THE EARLY EVIDENCE: QE DOES MORE HARM THAN GOOD
What exactly has QE “lite” and the expectations of QE2 done for markets and the economy so far? Two months following the initial rumors of of QE2 and well into QE “lite” we can make some early conclusions:
1) Equity markets have rallied, but this is of little significance. There is no evidence supporting an equity market “wealth effect” according to Robert Shiller (see here) and James Bianco (see here). Bianco’s research actually finds that the corresponding commodity price increases are more likely to be a net negative for consumers. And even if there is a “wealth effect” it only helps the rich because the middle class are only minority holders of equities on the whole. Of course, this isn’t a crisis of the wealthy so this looks like another case of failing trickle down economics at best. It’s also worth nothing that stock prices are nominal wealth so intentionally distorting prices from fundamentals is no recipe for sustained wealth. Keeping equity prices “higher than they otherwise would be” only diminishes the Fed’s credibility while also creating distortions in markets.
2) The 10 year bond yield is HIGHER since the Jackson Hole speech. The 30 year bond yield is up 50 bps since the Jackson Hole speech. Therefore, there is unlikely to be a sustained refinancing effect and no increased demand to take on more debt (not that this would work in a balance sheet recession anyhow, but Mr. Bernanke fails to acknowledge that this is a demand side problem). 74% of all consumer debt is mortgage based so it’s baffling that they are targeting the short end of the yield curve. Bernanke wants to stimulate borrowing, but his actions aren’t backing up his talk. He is focusing his efforts on the short end of the curve where rates are already very low – astoundingly confusing and misguided policy.
3) Many commodities have rallied in recent weeks which will do nothing but put pressure on input costs and ultimately make life more difficult for the US consumer (assuming these costs even get passed along, which is unlikely due to weak end demand). The consumer will either be hit with higher costs which they can’t afford to sustain or US corporations will continue to be hesitant to hire the millions that need jobs because they are too busy protecting their margins. On the one hand, this one of the few certainties we have regarding QE – it hurts corporate margins by causing a speculative ramp up in commodity prices.
4) QE IS NOT MONEY PRINTING so there is no reason to believe that it will cause anything more than expectations of future inflation. When the Fed implements a policy of QE they are merely purchasing an asset that already existed and swapping it with a deposit. There is some debate over the price changes before these transactions take place and whether the Fed is buying at higher prices, but this is offset by the fact that the Fed is removing a high yielding asset for a lower yielding asset. In this case, they are removing 1.2% paper (on average) in exchange for reserves that will earn just 0.25%. Remember, in QE1 the Fed removed over ~$47.5B in interest income from the private sector. So if anything, this has a marginal deflationary impact.
5) Borrowing didn’t pick-up after QE1 and there’s certainly no signs of a borrowing boom in recent data. Of course, with real estate in the midst of a double dip there’s unlikely to be a surge in borrowing in the coming quarters anyhow. As Robert Shiller detailed, the “wealth effect” of a housing boom can be quite substantial. With home prices now declining again we’re actually seeing the opposite of a “wealth effect”. In other words, the majority of Americans don’t feel better because Wall Street rallies each and every day. They feel worse because the asset they come home to every night, the asset that accounts for the majority of their net worth, has declined in value.
So just what exactly does QE do for the economy? Even the people who are advocates of it don’t seem to know and certainly can’t back up their claims with any positive evidence. Meanwhile the media and its misguided punditry are falling all over eachother to spread falsehoods and inaccuracies regarding this policy as they shower Ben Bernanke with praise for trying something. I am not sure why Mr. Bernanke is worthy of any praise. He did not foresee this crisis. He responded too late when it was clear that a crisis was on our doorstep. And when he finally did respond he saved the banking system and left the American public out to dry. Thus far the evidence surrounding his latest tool looks poor at best and it in fact appears as though it could be causing more harm than good.
As for the markets there has been some interesting action in recent weeks. It looks like the smart money markets (FX and fixed income) have slowly started coming around to the fact that QE won’t cause a dollar crash (because there is no interest rate effect and no “printed money”). Meanwhile, risk markets (equities and commodities) are on fire as “buy the dip” and “don’t fight the Fed” become the motto on every trading desk. The divergence here won’t last and given the early evidence it looks to me like a whole lot of investors are deep into the risk trade without the fundamentals to back it up. They’ve placed a bet on a Fed Chief who has failed at nearly every step of his tenure. A great deal of leveraged optimism has been priced into the market based on this “non-event“. I do not know if I have ever seen the market rally so much around an event that involved more misguided and inaccurate analysis.
Mr. Bernanke has created dangerous distortions in many markets over a policy that appears to have no real economic impact. He is playing games with the markets in an effort to give the appearance that he has not run out of policy tools. This not only calls into question the independence of the Federal Reserve, but has to very seriously make one wonder whether Mr. Bernanke is fit to run the world’s most important Central Bank? I have long maintained that he was never fit for this position and in my opinion the early evidence of QE only further confirms that belief.
Well TPC,
I’m talking directly to you tonight, and I again ask what I have asked many times over, which is, what would you have done in Mr. Bernake’s position with his tool set??? That answer I am looking forward to.
And further, the fact that China is up in arms is a great sign, imho. They have waged currency war on us for 20+ years!!!!! And we have done nothing.
To squander their so-called “reserves” of 2+ trillion in dollars is wonderful in my mind. Devaluing the currency is exactly, exactly what we need to do here… imho.
He should be honest and tell Congress that we are in a very dangerous and rare type of recession that requires fiscal aid. Monetary policy is unlikely to resolve our problems, but he will be prepared to smooth credit markets if need be. I know people like to say that the Fed Chief can’t get Congress to act, but I think that’s nonsense. He is THE central banker. His opinion carries ENORMOUS weight. Stand up and say:
“Ladies and gentleman, I implore you to help us in our battle to fend off deflation, but I can’t do it alone. We must work together, come together as a country and provide the necessary aid that the people of America need.”
But he wont do this because he is oblivious to what we’re going through. He thinks the great depression was a bank crisis and he thinks this is the same thing. But it’s not. It’s a household crisis and that’s why he is having such a difficult time solving the crisis. He hasn’t had his head wrapped around this problem since day one and his recent toying with QE is more evidence that he is out of touch with reality.
TPC,
Let’s carry your idea a little farther.
Suppose BB went to Congress and did as you suggested. Congress then awakes from their stupor and agrees and launches a $5T new stimulus plan (feel free to substitute whatever amount you think right instead of $5T). But then they realize that they can’t sell an additional $5T of bonds over and above what is already required. So BB then says “no problem, I will buy the bonds.”
It seems to me that this is what we have already done, only without the honesty part and not in the size that you would probably suggest should have been done. If you go this route, you still end up with the Fed buying bonds. It least in that case it would be done honestly, and you get rid of the mysticism surrounding QE.
TPC – Bonds don’t fund our spending. Technically, we don’t even have to sell bonds. We could technically drain the reserves via a CD. Bond sales are funded by money already in the system. Money spent gets used to buy the bonds. Have you read my 101? Would help you understand better. http://pragcap.com/mmt-101
The big difference between the two approaches is that the fiscal action would actually drive up incomes and most likely create something of value, potentially driving up the dollar value.
QE is just an asset swap, but by driving down rates, it also props up values of bad assets on bank balance sheets, providing banks with bogus equity to drive short-term speculation.
Since the speculation is expected to occur in FX and commodity markets – the cost-push impact will drain corporate savings as they lack pricing power and the FX/hot money impact is intended to pressure China to revalue the RMB.
This is a risky strategy whose outcome is not at all clear.
I have read your 101. I have also read a fair amount of other post-Keynsian stuff. I understand it. Much of it I even agree with.
But I also try to stick with reality and I try to base my comments on the current laws as they exist today and the way the government currently conducts its operations. We could combine the Treasury and the Fed and run our finances as your 101/MMT theory suggests. Current law says they are seperate. The Treasury and the Fed believe that bonds and taxes finance our spending, and they currently operate the government as if that were the case, and whether they do or not is irrelevant for purposes of figuring out what the Treasury/Fed are going to do.
Once again you didn’t resond to the substance of my comments.
Currently, treasury sells bonds equal to the difference between spending and tax collection. They plan to do the same thing next year. It doesn’t matter whether they have to or not. So if the government wants to spend say $5T more than they already plan to, Treasury is going to be looking for someone to buy another $5T of bonds. It is just how they operate, my worldview notwithstanding.
In an MMT world, we would spend whatever we want to spend by printing it all (yes, I know there is no real printing going on), and offset some of the printing with tax collection/bond sales. Current law requires a more indirect process. It requires that we first sell bonds to cover the deficit. Lately, the Fed has been buying an amount of bonds rougly equal to the size of the deficit shortly after the bonds were issued (sometimes only a couple of weeks after and often from holders who only bought with the intention of selling to the Fed at a slight profit), and they plan to do this for the forseeable future. I would prefer the MMT world. At least it would be more honest. But, current reality is QE.
My point was that given current law and current operational constrains of our system, a larger fiscal response would likely mean that the Fed would be doing exactly what they are doing now (buying bonds), just more of it. Do you disagree?
I do disagree because we live in a MMT world. The funds used to “fund” bond purchases is money that was already spent into existence. Not vice versa.
http://pragcap.com/n-y-fed-explains-government-spends-issues-bonds
TPC:
Zimmer is right.
The current operational reality is such that the Treasury has to borrow before it spends. It is not controversial, as speculations about the effects of QE2 might be, it is a simple consequence of the fact that the Treasury balance has to be positive at all times and that the Treasury cannot borrow from the Feds.
You have a point that some cash should be already in the system in order to make payment possible. What you might be missing is that not much cash is needed for the simple reason that cash inflows into the Treasury account(s) are compensated by cash outflows due to government spending.
Ideally, in the frictionless world, zero cash would be needed to settle mutual obligations between the Trasury and the banks as whole. In the real world, you need some amount of grease(cash) to smooth out fluctuations. The fluctuations are smoothed out by the open market operations(OMO) performed by the Feds through the repo/reverse repo game with the primary dealers.
E.g. last August, the Treasury received $164B in taxes, $91B in bond sales and spent $255B. i.e. everything. It does not mean that $255B of cash was needed to make transactions possible since incoming and outgoing cash flows largely cancelled each other, and OMO intervention was needed only to smooth out the differences.
The situation with mutual obligation netting is similar to the case when say bank A grants a loan deposited at bank B and vice versa. Mutual obligations between two banks settled, say, through CHIPS would be zero and no cash would be needed to settle interbank obligations.
TPC – Zimmer is not correct. You are reading out of a textbook that taught you the money multiplier and other such nonsense. The fact is, if the US govt were to debit the pvt sector of every USD it had there would be no money in the pvt sector to pay taxes or fund bond auctions. It’s an irrefutable fact that govt must therefore spend before it taxes or has bond auctions.
TPC:
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You are reading out of a textbook that taught you the money multiplier and other such nonsense.
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I am not reading from any book, but describing bond action money flows as they happen in real life, not in some fantasy world of yours.
What is the “money multiplier” strawman ? I did not even use the word “multiplier”, where did it come from ?
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It’s an irrefutable fact that govt must therefore spend before it taxes or has bond auctions.
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How would government spend $255B with $164B inflows and “no overdraft” rule ? It’s a matter of simple addition and subtraction.
TPC – I suggest you study how bond auctions actually occur. Reserve forecasters at the Fed actually track deposits and THEN decide the size of the auctions. They are in fact tracking down money in the banking system (money already spent into existence) and then using market operations to remove reserves. It doesn’t appear as though you have any desire to even explore this line of thinking, however, so I have no idea why we are bothering to have this conversation in the first place.
Does it really matter that much which comes first?
Fact is, last year, Treasury borrowed an amount that was more than deficit. They also did the same the previous year, and pretty much every other year.
So, whether the borrowing has to come first, or the spending comes first, it doesn’t seem to matter all that much to our Treasury. They act as if they believe they have to offset the deficit with borrowing. I think it is a safe bet that they will act the same way next year.
Therefore, when trying to figure what the various branches of government will do, I tend to ignore the theory, yours and the textbook’s, and try to figure out what they might actually do.
I can be pretty confident that if the government runs a deficit next year, Treasury will act is if they have to sell more than that amount of bonds, whether they have to or not.
The net effect of all this is that when the government wants to run a deficit, they don’t have to call China for permission, but since Treasury acts as if they have to cover the deficit with borrowing, if China, et. al, doesn’t buy they debt, that leaves the Fed as the buyer of last resort.
TPC – It’s quite crucial. When you realize that the USA is not revenue constrained you realize we are not Greece and that public policy should be entirely different. Particularly in a balance sheet recession.
Plus, China could stop buying tsys entirely and it wouldn’t really matter. In fact, after fear mongers spent the last 10 years warning of China stopping purchases, they finally slowed their purchases this year and look – we can still afford to survive! The auctions are arranged in a way that the PD’s always take down the entire auction….
Who cares what China does. Let those USD’s sit on a vault floor collecting dust for all we care.
I have repeatedly said I understand we aren’t Greece, we aren’t revenue constrained, and we are in no way dependant on China.
Recently, Treasury sold a bond. Three weeks later, the Fed bought the exact same bond. The effect would have been the same if instead of selling the bond, then the Fed buying it back, the Treasury had sold the bond directly to the Fed. And, if you believe as I do that the Fed is likely to just roll over the proceeds of any maturing bonds into new bonds, then the practical effect is also the same as if Treasury never issued a bond at all.
The point I have been trying to make is that all 3 methods are available to our government because they control the currency, but currently they only make use of the first method.
I would prefer our government to be more honest about the process and not issue the bonds at all.
TPC – It’s just a reserve drain….
“Currently, treasury sells bonds equal to the difference between spending and tax collection.”
Not exactly true, bonds come due and some are redeemed and some are rolled over all the time – this “noise” has to be separated from new government spend to determine the amount of new issue and where the reserves are accumulated to “fund” the buy. Part of the job of the primary dealers.
One way to think of “funding” is when government authorizes a budget which forecasts a deficit. Hence, there will be spending that equals the net new bonds to be placed. The mechanics of how it is executed is not really that critical.
A fiscal response would not necessarily result in the Fed doing exactly what they are doing now. In the first place, tax receipts rise when spending occurs (as incomes rise). It looks as if QE2 may result in lower tax receipts (via less interest income), although there may more Fed surplus returned to the Treasury.
BTW, we would most likely not “spend whatever we want” – language like that doesn’t help the conversation (although it does reveal bias).
If fiscal action also results in faster private balance sheet repair, banks may be more willing to lend. Also, investment may also rise in response to increased demand.
The overall increase in aggregate demand (assuming inflation can be kept under control) would probably result in rising interest rates (certainly from where they are now). This would hurt bank balance sheet to the extent they have overvalued bad assets on their books – probably resulting in nationalization or bank restructuring.
It is not at all obvious that fiscal action would result in the same amount of government debt issued as in QE operations.
What is ironic is that the action that would most likely result in bank restructuring – which everyone feels is necessary – is fiscal spending, which is what everyone appears not to want.
TPC posted a video of BB last speech at jacksonville university. Would be a good strat for you before re reading the 101 AND his latest stuff about how QE actually work.
Correct me if I am wrong but Bernanke doesn’t use the word ‘deflation’ – he uses ‘disinflation’. I’m not sure what the difference is between the two, but it’s obviously no accident.
Words matter – the markets can snowball down very quickly. We saw that on May 5th. For Bernanke to come out and say “Congress, we must battle deflation and we need your help” is akin to waving red flags on every corner of the Earth. If nothing else, it has no precedent and the markets will be confused. Intuition tells me that a confused market can only be bad.
I don’t think Bernanke is as oblivious to the effects of his policy decisions as you make it out to be. He is the leader of a flailing economy and he is intent on going down with the ship. I think there is some nobility in this. He could cry deflation and beg congress for help, but that wouldn’t save the sinking ship – it may just save his reputation.
of course i respect your faith in humanity and ……..politicians maybe….i can see why you voted for obama…..course u have said u voted against the status quo too….i understand that also.
i would never expect ben to give the speech u outlined that we both know should be given…he’s incapable of it….i guess thats where we differ also…..
a transcendant statesmen of reality he will never be….and i do see a single one on the horizon, actually…..at least not one with the ability to connect to people and with a handle on reality….the president?…just an excellent car salesman that can read a teleprompter bettern’ anyone alive.
i guess i have gave up on life being about the facts along time ago…..hopefully i am wrong to some degree but i fear not…..not alot of instances in history where what shoulda been done or said WAS done or said.
that was do NOT see one on the horizon.
Couldnt agree more with the effects on the economy.
But its clear that Bernanke is trying to use any means possible to devalue the USD.
From this perspective he is winning and if anything all this did was speed up the price discovery process in the forex markets…the USD was in my opinion overvalued versus every freely floating currency in the world before this action. Now it is at least at more realistic levels
I have a feeling that Bernanke knows this will do nothing, but tries to do something anyway given fiscal policy has now hit gridlock.
Looks like your short trade is finally having its day in the sun…risk appears to be coming off the table as we speak
TPC – trade weighted dollar is up in recent weeks as well. No reason for it to ever sell off. Mkts are recognizing this and the fact that optimism over QE is misplaced…..FX and bond markets have been repricing this recently
TPC,
In a way, this is a household crisis insofar as it is a balance sheet recession. And the good folks at Annaly Capital, whose thoughts carry a lot of weight with me, have noted several times that the Fed staff have been looking at “off the reservation” issues that are involved in this crisis – to wit, they have some grasp as to what is going on.
I agree, could/should the Fed do that, absolutely, I think that would be very helpful in explaining the situation and arriving at an acceptable solution.
However, I am very disturbed at the lack of discussion/analysis here with regard to the currency issue. I think ole BB may be stumbling his way right into the correct policy, albeit perhaps unknowingly.
He is forcing the issue, perhaps unintentionally, and that is a beautiful thing. Market will sort this out eventually, but this reaction gives you a great chance to cover your shorts…
Devaluing the USD is not a strategy. We’re all in a race to the bottom. These wild swings in FX will continue and ultimately create little good for anyone…..
I could not disagree more. Devaluing the dollar is exactly, exactly what we need here.
First, the trade wars as far as artificial currency pricing have hollowed out our manufacturing for over 20 frigging years!!! of course it has. time for some payback.
Second, this is exactly what the doctor ordered. Encouragement of capital flows by making America cheaper to buy for foreigners. I don’t really like FDR, but his unilateral debasement of the dollar as compared to gold was a good move into getting us out of the depression.
You wanna see deflation, link your currency directly to gold. Then you’ll see the misery that was the 30s.
You might be right, but my point is that it wont work. USA implements QE2, then Japan does it, then Europe talks tough and round and round we go. In the end no ones currency will stay permanently low…..
Japan is a bad example. Those clowns gutted our electronics/car industry with their goofy currency policies. Then China mopped up starting in the 90s.
Let Germany bail out the rest of the clowns. Now it’s all about capital flows/currency issues.
Chop to death the long term nonsense/entitlements, and we’ll be ok…
My indicators all show highly elevated risk levels in equity markets. Fundamental work backs that up 100%. This mkt is very fragile. BB has created a very dangerous disequilibrium.
Exactly right…the problem with currency devaluation is that everyone is going to devalue. Are the Chinese going to substantially move their currency? Is Brazil going to remove capital controls and taxes on foreign money? Is Europe going to stop letting crisis countries fester and come up with a long term solution?
The likely course is for all countries to continue to devalue. prescient11 is right that this is a currency war, but the problem is the trade agreements so renegotiate them. Maybe this was tried in back room deals, but this currency war is going to turn into a trade war…the only sane path is to try and deescalate and reach a compromise. Ya, we could do something crazy like declare a tax Holiday next year and deficit spent something crazy like $3 Trillion, but that is just going to result in intensifying the bubble in commodities. The devaluation can’t go on an endless spiral, eventually a government/central bank (maybe Canada, Australia, or Russia) is going to say to hell with this craziness and put up barriers on trades for their resources/food. We already saw Canada block the Potash takeover. If this continues we could end up in a trade war and cause a depression and literally starve countries that import food. Really great work by world leaders…
I am not sure that it is that simple for the Chinese to continue to devalue when the Fed floods the world with dollars. The Chinese will have to buy the dollars at a targeted rate which means that they will flood their own market with yuans. The inflation in China will go up and it is already high. They will make their internal imbalances worse if they continue down the same path. We can afford to do QE2 and devalue the dollar until the end of the world because the inflation here is low and the growth is low. The Chinese cannot use the same weapon. I think the Fed will win this battle easily as long as the Fed is persistent and acts in sync with the rest of the government. All emerging markets are in the same basket. They don’t have the same starting position in the devaluation race. They are vulnerable more than we are. QE is our best weapon in the trade war. As Michael Pettis points out the US and the Chinese interests are irreconcilable regarding the trade imbalances. We can’t just ask them politely to trim down their surplus. They won’t. We have to put pressure on them and this is exactly what QE is doing very well. Think of QE as another tool in our diplomatic toolbox. By the way, I think that if the central banks engage in the trade war and start absorbing the excess dollars, the most likely outcome from QE in the short term is that the dollar will strengthen which we already see happening.
TPC I actually asked this question the other day on your mechanics of a QE transaction…who is the end owner of the bank reserves that are effectively being ‘swapped’ in a QE transaction?
From scott fullwiler:
Can you please post me the full link from where the above came from…would appreciate the further reading
Sure thing: http://neweconomicperspectives.blogspot.com/2009/07/why-negative-nominal-interest-rates.html
Cheers
What are the banks legally allowed to do with bank reserves?
I asked because they are not capital…bank reserves typically allow the smooth settlement of transactions. But curious as to what other purpose they can serve…
BK:
Bank cash/reserve growth is the result of all the investors selling their securities, predominantly non-banks to the Feds, and depositing proceeds with the commercial/custodian banks. Banks themselves hold about 5% of treasuries which is about 3-5% of a specific bank balance sheet.
The banks tend to convert cash holdings into interest bearing securities that can be easily converted back to cash to satisfy customer withdrawals, interbank obligations, etc.
However, with the current $1T in excess cash and soon to be added $600B more, the banks cannot get rid of extra cash in principle since it can be drained from the system only through the Feds selling securities, not through shifting cash from bank to bank.
At any given moment in time, the amount of cash in the system is determined by the Feds selling/buying securities and the Treasury collecting taxes and selling bonds(borrowing). The non-government players are powerless to influence cash holdings in aggregate.
cash == bank accounts with the Feds + currency(federal reserve notes)
P.S.
Well, one can burn FRNs, I guess, to drain excess cash.
TPC,
My take on the Fed targeting the short end of the curve is that it’s doing so to retain better control over possible inflation. I believe that it has decided to use the bond market as a tool for money supply control. By swapping reserves for bonds it effectively expands the money supply (without actually printing new money). I anticipate that it will refresh these positions at each maturation until such time as the economy begins to recover (which might be a very long time).
Should inflation appear, the Fed can tighten by simply reducing the roll. This forces Treasury to find cash which will be accomplished through the implementation of austerity measures (deflationary).
All of this has to be on the short end because the Fed needs to be able to respond (relatively) quickly to changes in the economy.
QE1 was all about stabilizing credit markets and taking fraud off banks books (onto the Fed’s where it can sit indefinitely). It was never really designed to help the real economy. Bernanke *hoped* that increased lending would result as a bonus prize but he didn’t get it, not just because banks are afraid to lend, but more because borrowers are also tapped out.
QE2 is an attempt to get money into main street via the government. One of the primary recipients of the funds will no doubt be busted govt pension funds that are being hit by the double whammy of low bond yields effecting fixed income and the, let’s be frank, insolvency of the states.
As for the runup in equities, ignoring all the conspiracy theories at zerohedge, I believe that this has a lot to do with the aforementioned pension funds. They’re taking hits on fixed income and being forced to chase equities to make up for it, which is horribly risky. Perhaps QE2 will held redress this a bit.
On inflation of commodity prices. I agree, this is just ridiculous speculation not backed by any reality. Participants are going to get burned here.
Mediocritas – It’s bizarre because they can keep the reserves in the system and control the overnight rate now that they’re paying interest. So, inflation can be contained. The best answer I’ve heard about targeting short rates is that they’re scared they’ll lose money on the trades and have a political backlash.
Well, I think the primary mission here is to actually stimulate the real economy. Like Japan, when people stop borrowing and continue to service debt, it’s deflationary, so if people won’t borrow (and I think Bernanke realizes that’s the problem), then the govt must borrow “on their behalf”.
In this process, the Fedury (I don’t distinguish them) works with the short end because this is relatively uncharted territory for the Fed and it needs to be able to back out fast if something goes wrong and inflation appears. Most importantly of all, if there is another banking crisis that calls on the reserve, then the Fed needs to be able to pull that reserve back in very quickly, hence the short end. If the Fed felt confident that things were on track, it would spread out more across the bond spectrum, but at this stage, I really see no choice but to stay left.
In my view the only real threat of inflation is political; the world ditching the USD as the dominant trading currency. Probability of that is very low though.
The main problem I have with the Fed’s strategy here is that it relies on the govt to distribute reserves in a manner that actually stimulates the economy. I have my doubts about that…
TPC – Fedury. I like that. The problem with adding reserves is that it doesn’t really do anything except shuffle assets around. And yes, you are 100% correct that it is not an inflation threat at all. The only way it could become inflationary is if borrowing surged and that’s just not the Fed’s to control.
Whatever QE 1, 2, or whatever is supposed to do, or not, the simple fact is that at this stage it is way to early to tell what the actual effect has been [QE1].
No matter how large,typically, changes in the money supply take 3 to 5 years or more before they filter into the economy. QE1 can therefor have had nothing more than a psychological effect to date.
What will that effect be in the future?
Truth be told, nobody can know for sure. We may face future inflation, or we might get further disinflation, even deflation. The economic future is entirely unpredictable.
Although I agree with the Pragmatic Capitalist that QE1 seems to not increase the money supply, I disagree with the subsequent dangerous assumption that inflation therefor cannot occur, for reasons that I will not go into here [see instead "client questions on inflation": http://onebornfreesfinancialsafetyreports.blogspot.com/2009/10/client-questions-on-credit-union-safety.html , if you are interested] .
Regards, onebornfree @ yahoo dot com
TPC:
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Remember, in QE1 the Fed removed over ~$47.5B in interest income from the private sector. So if anything, this has a marginal deflationary impact.
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The Feds passes over the interest income they earn to the Treasury (minus possible Fed expenses). So, the interest lost to the original security owners gets spent by the Treasury into the economy anyway resulting in re-distribution of such income, not loss. Hence, no deflationary effect.
P.S. I am unwilling to revisit the stuff we discussed in the previous QE2 thread since everything that could be said was said
TPC – Sure, it goes against the deficit, but public sector earnings are pvt sector losses.
“Sure, it goes against the deficit, but public sector earnings are pvt sector losses.” – TPC
That’s an acounting identity, and while nominally true, has no impact on economic reality. It also leads some horrible economists to believe that there is no savings if the there is no government deficit. I don’t think they understand what the word savings means.
“Bernanke wants to stimulate borrowing”
The above statement is baffling. True, but baffling.
Wait — how has QE2 “devalued the dollar”, since no new money was printed? Didn’t money have to be printed to buy back bonds?
Thank you TPC for again shining a bright light on the problems being created and perpetuated by the Fed.
But fundamental problems are not being addressed by you or anyone at this point.
The US has lost it’s competitive positions due to the collective dumbing down of our population and too many years of “easy” money.
But even if we were still #1 in education and disciplined savers, a rapidly decreasing percentage of the world’s population can provide all the goods and services required – particularly in developed nations.
This growing economic crunch will eventually devolve into war.
Not a good answer to these problems, but always effective.
We are still a primitive species at our core.
I’d argue the biggest drag on the US isn’t education, easy money is getting closer…
The biggest problem is us choosing not to enforce laws and giving corporate subsidies to the banks. The largest problem is that we know have a financial system with a bunch of banks that have a put from the government to speculate in the markets. Core banking of taking deposits and investing boring loans you hold on your books doesn’t generate bonusus. Making large bets in the markets with borrowed money and taking bad assets and slicing them into AAA products, however can result in massive bonuses. As we have seen when the crisis hits you just keep your bonuses and go find work a new corporate entity or better yet the government will bail you at and you can start the game all over again. The huge hole in your balance sheet gets billed to the US taxpayers/treasury/dollar holders. The main problem is we have failed to prosecute the fraud and stick the losses and jail time to the appropriate people. Someone is going to take the losses sitting on BAC, C, and Ally balance sheets and MBS investors portfolios and it should be the people who created the junk in the first place.
TPC, as usual this is top notch work and a nice overview of your overall position. It’s amazing that we can’t get this kind of honest and ethical research at the big wire houses. I am not sure if the market will come around to your position or not, but it’s been highly educational reading you cover this topic in recent weeks. Personally, I think you’ve been proven correct already, but the market always has the final say, right?
here’s a nice stuff that was linked on the big picture, http://home.comcast.net/~lcmgroupe/2010/MMU-2010-11-Historic_Policy_Framework_Week.pdf
a detailed broad picture, some good things…
and owes some stuff to TPC…a bit messy though
At the expense of stating the obvious, a report by Miller Tabak + CO., LLC:
We remain skeptical that a sharp reversal in government spending in the aggregate will, in the immediate, result in anything other than further difficulties which will drive the unemployment rate higher, potentially worsening the very budget deficit proponents of austerity are trying to address. In this paper, we review analogous episodes of adjustment to support this claim.
http://www.scribd.com/doc/42074199/Will-Sharp-and-Immediate-Spending-Cuts-Weigh-On-or-Boost-Growth
Posted by ritholtz (THE ritholtz?). Sourced from Plan B again:
http://www.planbeconomics.com/2010/11/12/will-spending-cuts-promote-or-slow-growth/
TPC,
Why do you think stands QE for ‘Quantitative easing’ and not for ‘Qualitative exchange’? Because it’s not a swap of assets (as you think), it’s paper money printing!
Even if QE would only be a swap of assets it would still distort the normal trading conditions in the particular asset class (bonds). It will certainly lead one day to a new bubble. This you must at least admit.
TPC – It’s called QUANTITATIVE easing because it expands the monetary base. That is not the same as expanding the size of the money supply in the real economy.
Quote:”When the Fed implements a policy of QE they are merely purchasing an asset that already existed and swapping it with a deposit.”
If the fed swaps with a deposit how can this only change the monetary base? What will do the banks with the ‘new’ money? Won’t they ‘invest’ it?
This would mean that the banks do nothing with the new money on their deposit.
TPC -This was covered way too thoroughly here: http://pragcap.com/mechanics-qe-transaction
Thanks for the link. Let’s assume this is true…
I still have three concernes.
A. The distortion of normal trading conditions.
B. The fed can buy (as happend in the past) bonds directly from the treasury’s auction.
C. The different liquidity of bonds and cash. You made the point:”Think of one like a checking account (cash) and the other like a savings account (bonds).
As Bernanke explained:”…the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed.”
What will the banks do if they have more and more reserves with the fed? Won’t they give more and more credits, loans and so forth.
TPC – That’s the theory. But there’s very little evidence to back it up. He wants to make borrowing more enticing, but he’s focusing the purchases on a very low part of the curve where rates are already near rock bottom. Quite honestly, I’ve done a mountain of research regarding QE and it just doesn’t appear to do much of anything besides create confusion and distortions in the market….
where you get the patience for educating drive-by commentators ….and buy and holders that automatically assume they know more than you is beyond me..
the irrational reflex actions of ben and OTHER politicians continues to prove the fact of the coming years-long rush to gold-another predictable response only rational in that it will, for a few years, be one of the the only stores of wealth available(thru abdication of others)
equities and real estate in 2003, gold and a few other things in 2009……just riding that bear that started in ’99 n happy to do it……you must deal with the landscape given, irrational as it may be….predicting human behavior IS by definition predicting irrationality w/a historical context.
BNN speaks to Mohamed El-Erian, CEO and Co-CIO of the world’s largest bond fund manager, Pimco, about the state of the U.S. economy, quantitative easing and investment expectations.
http://watch.bnn.ca/#clip374296
QE explained . . .
http://www.businessinsider.com/quantitative-easing-cartoon-2010-11
Aren’t you missing a step in your analysis of Quantitative Easing? After the Fed swaps an interest bearing asset with a lower interest bearing asset, what prevents the banks from turning that asset back into an interest bearing asset by buying more government debt?
In fact, isn’t that exactly what happened following QE lite? Bank lending to the government has increased and now surpasses bank lending to the private sector.
So while QE can have a deflationary impact on the private sector, it should have an inflationary impact anywhere that the government spends money.
It seems that the only thing that we can say with certainty is that QE can increase the size and scope of government. I speculated the other day that this round of QE will encourage a raising of the debt ceiling. And what do you know, the Republicans are already talking about raising it to “balance the budget” LMFAO. THe people have been betrayed yet again
TPC – QE doesn’t allow the govt to spend more. In fact, budget cuts are likely coming.
I love your work here, but you are simply wrong.
http://www.washingtontimes.com/news/2010/nov/7/looming-debt-vote-could-spark-spending-showdown/
Republicans in the banker’s pockets like DeMint, McConnel, Graham, etc. They all the want the debt ceiling raised. The Democrats want the debt ceiling raised. You are depending on freshman Congressmen to fight back and say no. I don’t like their chances of winning.
The stated purpose of QE is lower interest rates, which makes bond issues more attractive. You have pointed out correctly that interest rates can’t really go any lower, but you haven’t mentioned that they would be MUCH higher if the Federal Reserve wasn’t actively keeping them down. Or do you really believe that the market (without Fed involvement) would set interest rates on 5 yr bonds at 1%?
Again, bank lending to government is increasing. It’s a fact. You can say that QE doesn’t allow, but you are simply wrong. It promotes it.
The entire point of monetary policy is to get some other sucker to pay for government debts. That’s it. Nothing more. Nothing less. Everything else is apologia. QE is just another version of that story.
http://www.fool.com/investing/general/2010/11/09/anatomy-of-a-failed-financial-system.aspx?source=ihpsitcag0000002&lidx=1#472363
“In a shift that began about a year go, banks are now lending more money to the government than they are to corporations, to the tune of roughly $400 billion. Just two years ago, it was exactly the opposite: Banks were lending $400 billion more to corporations than to Uncle Sam. That’s an $800 billion shift in 24 months — roughly the same amount, and during the same length of time, as our bedeviled stimulus package.”
It’s a moot point. Govt bonds don’t fund our spending. QE in no way allows the USA to spend more money….
Let me get this straight:
The fact that increased lending from banks to government has occured under QE, the stated purpose of which is to keep interest rates as low as possible, is a moot point, because you believe that QE doesn’t allow it?
Then what am I missing?
I need some clarification. Are you saying that because bond issues do not DIRECTLY impact government spending, the INDIRECT impact on spending doesn’t matter to you, or that there is no indirect impact?
The point is that there is no increased spending ability from QE. Bond auctions are a monetary tool to help Fed control overnight rate. Not a fiscal financing tool.
Every bond issues ultimately leads to greater spending down the road. Otherwise, there would be no point to them. Yes, Fed machinations make the process more cumbersome and increase the number of steps along the way, but the end result is always the same.
NY Fed study from earlier this year found a possible 50 bps reduction from QE1. That’s disputable and minimal even if true.
The US Govt is never revenue constrained so “funding” via increased bond purchases wouldn’t matter even if true.
My goodness. Did you just abolish the Law of Scarcity? But nominal revenue is not the same thing as real earnings. Sure the government is never nominally revenue restrained. No monopoly on money production ever is. But who cares? That doesn’t help anyone understand the economic picture any better.
Don’t see how the law of scarcity applies here….
Sadly, then I should just shake my head and leave.
Instead, I will take one last stab at this. But that’s it. I have my own blogs to write. You are very sharp, but stepping back from the mechanics and looking at the big picture is not your strength – at least on this particular issue.
ANY monopoly on money production is in a position to spend ANY amount of money it produces at ANY time. That’s not a novel idea, even if many economists stumble upon it, forget that monopoly money production is backed by force, declare that the USA is not revenue constrained, and then pat themselves on the back for their glorious discovery (of something that everyone already knew.)
BUT what the government can actually buy with the money produced is whole different story, and it’s the real story. You can run QE’s until the cows come home. Bring on QE6,000 it doesn’t matter. But we’ll all be dead broke, including the government, because scarcity is an economic fact of our existence.
Is the USA spending in excess of its productive capacity?
You seem to think QE helps fund our spending which is too high…..I’m not sure what point you’re trying to make. Sorry.
It just turns out that we are speaking different languages. I started by asking why, after the “Bank XYZ” swaps it’s T-bills to the Fed, what prevents “Bank XYZ” from buying more T-bills? After that we devolved into macro speak versus real world speak.
Debates over the sizes of budget deficits are irrelevant and, while sometimes amusing, are about as useful as a football bat. If your government decides to run a deficit, it will run a deficit, and that deficit will get larger. That’s part of the joys of having a government, watching it pee away the nation’s producitivity. Monetary policy is just a cover, a way to pass the buck to someone else, some total patsy (usually the taxpayer, but USA govt is pretty good at getting other countries’ taxpayers to pay, like the Vietnam War, for example, which Europeans paid for.)
Ok, nuff rambling. Thanks the discussion.
TPC, can you belabor yourself one last time on “QE is not money printing”. You’ve been clear on this over and over again, and Mr. Bernanke is also on record that it’s an asset swap, BUT, reputable people continue to refer to QE as money printing. Two notables just this week were Jim Rickards and Jeremy Grantham. Grantham is not an economist, but he has a long history of accurately “calling a spade, a spade”. What is being left out on the explanation or interpretation of QE? Are you mystified by this as well? It’s almost as if there is a white elephant in the QE room, and no one is talking about it. What gives?
TPC – Well, QE, in my opinion, has proven that most people have no idea how our monetary system works. Even some very well known people. BB has a different theoretical background from myself, but we both agree in large part about how the system truly works.
The smartest people in Europe used to think the Earth was flat and the Sun went around the Earth. It doesn’t matter how smart you are if your model’s wrong.
I’d be interested what Scott and TPC think of this:
http://www.zerohedge.com/article/qe2-stealthy-90-billion-gifting-scheme-primary-dealers
It looks like the Fed could be paying substantially above market price. About 6.5% by these calculations.
This article, like most things at ZH is entirely misleading. The FED announces in advance what quantity they will buy. It’s like a stock buyback. You announce $600 in purchases and the Fed pays the best price. It doesn’t matter if they pay $100 per bond or $102 per bond. They’re only buying a total of $600. So, just like a buyback, the market will front run it and the buyer will pay more, but that doesn’t mean they added money. The money comes from the private sector. That $600 was already there. Price doesn’t matter. In fact, the Fed wants to pay a higher price so it drives down the yields. That’s the entire point. But it doesn’t mean they’re adding money. The money that they’re “buying back” was already in the private sector to begin with.
I get it. That makes sense since they announce 1.25 trillion in purchases in QE1 and that’s exactly what they ended up paying. So it’s just adding reserves or swapping assets as TPC likes to say. Thanks SS.
TPC – Yes, this is the point I keep trying to make that no one seems to be able to understand. The money from the purchases comes from the pvt sector. It’s already there. They could buy $10T worth of assets and it would all come from the pvt sector. It’s an asset swap….
The stock buyback analogy is apt. It might change the mkt price temporarily, but ultimately it has little effect. Stock buybacks have been shown to be ineffective even though they increase EPS.
Hi TPC,
Regarding MMT, can you please explain how the following scenario can be resolved?
Say the US keep spending and 90% (say 90% of 10T) of the base money are now in People bank of china account at the Fed. So, and there is just 900bn of bank reserve that belongs to ‘private sector’ bank left and the rest of the 100bn are in paper cash. Now, the US government has a liability (salary) of 1 trillion to pay and people bank of china decides to let its bank reserve to gather dust (can’t be bothered with 0.27% bond yield).
According to MMT, it is not possible for the US government to default. So, in this case is MMT saying that the US government just go out crediting the employees account for a total of 1T and hand over a piece of TSRY with 1T writing on it. I thought this is called debt monetisation?
And isn’t that the idea of china funding US government spending is fundamentally about allowing US government/people to access China’s productive capacities through the use of USD? If too much of monetisation is being done, presumably China will say we will no longer allow our productive capacities to be ‘accessed’ via USD? So, US is effectively ‘borrowing’ productive capacities from China and hence China is funding the US spending (or lifestyle/consumption) ?
Thanks
Steven
China owns a lot of Tsy’s, but the qty is a fraction of the amount you quote. And most of it is on the shorter end (and Tsy’s aren’t “base money”). At any rate, the point that MMT recognizes is that the interest on the debt owned by China is a US policy variable that the Fed sets where it wants based on its view of economic conditions. Also, “monetization” doesn’t actually occur; that’s a gold standard term that doesn’t apply anymore–it’s the size of the deficit itself that matters regarding inflation (relative to the capacity of the economy), not where along the term structure the corresponding govt liability exists. And that’s basically the same point TPC is making about QE2.
Hi Scott,
I totally understand that the figure is nowhere close to the figure quoted and China now holds TRSY rather than reserve. The situation quoted is hypothetical(but can become reality if the trend continues and if China decides to hold them in reserve paying 0.25% vs TSRY at 0.27%).
MMT is basically arguing that this does not matter and so it is worth taking the matter to the extreme and see if MMT assumptions match the realities.
So, in the above, what would the US government do? 1 trillion of salary coming due soon, and most base money are now in People Bank Of China hand who now refuses to lend. (Note: I don’t think this is likely at this point).
If the US government go round crediting account, I think that is called debt monetisation in most people book. (Debt cannot be monetisation in a Gold standard world. Debt monetisation is solely a game of the fiat money system).
The dollars held by PBOC Fed’s account represent claims on real US resources. The more they have, the more problem it will be for the US (other than outright default/war sort of things).
Of course QE itself does not increase PBOC Fed’s account balance, rather it is trade deficit that does (even fiscal deficit does not do that). Under MMT, fiscal deficit might be OK, but trade deficit isn’t. Ultimately, trade and fiscal deficits are related (as those money someone ends up in China hands).
So, looking through the shenagian of bond/reserve/dollar, the US is ‘borrowing’ productive capacities from China etc and in that sense, China does fund the US lifestyle/spending.
All settlement with PBOC ultimately will be done via Fed Credit. So, when there was just $200bn of reserve, the maximum PBOC can get is 200bn. Now, with
several Trillion of these, the PBOC can get hold of alot more of these and PBOC might get bored of these stuffs at some point. At this point, China will turn round and say, well, if you want to borrow our resources/productive capacities, we want Euro/RMB etc. Then you will have a problem.
“it is worth taking the matter to the extreme”
That just shows you don’t understand MMT. MMT is very clear about what the constraints are and are not. The constraint is the ability to produce goods and services without instigating inflation. Or, rather, MMT is very clear that a sovereign currency issuer can go beyond that constraint, but rising inflation is what will result. You are designing a scenario here in which that is what will happen, and we’ve already said that’s what will happen. You’re not saying anything we haven’t said 1000s of times.
The rest of your post is too confused to worry about responding to. And I don’t care what everyone else thinks debt monetization is or is not. I care about how it actually works in the real world accounting. And “monetization” as described by the people you are talking about doesn’t actually occur or matter–it’s either a deficit or it isn’t. And the deficit is either too big or it isn’t.
Please can you also explain what the digits (bank reserve and TSRY) in PBOC/BoJ account at the Fed actually represent? Aren’t these claims against present and future US resources?
When somebody hands a dollar bill to a foreign company, what does actually means? Isn’t that mean borrowing a resource from the chinese economy?
How about this one?
http://seekingalpha.com/article/69786-thriftville-and-squanderville-a-true-story
TPC – Steven, try reading this. http://bilbo.economicoutlook.net/blog/?p=5402
Prof Mitchell’s work requires some patience as it is dense and detailed, but understanding MMT will require some work. It’s not easy to understand for most of us with traditional econ backgrounds….
Hi Scott,
OK – please address how does trade deficits are dealt with in MMT theory. It looks to me that MMT theory only works in a close economy (or one that has fiscal deficit but trade surplus – like Japan).
The US government is free to ‘allocate US resources’, but the US government cannot ‘allocate’ Chinese resources by force, other than trying to persuade them to do certain things through dollar bills (which the chinese are free not to accept). The US government is free to debit US private sector accounts through taxation, but it cannot debit PBOC account at the fed at will.
The consequences is not necessarily inflation in the short term because the fiscal deficit spending may get soaked up in PBOC Fed’s account until they get scared/bored and buy anything in sight (that was how Weimar hyperinflation happened).
It also causes political tension/losing control as China/Japan as the largest creditors will not want their ‘holding’ to be inflated (cheated) away.
So, if foreign political pressure prevents unconstrained money printing, does MMT still guarantees no US government default ?
MMT, like most macro economic theories, relies on the assumption that there is a coercive party that can force at least one party into an involuntary exchange. Then, like pretty much every macro theory, they find all these bizarre relationships that result from these perversions (like, the USA is not “revenue constrained”) and declare themselves geniuses.
Basically, it’s advanced Hut Tax theory.
http://en.wikipedia.org/wiki/Hut_tax
TPC’s link to Bill’s blog should disabuse you of the notion that MMT is only applicable to a closed economy. Bill and others have also dealt with Weimar and Zimbabwe, neither of which are applicable to the issues at hand.
Regarding trade, beyond Bill’s blog, here’s an interesting back and forth between Warren Mosler/Tom Nugent (of the National Review, which might also help dispell frequently voiced notions that MMT is somehow leftist–not that Steven suggested this) and Brad DeLong (who, given that the Mosler/Delong piece was from the National Review, assumed MMT was in fact a right wing view) from several years ago:
February 24, 2004, 8:46 a.m.
National Review Online
Warren Mosler and Tom Nugent
Debtor Nation, Without the Rhetoric
When it comes to trade deficits, choose fact over myth.
In the world of economic analysis, fundamental truths are sometimes lost to rhetoric. For example, it is fact — not theory — that government budget deficits add exactly that amount to the savings of financial assets that the rest of us hold. Yet politicians and economists have attacked the federal budget deficit on the premise that it reduces savings. Few media moguls pick up on the fact that expansive fiscal policy (the budget deficit) has been directly responsible for the recent increases in non-government savings, just as they overlooked the fact that the Clinton surpluses reduced our savings.
Along with errantly berating budget deficits as draining our savings, the media make an equally illogical error regarding the trade deficit. Within the Beltway, a trade deficit means that U.S. consumption is at the mercy of foreign lenders, and the U.S. Treasury is beholden to foreign owners of its securities. The image is that of the U.S. government and American consumer going hat-in-hand around the world begging for credit to fund expenditures, with the United States also at risk of meeting its foreign “obligations.” We are presumed to be suffering the consequences of being a debtor nation.
Fortunately, the truth is far from the mythology. To expose these myths, all that’s needed is a closer look at what’s really happening. First it’s the U.S. consumer who is funding foreign savings, and not foreign savings that is funding the consumer. Second, U.S. Treasury issuance has to do with alternative accounts at the Federal Reserve, and is not the precursor of financial stress.
What occurs when a U.S. consumer purchases a German-made car? If the consumer pays cash, the consumer’s checking account in a U.S. bank is debited and the German carmaker’s account is credited, thereby increasing foreign savings of U.S. dollars. Total deposits in the U.S. banking system remain the same. (By the way, there is no cargo ship in New York harbor taking dollars back to Germany. All that occurs is a change in holders of U.S. dollar deposits in the banking system.)
When the consumer borrows to buy the car rather than using cash in his bank account (a more likely option), the bank makes a loan to the consumer, creating a loan on the asset side of the bank’s balance sheet and a new deposit on the liability side. (Loans create deposits.) After the car is paid for, the German car company has the new bank deposit. Note that consumer borrowing increased total bank deposits and funded foreign deposits (savings) of U.S. dollars. The widely held causal myth is that foreigners are funding U.S. consumers.
That’s what the trade gap is all about-the desire of foreigners to net save U.S. dollars and to sell goods and services to the U.S. to obtain those assets. If foreigners did not desire to save U.S. dollars, they would instead buy goods and services from the U.S. and there would be no trade deficit.
Following the above transaction, the foreign holder of U.S. dollar bank deposits may decide to invest in U.S. Treasury securities rather than hold a bank deposit. At the time of the German car company’s purchase of these securities, the seller of the Treasury securities becomes the new holder of the bank deposit, and the foreigner the new holder of the Treasury security. (If the foreigner buys securities directly from the Treasury the result is the same.)
When foreigners hold Treasury securities, the U.S. government is said to have foreign creditors, and the U.S. is said to be a debtor nation. While this is true by definition, a look past the rhetoric at what the U.S. government actually owes the holder of Treasury securities is revealing. The government promises that, at maturity, the foreigner’s security account at the Fed will be debited, and his bank’s reserve account at the Fed will be credited for the balance due. In other words, the U.S. government’s promise is only that, at maturity of the Treasury security, a non-interest bearing reserve balance will be substituted for an interest bearing Treasury security. This transaction is not a potential source of financial stress for the government. Remember, the U.S. is no longer on a gold standard meaning that the dollar is not redeemable at the government for gold or any other good or service. Holders of deposits or Treasury securities can’t demand the surrender of our national parks, or any other U.S. asset.
Understanding that government deficits add to savings and that U.S. consumers fund the desires of foreigners to save is a good way to start seeing through the media’s economic mythology.
February 24, 2004
Why Is National Review So Stupid?
Brad DeLong
Another example of breathtaking stupidity from National Review:
Thomas E. Nugent and Warren Mosler on Trade Deficits on NRO Financial: …Fortunately, the truth is far from the mythology. To expose these myths, all that’s needed is a closer look at what’s really happening. First it’s the U.S. consumer who is funding foreign savings, and not foreign savings that is funding the consumer…. When the consumer borrows to buy the car… the bank makes a loan to the consumer… After the car is paid for, the German car company has the new bank deposit. Note that consumer borrowing increased total bank deposits and funded foreign deposits (savings) of U.S. dollars. The widely held causal myth is that foreigners are funding U.S. consumers….
Understanding that government deficits add to savings and that U.S. consumers fund the desires of foreigners to save is a good way to start seeing through the media’s economic mythology.
In the English language, the entity that lends the money is the one that does the saving–the funding–holds the asset. The German car company makes a deposit–that is, lending to the bank. The bank, a financial intermediary, lends the money to the consumer. The German car company has thus indirectly funded the desire of the consumer to purchase.
In the English language, the entity that takes out the loan is the one that does the borrowing–the receiving–accepts the liability. The consumer takes out a loan–borrows from the bank. The bank, a financial intermediary, covers the loan by accepting a deposit–borrowing–from the German car company. The consumer’s desire to purchase has thus been funded by the German car company.
Borrowing doesn’t “fund” anything. Borrowers do not have funds to commit–that’s why they are borrowers. It is the lender who “funds” the borrower. Only in some other completely non-English language–call it NationalReviewese–can one say that the borrower (the consumer) “funds” the lender.
If I were anyone who wrote for National Review on any other topic, I would be yelling and screaming at the editors to institute some quality control in their “economics” writing. For stupidity has a way of leaking across pages, and their reputations are harmed as well when the stupidity quotient exceeds the level at which the alarm bells start to ring.
Posted by DeLong at February 24, 2004 08:04 AM |
March 09, 2004, 8:47 a.m.
National Review Online
Warren Mosler and Tom Nugent
The Debtor Nation, Revisited
A response to Prof. Brad DeLong.
Far too often, professional economists with the highest credentials make headlines with opinions, analysis, and ridicule that may satisfy their constituents, but unfortunately fly in the face of the causal and operational realities of today’s monetary economics. Perhaps the latest example is J. Bradford Delong’s (Harvard educated professor of economics at Berkeley) criticism of our analysis of the dynamics of the U.S. trade deficit.
In his “Why Is the National Review So Stupid?” DeLong, as is evident in his title, has injected arrogance in his argument from the outset. In the following analysis, however, we let that slide, and instead rebut DeLong’s position on the trade deficit point by point with cold, hard analysis and logic. As you read this, you may want to revisit our argument on debtor nations and DeLong’s response. We are hopeful that in the end you will share our concern as to what’s being taught at the highest levels of academia.
DELONG: “In the English language, the entity that lends the money is the one that does the saving — the funding — holds the asset.”
MOSLER & NUGENT: This analysis is not a question of the “English language.” The causation is “loans create deposits,” not the other way around. This relationship is taught in every first year “Money & Banking” course, and is a matter of accounting, not theory. The Federal Reserve Bank of Chicago has published a primer on this subject, Modern Money Mechanics. The Chicago Fed makes the process of bank-money creation clear: “Loans are made by crediting the borrower’s account, i.e., by creating additional deposit money. This is the beginning of the deposit expansion process.”
The basic economics textbook for the Chartered Financial Analysts program, “Economics, Private and Public Choice,” by Gwartney and Stroup, describes the process: “Under a fractional reserve banking system, an increase in reserves will permit banks to extend additional loans and thereby create additional transaction (checking) deposits. Since transaction deposits are money, the extension of the additional loans expands the supply of money.’
In addition, readers can find a clear definition of this relationship in Understanding Modern Money, by L. Randall Wray, associate professor of Economics at the University of Denver. Professor Wray explains: “A loan is nothing more than an agreement by a bank to make payments now on the basis of a promise of the borrower to pay later. Loans represent payments the bank made for business, households and governments in exchange for their promises to make payments to the bank as some future date. All of this occurs on the balance sheets of banks; the money that is created by a bank is nothing more than a credit to another bank’s balance sheet.” In fact, every text we have seen says almost the exact same thing.
DELONG: “The German car company makes a deposit — that is lending to the bank.”
MOSLER & NUGENT: No, the sequence of events is the opposite. The German car company receives a U.S. dollar deposit — a credit to its bank account — when the car it sells is paid for. Obviously, the bank advanced the funds to the consumer before the German car company received the deposit. In other words, the German car company doesn’t begin with the bank deposit it ends up with it.
DELONG: “The bank, a financial intermediary, lends the money to the consumer.”
MOSLER & NUGENT: Yes! The bank grants the consumer a loan. One way this is done is by giving the consumer a check for the amount of the loan, which he uses to pay the German car company. When the German car company deposits the check and it clears, assuming the car company uses the same bank, the bank then has both a loan to the buyer of the car and the deposit of the German car company on its books. If the car company uses a different bank, that bank is “long” fed funds and the other bank is “short” fed funds, and these banks find each other in the money markets and do a fed funds trade. At the end of the day, the banking system has created a new loan and a new deposit.
DELONG: “The German car company has thus indirectly funded the desire of the consumer to purchase.”
MOSLER & NUGENT: Apparently, Delong is claiming that Americans are dependent on foreigners for the funding of our purchases of foreign goods, a message the media in general conveys almost daily. But that is not what happened in the example of the German car company. In fact, the German car company has provided the car in exchange for the bank deposit.
The idea that the process starts with the banking system holding deposits and then lending them out is a throwback to “loanable funds” theories that prevailed under fixed exchange rates, and are at best not applicable. Under a fixed exchange rate policy, like a gold standard, banks are at risk of depositors withdrawing their deposits and exercising their right to actual convertible currency. The quantity of real convertible currency issued by the government is limited to the size of the gold stock in the case of a gold standard or the reserve currency in the case of a fixed exchange rate. The availability of reserves therefore constrains bank lending, as insufficient reserves for withdrawal demands cause the bank to fail.
With a floating exchange-rate policy bank lending is not constrained by reserve availability. The government of issue stands by to lend banks actual currency in the case of customer withdrawals, and the government is unconstrained by the need for reserves as the currency is not convertible into gold (or another currency) at the Fed.
DELONG’S CONCLUSION: “If I were anyone who wrote for National Review on any other topic, I would be yelling and screaming at the editors to institute some quality control in their ‘economics’ writing. For stupidity has a way of leaking across pages, and their reputations are harmed as well when the stupidity quotient exceeds the level at which the alarm bells start to ring.”
MOSLER & NUGENT: Unfortunately, the general tenor of Professor Delong’s diatribe seems to be characteristic of many economists these days. They have acquired constructs divorced from the operational and causal realities of today’s central banking dynamics, and are passing them along to both their students and the general public.
“For example, it is fact — not theory — that government budget deficits add exactly that amount to the savings of financial assets that the rest of us hold.” – Mosler
I see this statement repeated around here and it just cracks me up. I can only imagine that in times when the government had no budget, accountants scratching their head and politely informing Granny May that it’s simply not possible for her to save any money.
I openly wonder if Mosler understands what the word savings actually means. I know that DeLong doesn’t, and that conversation between him and Mosler must be like watching two monkeys try to hump a doorknob.
Savings is the foregoing of consumption to produce or consume a greater quantity or quality of goods down the road.
Savings is DEFINITELY NOT taking $10 from Peter and putting into Paul’s account. Yes, technically it is true that Paul’s $10 increase in savings is only possible by the very fact that Peter is now running a $10 deficit.
It’s also not economic theory. It doesn’t help us understand the world any better. It doesn’t tell us anything we don’t already know.
And Mosler’s ridiculous arrogance from his “discovery” of what happens when Paul gains $10 from Peter would be laughable if so many didn’t buy into this money crank’s nonsense.
Hi Scott,
Thank you for your repsond.
From what you quoted, MMT basically boils down to this:
“Remember, the U.S. is no longer on a gold standard meaning that the dollar is not redeemable at the government for gold or any other good or service. Holders of deposits or Treasury securities can’t demand the surrender of our national parks, or any other U.S. asset. ”
Is this assumption true? What would happen to the ‘full faith of the US government’ if the US gov or private sector refuses to sell anything in exchange for US dollar? What would happen to US dollar? Do you still think foreigner will accept dollar as payment once US government/private sector frequently refuse to accept dollar in exchange for things ?
For a start, you will get some very upset foreigners and oh yes, US companies have lots of assets around the world which can be seized.
Steven
You’ve completely misinterpreted the statement. The point is that, since the $ is not convertible, you can’t demand gold or anything else IN THE US COURTS for payment of US govt debts. It’s payable in the govt’s money, and given no gold standard, the govt can always pay its debts (though, again, that could be inflationary if the deficits or debt service become too large). Absolutely, though, if it decided not to, there would be big trouble–MMT’ers completely agree with much of what you say there (which is where you’ve misinterpreted, assuming the MMT position is the opposite of what it actually is).
Note also, though, that if other countries didn’t accept dollar payment or wanted to devalue it, then their trade surpluses with us would vanish. Seems to me that most policymakers and most economists would like to see that happen, though not via such extreme measures obviously.
Thanks Scott.
I apologise if I misunderstood here but I thought the main claim of MMT is that the US government can runs large deficit with no consequences EXCEPT domestic inflation. Sounds like we agree that things can get much worse than just domestic inflation if the government behaves as if it is not ‘revenue constraint’ ?
For many, causing large inflation through unconstrained money printing (in MMT term, unconstrained crediting of non US government accounts ) to devalue one’s debt counts as default. So, it is just a matter of semantics to say US government ‘cannot’ default under MMT. (Otherwise, by MMT standard, Zimbabwe (and Weimar) government had not defaulted on its Z$/DM domestic debt either.
In the sense, Zimbabwean government wasn’t revenue constrained either).
On top of that, one have to question if the US government can do unconstrained money printing due to international political pressure. Further, foreign creditors may even able to get an injunction in the supreme court to prevent unconstrained account crediting (under tort).
Steven
I’m not sure how Zimbabwe and Weimar get into this discussion. The economic realities on the ground in both cases were completely different. They were destroying productive capacity, whereas in the US it sits idle. At any rate, MMT doesn’t want inflation any more than anyone else. That’s why we see it as THE “constraint” to really be concerned about. I don’t see where that differs from your view–if you want to see inflation as default, go ahead. But if we both don’t want inflation, I’m not seeing where this matters in our conversation.
As for international constraints on the US govt, the US doesn’t issue in any currency other than its own, so it can always service its debts if it so chooses. I have never heard of any debtholder being able to impose some “injunction” on the US govt like the one(s) you mentioned, but if it is possible then even so it’s a self-imposed constraint, since Congress writes the laws that would enable or not enable that in the first place.
I’m sorry that Accounting 101 gives you so much trouble, David. It simply a fact of accounting that a sector of the economy cannot net save unless another sector net dissaves. Yes, individuals within the non-govt sector can save without the govt sector deficit, but that requires someone else in the non-govt sector to be dissaving.
“It’s also not economic theory.”
Right. It’s accounting 101.
“It doesn’t help us understand the world any better. It doesn’t tell us anything we don’t already know.”
Well, I would say that 99% of individuals, economists included, and obviously you, don’t realize that a govt deficit equals to the penny a non-govt surplus. so it clearly IS telling most people something they didn’t already know.
“Well, I would say that 99% of individuals, economists included, and obviously you, don’t realize that a govt deficit equals to the penny a non-govt surplus. so it clearly IS telling most people something they didn’t already know.”
Um, no, everyone understands how accounting works. That’s Checkbook 101. It’s not SAVINGS. SAVINGS is the foregoing of consumption to produce or consume more goods down the road. CHECKBOOK 101 is a nominal representation of PAST SAVINGS.
What we don’t do, is pat ourselves on the book for repackaging something everyone already knows, mainly that $1 + (-$1) = 0.
Telling people that the nominal representation of past savings indicates that deficits must be increased to increase that nominal representation is beyond stupid. The real underlying wealth of Americans is what’s truly important.
It’s a nice trick. But it’s also completely meaningless. If that’s the core idea of MMT, that’s beyond crude. It’s just stupid.
David,
The sectoral balances approach is not something of debate. It’s in use at many of the big banks including Goldman Sachs where Jan Hatzius is one good conversation away from being an MMTer. He often cites this chart, which, if you like pictures shows what we’re talking about:
You might also be interested in the following:
http://www.levyinstitute.org/pubs/sa_dec_08.pdf
http://stopmebeforeivoteagain.org/2010/07/intro_to_economism.html
We’re not arguing that the govt can create wealth. We’re essentially arguing that the wealth exists (and is currently sitting around in the form of idle capacity) and that during a time when the pvt sector is unwilling to put that idle capacity to work (what I refer to as a balance sheet recession) that the govt should do more to put that idle capacity to work.
Plus, no need to get pissy. You might not like our work, but that doesn’t mean you should insult it. I am all for disagreement and debate, but thus far you’re not really doing much to provide a counterargument. You’re just insulting people and that doesn’t help anyone with anything. We’re all here to help. If you don’t care to try to understand then move on. Thanks.
David . . . whatever.
David, only budget deficits increase nongovernment net financial assets, since all nongovernment creation of financial assets nets to zero, X’s assets being Y’s liability. Only government deficit expenditure results in an increase in nongovernment assets without a corresponding nongovernment liability.
The offset of deficits with tsy issuance forces saving of the increase of nongovernment NFA as tsy’s in the exact amount, since the required offset is $-4-$. The national debit equals accumulated deficits, i.e., nongovernment NFA. Therefore, the “national debt” is actually nongovernment savings of NFA.
QED
For TPC,
“If you don’t care to try to understand then move on. Thanks.”
I’m HERE to understand, which is why I’ve asked simple questions and received nothing but “you don’t understand accounting.” Seriously, the dude high-fived himself because he can add.
So here’s a simple question:
What does that chart look like before 1971?
TPC – Who cares what the chart looked like before 1971. We don’t live in a 1970 world.
The data going back to 1952 is here, with two different types of charts–http://moslereconomics.com/2010/11/04/sector-financial-balances/
TPC – Thanks Scott. I added the chart below. Not sure why David needs to see it, but…..
You do realize that Gross Domestic Product has long been almost entirely a measure of inflation, right?
I’m just trying to understand how you can come to conclusions based on relationships between numbers that have no basis in reality and have no representation to any underlying fundamentals.
This is just repackaged Keynesianism. I’m definitely moving on. I was looking for something that actually represented economic realities, not crude models that show no understanding of how people make economic decisions.
Ok I have a fundamental question to TPC? we all know this is balance sheet recession…so why doesnt fed goes and buys all the homes at whatever price quoted by sellers and thus relieve them of all the debt they hve…isnt this mere asset swapping
TPC – 1. They are not legally allowed to buy homes so it’s kind of a moot point. They can only buy MBS, tsys and munis.
2. In order to have an impact they’d have to SUBSTANTIALLY bid over market price. No way they would do that. I think BB is afraid to buy long bonds here because of potential losses so buying homes would be out of the question. Congress would never allow it.
Bernanke has no choice but to prefer short bonds over long bonds.
If he moves right on the yield curve then he screws up every pension fund that depends on fixed income (in fact they’re already screwed due to artificially low yields). Europe is a problem, but these US funds are a bigger one in my opinion.
Secondly, the way in which the Fed recovers the reserve (swapped out during QE2) is by allowing bonds to go to maturity without rolling the position. If the Fed’s holding long bonds then it’s useless in a crisis. Short is the only option here.
I am just very glad that everyone on this blog has acknowledged that Ben has no other options available other than:
“Tell the truth” and/or “get the Congress to do their damn job”.
While those suggestions are all well and good, THERE IS NOTHING in his tool set other than what he has done and perhaps other steps, but none that anyone can point to.
At least BB is trying to do something! Is he perfect and may he understand everything, obviously not. And his predictions suck. But he’s ok and I actually kinda like the guy.
So prescient
You’re okay with him not telling the truth? He knows the limits of monetary policy yet refuses to tell people he can do nothing and that fiscal policy is the only thing that can work? And you like him in spite of this?
Cullen
In your article you referenced the smart money markets (forex and fixed income) as being able to discern that no money has been “printed” and thus dont fear a dollar crash. How is it that they discern this? What are the metrics they follow?
Greg,
He is telling the truth. He’s said repeatedly that the Fed is not monetizing the debt.
As to the problems in the housing market, etc., it is so easy to sit here and criticize and play armchair QB. What did you want him to say during all of this, yes America, the banks are screwed, your houses are all under water and I have no tools to deal with the situation?
Is he perfect, obviously not and he has made mistakes.
But I have yet to hear any kind of concrete alternative steps that he should have taken.
The concrete alternative steps are to admit that monetary policy cant deal with a job loss problem of this magnitude. Its impossible.
Back the banks and tell the people to ignore the deficit. Whatever deficit it takes to reach full employment is the right level.
Letting a housing market problem infect the rest of the economy was the biggest mistake and it could have been avoided.
Being ignorant is not an excuse.
while i agree w/you on the housing market…..there was a few that pointed it out at the time—and where boooed off the stage…litteraly.
i can think of few, especially barney frank, that would have supported closing the bar at midnight….can’t you hear it now–”they’re cutting off housing to the poor!!!”……even the conservatives were doing shots.
i was thinking oh my god look at this…..bought n sold real estate….
now this is the phrase i use on the DOW
Again, he could have DONE nothing but beg for others to act.
Fair enough, but it’s not as if there are/is some alternative ACTIONS/TOOLS for him to take.
I agree with his actions on monetary policy. At least it’s something while our do nothing Congress jerks around with stimulus pork and bs social programming.
Hopefull they will get the picture that some assistance is needed and directly in the private sector.
Warren Mosler on QE from this thread at his place:
Warren Mosler
November 14th, 2010 at 8:40 am
qe:
1. the fed asks for competitive offers of tsy secs.
2. the fed buys what it wants at prices offered to it, by crediting that dealer’s fed reserve account.
(the tsy sec becomes a fed asset, and reserve balances are fed liabilities)

Warren Mosler
November 14th, 2010 at 8:51 am
what does qe accomplish:
asset prices adjust to where the economy is indifferent between all the investment choices.
the choices for govt liabilities have shifted to fewer tsy secs and more reserve balances, which changes the entire term structure of interest rates and asset prices, presumably, but not necessarily lowering them.
this is presumed to raise the prices of existing assets- houses, stocks, bonds, and anything else valued against the term structure of risk free interest rates.
the reduction in tsy secs held by the economy reduces income earned by the economy from the tsy
So qe is a policy to lower the term structure of interest rates and hope that somehow ’spills over’ into more aggregate demand (spending on real goods and services which increases sales and employment)
I’ve seen no evidence, ever, that qe helped aggregate demand anywhere it’s been tried.
And let me add that the Fed buying tsy secs is functionally the same as the tsy not having issued them in the first place.
So qe works on the theory that issuance of tsy secs slows aggregate demand, which many many mainstream economists steadfastly believe to be the case.
These are the ones who believe taxing and borrowing both ‘remove money’ and therefore both reduce demand.
No surprise they think QE adds to demand.
TPC,
You have a very static and short term view on QE. Just because a few months after QE I you can’t see any effects in the economy you think QE has almost no effect. But cause and effect are not happening at the very same moment. It may take YEARS.
Of course, right now there is little evidence that Banks do lend more and more money, despite the higher reserves at the fed. The economy is still in bad shape and no one in the real economy who is clear in mind is looking for more credits and loans. So you can’t and won’t see any evidence right now or even in a few months.
You will notice the effects of QE I + II (together with 0% intrest rates) when the economy starts to recover. Banks will then straight away start to lend more and more money (because of the higher reserves at the fed). The rates at the fed will not raise in the same pace as lending grows because Bernanke is using lagging indicators. It will take years until the fed will have the ‘right’ intrest rates. By then the Banks already gave too many credits and loans. Inflation is not noticable in a depressed economic environment! That’s why you think right now QE doesn’t has any effect on the inflation. The inflation caused by QE and ’0% intrest rates’ will only be noticed in an economic recovery. So it my take years from now on! Every cause has its effect. When a raindrop hits the sea you will see small ripples straight away. But the real wave hitting shore you won’t see straight away. It takes time.
Anyway, i guess you made up your mind and you won’t (or you can’t) chang your beliefs. But thanks to your fantastic website. It’s always a pleasure and very informative to read it.
TPC – Dave, banks don’t lend reserves so can you explain why QE would have a positive impact on the economy? Aside from lowering rates there doesn’t seem to be anything to it….
So, in your opinion, why didn’t we see similar effects in Japan when they did QE for 4 years and it reached 25% of GDP (or more than 2x that in the US)? It’s been 5 years now since they stopped and still nothing. And why haven’t 0% rates in Japan done anything even though they’ve been in place since 1998?
There is a lot of evidence that QE and low intrest rates did harm the Japanese economy. Japanese national debt increased rapidly. Only Zimbabwe has a higher debt burden then Japan. But because of the high saving rate and deleveraging, there is not much money going out rapidly into the real economy – for NOW. The depreciation of the currency is a slow process but might accelerat very quickly. 70% of tax revenues in Japan are used to servicing the debt. What future does such an economy / society have? A currency reform in Japan is at this stage probably already inevitable. At the end, a lot of factors will have contributed to a currency refrom -but QE and low intrest rates will be a significant reason.
TPC – I’ve been listening to bond traders repeat this story for 10 years +. We agree, QE does nothing for the real economy, but comparing Zimbabwe and Japan is a gross misrepresentation of the two economies. Zimbabwe is an absurd joke of an economy. Japan is a highly diverse and sophisticated economy. The two simply cannot be compared in any way.
I’m with TPC. Your original point was there would be inflation in the US. But Japan has had deflation, or at least disinflation. I don’t deny that QE didn’t help and may have hurt, but it certainly didn’t cause inflation in Japan. The comparison to Zimbabwe is ridiculous–again, Japan has DEflation.
I didn’t compare the economy of Zimbabwe with Japan. I was ‘showing’ the relations of Japans debt burden. By the way the real economy in Japan is not in deflation. Only stocks are in deflation – this is not the same as the whole economy would experience a deflation. By far not every price collapsed 80% since 1990 in Japan. And please remember I do not talk about hyperinflation.
There are many reasons, why inflation isn’t noticable in Japan right now. One are the cheap Chinese imports, another the highly competitive economy of Japan (as mentioned), another is the high saving rate…
I don’t know if the dollar will collapse one day. But we might experience a period of high inflation (not necessarily hyperinflation) – true, right now more likely in Japan then in the US.
A collpase of a currency does not imply a collapse of the output. It is quite the opposite. Inflation is not noticed in a depressed economy – it’s the opposite. But a collapse of the output would lead to inflation and to a collapse of the currency. There are a lot of reasons of inflation.
I don’t see any collapse of the output in the US too. As I mentioned, I do not talk about hyperinflation, I talk about higher inflation which is not the same. But high inflation destroy’s wealth in the same way hyperinflation does (it requires just more time).
Anyway, you guy’s never mention the distortion of the normal trading conditions in the bond market when talking about QE. Or what happens when the fed buy’s bonds straight from the treasury’s auction?
QE is just not a problem and everyone who is concerned is just too dumb to understand it. For you there is no distortion, no money printing, no bigger money supply – it’s just a swap. Hope you guy’s are right.
Remember, money is two dimensional – quantity and velocity of circulation. The fed can only control the first. That’s why QE and low intrest rates are dangerous and the risk is underestimated not only by you.
TPC – Well, one of our points is to show that the Fed has less control over quantity and velocity than most think….
How is this not comparing Zimbabwe with Japan?
“Only Zimbabwe has a higher debt burden then Japan”
“Or what happens when the fed buy’s bonds straight from the treasury’s auction?”
They don’t and aren’t allowed to by law, except to replace maturing bonds they already hold.
I don’t know what’s your definition of economy, but if it is limited to debt burden then you are truely comparing Zimbabwe with Japan.
TPC,
I completely understand your point. Your facts and claims are valid in all forms. However, how can the dollar possibly strengthen (or atleast not crash)if professional traders bid markets up daily? Also, when do we see the purification of markets and the progression of this “Depression” with such a media blitz of myths? To me it appears “laissez faire” philosophy has gone the way of true beliefs of our Founding Fathers. I see today’s America through the eyes of Thomas Cole in his Course of Empire works…sad to say we are well into the DESTRUCTION phase.
TPC – I am not sure how the dollar can just collapse? Can you explain how that would occur exactly? It would involve a total collapse in our output and a complete collapse in faith in the currency. The two would go hand in hand and personally I just don’t see our output collapsing. Our corporations are simply too strong.
The dollar, as I understand it, is credit. The value is relative to its ability to circulate through the system of consumers to corporations to collector (banks) where it becomes a “reserve”. Therefore if credit continues to decline via lack of demand for it or lack of supply of it then the dollar collapses. The dollar (USD) is the world’s reserve currency…why? My view is the dollar is vessel for the fluid movement of continuous credit growth around the globe. To stay on point to your questions, regulators would never admit to the currency collapse (e.g. the Euro)hence you would be correct it could never “collapse”. On the other hand corporations, since December 21, 1913, have been made stronger by credit flows only and not a result of being prolific innovative engines.
“TPC – I am not sure how the dollar can just collapse? Can you explain how that would occur exactly? It would involve a total collapse in our output and a complete collapse in faith in the currency. The two would go hand in hand and personally I just don’t see our output collapsing. Our corporations are simply too strong. ”
“Our corporations are simply too strong. “,,, our salary is way too high comapre other country, we have hugh trade deficit, we spent more than we earn,,,.
I member someone said before that the real reason US enave Iraq is because they want to sell oil in Euro instaed of Dollar,,,3 or 5 years ago, US government/congress did not allow China to buy Unical oil and did not allow UAE to buy US port,,,will Dollar be the reserved currency forever?