey Reply:
March 15th, 2011 at 2:45 pm
Craig, budget deficits offset demand leakage due to increased private domestic saving and also a current account deficit. The government fiscal balance, the private domestic balance and the external balance sum to zero as an accounting identity.
Here is Bill MItchell on it:
Sectoral balances approach
The national accounts concept underpin the basic income-expenditure model that is at the heart of introductory macroeconomics. We can view this model in two ways: (a) from the perspective of the sources of spending; and (b) from the perspective of the uses of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.
So from the sources perspective we write:
GDP = C + I + G + (X – M)
which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).
From the uses perspective, national income (GDP) can be used for:
GDP = C + S + T
which says that GDP (income) ultimately comes back to households who consume (C), save (S) or pay taxes (T) with it once all the distributions are made.
So if we equate these two perspectives of GDP, we get:
C + S + T = C + I + G + (X – M)
This can be simplified by cancelling out the C from both sides and re-arranging (shifting things around but still satisfying the rules of algebra) into what we call the sectoral balances view of the national accounts.
(I – S) + (G – T) + (X – M) = 0
That is the three balances have to sum to zero. The sectoral balances derived are:
The private domestic balance (I – S) – positive if in deficit, negative if in surplus.
The Budget Deficit (G – T) – negative if in surplus, positive if in deficit.
The Current Account balance (X – M) – positive if in surplus, negative if in deficit.
These balances are usually expressed as a per cent of GDP but that doesn’t alter the accounting rules that they sum to zero, it just means the balance to GDP ratios sum to zero.
A simplification is to add (I – S) + (X – M) and call it the non-government sector. Then you get the basic result that the government balance equals exactly $-for-$ (absolutely or as a per cent of GDP) the non-government balance (the sum of the private domestic and external balances). This is also a basic rule derived from the national accounts and has to apply at all times.
http://bilbo.economicoutlook.net/blog/?p=9198
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Craig Reply:
March 15th, 2011 at 5:43 pm
Thanks for the info Tom. Very helpful. In fact, I was reading some of Warren’s material on the subject earlier.
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Tom Hickey Reply:
March 15th, 2011 at 3:08 pm
i thought federal deficits served a purpose…absorb private savings to reduce asset bubbles. Likewise, i thought issuing money as debt served a purpose- incentive private investment.
In the view of functional finance and the sectoral balance approach that MMT follows, a federal deficit injects nongovernment net financial assets in order to offset demand leakage to increased private domestic desire to save or a current account deficit. This prevents the economy from contracting and unemployment rising due to lagging demand.
This injection increase bank reserves in that the Fed supplies reserves to clear the government checks and deposit credits. Issuance of tsys is a monetary operation to drain excess reserves created by fiscal injection, so that the Fed can hit its target rate in the overnight bank market.
Tsy issuance is unnecessary under the present system in that the government funds itself directly with currency issuance and doesn’t need to tax or borrow for funding. The same result could be accomplished by the Fed paying a support rate on excess reserves if it wished to set the overnight rate above zero, toward which the excess reserves would drive it.
Warren is saying that in general the budget is in deficit under FF because there is generally demand leakage. That means there are almost always excess reserves in the interbank system (FRS), which would drive the overnight rate to zero if the Fed stays out of the way. This is the “natural,” or “normal” condition if the central bank does not get involved in setting rates higher than they would be otherwise.
This does not imply that any interest rates in the economy would fall to zero. This applies only to the interbank market. As far as the economy goes, it just means that the spread would be lower than it would be if the Fed set the overnight rate above zero through monetary operations and so the interest rate curve would be lower as a whole.
What MMT claims is that the central banks monetary operations function through price (the overnight rate) rather than quantity (money supply — there is no money multiplier), and that this is a blunt instrument at best. Fiscal policy gives more direct and tightly targeted control over demand by increasing nongovernment NFA through injection (deficit expenditure) and decreasing NFA through withdrawal (taxation).
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Mario Reply:
March 16th, 2011 at 1:03 pm
Hey tom…great explanation here. I am with you totally when you state this (although I am assuming you mean Fed Funds with you say FF…right?):
“Warren is saying that in general the budget is in deficit under FF because there is generally demand leakage.
That means there are almost always excess reserves in the interbank system (FRS),”
However you lose me when you state this:
“which would drive the overnight rate to zero if the Fed stays out of the way.”
Okay…so how do excess reserves drive the overnight rate to zero? The overnight rate is the Fed Funds Rate right?
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Mario Reply:
March 16th, 2011 at 2:13 pm
oh…does the overnight rate go to zero simply b/c there are excess reserves and therefore no need to use the interbank system? Does that explain why?
Also the overnight rate is the FFR right?
Peter D Reply:
March 16th, 2011 at 2:44 pm
Mario, once there are excess reserves, the banks try to get rid of those and lend them among themselves. The rate at which this lending occurs is the FFR. If there are too many reserves in the system the FFR potentially falls to zero or to the support level, if the Fed pays interest on reserves (IOR) in which case the banks become indifferent between lending reserves out and holding them earning the IOR.
“FF” that Tom mentions stands for Functional Finance, I believe.
Will reply to our “productivity” discussion later.
Tom Hickey Reply:
March 16th, 2011 at 3:13 pm
FF – functional finance.
FFR is the federal funds rate
Mario Reply:
March 17th, 2011 at 12:10 am
ahhh it all makes sense now…thank you Peter. much appreciated man. ;)
However doesn’t the Fed offering IOR count as the Fed “getting involved” and hence the “natural rate” of interest isn’t actually zero if they didn’t offer the IOR? Or once again…am I missing something?
Yes I too hope to get to our productivity discussion soon too!! Hopefully tomorrow…cheers! :)
WARREN MOSLER Reply:
March 23rd, 2011 at 1:18 am
in it’s simplest form, the govt legislates tax liabilities and then spends the funds that get used to pay the tax and get net saved.
the interest on any govt funds spent in excess of the tax liabilities that gets saved is 0
Tom Hickey Reply:
March 17th, 2011 at 1:42 am
The overnight interbank rate only falls to zero with excess reserves if the Fed doesn’t intervene to set a higher rate using either FFR/OMO or IOR. Thus the “natural’ or “normal” rate is zero.
Mario Reply:
March 17th, 2011 at 12:12 pm
okay so a higher FFR penalizes them for the excess reserves, causing them to loan them out, or if there’s a lower IOR this too would move them (like a beast lying in a cave) from their indifference levels and loan them out that way. Either way if the Fed didn’t do anything the natural or normal rate would be zero…or indifference.
Is that right now?
And all of this is in response to a budget deficit…but if there was no deficit, if there was a surplus instead, would rates still naturalize at zero? I am trying to think about it and can’t figure it out.
And the overall value of rates normally at zero is that inflation is low…according to Warren…b/c tsy rates will be lower and therefore inflation less expected in the future. yeah?
WARREN MOSLER Reply:
March 23rd, 2011 at 1:30 am
loan demand is a function of interest rates borrowers face (and a few other things), but
borrowers really don’t care what’s going on inside the bank
Tom Hickey Reply:
March 17th, 2011 at 2:17 pm
Is that right now?
All that happens when the Fed changes the FFR or IOR is that the price of money changes and banks act accordingly by adjusting the interest they charge on loans through the spread between what the money costs them and what they charge for lending it.
but if there was no deficit, if there was a surplus instead, would rates still naturalize at zero?
Deficits create excess reserves (net injections increase NFA) and surpluses shrink them (net taxes withdraw NFA). The existing reserves in the system remain until removed through taxation or get drained through monetary ops. If the string of balanced budget or surplus periods were long enough, there could conceivably be no excess reserves and no tsys. The cb would have to step up and provide liquidity for interbank settlement. The cb can set rates as it pleases. It could set a rate of zero if it wished.
When there is a balanced budget, there are no nongovernment net financial assets added or subtracted. When there is a surplus, then not only are there no NFA added, but NFA is subtracted, meaning that government is taking out more than it is adding. Therefore, nongovernment has to cough up the tax burden itself from income, savings, selling assets, or taking on debt, unless net exports fill the leakage to taxation. This tax leakage drains nongovernment and drives it into private debt in the case of a net importer like the US.
Mario Reply:
March 18th, 2011 at 1:51 am
thanks Tom. that all makes sense now. I appreciate it. I guess the message behind the normal rate is zero is that money is naturally a rather cheap and relatively free commodity when priced freely in our society. That’s kind of a cool thought I guess.
Tom Hickey Reply:
March 18th, 2011 at 1:09 pm
Money is not a commodity.
Wray:
This paper advances three fundamental propositions regarding money:
(1) As R. W. Clower (1965) famously put it, money buys goods and goods buy
money, but goods do not buy goods.
(2) Money is always debt; it cannot be a commodity from the first proposition
because, if it were, that would mean that a particular good is buying goods.
(3) Default on debt is possible.
“Money,” (Dec 2010), Working Paper 647, Levy.org
In this view, money is not imposed on barter. Economic systems based on money are essentially different from barter systems. This is a fundamental difference between the neoliberal paradigm. which views money as merely a convenience for setting price, and those based on Keynes, which view money as an integral economic factor in its own right, with broad and deep implications. See Paul Davidson, “Keynes and Money.”
Peter D Reply:
March 15th, 2011 at 3:14 pm
Are you talking from the point of view of the govt or of the private sector here? Because bonds are sort of “loans” from the private sector to the govt and not vise versa. In which case it is true that the govt should have an incentive to invest etc, but then this incentive should not come from the need to repay the bonds bt from the whole purpose of the govt to provide prosperity to its citizens.
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WARREN MOSLER Reply:
March 15th, 2011 at 9:27 pm
higher interest rates don’t absorb private savings.
the causation runs from loans to deposits
private investment chases profits
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Craig Reply:
March 16th, 2011 at 5:55 pm
thanks for the clarification. okay let me rephrase. higher interest rates causes private savings to invest in more government securities which results in less demand (aka. “reserve drain”, “demand leakages”, “demand drain”). so when you refer to real savings (comment #10) your referring to non-government securities that increases demand?
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WARREN MOSLER Reply:
March 23rd, 2011 at 1:16 am
higher rates shift interest from borrowers/payers of interest to savers (as well as to the intermediaries collecting fees)
March 15th, 2011 at 2:25 pm
Having provided a few possibilities as to why the natural rate may not be zero, I do understand that the most important commodity price in any society is money – the prevailing rates of interest on loans and bonds. Interest rates are important because when money is cheap, consumers and business borrow and the economy expands.
Lower interest rate increase speculation but as Warren mentions in his Banking System proposals a way to reduce speculation is require real assets as collateral for loans instead of financial assets – since speculation acts as an unproductive economic rent like Tom mentioned above.
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Tom Hickey Reply:
March 15th, 2011 at 3:12 pm
Money is not a commodity. See L. Randall Wray, Money.
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Craig Reply:
March 15th, 2011 at 5:06 pm
interesting paper. i’m a fan of Wray but i got hung up on one of his working assumptions. His first assumption makes sense – money is not a commodity because money is not a good. however, money is not always debt. why? money is an asset that can be owned by debt or can be owned free and clear. How does money issued as debt become free and clear? Let’s illustrate it by looking at the components of a cash loan: the asset and the liability. A borrower receives cash as the asset and the debt claim as the liability. If the borrower, uses the cash to make a purchase the cash payment would be free and clear to the seller while the debt claim would remain with the buyer/borrower. Money is issued as debt but once in circulation the money paid out in profits and wages are free and clear. The reason cash is free and clear is because the debt claim of the money lies with another party.
so it seems to me that yes money is not a commodity (good) but it is an asset. therefore, thinking money strictly as debt may be limiting. why? the supply and demand of commodities are similar to the supply and demand of assets. the price of a commodity in relationship to producers (supply) and consumers (demand) behaves similarly to the price of a asset (money) in relationship to the lenders (supply) and borrowers (demand).
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Tom Hickey Reply:
March 15th, 2011 at 6:59 pm
“Money is debt” because it comes into being as someone’s liability, the borrower in the case of a bank deposit created by a bank loan, or the government liability if issued as currency that the government agrees to accept in exchange for nongovernment obligations to government in the form of taxes, fines, and fees.
All money functions as a credit in that it can be used to satisfy both private and government obligations. From the vantage of money creation, state money is a tax credit and bank money is a loan credit. That is its nature as a financial asset.
Of course, money has uses as a medium of exchange, unit of account, and store of value also, but it is the creditary nature of money that gives money its value. According to Chartalism, that value arises out of people’s need for money to satisfy public and private creditary obligations.
Mario Reply:
March 15th, 2011 at 7:36 pm
“According to Chartalism, that value arises out of people’s need for money to satisfy public and private creditary obligations.”
Tom I don’t think that logic really follows. If I have debt on my credit card, is the debt money? Well actually it isn’t…money is just the “form” that the debt is choosing to represent itself (let alone the fact that no “money” was issued in the first place in the case of a credit card). The debt really is just an assumed obligation to give back for what I have received in advance. In the case of a bankruptcy where all debts are forgiven…did the money just disappear? Well no, b/c there was no money in the first place…it was just an assumed obligation to pay and that obligation was renegotiated. Money is not debt. Money is simply an arbitrary form acting as a medium of exchange. By your logic money is as much a credit then as it is a debt…you are just choosing to call it a debt but by the same token you could also call it a credit. A thing cannot be both x and -x at the same time…therefore money is not debt nor is it credit. It is simply a chosen medium of exchange.
Tom Hickey Reply:
March 15th, 2011 at 9:35 pm
Write up a paper on it and send it to Randy, and see what he says. :)
Mario Reply:
March 15th, 2011 at 11:15 pm
“Write up a paper on it and send it to Randy, and see what he says. :)”
That’s an idea!! haha!! I just might do that. ;)
Tom Hickey Reply:
March 15th, 2011 at 11:50 pm
You can even cite Warren, Mario. See below. :)
ESM Reply:
March 18th, 2011 at 11:29 am
“Money is not debt. Money is simply an arbitrary form acting as a medium of exchange. By your logic money is as much a credit then as it is a debt…you are just choosing to call it a debt but by the same token you could also call it a credit. A thing cannot be both x and -x at the same time…therefore money is not debt nor is it credit. It is simply a chosen medium of exchange.”
This is exactly the opposite of the way I view money. I view money as an IOU. It is both a credit and a debt — a debt to the debtor and a credit to the creditor. Under this view, gold cannot be money because it is an asset, but nobody’s liability. A dollar bill is money in that it is a liability of the government. It is a credit to the holder of the dollar bill. A credit for what? A credit for tax liabilities that the government imposes on its residents. Or perhaps a credit against some goods and services the government produces.
A credit card receivable is money. When you use your credit card, a 3-way transaction takes place. You receive goods and services from a merchant in exchange for giving the credit card issuing bank an IOU (promise to pay an equivalent amount of dollars at the end of the month) and the bank giving an IOU to the merchant (promise to pay an equivalent amount of dollars in a couple of days).
Effectively, the merchant has exchanged goods and services for receipt of bank IOUs (bank money) which within a couple of days gets turned into other bank IOUs (when the wire gets deposited into his bank account). The credit card bank has effectively exchanged reserves for your IOU (money issued by you). If you default, then the money you issued went to zero, and the bank takes a loss in dollar terms (it was at first expecting your money to be worth the same as dollars, but it depreciated rapidly to zero by the end of the month). In some sense, any credit loss can be considered to be an FX loss. There is no economic difference between a default and a catastrophic depreciation in value, although there is a legal difference certainly.
Money
Mario Reply:
March 18th, 2011 at 12:31 pm
hey everyone…so I emailed Randy Wray my thoughts as posted above regarding money and he directed me to this working paper here:
http://www.levyinstitute.org/publications/?docid=1357
stating that it “should straighten this out”
I have yet to read it but look forward to it. Thanks Randy!
WARREN MOSLER Reply:
March 15th, 2011 at 9:34 pm
and I say it can be analyzed in the same framework as any other commodity:
http://www.moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/
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WARREN MOSLER Reply:
March 15th, 2011 at 9:32 pm
most economies are net savers (about equal to the net govt spending) so low rates remove income and high rates add income.
helps to explain how near 0 rates in japan have not generated excess demand. not even close
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Craig Reply:
March 15th, 2011 at 10:58 pm
thanks for all your input everyone!
not sure i follow you warren. lower rates may decrease interest income but doesn’t cheaper money increase investment and consumption which results in more demand. which conveniently leads back to my original question. why wouldn’t cheap money, 0% rates, result in overinvestment both in real assets (overproduction) and financial assets (asset bubble). Isn’t that the business cycle – ie. as the economy grows, it generates money, more than the economy can readily consume. A surplus of money chasing assets such as homes, stocks, or bonds causes prices to rise and interest rates fall. Eventually prices reach irrational levels and then they collapse. Money becomes scarce and inefficient businesses are forced to shut down. Efficient businesses survive, and the cycle starts again. This has been repeated over and over since modern capitalism arose.
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Mario Reply:
March 15th, 2011 at 11:07 pm
also what about the fact that has been discussed on this website numerous times that savings “income” very rarely becomes “liquidated” as discretionary spending? I thought we already established in regards to banks buying Fed bonds at auction that savings stays savings and no evidence suggests that there is a “supply leakage” as it were.
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March 17th, 2011 at 1:48 pm
Mario, what you are saying about economic rent indicates to me that you are fine with letting rentiers shift the tax burden chiefly to workers’ wages. If this is not your intention, maybe you should rethink — and also do some research on land rent.
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Mario Reply:
March 18th, 2011 at 1:48 am
well the “tax burden” doesn’t even need to shift to them either it seems to me. As you know taxes are not about revenue…they’re about initiating a deflationary pressure in the economy. Looking at taxes in that way really frees up the playing field on how we want to do that…I mean we could just have a simple flat tax across the board, we could do this, we could do that, etc.
But no I am definitely not saying that workers should foot the tax bill over the rich…not at all!!!!
I guess it’s possible that a group of people could build up an area where they own lots of houses, increase the value there, make it more attractive and then sell them off to people…but again…I just don’t see that as a bad thing at all…they just contributed in a beautiful way to our society didn’t they? Who doesn’t want nicer neighborhoods? :) If they can find buyers (legitimate buyers mind you!) and are willing to invest in the reconstruction then what’s wrong with that? Yes of course you’ll tax them on the income they earn, etc. as usual…but why tax them more than that?
I mean if all you want to do is restrict “real income” and “real wealth creation” to “producing things” with your hands or something…I’m still not clear about what “producing things” really means…then I guess I just fundamentally disagree with you there…I personally like having easier options of doing things that make me wealthy…I am lazy and I don’t mind working hard to be lazy either! haha!! I guess that’s what it comes down to…although I do and can work quite hard and I am not saying I don’t believe in a hard day’s work or the value of labor AT ALL…but I do believe in the option to do something else for sure! I call it innovation and thinking ahead and being smart, etc. I like that. Do we need to regulate and follow through on the punishment in all areas of business? Yeah you betcha!! For sure. Like I said I think we may just agree to disagree on these points, which is fine with me…I like having a healthy difference of opinion from time to time…it keeps things lively! ;)
I’ll see what I can find about land rent whenever I get around to it…I have alot on my plate as it is!
Cheers mate!!!
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Tom Hickey Reply:
March 18th, 2011 at 12:55 pm
Mario, according to Chartalism, taxes are not “just” about withdrawing nongovernment NFA to control inflationary pressure. They are needed to give value to state money. Therefore, there always needs to be some level of taxation. The question is how to target it for optimal public benefit.
Taxation plays a dual role: First, from the vantage of functional finance they withdraw nongovernment NFA and should be used chiefly to control inflationary pressure. Secondly, taxes discourage whatever is taxed. They act as disincentives and should logically be applied to controlling negative externalities.
Rent-seeking is a negative externality. Environmental degradation is a negative externality. Etc. In many cases taxation is a more effective deterrent than regulation, and it can be used as a market solution by adjusting cost to compensate for externalities that distort price discovery in competitive markets, which economic rent does.
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Craig Reply:
March 18th, 2011 at 1:17 pm
“Taxes are needed to give value to state money”
Does taxes establish currency (create demand), does demand for bank loans establish currency (see comment #23), or does US law establish currency (create demand). I would think the best explanation for currency is the legal one. Our laws dictate that dollars can not be refused as payment of goods and services. Law creates demand and serves the common good by reducing the risk of payment refusal and encouraging commerce. IMHO I’m not sure taxes are needed to give value to state money.
WARREN MOSLER Reply:
March 23rd, 2011 at 1:40 am
demand for bank loans per se doen’t alter the value of a currency
but borrowing to spend can drive up prices
Mario Reply:
March 18th, 2011 at 1:18 pm
yes totally agree the secondary purpose of taxes…I just didn’t state that as well.
I definitely agree about environmental protections for sure and yes tax dis-incentives would probably work well there along with regulation.
We already take out monopolies and cartels though our anti-trust laws and we should probably make sure our oligopolies aren’t in cahoots either b/c they all seem to set prices together and then put up tons of entry barriers and control the market that way (all “legally” too)…we need to break that up imho too through regulation as well…but these are the things that can distort price discovery it seems to me. Not CEO salaries or land rent per say imho. And I still think regulation takes care of most other issues better than taxation does.
But that’s just my thoughts on it that’s all. I think primarily we disagree on what qualifies as economic rent…yours is more broad and mine less. Thanks man! :D
Tom Hickey Reply:
March 18th, 2011 at 2:15 pm
Craig, Mario, you may wish to write up a working paper on your theory and pass it to the MMT economists for consideration. Maybe they will change their minds.
Tom Hickey Reply:
March 18th, 2011 at 2:18 pm
Mario, you are still talking off the top of your head. If you want to understand economic rent, read Michael Hudson, for example.
Mario Reply:
March 18th, 2011 at 3:27 pm
I see what you’re saying Tom about land rent now after reading a bit of Hudson. Here’s what I read by him:
http://michael-hudson.com/2010/12/adam-smith-critiques-the-deficit-reduction-commission/
I agree with your concern for sure…particularly on monopolies as well as on real estate. I am still unsure about financial markets OUTSIDE OF crazy secondary home loan markets. I mean what’s the big deal with stocks or bonds or futures? I love those! haha! However I think there is a justified distinction between a justified increase in home values (thanks to real production mind you) which in fact do equate to an increase in profits versus no increase in home values (aka no real production) and still an increase in profits. I realize the latter is going on and did go on in the housing bubble for sure…totally. However the solution seems to me to be more difficult than just taxation…b/c the real reason land values went up was b/c for whatever reason demand went up…just like in the financial markets demand for stocks can just climb for no apparent reason other than mass consciousness (albeit also hyped up by media, lending, etc.). Therefore I don’t think that taxation will due away with bubble creations.
First off, if you want to handle monopolies just break them up first off or force them to produce where price = MR = MC…this usually means that total costs are greater than total revenue so the government could either subsidize it or just take it over completely…and we make sure to NOT buff up our costs to ask for more subsidies. There’s all kinds of ways to do this I think. I do agree that “tollbooths” are not good but where are they in our society? I see them in private, hired armies and possible even private security guards and protection agencies but where else are they? Is rent control in apartments or the lack thereof considered land rent? I personally think the whole concept of rent control is just a less volatile version of the problem they purport to solve (namely ever increasing rents for no apparent reason). I’m sorry for asking such simple questions but I don’t see all the tollbooths you speak of other than those mentioned…maybe I’m just not looking or am blinded by it? It really could be.
It would seem to me that If you want to dis-incentive land rents and tollbooth accumulations rather than to tax them…well you can of course raise the taxes on them…but I don’t think that is really very effective in the long run…instead you could just CUT TAXES for all people that aren’t rentiers (I still am not clear how to define a rentier or not…I get the IDEA of it but I fail to see the equal application of the idea). My parents own a rental property…are they considered land rentiers? If you cut taxes for the rest of us in equal proportion or even greater proportion to the unearned income, we could hypothetically cross cancel the drain to the rentiers. Then along with taxing the rentiers, we might be able to keep agg demand healthy and nfa stronger and thereby support production income versus unearned income. Although I still love the markets and wouldn’t want them to go away. haha!!! :D
thoughts?
Tom Hickey Reply:
March 18th, 2011 at 4:10 pm
I mean what’s the big deal with stocks or bonds or futures?
Of course, there is nothing “wrong” with trading. The question wrt economic rent, which gains from trading constitute, is whether this should have a tax privilege over gains from primary investment and income from work, whether it should be taxed equally, or even more, since it is not directly productive.
WARREN MOSLER Reply:
March 23rd, 2011 at 1:42 am
it uses up brain power that could be helping to cure cancer
Craig Reply:
March 18th, 2011 at 4:19 pm
first, in our current situation i would think MMT would argue taxes need to be reduced across the board to increase consumption (demand). second, from a macro perspective i would think policymakers would want to incentive earned income over unearned income. earned income comes from profits / wages. unearned income (economic rent) is a free lunch and comes from interest income and asset appreciation.
reducing interest rates decreases interest income from govt securities and forces profits to invest in the private sector. over time a surplus of money chasing homes, stocks, or bonds causes prices to rise. Eventually if interest rates don’t rise to drain excess demand prices reach irrational levels until they collapse. excess credit expansion leads to asset inflation just as excess government spending leads to general inflation.
i would think MMT would argue taxes reduce demand and create incentive structures while interest rates set independent of the market serves to manage supply of credit from a macro perspective. does that sound right?
Tom Hickey Reply:
March 18th, 2011 at 4:49 pm
Land rent comes most from adjacent improvement much of which is publicly subsidized, e.g., roads, schools, security, and so forth. Hudson claims that most of the wealth generated in the past has been from land rent and that the wealthy and well-connected have profited most from it.
For example, I was thinking of doing a project in CA some time ago that involved land development. Although it was not exactly development in the conventional sense, it would have required a development permit. I was told that only five development permits per year are granted in that county, and they go to the good old boys, so forget about doing it that way.
While monopoly rent is limited due to anti-trust legislation, some industries have been exempted, like the health insurers. Wonder why premiums are so high?
Moreover, most real goods markets are dominated by price setters. It is well known that the strategy of very large companies is only to enter markets they can dominate. This was the stated strategy of GE, for instance.
When it comes to the financial sector, large firms not only dominate but are accorded preferential government treatment through their influence, which disadvantages smaller firms.
CEO’s setting their premium salaries and benefits disadvantages shareholders, who are not accorded rights to challenge collusion of the CEO and board in this regard.
A combination of laws, regulations, and taxes would address these instances of economic rent and its consequences, which are distortional and even parasitic.
Who are the rentiers? Basically, an economy runs on flow, that is, exchanges or transactions. There are three leakages from this flow, saving, taxes, and net imports. Leaving net imports aside, Hudson claims that surplus that is not taxed is saved, this saving is mostly at the top, and it comes from economic rent instead of production. He recommends taxing this saving from economic rent that gathers at the top, while leaving gain from production alone in order to discourage rent-seeking and encourage productive contribution by keeping funds in flow.
Saving does not fund investment as erroneously claimed. Investment result in saving. Saving from investment is fine. I have no problem with Steve Jobs being a billionaire due to his productive contribution through Apple, for example, which he and Woz started it in their garage. That’s pretty primary. Traders in Apple stock, not so much.
Hudson claims that there is also a surplus in addition to gains from production in a competitive market. This surplus is economic rent. If it is not taxed or regulated, then it will be extracted as rent and saved as financial claims on real resources.
The result is a superclass that undermines democracy and creates in effect a plutocratic oligarchy, which is capable of capturing the apparatus of the state through money and influence. This results in a two-tier society with a privileged class and a double standard of justice.
Hudson emphasizes that the bulk of taxing of economic rent would fall on the upper 1% and when the marginal tax rate at the top was 90% the economy did just fine. What happens to that money? Government spends it into the economy in order to restore the flow. Why not just leave it at the top, since government does not need to tax to spend. First, it creates the distortions mentioned above and more, and secondly, it creates total financial claims on real resources in excess of the total value of real resources, making the economy top-heavy.
Mario Reply:
March 18th, 2011 at 5:31 pm
I’m in tom…you’ve got me and I agree. All that you’re saying I believe in and agree with. Yes. I guess I needed to really get it proven to me and I am clearer about what you mean by economic rent now. I’ve also read more up on it too. I think it just goes to show that taxes need to be fundamentally changed.
Your personal story is something I can’t stand…that is when the government is not blind and that’s what creates problems.
Same with health care, etc. Finance I acquiesce unwillingly (since I am a trader!!!) but I guess you’re right…but dude don’t you think the taxable rates on these economic rents need to be made in proportion to the economic gains? I mean I am a trader yes, but I’m not bringing in billions or millions or hundreds of thousands at this time…surely you don’t want to tax me heavily on my small gains? Same with my parents who have a rental property that brings in less than 2G a month…surely this is not an issue of rentiers right? It’s kind of like taxation to income scales. And the reason for taxing is NOT for the revenue but rather to make sure that there is a more competitive market and low barriers of entry across the board and to ensure the most economic value being produced for all involved.
I mean it sounds like you are trying to rewrite game theory and the nash equilibrium in a way…which I am all for and in support of but I mean it’s going to require a pretty huge social shift…not that it’s not possible just a big road to hoe…even more so than MMT in general I think…just look at how the latest tax hikes were received! whew!! It’s a long road to hoe I’d say.
Thanks for sticking in there with me…we’re one step closer…taxes and diminishing “profits” just really seems to run against most American values it seems to me. Are you saying that company surplus needs to be taxed? Can you PROVE AND SHOW that the increased taxes on the rich equates to greater wealth for the rest of the people?
the idea that more government spending will increase most people’s nfa isn’t exactly accurate if the government spends into an economy with economic rentiers all over the place…you see what I mean?
How EXACTLY does MMT state that government spending will actually increase the majority of people’s nfa? How will it get to them? Through what channels?
you see what I mean? Government spending on economic rentiers is surprisingly not that different to sending foreign aide to a country where the leaders take all the profits and give none to the people…whom the funding was intended for in the first place.
Tom Hickey Reply:
March 18th, 2011 at 7:27 pm
How EXACTLY does MMT state that government spending will actually increase the majority of people’s nfa? How will it get to them? Through what channels?
A simple example is the one the US faces right now. Savings are gathered at the top (corps sitting on 2T) with U3, U6 and not-looking-any longers totaling ~20%. The money is not flowing.
Government needs to create a strong disincentive for saving (taxing rent does this) and also to inject funds at the bottom that will be consumed quickly (spending stimulus). If pressure is applied at both ends of the cycle, the incentive of increasing demand coming from the bottom will stimulate a switch from saving to investment at the top, prodded by a disincentive to save through tax policy.
Cutting corporate taxes in the absence of increasing demand will just be a signal to save instead of to invest. Why take risk by investing, when rent is a sure thing and is being incentivized by lower taxes.
March 18th, 2011 at 3:31 am
“real wealth creation”
Financial wealth is significant to you and I on an individual level but from a macro perspective financial wealth is only valuable because of the technology, goods, services that money can buy. If we don’t produce something that people want our dollars will lose value. The only way to maintain a competitive advantage in our global economy is to invest deeply in next-generation technology. Unfortunately, IMHO the financial sector has become a colossal waste of resources with perverse incentives that creates instability. Making structural changes to our banking system to make it safe, low risk, and boring will free up our best minds to pursue something of real value.
but hey what do i know…i’m just an engineer trying to figure out why our economy seems so dysfunctional
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Mario Reply:
March 18th, 2011 at 10:57 am
I agree with you completely…all I’m saying is that the financial markets can be included in our economy with the proper regulations of course as well. I see the two as mutually exclusive…in fact I still see financial markets as productive, b/c well…they are! But regardless you can still have both a financial industry and a “production” industry if you want to call it that.
I personally think the USA needs to get SERIOUSLY INVESTED in space innovation…I’m talking sci-fi novel serious…that’s the future imho…it’s the 21st century…it’s time. While China can be up making widgets in their coal factories we need to be pushing the barriers of green energy in all industries here in the USA as well as really push space innovation and get some space stations on mars, etc. If you look back, doesn’t it seem that the cold war era was the best time to be an engineer? Alot of that was government spending too. Add those initiatives with a government employment assurance program and a lot of incentives and lower barriers of entry for small businesses all around the country…to help get people out from under the gun of old labor/manufacturing jobs that are really pretty dead beat now in the USA…and I think we’re onto a good start. Plus there’s all the tech jobs too. Just my thoughts!! great talking too btw. :D
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Craig Reply:
March 18th, 2011 at 1:48 pm
“I see the two as mutually exclusive…in fact I still see financial markets as productive, b/c well…they are!”
I completely agree. They are not mutually exclusive. You can’t have a brain without a body. However, our financial brain has been on an allnight bender for a few decades and needs a bit of “legal structure” in it’s environment to function correctly, gain stability, and serve the common good.
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March 18th, 2011 at 12:05 pm
the thing I like about MMT, besides representing how things actually work, is the massive potential behind it for a country like the US. outsource all the low skilled work elsewhere to free up resources and let the government invest in deep technology development for military and spin-off commercial applications. then like you said “Add a government employment assurance program and a lot of incentives and lower barriers of entry for small businesses all around the country”. talk about a truly post industrial economy – next gen R&D with a strong high tech sector.
which reminds me of one of our other exchanges. IMHO to market MMT effectively requires appealing to the ownership class. they are concerned with public debt, systemic risk, and long-term stability. unemployment is a non issue for them. labor is so politically fragmented the success of MMT adoption is really dependent upon getting buy-in from the owners.
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Mario Reply:
March 18th, 2011 at 1:07 pm
totally agree man…I love MMT. great point about the ownership class…once the rich realize that there’s a treasure chest of investment opps through the US government…and the US government realizes what system it’s got then we’re on our way.
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Craig Reply:
March 18th, 2011 at 1:27 pm
ha – treasure chest of opportunity is right. talk about a marketing opportunity. gather that LA crew of yours together and let’s make a move! ;-)
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March 18th, 2011 at 7:16 pm
Craig: i would think MMT would argue taxes reduce demand and create incentive structures while interest rates set independent of the market serves to manage supply of credit from a macro perspective. does that sound right?
Taxes withdraw nongovernment NFA and therefore decrease demand, more so consumption is targeted instead of what would be saved (which is just trading one demand leakage for another). Cutting taxes decreases nongovernment NFA withdrawn, which increases demand to the degree that this doesn’t go toward savings, which is also a source of demand leakage along with taxes. Since taxation is also a disincentive for what’s taxed, targeting taxation and figuring multipliers is crucial to successful fiscal policy.
Interest rate setting influences the cost of credit but that doesn’t translate directly to supply in a linear way. For example, the Fed is setting the interest rate close to zero, but demand for credit is low.
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Craig Reply:
March 19th, 2011 at 6:53 pm
very helpful. thank tom.
I’ve read and searched through the mandatory readings on the site but still getting stuck with savings and investment from a MMT perspective. My general question is how does MMT view financial investments in non-govt securities? Are they viewed as a drain also?
Here is my understanding. investment is deferred consumption and precedes income. savings is income not spent. Income can come from real and financial investment. real investment creates real income – ie. “only people working/producing can contribute to real savings”. if financial investment in govt securities acts as a drain what about other financial investments? if i invest in Apple. Have i made a financial investment that drives real investment? Along those same lines let’s say I sell my Microsoft stock for a profit. What has been created – real income? Let’s say all the capital gains I put into savings – is it considered real savings? I’m guessing the answer is no to those questions if so how would MMT explain them?
On another note – does MMT define savings only as bank deposits like savings, checking accounts & certificate of deposits?
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Tom Hickey Reply:
March 19th, 2011 at 9:42 pm
Craig, “saving” and “investment” have a technical meaning in economics that is different from ordinary usage.
Saving is equivalent (by definition) to income less expenditure (“consumption”).
Investment is firm spending on capital goods and inventory.
Here’s Bill Mitchell with a precise definition:
In the National Accounting system S and I have very precise meanings. S is disposable income not consumed. I is gross fixed capital formation (that is, creation of productive capacity – machines, equipments, buildings etc) plus inventory variations. Investment in this accounting framework does not mean buying financial assets which is the usage that is common in normal discourse.
I am using the economic meaning rather than the financial one. Financial assets generally fall under savings in the economic model, even through they are called investments. Finance differentiates savings and investment based on risk assumption, but both result from income not consumed in the present period.
More ambiguity and confusion from using the same term to signify different concepts.
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Tom Hickey Reply:
March 19th, 2011 at 9:43 pm
Here’s the link to Bill’s definition of S and I.
http://bilbo.economicoutlook.net/blog/?p=13823&cpage=1#comment-15601
Craig Reply:
March 19th, 2011 at 10:21 pm
would that be macro 101 by chance? good grief i feel like a first day student. okay no worries i just downloaded Mankiw’s macro textbook so having it close by for reference should be helpful.
thanks for the clarification…and your patience :-)
Tom Hickey Reply:
March 20th, 2011 at 12:12 am
Mankiw? Yikes, trash it immediately before the virus invades your brain. Don’t poison your mind with what passes for economics in the mainstream unless you have to take a course in it for some odd reason.
Wait for Randy Wray and Bill Mitchell’s text, or get Macroeconomics principles and policy first canadian edition by Baumol, Blinder, Lavoie and Seccareccia (2009). There are often used copies of Godley and Cripps, Macroeconomics (1982) available.
Craig Reply:
March 20th, 2011 at 12:57 am
ha – i figured Mankiw would get a reaction out of you :-) . i just got a copy of Baumol. I’ve been trying to track down an electronic copy of wray’s understanding money but no luck. thanks for the references. no classes for me. i’m trying to get the general MMT concepts down to build a story around it for a marketing project/idea i’m working on. i really appreciate the time and energy of your responses – along with everyone else’s too.
beowulf Reply:
September 11th, 2011 at 11:23 pm
@Craig,
“I’ve been trying to track down an electronic copy of wray’s understanding money but no luck.”
http://www.questiaschool.com/read/99460806?title=Understanding%20Modern%20Money%3A%20The%20Key%20to%20Full%20Employment%20and%20Price%20Stability
Mario Reply:
September 12th, 2011 at 12:24 am
@Craig,
“I’ve been trying to track down an electronic copy of wray’s understanding money but no luck.”
I emailed Randy about a theory of money I had and he directed me to this article on money. You might be interested:
“go to http://www.levy.org and read WP 656, that should straighten this out”
WARREN MOSLER Reply:
March 23rd, 2011 at 1:48 am
govt investments in non govt secs are govt loans to those entities
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March 19th, 2011 at 7:45 pm
Government needs to create a strong disincentive for saving (taxing rent does this) and also to inject funds at the bottom that will be consumed quickly (spending stimulus). If pressure is applied at both ends of the cycle, the incentive of increasing demand coming from the bottom will stimulate a switch from saving to investment at the top, prodded by a disincentive to save through tax policy.
I agree with you there tom and love what you’re saying. I think it is good and would work…especially if the government added in there some types of programs that stimulated industry growth in green technology across the board and space innovation and maybe even lowered entrance barriers in the health care industry…that would direct new investment into those areas and only benefit our nation’s stance.
also to inject funds at the bottom that will be consumed quickly (spending stimulus).
So, specifically, does that mean checks out to the people like the Bush stimulus or just an across the board tax deduction or something else altogether?
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Tom Hickey Reply:
March 19th, 2011 at 9:27 pm
Mario, it really depends on the situation and timing. It is always better to commit public funds to investment that will pay off in the future as well as stimulate the economy in the present, but it may be necessary due to circumstances like an external shock to target funds where they are needed most and will be spent quickly. This often would involve transfer payments like food stamps. Think NO after Katrina.
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WARREN MOSLER Reply:
March 23rd, 2011 at 1:50 am
i like to say stop taking funds away from the bottom with a fica suspension
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March 30th, 2011 at 8:55 pm
fiat currency issuers may pose no credit risk but wouldn’t market forces still translate the inflation risk into the term structure of interest rates – removing the notion of “risk free” rate?
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WARREN MOSLER Reply:
March 30th, 2011 at 9:08 pm
Yes, is the govt continues to let the term structure of risk free rates flap around in the breeze
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MamMoTh Reply:
March 30th, 2011 at 10:07 pm
How could the govt remove inflation risk and still issue long term bonds?
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WARREN MOSLER Reply:
March 31st, 2011 at 11:54 pm
???
how are those two related?
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Art Reply:
June 27th, 2011 at 7:11 am
@Craig,
“wouldn’t market forces still translate the inflation risk into the term structure of interest rates – removing the notion of “risk free” rate?”
They always reflect inflation expectations along with a real rate which is influenced by the central bank, but they’re still considered risk-free in practice (in other words, “risk” refers to default, not inflation). Existence of inflation-linked govt securities like TIPS, along with futures and forward markets, make inflation risk a bit easier to measure and manage.
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WARREN MOSLER Reply:
June 28th, 2011 at 10:54 pm
They anticipate fed rate settings, not credit risk
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June 24th, 2011 at 1:52 pm
Warren,
if people realized that a sovereign nation can always payback their debt (tsys), then wouldn’t it be possible for a nation/market to essentially set whatever interest rate they wanted on their bonds and just pay it out?
Ability and/or stability to pay would no longer be an issue.
I know bonds track inflation and/or Fed Funds as well so it is unlikely for rates to go wherever they wanted, but still…wouldn’t that be possible?
You want get a 5% return on your bonds? An 8% return? Sure!! We can do it no problem!! LOL
Could such manipulation be possible once people realize MMT and rates are always at a floor of zero?
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WARREN MOSLER Reply:
June 27th, 2011 at 2:04 am
yes
rates can be decided based on public purpose.
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September 7th, 2011 at 1:17 pm
Mr Mosler, I am rather dumbfound by the title of your book…
Was it titled to attract attention or does it literally mean what it said ?
BTW, I am currently reading your 7 deadly sins book…
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WARREN MOSLER Reply:
September 7th, 2011 at 4:17 pm
means what it said, as explained by the text.
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Hans Reply:
September 8th, 2011 at 9:54 am
@WARREN MOSLER,
Thank you for your reply, Mr Mosler…
Well then, before I utter another word I best read the text…
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Mario Reply:
September 11th, 2011 at 10:55 pm
@WARREN MOSLER,
Warren,
is this title of natural rates being zero also saying/implying that really in a modern society the best way to insure one’s financial future is through proper capital investment (aka business and ventures) instead of through unearned interest bearing vehicles like bonds, CD’s, etc. I guess stocks and futures and forex are some sort of hybrid vehicle that combines venture capital and savings into one.
In a world where rates are naturally zero people would be forced to create businesses and do things in the society in order to secure and grow their fortunes to any real degree. This is “natural” in a sense and healthy for a society b/c people are involved in the world and active rather than living off of savings and interest mechanisms.
Would you say this is accurate? And is this what you were meaning by the title perhaps?
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WARREN MOSLER Reply:
September 12th, 2011 at 11:32 am
all it says is that in the absence of govt measures to insure otherwise, the ‘risk free’ rate for that currency will be 0%.
And an economy with a 0 rate policy, the natural rate, still needs the right fiscal balance to achieve full employment, etc.
November 29th, 2011 at 3:48 pm
Warren,
from a MMT perspective is a zero interest rate better than a positive rate? which are the pros and cons? who has to gain and who has to lose from a zero interest rate?
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Shaun Hingston Reply:
November 29th, 2011 at 4:17 pm
From a neo-MMT perspective, positive or negative interest rates determined by a popular average, for loans to purchase anything, actually solve nearly every economic issue that we currently have, including our national debt!
However, generally speaking the conventional MMT stance is that a zero interest rate combined with a strong regulatory framework, ensuring that loans are only ever approved for the public purpose is actually the optimal way to run our economy.
The idea is that loans should be used to increase the capacity of our economy. Accordingly, as long as loans adhere to this principle then the overall effect is non-inflationary, and if anything possibly deflationary. The possibility of deflation arises from the fact that the growth in productive capacity may actually exceed the total amount of circulating financial assets( money-like objects).
So who gains and benefits? The likely losers of such a situation are the current controllers of productive capacity. The beneficiaries are those that have the talent to identify productive deficiencies within our economy, and are able to fulfill such a demand by purchasing the necessary means of production using a zero-interest loan from the FED.
Now the neo-MMT position is; as long as people don’t think to hard and realize that MBS were used as a way to exploit the current arrangement, then they are non the wiser, or the fact that zero-interest rate could be repealed in the future and we repeat the same mistakes, then MMT will appear to be a nice ‘complete’ solution.
Just don’t think too hard, and this zero-interest rate idea actually sounds amazing.
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Matt Franko Reply:
November 29th, 2011 at 6:39 pm
@Shaun Hingston, Shaun, Here in my area in the Mid-Atlantic, back in 2004 (once the main hostilities stopped in Iraq and the “rebuilding” started) the DoD contractors came in here and wiped out all of the inventories of building materials, for instance a sheet of plywood went up to $50 (and they paid it!) that you can now get for $13. No drywall could be had and had to be imported so China obliged with some that was made out of radioactive waste, etc…
So the prices for housing went up to way over $100 psf. Now that the government has stopped buying (and price setting) huge marginal amounts of building materials, the housing prices have come down. This part of it had nothing to do with MBS, perhaps it could even be looked at as the government implemented a huge price increase in housing that then turned into a speculative frenzy, but the government started it imo. You had one part of the government (DoD) competing and bidding up with another part of the government (Banks) for the same fixed amount of building materials. WW2 was not run this way.
The government morons do not understand what fiscal authority is or how to properly use it. All of this chaos we have experienced over the last few years can be laid exclusively at the feet of the government which caused the price run up and then when balance sheets maxed out, did not engage with fiscal to maintain the levels of AD that they were responsible for stimulating in the first place.
If we can get people in there who have a clue, a lot of this goes away. And if we can get a broader understanding of the true fiscal authority of govt out to the masses thru education, it never comes back…. Resp,
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Shaun Hingston Reply:
November 30th, 2011 at 4:04 am
@Matt Franko,
So the prices for housing went up to way over $100 psf. Now that the government has stopped buying (and price setting) huge marginal amounts of building materials, the housing prices have come down. This part of it had nothing to do with MBS, perhaps it could even be looked at as the government implemented a huge price increase in housing that then turned into a speculative frenzy, but the government started it imo. You had one part of the government (DoD) competing and bidding up with another part of the government (Banks) for the same fixed amount of building materials. WW2 was not run this way.
I wasn’t really trying to say that MBS directly caused the rise in house prices, although I would expect it to have some effect. I was trying to highlight the fact that any ‘asset-class’ can be used in a similar way as gold was used during the fixed exchange era, but without the regulatory restrictions. So an unregulated ‘asset’ class can be used in such a way to inflate the ‘money supply’(or whatever MMT term is supposed to be used).
The government morons do not understand what fiscal authority is or how to properly use it.
Their criminals, war criminals. Regardless, the game needs to be setup in a way that prevents morons and criminals from getting into power.
The fact that MMT has taxation and govt spending as one of its founding principles shows the unbreakable link between politics and economics. How can MMT ever be a ‘complete’ body of knowledge if it does not also deal with the political component? This where schools of thought such as Game Theory and Cryptography need to be applied so that distributed feedback systems can be created( popular voting systems).
If we can get people in there who have a clue, a lot of this goes away. And if we can get a broader understanding of the true fiscal authority of govt out to the masses thru education, it never comes back….
The masses aren’t going to care about something that they can’t interact with. I don’t agree with the line of thought against dramatic change. If it were a true line of thought, democracy would have never occurred in most countries.
Even if someone like Warren gets in and we have 40 years of prosperity, then what? By then there will be a new generation that has not experienced what we have. It is exactly the same as us, in the sense we have not experienced WW2. The same issues will occur, the good work implemented by some will be repealed and the problems will reappear. This is especially true given that there is no school of thought that does not deal with the political component of political economy.
If I had to choose a ‘team’ I would choose MMT, but I still think that if there is one word I could use to describe MMT it would be inadequate. This is still certainly better than irrelevant, which is how I would describe every other school of economic thought.
Best Regards :)
WARREN MOSLER Reply:
November 30th, 2011 at 7:35 am
The bank cost of funds is 0, not the rate for the borrower who is investing
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Hugo Heden Reply:
November 29th, 2011 at 5:38 pm
@Jan,
Good question, I would like to know too.
My impression is that MMTers consider interest rate policy ineffective and with ambiguous and indirect effects. See page 16-17 in this paper by Wray, for example: A Post-Keynesian View of Central Bank Independence, Policy Targets, and the Rules-versus-Discretion Debate
Fiscal policy is the preferred tool.
But does all this ultimately amount to a ZIRP (zero interest rate policy) proposal? I don’t know.
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ESM Reply:
November 29th, 2011 at 6:01 pm
@Hugo Heden,
Interest rate uncertainty needlessly raises the risk premium for investment. Since there is roughly a zero floor on interest rates, I think ZIRP will prove to have the lowest interest rate volatility.
There is another virtue, which is that we’re already there.
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beowulf Reply:
November 29th, 2011 at 6:23 pm
@ESM,
True enough thought its not quite at zero because of the 0.25% IOR payment. Would you lock that in or drop IOR to 0?
WARREN MOSLER Reply:
November 30th, 2011 at 7:36 am
For me it does
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WARREN MOSLER Reply:
November 30th, 2011 at 7:33 am
I like 0
See ’0 is the natural rate of interest’ on this website thanks
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April 24th, 2012 at 2:44 am
I’d like to chime in on Economic Rent … next speculation/Ponzi.
First, I’d say Economic Rent has real ramifications, but it’s largely conceptual and philosophical, and based on “just earnings”. That is, it goes back to Classical Liberalism, the Enlightenment, the opposition to Feudalism and Mercantilism. From Smith to Ricardo to Marx, etc. This is why it’s largely been erased from common consciousness.
There are a number of sources to get a broad picture.
Murray Rothbard, when not pushing the Gold Std, described the classic examples of the Railroads. Govt issued broad and wide land grants to railroad companies. Land speculators purchased land ahead of laying track, or if insiders (Carnegie, Rockefeller), ahead of official allocation. As/after track laid, land goes up in value, railroads sell off excess land at premium prices. Ka-Ching.
another Libertarian view of what was commonly understood as legitimate earnings vs economic rent, see 2nd Paragraph
Liberty vs. the Constitution: The Early Struggle – Albert Jay Nock
http://mises.org/daily/4254
——
“The Constitution looked fairly good on paper, but it was not a popular document; people were suspicious of it, and suspicious of the enabling legislation that was being erected upon it. There was some ground for this. The Constitution had been laid down under unacceptable auspices; its history had been that of a coup d’état.
It had been drafted, in the first place, by men representing special economic interests. Four-fifths of them were public creditors, one-third were land speculators, and one-fifth represented interests in shipping, manufacturing, and merchandising. Most of them were lawyers.
Not one of them represented the interest of production [farmers, artisans] – … .
——
Mario cited Michael Hudson who is expansive with many explanations on Economic Rent.
One was a proposed project in City of London for a tram system. Hmmm. How to pay for that fairly? Issue fiat currency? Tax all citizens? How about the fact that the Land Value — equity — in the office space adjacent to the tram will increase in value? This is a free lunch.
Most wealth in most countries, he says, comes from some portion of “free lunch” because it’s nearly impossible to get stinking rich via work or even launching a business, at least not without leveraging some Econ Rent of some type. Hudson uses that concept especially to attack Milton Friedman’s statement about “free lunch”.
The choice of mid-1800s Progressive economists & philosophers was to TAX that instead of to nationalize rentier industries, aka Socialism.
Hudson also differentiated between two kinds of Land vs Property value increase, with appropriate tax policy. One, from “sweat” or private capital investment, improving your own building or clearing land, digging a well, etc. Same as “work”, not Economic Rent.
Two, gains due to nearby roads, water & sewer, airport (could be + or -), govt provision or co-investment for shopping mall (not next door but so you are no longer in the boonies), or other form of free improvement such that commercial or residential property gets a free asset gain.
Flipping houses requires an INFLATING market, or else sweat equity, which is not “flipping” per se. An inflating market is a function of Govt/Bank asset inflation policy, a la Greenspan’s “how to get rich” by buying low and selling high 5-30 years later, except that the new buyer sees a higher price, so it’s a wealth transfer that literally “costs our grandchildren” contrary to the supposed “national debt burden”.
More to the point, Hudson discussed the inflation of NYC Land Assets, vast value equal to the physical production plants across USA, but untaxed gains due to repeat “depreciation” ad infinitum.
The US Govt had initially placed Tariffs on foreign exchange. Those traders applied pressure to replace Tariffs with Income Tax … but only on the very rich, presumed to be non-working recipients of Dividends and Land Asset Gains. (Read Wigan Pier on class warfare in England, one class digging coal, the other living on dividends.)
Adam Smith rejected taxes on Labor/Consumption for moral and obvious economic reasons. I can’t state all others who agreed, but I noticed that even as late as Coolidge his TsySec Andrew Mellon argued for income taxes at ONLY the top 2% level, consistent with what Hudson argued about that high income tax being mostly to grab Econ Rent, not productive labor, not just penalizing “rich people” for “success” and “hard work”.
Philosophically, Hudson refers back to Classical Liberalism to include these functions as Economic Rent:
Not the labor and capital cost + competitive profit of producing petroleum products, but profiting fully on the Market Value of Petroleum Energy taken from the ground by License/Privilege what was created by Nature (or God).
Not the value of radio & TV broadcast content (advertising) but the portion of profit gained by the creation of the FCC to divide up Nature’s radio spectrum for commercial exploitation (Privilege) at below market cost, without which commercial radio would be practically impossible … or too expensive to enforce privately against “pirate radio”.
However, per Hudson, political pressure applied over years was to untax such unearned non-productive wealth, and shift taxes to productive activity, labor especially. This is now widely considered legitimate, just, and also economically sound.
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Gary Goodman Reply:
April 24th, 2012 at 3:20 am
@Gary Goodman,
Someone mentioned Steve Jobs.
I forgot to add the controversy about Patent Rights, which plays a big role in the profits of virtually ALL highly-profitable sectors in the US at this time, especially Intellectual Property, a patent on pure ideas.
People who consider Patent Rights to be Economic Rent
Michael Hudson
Stephen Kinsella (IP atty and Austrian)
Kevin Carson (Anarchist Austrian + Marx)
Naomi Klein (Disaster Capitalism, and her previous book on Branding)
Noam Chomsky
surely all Marxists
etc.
Hudson explained that Patents and IP intentionally provide Economic Rent, govt mandated higher prices. Progressives felt that the temporary advantage in knowledge was sufficient Econ Rent (price over market-clearing labor-cost + capital), with the rest of competition being on production skills, not knowledge hoarding.
Some distinction could be made for short-term patents, appropriate to recoup dev costs, that is IF part of dev costs not borne by previous Govt spending, as Chomaky describes Big Pharma, Computers, Software, etc. developed in part by State colleges and the military.
Carson also cites all those Pentagon “spin-offs” immediately privatized and patented. Even that the cartel of GE AT&T Westinghouse RCA Thompson etc. would hire engineers to develop patents on technology that they intended to NOT create or manufacture, to prevent others from competing, to block innovation, or to sue innovators who may have independently invented a new and better design.
Carson’s Austrian-Marxist book on Organization Theory, and papers on Monopoly Capitalism, which also cites Schumpeter and many others, describes Capitalism at it’s roots as a series of violent Govt-imposed monopolies … or Economic Rents, vs the myth of “free markets” celebrated by “vulgar libertarians”.
Carson’s aim is Marxist-Socialist ends via interpretation of Austrian and other Anarchist principles of legit property rights.
I think most people here would see that Carson’s vision (Benjamin Tucker) of anarchism-mutualism would fail on many counts, MONEY in particular. But for anyone so inclined, it’s a useful and interest read, if for no other reason than to debunk Conservative talking points.
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April 24th, 2012 at 3:00 am
On speculation/Ponzi.
I’m very new to this, but on this topic I like Minsky and Keen for a more detailed differentiation.
Minsky developed a famous classification for fragility of financing positions. The safest is called “hedge” finance (note this is not related to so-called hedge funds). In a hedge position, expected income is sufficient to make all payments as they come due, including both interest and principle. A “speculative” position is one in which expected income is sufficient to make interest payments, but principle must be rolled-over. It is “speculative” in the sense that income must increase, or an asset must be sold to cover the principle payment. Finally, a “Ponzi” position (named after a famous fraudster, Charles Ponzi, who ran a pyramid scheme—much like Bernie Madoff’s more recent fraud) is one in which even interest payments cannot be met, so the debtor must borrow to pay interest (the outstanding loan balance grows by the interest due). Speculative positions turn into Ponzi positions if income falls, or if interest rates rise. Ponzi positions are inherently problematic as default is avoided only so long as the lender allows the loan balance to grow. Beyond some point, the lender will cut losses by forcing default.
http://www.creditwritedowns.com/2012/03/why-minsky-matters.html
Keen goes on to clarify Minsky’s Financial Instability Hypothesis, that a prior bust causes conservative cautious investment, typically in genuine productive business or what Minsky called “hedge”.
As investments meet Success, confidence grows over months and then over years (like since the G.D.), investment shifts more and more to Speculation, and greater financialization of the economy.
Eventually, Ponzi Finance arrives and along with it, political pressure on Govt to permit more Ponzi Finance, by that time it is seen as “sound fundamentals” due to the long period of success.
How far away from soundness? I won’t repeat the Housing Bubble or Dot Com that preceded it.
For a reality check, I would suggest Prof Lynn Stout on a UKMC forum (youtube) led by William Black. Stout explains that derivatives are ultimately bets or wagers, like a horse race, and differentiated historically from “insurance” for a number of sound reasons.
Govts to antiquity placed restrictions on wagers, such as refusing to enforce debts incurred by gambling. Cited speculation in olive oil described by Aristotle.
In mid-century, Congress permitted “private” licensed gambling markets with restrictions. Then in 1999 or 2000, Congress threw open the casino doors to accommodate Interest Rate Swaps.
Also, early Futures markets were structured for 70% real buyers, plus 30% speculators to add liquidity, a good working proportion.
Goldman-Sachs made a secret deal (literally) with the CFTC to exceed limits, as it had sold Derivatives of an Index Fund based on Food Futures (and energy) and needed to manipulate the Futures market to “earn” a profit for investors and itself .. without, of course, taking delivery of anything tangible.
Under de-regulation, the Futures casino was unleashed too, the Fin Svcs Mod Act, in particular.
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November 3rd, 2012 at 7:29 am
Do you mean, that the natural rate of the federal fund rate is zero, or the interest rate in general?
The natural rate of interest can’t be zero.
Members of a property society vie with each other for economic status. They try to sustain or to improve their status.
If the member of such a society wants to consume a real ressource now, despite not yet having earned enough income to afford the ressource, this would lead to justified envy by the other members of the society, because that member can enjoy a ressource now, despite the fact, that it has not yet deserved to enjoy it.
If this member wants to enjoy the good now, it have to pay a price, so that there is no justified reason for the other members to be envious. This price is the interest, which means that the member has to provide more ressources later for the other members, as it has consumed now.
To make sure that the member will do this, it would lose collateral (some sort of property), if it is not willing or able to provide the ressources later, which means automatically, that the member would lose economic status.
If a property society allows for loans, the creditworthiness of the members has to be checked. This check is a real cost for the society. This cost marks up the interest rate..
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WARREN MOSLER Reply:
November 4th, 2012 at 7:12 am
it means if the govt ‘doesn’t do anything’ and does any deficit spending, which generally it *must* the ‘risk free’ rate will be 0% bid
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Ben Reply:
November 4th, 2012 at 1:25 pm
@WARREN MOSLER, okay,
If A gives B 100 bushels of barley, and one year later B gives 110 bushels of barley back to A, would you call this lending barley with interest?
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Sergei Reply:
November 4th, 2012 at 2:02 pm
@Ben,
Ben: would you call this lending barley with interest
Ben, there are lots of MMT corners cut here. It means that in the *current* monetary system, i.e. floating fiat etc, the rate of interest for lending *between*banks* is *generally* zero. Nothing more than that. And please note the “generally” part because it needs a bunch of additional qualifiers. Funnily enough MMT commits the mistake of mainstream here by ignoring the elephant in the room – financial sector. That is why any other claim about something natural here is to be laughed out.
WARREN MOSLER Reply:
November 4th, 2012 at 9:13 pm
mmt ignores the financial sector?
time for you to find another blog to post to, mate
WARREN MOSLER Reply:
November 4th, 2012 at 9:12 pm
that would be the ‘own rate’ for barley in that context
Sergei Reply:
November 5th, 2012 at 3:07 am
@Ben,
Warren: mmt ignores the financial sector?
Lol, Warren! Please not that I added “here” in my statement above.
Why do you think Ben is confused and speaks about barley? When you write that natural rate of interest is zero, which sector of the economy do you think most people assume? Why should they ever give a SH&%$T about what the lending interest rate in the financial sector is? And even this rate is not always guaranteed. So please make you statements clear and unambiguous to *everybody* rather than only a friendly MMT crowd, or everybody will find another blog to read and post to. Lol.
Why do you think people will always have fun trying to read between your lines and yet you refuse to even have an appearance of trying to understand what others say and mean?
You have to fight on the “enemy”‘s ground where the enemy sets the rules and terms. Not you. Until you win. When you win, you will set the rules.
Sergei Reply:
November 5th, 2012 at 3:09 am
@Ben,
Warren: that would be the ‘own rate’ for barley in that context
That sounds like a new MMT concept to me. Could you please elaborate? And how, when you try to take a loan, you are going to reconcile the two rates?
WARREN MOSLER Reply:
November 5th, 2012 at 5:54 am
that’s a mainstream term alfred marshall used over 100 years ago.
Principles of Economics by Alfred Marshall (1890)
Book Five: General Relations of Demand, Supply and Value
Chapter 2, Temporary Equilibrium of Demand and Supply
Neil Wilson Reply:
November 5th, 2012 at 3:43 am
@Ben,
I would recommend reading the paper above right through to the end.
“Under a state currency system with floating exchange rates, the natural, nominal, risk free rate of interest is zero. As many other key rates of interest in the economy continue to follow the Fed funds rate very closely, this will serve as the base rate in the economy, with markets determining the credit spreads through risk assessment.”
Banks will always charge as much as they can get away with for money – that’s how they move real resource to their owners and their staff.
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Sergei Reply:
November 5th, 2012 at 4:29 am
@Neil Wilson,
Neil, no problem with me. If the statement was “The natural rate of interest *in*the*banking*sector* is zero” there would be much less to talk about. While that statement still needs additional qualifications it would at least set people’s mind on the right track.
However that phrase is NEVER worded like that. That is why I stated that in the reference point of this world, which thinks of the real economy, the claim of zero interest rates ignores the financial sector. To which Warren fiercefully objected. Wrong in the opinion of this world but of course right in the opinion of Warren. And you seem to agree with me as you write above.
Please also note that the two statements above are somewhat contradictory:
1. “As many other key rates of interest in the economy continue to follow the Fed funds rate very closely, this will serve as the base rate in the economy”
2. “Banks will always charge as much as they can get away with for money”
Banks want to make say 15% RoE which can come from several sources. And margins on assets is just one of them. However in making such claims as above (1) the assumption is made that margins on assets are NEVER a source of income and therefore interest rates in the financial sector and real economy correlate very closely with the difference being credit risk. Additional and quite strong assumptions. Plus RoE is surely not constant as well as capacity of banks to extract income from different sources.
None of this complexity is explained to outsiders. Instead the standard cryptic 1-liners are thrown out as if everybody has any desire to put any effort and understand them. As you know pretty well out there MMTers already have a reputation of freaks. Why should anybody invest his/her time esp. if MMTers are not really careful in the image they create?
But as said above – just a piece of advice. Feel free to ignore.
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Neil Wilson Reply:
November 5th, 2012 at 5:10 am
@Sergei,
“Please also note that the two statements above are somewhat contradictory:”
No they’re not.
I have no trouble explaining to my five year old that ‘want doesn’t mean get’.
PJ Pierre Reply:
November 5th, 2012 at 8:56 am
@Sergei,
Surely you just? Just so that we are clear, do you have a problem with this paper or are your objections solely about the wording of a title.
The world is full of those who feel that they have the uncanny ability to learn all that there is to know about an authors work by simply judging the cover.
November 5th, 2012 at 5:58 am
you need to go to another website with your comments thanks.
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November 5th, 2012 at 9:41 am
@Sergei,
My last comment here because apparently my comments are censored now. Well done.
PJ Pierre, I have no problems with neither the title nor contents nor anything else. I might have my doubts about political goals of MMT but these are separate from this discussion. And even there I am talking only about doubts and not facts. Though I still am disappointed about the reaction to that.
With regards to the natural interest rate I tried to express a concern that the most of the world is using a different reference point (i.e. definition) than the cash interbank market. So when most of the world hears about the zero natural interest rate they start laughing with all obvious consequences for the reputation of MMT.
The problem is that a) MMT is *generally* right and b) the rest of the world is *generally* right. But on different definitions. So how do you solve it?
MMTers seems to believe that it is undoubtedly the rest of the world who should guess what MMT means by zero interest rate. Because what they mean is “the natural interest rate of *interbank*lending* is generally zero”. And by dropping “interbank lending” MMT effectively drops the financial sector which stands between interbank market and the real economy and which, with regards to the interest rates, has pretty interesting implications, to say the least.
So I really do not understand who should feel embarrassed in this discussion. But of course I can shut up and go and read other blogs. I have no problem with that and no skin in this game.
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PJ Pierre Reply:
November 5th, 2012 at 1:40 pm
@Sergei_new,
IMHO, it seems that this is a case of speaking past one and other.
The title is just that, a title. The paper makes clear what is meant exactly is meant by the title.
Seems that you understand (and do not disagree with) what the paper claims.
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MamMoTh Reply:
November 5th, 2012 at 2:42 pm
@Sergei_new,
sadly, censorship seems to be becoming more common and now it targets not only comments with ad hominem attacks, which could be understandable, but also respectful posts raising some good points worth being discussed.
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PJ Pierre Reply:
November 5th, 2012 at 3:07 pm
@MamMoTh,
I’m up for a discussion.
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MamMoTh Reply:
November 5th, 2012 at 5:52 pm
@PJ Pierre, you are not the one removing the comments I guess
ESM Reply:
November 6th, 2012 at 9:19 am
@Sergei_new,
Did Warren really block you? I find that hard to believe, but if so, it would be beyond the pale.
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Sergei_new Reply:
November 6th, 2012 at 9:52 am
@ESM,
ESM: Did Warren really block you? I find that hard to believe, but if so, it would be beyond the pale.
Yes, he did. And I just tested it again.
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ESM Reply:
November 6th, 2012 at 10:45 am
@Sergei_new,
That’s just pathetic. Doubly pathetic, in fact, since unless you set up a registration system or an email verification system, blocking a username is completely ineffective.
WARREN MOSLER Reply:
November 6th, 2012 at 11:46 pm
I deleted some of his posts rather than address his cheap shots
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RyanVMarkov Reply:
November 7th, 2012 at 12:08 am
@WARREN MOSLER,
Warren, do you have any news about the most important elections in the USA – House Representative of USVI?
WARREN MOSLER Reply:
November 7th, 2012 at 12:50 am
i lost in a pretty clear case of voter fraud/rigged machines.
story to be posted
November 5th, 2012 at 12:16 pm
If A gives B 100 bushels of barley, and one year later B gives 110 bushels of barley back to A, would you call this lending barley with interest?
Answer: that would be the ‘own rate’ for barley in that context
If A gives B 100 bushels of barley, and one year later B gives A 10 pounds of potatoes, how would you call this?
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ESM Reply:
November 5th, 2012 at 12:57 pm
@Ben,
That is a swap.
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Ben Reply:
November 5th, 2012 at 1:32 pm
@ESM, If A gives B 100 bushels of barley, and one year later B gives 110 bushels of barley back to A, would you call this lending barley with interest?
Is this a swap or is this lending?
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WARREN MOSLER Reply:
November 5th, 2012 at 1:45 pm
not wrong to call it lending with interest
WARREN MOSLER Reply:
November 5th, 2012 at 1:42 pm
barter exchange?
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Ben Reply:
November 5th, 2012 at 2:02 pm
@WARREN MOSLER, In my opinion in both examples B buys something from A by promising to pay later.In both cases B pays A by ‘issuing’ a promissory note.
The only difference is the ‘price’ he has to pay. In the first example barley and in the second example potatoes.
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WARREN MOSLER Reply:
November 5th, 2012 at 2:30 pm
agreed.
it’s about the denomination of the note
Ben Reply:
November 5th, 2012 at 2:43 pm
Okay the next example:
If A gives 100 Dollar to B and one year later B gives 110 Dollar back to A, how would you call this?
WARREN MOSLER Reply:
November 5th, 2012 at 9:15 pm
a loan with interest
ESM Reply:
November 5th, 2012 at 5:07 pm
@Ben,
It’s called losing interest in these scenarios. :^)
I suggest you look up the definition of normal backwardation. A commodity is not the same as money.
Ben Reply:
November 6th, 2012 at 4:34 am
If A gives 100 Dollar to B and one year later B gives 110 Dollar back to A, how would you call this?
a loan with interest
It is ‘buying’ by promising to pay more later. It is not lending.
State money don’t bear interest, why? Because the holder of the money can always make payments to the state, the bearer has not to wait.
So you have to pay interest for the benefit to be able to buy something now, but not having to pay the price immediately.
What is the MMT answer to the question, why the interest rate (not the FFR) is positive?
WARREN MOSLER Reply:
November 6th, 2012 at 11:35 pm
the interest rate paid on deposits at the Fed is set by the Fed.
ESM Reply:
November 6th, 2012 at 9:24 am
@Ben,
Normal backwardation (future price lower than spot, so that you have to deliver more in the future if you take delivery now) occurs with both money and certain commodities. In the case of a commodity, however, it is an intrinsic property of the commodity which is called the convenience yield. You can think of interest on money being like a convenience yield as well (as you have indicated), but the convenience yield of money is completely determined by the government. The government does not try to set the convenience yield on oil or corn, nor could it.
Ben Reply:
November 6th, 2012 at 10:30 am
@ESM, I agree that the convenience yield could be part of the interest. There is the risk premium, the property premium and so on, which also influence the interest. But what is the reason for paying interest in the first place?
WARREN MOSLER Reply:
November 6th, 2012 at 11:47 pm
I’ve been proposing the govt not pay interest for a long time.
they think it somehow controls inflation
ESM Reply:
November 6th, 2012 at 10:57 am
@Ben,
Well, the Fed evidently believes that by providing a high interest rate, people are encouraged to hold their cash rather than spend it, which means increased savings desire and lower inflationary pressure. I think this works in the short-term, but there are offsetting effects, the principal one being the income effect. Higher interest rates means more income for the private sector, and people are more willing to spend out of income than out of savings.
For private loans, a part of the interest charged is to compensate for expected credit losses, as well as a credit risk premium. The remainder is the convenience yield as determined by the government, plus the risk premium due to interest rate risk and liquidity risk.
Ben Reply:
November 6th, 2012 at 11:26 am
@ESM, There are two questions:
1. Why is somebody willing to pay interest?
2. Why is somebody charging interest?
Please try to answer the first question!
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Ben Reply:
November 7th, 2012 at 2:41 am
@WARREN MOSLER, ‘the interest rate paid on deposits at the Fed is set by the Fed.’
It’s a different kind of interest rate. It is rather an interest rate for saving.
In general, if you want to buy something now, and you should be induced to buy it later, then one should try to offer you interest to achieve this goal. (Reward for saving)
If somebody don’t want to buy something now, you should not pay him interest (No reward for hoarding).
In reality its is not easy to differentiate between this two cases, but the treasury of a private bank works hard to guess the payment habits of its customers in order to reduce interest payments for saving.
The relation bewteen the FED and the private banks are in my eyes from a different kind, than the relation between the banking sector, and the non-banking sector.
In my eyes the discount rate is rather some sort of tax and the interest rate, the FED pays for deposits is some sort of subsidy.
November 7th, 2012 at 7:19 am
Let’s take a functional finance approach, further let us assume, that there is no foreign sector and that the banking sector belongs to the government sector.
Why should the government pay interest for already existing deposits of the private sector?
Because the government doesn’t want the private sector to consume or to invest now.
This makes only sense in wartime, or maybe trouble, caused by a natural catastrophe. With some additional measures, inflation can be avoided, and when the crisis is over, the private sector has to produce more goods and services, to absorb the additional money.
In the real monetary system, you maybe have to pay interest for already existing deposits, to avoid the shifting of ‘money’ from one bank to the other or from one currency to a foreign currency.
But this makes no sense from the perspective of the system as a whole.
So I conclude, the natural interest rate for existing deposit (saving) is zero.
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WARREN MOSLER Reply:
November 7th, 2012 at 10:24 am
it’s an interest rate for saving and also for borrowing as it’s the banking system’s marginal cost of funds.
and agreed on the natural rate, but for different reasons.
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Ben Reply:
November 7th, 2012 at 12:36 pm
@WARREN MOSLER, okay, the interest rate for saving and borrowing is the same for already existing deposits and money.
But what about newly created bank money? Why is the interest rate for newly created loans positive?
P.S. I am not an enemy to the ideas from MMT. My personal approval rate has increased from 70% to 90%. Lets look if 100% are possible ;)
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Neil Wilson Reply:
November 7th, 2012 at 12:52 pm
@Ben,
“Why is the interest rate for newly created loans positive?”
Banks will charge as much as they can for their money, and if they can’t they won’t create it.
Money creation happens *after* a loan is agreed, often after a line of credit has been agreed. Remember your credit card limit.
WARREN MOSLER Reply:
November 7th, 2012 at 1:27 pm
when banks make loans and create deposits, they have to pay the going rate of interest on that deposit or lose it to a bank paying a higher rate
Ben Reply:
November 7th, 2012 at 1:25 pm
@Neil Wilson, ‘Banks will charge as much as they can for their money, and if they can’t they won’t create it.’
Would you say, that charging interest is always usury?
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Ben Reply:
November 7th, 2012 at 2:07 pm
@Warren Mosler, ‘when banks make loans and create deposits, they have to pay the going rate of interest on that deposit or lose it to a bank paying a higher rate’
Was this also true under the conditions of the former Regulation Q (Glass-Steagall-Act)?
WARREN MOSLER Reply:
November 7th, 2012 at 4:25 pm
yes
RVMarkov Reply:
November 7th, 2012 at 2:19 pm
@ Warren,
“when banks make loans and create deposits, they have to pay the going rate of interest on that deposit or lose it to a bank paying a higher rate”
Aren’t the banks just interested in creating the loan (asset for the bank) and then it doesn’t matter where the corresponding deposit would go?
The profit for the bank depends only on the quality of the loans it creates, and the spread between the loan’s interest and the price for the reserves the bank pays on the interbank market or fed’s discount window. Bank’s profits also depends on the established banks’ capital requirements?
Therefore banks don’t have incentives not to lose the created deposits to another bank?
WARREN MOSLER Reply:
November 7th, 2012 at 4:31 pm
the bank makes a loan and is subsequently required to have/automatically has a corresponding liability/deposit/loan. ‘worst case’ the loan is from the CB as an ‘overdraft’
November 8th, 2012 at 4:21 am
Do we need the banking sector at all?
Can all be done by government spending and taxing?
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Neil Wilson Reply:
November 8th, 2012 at 4:37 am
@Ben,
Rather than asking lots of obtuse questions, why don’t you tell us what you think?
Otherwise the debate gets a little one-sided and boring.
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Ben Reply:
November 8th, 2012 at 7:52 am
@Neil Wilson, Sorry Neil,I don’t want to bore. My thoughts are available at Nr.69.
Example to these thoughts:
If you purchase a car on credit, you can immediately enjoy driving that car. Without credit you have to wait until you have earned enough money. For this real benefit (to enjoy driving the car immediately) you have to pay a price and this price is the interest.
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Neil Wilson Reply:
November 8th, 2012 at 8:46 am
@Ben,
It’s a bit more than that.
For the car to be produced somebody has to want to buy it. So there is a craving for the loan on all sides of the transaction.
Interest in aggregate is just the way that bankers transfer real resources to themselves and their staff. It sort of pays for itself.
Ben Reply:
November 8th, 2012 at 3:01 pm
@Neil Wilson, ‘For the car to be produced somebody has to want to buy it. So there is a craving for the loan on all sides of the transaction’.
okay,
loan for buying consumer goods-real benefit: to enjoy the good earlier
loan for buying capital goods–real benefit: to make a profit
loan for paying tax debts——real benefit: to avoid to go to prison
WARREN MOSLER Reply:
November 8th, 2012 at 8:42 am
the banking sector is an arm of govt with the idea that a govt. payments system promotes public purpose.
see my proposals for banking on this webiste
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Ben Reply:
November 10th, 2012 at 9:30 am
@WARREN MOSLER,
If you are buying government bonds or buying the bonds of a commercial bank, it is not the same as if you are buying a corporate bond of a non-financial company.
In the first two cases, you rather deposit your money at the ‘saving accounts’ of that institutions as to lend them your money. In this cases the natural rate of interest (saving) is zero. The interest serves as an incentive to shift or to deposit your money to this bank or that bank, or to this or that state.
If you buy the bonds of Intel, then this is not saving but it is making a financial investment.And in this case the natural rate of interest is positive.
(to the idea that holders of deposits don’t lend their deposits to banks : (Parguez/Seccareccia, The credit theory of money, the monetary circuit approach, in John Smithin. What is money? Page 104)
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WARREN MOSLER Reply:
November 11th, 2012 at 6:24 am
seems like you’re trying to establish alternative definitions
Ben Reply:
November 11th, 2012 at 3:08 pm
@WARREN MOSLER,
It’s MMT. Government and commercial banks can create money, so why should they borrow? Intel has to sell some chips. If there is no difference, i have completely misunderstood MMT.
WARREN MOSLER Reply:
November 11th, 2012 at 7:38 pm
see ‘soft currency economics’ on this website to understand govt borrowing, thanks.
November 15th, 2012 at 4:10 am
Let me ask one last obscure question.
Why is Warren Buffett accumulating financial wealth?
a) He wants to make profit in general (Classic, Smith,Marx)
b) He wants to consume more tomorrow (Neoclassic)
c) He wants to be able to pay future debts of all kind (Keynesianism)
d) He wants to be able to pay future taxes) (MMT)
e) He wants to secure and augment his property (property economics)
f) He wants to sustain and improve his economic status and prestige (Thorstein Veblen)
g) There is no rational reason. He is an anal character (Sigmund Freud)
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WARREN MOSLER Reply:
November 15th, 2012 at 8:08 am
something like the fun of winning in general, even when there is no material ‘prize’
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