Fed’s Fisher: QE Did Nothing (& Also Didn’t Bankrupt the USA Like I Expected)

Back in 2011 Dallas Fed President Richard Fisher voiced his concerns about QE and how he thought “monetizing the debt” was a dangerous path on the way to insolvency:

“If we continue down on the path on which the fiscal authorities put us, we will become insolvent. The question is when.”

Now Fisher is saying QE did nothing, but he’s also not pointing out that it didn’t cause us to go bankrupt either.  Fisher was against QE from the start, but not because he thought it would do nothing, but because he was worried about the precedent of monetizing the debt and how we would ever be able to control our fiscal situation once the central bank engaged in such a policy.  At the time, I said it was a bunch of nonsense.  I explained how QE was a simple asset swap that likely wouldn’t have much of an impact on the real economy and that it certainly wouldn’t contribute to bankrupting the USA.

So, I find it odd how he’s now so blithe about the whole thing.  Did he forget all the bankruptcy predictions he made?  The reason this irritates me is because he’s not really shifting his position.  He’s just moving the goal posts to claim he was right.  It would be one thing to come out and say “QE did nothing, but I was also wrong about the insolvency concerns because I may have misinterpreted exactly what QE’s impact is”.  Of course, a voting Fed member would never say that in public, but still – what is it these days where people can be so incredibly wrong and just sweep it under the rug.  Worrying about government insolvency and explicitly contributing to such silly fears are a big deal coming from a Fed President.  When such a person is so colossally wrong I think the public deserves to hear an explanation.  Not these days though….Instead, we just shift the discussion to something similarly misguided based on the same politically motivated nonsense.

Related: Why the USA Isn’t Going Bankrupt


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Frederick

    The Fed is filled with Monetarists and New Keynesian hacks. Fisher sounds like he might even have some Austrian in him. There’s no hope there.

  • Frederick

    And of course, Summers is on the way in.

  • Suvy

    Fisher voted for the first QE and didn’t vote for the others because he didn’t want to monetize the debt. He’s actually been forecasting deflation ever since 2008. Here’s an article which talks about who’s been the most successful forecasters; Fisher finished fourth which was ahead of many doves.


    “Hawks such as Dallas Fed President Richard Fisher, on the hand, say slow growth shows the ineffectiveness of the bank’s easy-money policies. Fisher was also among the best forecasters, finishing fourth out of 14 Fed officials.”

  • Suvy

    See my post below. Fisher has consistently been saying deflation is the real threat; he just felt that QE wasn’t worth the risks. To compare him to Monetarists, New Keynesians, and call him Austrian is not only absurd, but flat out wrong. The traditional Monetarists and Austrians have been calling for hyperinflation since the beginning of time. Richard Fisher isn’t one of them.

  • Johnny Evers

    If the Treasury issues a bond on Monday and the Fed buys it, I think we would all agree that’s monetization.
    However, if the Treasury issues a bond on Monday and Joe Public buys it, but then turns around and sells it back to the Fed on Tuesday, supposedly that is not monetization.

    He’s still right, imo. The question is ‘when.’ The forecaster who predicts that heavy drinking will kill you is correct, even if the boozer doesn’t drop dead right away.

  • Patrick

    Although Fisher may have been right with his forecasts, his prescriptions have been wrong. Here Sumner calls him out for wanting to raise interest rates in the depths of the crisis – http://www.themoneyillusion.com/?p=13970

    I also have qualms with him about his TBTF banking views. Can the world operate with banks the size of Comerica (largest in his Fed district)? http://www.euromoney.com/Article/3251174/Standing-up-to-Too-Big-to-Fail.html

  • Suvy

    Yea, but Fisher was also the guy who actually warned of Bear Sterns going down before it did. He warned of several other firms that ended up having major trouble down the road. Fisher actually recognized several of the problems that were building up in the financial system well before anyone else on the committee did. He saw a housing problem well before anyone else was aware of it.


    “On the housing credit side, the Dallas Fed was way ahead of others on that front because we were talking to homebuilders. You could see it building, but not showing up in the data yet”

    “Richard Fisher, president of the Federal Reserve Bank of Dallas, was a lone voice of caution in June 2007 that problems at the Wall Street investment bank Bear Stearns were not “contained” and posed an “enormous risk.

    Then-New York Fed President Timothy Geithner, now U.S. treasury secretary, and others disagreed and brushed off Fisher’s concerns. Bear Stearns collapsed in March 2008 — an early casualty of the financial crisis that led to the start of the Great Recession in December 2007.”

  • http://orcamgroup.com Cullen Roche

    He’s not right at all in the sense that everyone implies. The reason “monetizing the debt” is a dangerous concept is because it implies that it could lead to some sort of out of control inflation. I have never claimed that QE doesn’t change the composition of assets or the “moneyness” of assets. But it certainly doesn’t add to the money supply in any meaningful sense that would lead to higher inflation. That’s why the idea of monetization is so dangerous and should not be used when discussing QE.

  • JK

    I think the point Cullen is making, and I agree with this, is, look, through QE with non-banks, the Fed is basically moving people’s money from savings accounts into checking accounts. It’s important to remember that the reason people had that money in savings accounts (treasuries) in the first place is because they intended to SAVE that money, not spend it. So just because the Fed moves that money from a savings account that earns a higher interest rate into a checking account that earns a lower interest rate, that really gives us absolutely no reason to think people are going to go out and spend it. In fact, they’re likely to not spend it because of the reason just mentioned – > they bought treasuries in the first place with the intention of savings that money. As Keynes said: people’s propensity to consume is mostly determined by their income (not their portfolio balance).

    On this “The reason “monetizing the debt” is a dangerous concept is because it implies that it could lead to some sort of out of control inflation…it certainly doesn’t add to the money supply in any meaningful sense that would lead to higher inflation.”

    The only reasons “monetizing the debt” implies out of control inflation is because people who throw that around don’t know what they are talking about.

    To Johnny’s point that Deficit Spending + QE is monetizing debt (essentialy money printing), that’s correct, right? But it’s not a problem. In fact this is good. This is what we need. More Spending! No need to worry about inflation until the economy improves a lot, until unemployment gets much lower. Until then, keep smonetize away! What’s the harm?… there might be 4-6% inflation down the road in 5-10 years?

  • Suvy

    QE does depreciate the currency(the process may be indirect, but it still occurs), which does raise the value of imports. I’m also pretty sure that a lot of the “money printing”(I know this is technically not correct) has gone overseas–as it has always done historically–and is driving a lot of the froth in emerging markets. I also find it very difficult for people to tell me the massive spike in food prices worldwide combined with the massive asset price inflation that occurred right after QE 1 had nothing to do with QE 1.

  • http://orcamgroup.com Cullen Roche

    Thanks JK. That’s also why I like to look at QE as its own operation. You could have QE with deficit spending or without. Understanding that is crucial to understanding how it works and why it works if at all.

  • Suvy

    Also, you do recognize that every 1% increase in short term rates costs the federal government around $100-150 billion in interest expense right? If an inflation broke out tomorrow and say that long end rates went up to around 5%, to invert the yield and kill the inflation would cause major fiscal issues. What might actually happen is that you may get a worse recession by trying to crush the inflation that would get us out of this recession.

    The problem is the nonlinearity that forms. When government debts become many multiples of tax revenues, debt service costs move exponentially with respect to shifts in interest rates while tax revenues move linearly to inflation(technically NGDP). Once debt/income ratios get high enough, inflation actually leads to default. We’ll see this happen in Japan soon enough.

    People always focus on public debt/GDP ratios, which is wrong. The correct ratio to focus on is debt service costs/tax revenues.

  • Benjamin Cole

    I think QE monetizes debt and I like that, in context. Richard Fisher is an active menace to USA prosperity.

  • http://highgreely.com John Daschbach

    Cullen, QE does monetize the debt for as long as the Fed holds the assets. As someone has said, the Fed is just a bank, a special bank, therefor we have to analyze it as a bank. It’s exactly the same. I can’t understand how you illogically argue against yourself! It gets back to the critical thinking gap you have.

    The Fed creates money out of thin air, just as a bank does. This money goes away when the loan(bond) is repayed. It’s the same simple arithmetic. If the Fed balance sheet doesn’t contract, then that much money has been inserted into the system. Bank loans contracted hugely post-crisis (and consumer loans have yet to even turn the corner on their decline). Adding all bank loans to the Fed balance sheet is now growing slightly, but at a slower rate than any time since data is available. Since total money creation is slow, nominal GDP growth is slow.

    It’s not an asset swap if the bank does not shrink it’s assets by removing the asset.

    Again, the Fed is a bank. Use the same logic.

  • Johnny Evers

    I’m glad to hear you say that, although I disagree that monetization has any long-term benefit (short-term, yes).
    I have long suspected that many on this board favored a kind of ‘stealth monetization’ i.e., not really admitting they were for that because the word has a negative connotation — but now we’re hearing people come out and saying it.
    I think that will sharpen the debate. I’m up for hearing why pumping money in the system will grow the economy, improve living standards, etc., and not lead to inflation or currency debasement down the road.

  • Geoff

    The Fed is a bank that exists outside the private sector. The assets that the Fed buys are removed from the private sector, i.e. removed from circulation.

  • Johnny Evers

    Not really a ‘swap’ then. The bond holder is returned to his original position, but the beneficiary of deficit spending has been enhanced.

    By they way, as a bookkeeping measure, it you say that QE removes the bonds from the private sector, don’t you then have deposits in the system (deficit spending and now the bondholder) in which their money is not attached to any debt. Those deposits are just assets, right?

  • Geoff

    QE and the deficit are separate things. QE is a swap that doesn’t change the income/wealth of the private sector. The deficit DOES add to the income/wealth of the private sector.

    You might believe that QE facilitates the deficit, and that’s fine, but it’s the deficit that affects the private sector, not QE itself.

  • JWG

    When the Fed purchases Treasuries with newly created dollars it decouples federal spending from the discipline of taxation and the need for Treasury to borrow to raise the revenues it does not raise via taxation. Federal deficits funded by the Fed are the epitome of unsterilized money creation, whereas deficit spending funded by borrowing in the open market is fully sterilized. Revolutionary War continentals and Civil War greenbacks are examples of such unsterilized money creation, which inevitably leads to high inflation absent countervailing deflationary forces (which have existed since 2008). Of course, MMTers assert that in a pure fiat system taxes don’t fund anything, and they are correct if they ignore the ultimate constraint of inflation.

    Fisher was flat out wrong on “insolvency” in a pure fiat system such as the US dollar, but his concerns about debt monetization are valid because unsterilized and unmoored money creation in a pure fiat system will always be abused in the end.

  • http://brown-blog-5.blogspot.com Tom Brown

    Johnny, you write:

    “in which their money is not attached to any debt.”

    In our system ALL money (except perhaps coinage) is money to one entity and debt to another.

    Simplest case: loan creates deposit. This creates two separate things and four views of those two things:

    The two completely separate things are:

    1. deposit
    2. loan

    The value of these can change independent of one another. They are totally separate. E.g. assume the borrower and depositor are the same person: if the borrower/depositor pays interest on the loan, his deposit decreases. If the bank pays interest (or a salary or dividend or money for goods or services) to the depositor/borrower his deposit increases. If the depositor/borrower pays principal on the loan, both the loan and deposit decrease. Of course the depositor and borrower don’t have to be the same person… but if we aggregate all the banks on one hand and all the private non-banks on the other, they are (in a sense).

    To the bank the loan is a debt, to the depositor it’s an asset (thus accounting for 2 of the four balance sheet entries: of course these entries HAVE to be equal).

    To the bank the loan is an asset and to the borrower a debt (the other two balance sheet entries: of course these entries HAVE to be equal too)

    So unless we’re literally talking about coins, no money looks like ONLY like an asset if we consider all the players in the system… and even coins (though not officially liabilities to anyone) are practically a liability to the Tsy since it agrees to accept them in return for new ones when they’re worn out.

    So say you take out a loan to buy Tsy debt, then sell it to the Fed, and then Tsy spends the proceeds on you, and you use half your money to pay back your loan.

    The remainder of you money (bank deposit) is a debt to the bank. the bank is compensated for being your debtor by holding an equal share of Fed deposits as assets. The Fed, meanwhile holds Tsy debt as an asset and likewise is a debtor to the bank. Tsy is just a debtor to the Fed (no assets).

    Now say you pull your deposit out as reserve notes. Now the bank’s balance sheet is empty. The Fed is now a debtor to you instead of the bank. All else is the same.

    As long as there are no coins in the system, if you aggregate all the balance sheets together onto one balance sheet, the assets will always be equal to the liabilities. In a sense it all adds to zero at all times.

    Make sense?

  • http://brown-blog-5.blogspot.com Tom Brown

    “and not lead to inflation or currency debasement down the road”

    Well one constraint is inflation. The Fed is supposedly targeting a 2% inflation rate (from what I understand) and it’s been falling short of that goal. That kind of says they ought to be trying to INCREASE inflation. When inflation pressures start to rise above 2% they do something else. Perhaps they are not able to get there on their own and thus require MORE deficit spending from Tsy to do it. I understand that in reality they’re concerned with more than hitting their inflation target.

    If the Fed were to instead successfully target NGDP growth at say 5%, then inflation could run anywhere between 0% and 5% (supposing they are successful), while real GDP grown runs between 5% and 0%. Again, perhaps cooperation is needed from Tsy to actually accomplish this. MMists would say the Fed can do it all w/ no help from Tsy.

  • http://highgreely.com John Daschbach

    Of course it doesn’t matter how you view the Fed. The Fed is a bank. Period. Special in many ways (it has not reserve requirements and it turns over all it’s profits to the Treasury for instance) but still a bank.

    When the Fed creates money to buy Tsy or MBS securities it is doing the same thing mathematically that a bank does when it creates a loan. (of course the Fed doesn’t have to deal with small asset/liability fluctuations by borrowing in the Fed Funds market, but that is only significant to banks when there is a panic).

    The idea that assets are removed from the private sector ignores the chain events. All that matters is the net effect. It doesn’t matter if the Tsy sold the notes to private citizens and then they sold them to the Fed, the intermediate transactions (nearly) cancel out (TVM differences have an effect). If the Fed never shrinks it’s balance sheet of Tsy debt then it has monetized that much debt. (The Fed remits it’s profits [e.g. interest on notes it holds] to the Tsy). But it has to maintain it’s balance sheet of Tsy to do this, so when notes and bonds reach maturity, it has to buy new notes, bonds to offset the expiration of the existing notes/bonds.

  • http://orcamgroup.com Cullen Roche


    As usual, you are wrong and talking in your typical accusatory manner. When the Fed implements QE they swap a bond for a reserve/deposit. This is not a loan! The Fed can make loans to other banks like a regular bank does, but QE is not a loan.

    This is basic QE. If you’re going to continue commenting here in this sort of manner then please learn the basics! I get tired of having to correct comments from the same 2 or 3 people almost every single day. Thanks.

  • Stephen

    “what is it these days where people can be so incredibly wrong and just sweep it under the rug”
    What is it these days when he can be in such a job role at all when he obviously doesn’t understand the system he is supposed to be helping to manage.

  • Stephen

    Rather than applaud that is 4 from 14 perhaps we should be examining the performance of 5 downwards as well.

  • http://orcamgroup.com Cullen Roche

    QE is not a loan! A loan creates a new deposit for the non-bank private sector. QE is a permanent open market operation and involves the Fed creating ex-nihilo money to alter the composition of (mostly) non-bank financial assets.

  • http://highgreely.com John Daschbach

    NGDP targeting requires a transmission mechanism. The Fed has no mechanism to directly transmit money to the economy. Banks don’t make loans primarily based upon Fed Funds rates, in fact if you look at the data, in the past the Fed has tried to stem private sector credit formation with huge increases in the Fed Funds rate, and yet the rate of credit formation increased as the Fed raised the FF rate (e.g. late 90’s).

    Potentially the government can do NGDP targeting, with the fiscal side employing people to do productive work funded by deficit spending purchased by the Fed.

    But we are so far from equilibrium that it all depends on how people respond. Japan is probably the quintessential examples of how this can all break down.

  • Benjamin Cole

    Johnny Evers-

    Here is a short article and very readable by Milton Friedman, in which he told Japan to monetize debt hot and heavy:


    Right now we haVE tons of underutilized capacity. Pumping more money in now will increase output while competitive pressures will keep a lid on prices.

    At some point, yes, you have to let up on the gas. We are a long, long way from that point now.

    Inflation is not the threat now; Japan-o-nomics is. We could see a long-term, ZLB minor deflation perma-recession set in, if the Fed does not get very active.

    Imagine a Western town where no one has any money. People are sitting around gloomily.

    So a stranger appears with a $20 bill. He hires a guy to build a corral and that worker buys some hay and the haysellers has his horses shod, and the blacksmith hires painter to do his house, and the painter visits a bunch of call girls, and the girls spend their money at the bars and so on.

    Then, one day, it is discovered the $20 is counterfeit.

    “We have been robbed!” they cry.

    Meanwhile, a corral has been built, a house painted, horses shod, hay consumed, drinks bought and pleasures had.

    Sometimes printing (or counterfeiting) money has very positive effects.

  • Auburn Parks

    Hey Cullen,

    Do you know how the operations would play out if the Fed held its Treasuries to maturity? More specifically, does principle repayment from the TGA to the Fed qualify as “profits to the Fed to be remitted back to the Treasury” just like the interest income profits are?

    Because if the Fed remits the principle reserves back to the TGA, and the TGA received the reserve injection from the buyers of the newly issued T-bonds that covered the cost of repaying the Fed’s T-bonds, wouldn’t the TGA have that amount of extra reserves to spend?

  • Auburn Parks

    MMTers never ignore the inflation constraint. There are only two constraints to Govt financial asset creation: Inflation and the foreign exchange rate. No honest person would deny that.

  • Johnny Evers

    Tom, you are saying that all deposits are loans.
    But look at two cases:
    1. I take out a loan from the bank. The bank creates money and I have a deposit. I owe the bank money. My net position is the same. When I pay them back, the status quo is returned.
    2. The Federal government deficit spends, it creates a deposit and it comes into my account as a tax credit. This deposit is a pure asset to me, I don’t have any liability. My net worth is increased.
    Yes, in each case the deposit is a liability to the bank, but in one case money has been created that must be paid back, in another money has been created that must not be paid back.
    I’m not saying this is a bad thing.

  • Geoff

    Repetition is the mother of something :)

    John, if you would be so kind as to indulge me in a thought experiment. Let’s say the govt is running a budget surplus and the economy is weak and deflationary. So the Fed tries to stimulate with a massive QE program. The Fed balance sheet explodes, as do private bank balance sheets with shiny new deposits. Do you think this so called “money printing” will be inflationary?

  • Johnny Evers

    Ben, what I’ve taken away from MR is that debt — a T-bond — is a financial asset. It’s not a debt that has to be paid back. It’s like a guaranteed deposit. Why should the government buy them when they are already assets?
    In that sense, I agree with the idea that QE is pointless other than perhaps keeping interest rates low and triggering hot potato inflation of other assets.
    The weakness of your counterfeit argument is that at the end of it, the townspeople were holding worthless money. Is that a good tradeoff? I don’t know.
    In the 1920s, the standard of living in the U.S. grew at the fastest rate ever as the consumer society took off, but it was followed by the Great Depression. Is that the natural tradeoff?
    Now, as to deficit spending, I would support a massive stimulus only if it was targeted at students or working people in such a way that helped them succeed after the spigot was turned off.

  • Greg

    “As Keynes said: people’s propensity to consume is mostly determined by their income (not their portfolio balance).”

    I think that is true for most consumers, but there are people at the top end of town who look for a certain portfolio balance and spend the rest (disposable income ), however I think these people mostly spend their disposable income on things the rest of us consider useless like 10,000$ purses, 250000$ cars and the like.

    Monetarist policy seems over concerned with these peoples needs than the needs of 90-95% of us.

    In their dream world, the unemployed would be competing in markets to be their toenail lickers or their underarm sniffers, kind of like Morgan Warstlers bastardized JG program where we use Ebay to sell our services to bidders starting at 2$ hour with the govt paying 6$

  • Suvy

    Fisher was one of the only ones(him and Yellen, I think) who actually figured out there were things that were really wrong in the financial system beforehand(see below). He actually realized that Bear Sterns was going under and was warning about systemic risks in the financial system and no one bothered to listen to him. It actually might be a better idea to listen to him.

    Everything that I’ve heard people say(see this post and various other comments) to Fisher not being Fed Chairman is really just based on false statements and misconceptions, which I’ve pointed out several times.

  • Suvy

    So what happens when you’re dependent on the Fed buying massive quantities of debt to finance your deficits while debt/income ratios are high and an inflation breaks out. Trying to kill the inflation could either create major fiscal issues and maybe even a default(ex. Japan). What if the central bank just decides to keep going and has to effectively peg a yield curve and what’s the impact on the FX?

    The kind of inflation that we get through QE is a cost-push inflation. To say that we need larger deficits and more QE is a very, very risky strategy and if we keep pretending like it’s not risky, then we’re gonna be in some real trouble.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    I’d say in neither case must the money be paid back. In aggregate banks never want the money to be paid back. If it’s paid back they don’t make any profit.

  • Johnny Evers

    Technically, I’d say that the bank doesn’t want you to pay back the loan, but it wants you to keep paying them interest — and take out more loans!
    Doesn’t that make for an unstable system, as we’ve seen?
    Maybe that’s why we need QE and deficit spending — to introduce deposits into the system that we don’t have to ‘pay back’ or pay interest on. (Question mark).

  • Auburn Parks

    I am sorry but I honestly have no idea what you are talking about. A growing economy with a growing population must have a growing money supply. That supply of money can grow either through private debt expansion or Govt “debt” expansion. (Yes fellas, I understand the MR position that Govt is simply a redistributor of bank money, and thats accurate through one particular lens or POV.).

    The difference between the two:
    Bank debt must be paid back and Govt debt should be a permanent and continuing infusion of Net financial assets.

    Japan has neither major fiscal issues or has defaulted, so that statement was irrelevant.

    The Govt is not at all dependent on QE in order to sell Treasuries. Cullen has pointed out many times that during the periods when QE was not actively happening, there was never a shortage of people who want to deposit their money at the Fed to earn default risk free interest income.

    If unemployment is too high => the deficit and private credit expansion are too small and\or slow

    If inflation is too high and rising => the deficit and private credit expansion are too big and\or fast

    Which of these two things is the case right now?

    General demand pull inflation is pretty easy to deal with, cut the deficit and\or raise interest rates or capital requirements to slow bank credit expansion.

    There are many, many extremely complicated issues in economics and banking. However, understanding national accounting and identities are simple.

  • http://orcamgroup.com Cullen Roche

    Actually, pvt debt doesn’t get “paid back” in the aggregate either. That’s a fallacy of composition. Saying that the aggregate pvt sector pays back its debt over the long term is just as wrong as saying that the govt must pay back its debt.

  • Phillips

    I can’t agree that QE did nothing.
    In my opinion, the true objective of QE has always been suppression of interest payments the government has to pay on debt during a period of unprecedented debt growth.
    Secondarily, its purpose was to bolster confidence in the financial system. “I got your back”.
    By monopolizing the UST market, the FED successfully held down the interest burden on new US debt and allowed refinancing of old debt at lower rates. And by refunding interest earned back to the Treasury, the government essentially borrowed money for free.
    It was an opportune time for such a move. The world wanted a safe haven for money in a global financial crisis, so it was willing to accept negative real returns. It also occurred at a time when demographics are creating an unprecedented demand for safe haven funds.
    Suppression of yield also helped housing to recover to some extent and allowed refinancing at lower rates which made cash available for other consumer goods. New regulations help keep it from getting out of control.
    It was not inflationary because it was a swap of assets. The cost of money also contributes to inflation through the pass through to consumer goods. And low cost of money helps suppress inflation. Further it coincided with changes in banking regulations effecting reserves, capital structure and risk taking. It was not inflationary because it did not really stimulate demand to any significant extent. It was not inflationary because the consumer has concurrently been deleveraging.
    The return of confidence in the financial system in turn promoted some risk taking as reflected in equities. Unfortunately as the saying goes, ”you have to have money to make money”, so the recovery of capital markets benefitted those that had money to begin with. The rest are simply struggling to stay afloat.
    My opinion is that, it was stroke of pure genius.

  • Auburn Parks

    Of course you’re right in the aggregate, don’t know what I was thinking. That was a terrible way of describing that point.

    Have any insight into my question above about whether or not TGA payments to the Fed for the principle of maturing Treasuries (should the Fed hold them to maturity) are also remitted back to the TGA in a similar manner as interest income is?

  • Mr. Market

    Fisher is an optimist. The US is already insolvent. But Insolvency won’t be a problem as long as the US can pay its interest bills (=liquidity).

    QE has led to an increased amount of debt & credit. Making the upcoming bankruptcy of the US even more severe. In that regard, Fisher is absolutely 1,000,000 % right.

    Fisher is alse very when it come to the notion that QE would set a precedent. Now the FED is forced to QE from “here till the kingdom comes”.

  • http://orcamgroup.com Cullen Roche

    Well, if the Fed was paid the principal they’d just end up buying the bonds again on the secondary market to maintain QE. So I don’t see how that would really change much.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Auburn, I asked that of JKH once and he said that the principal is NOT remitted back. If I read him right and recall correctly :D

    Anyway, I’ve been going with that ever since.

    That kind of makes sense. If it was remitted back, it would unbalance the Fed’s balance sheet. That’s also my assumption here:


  • PeterP

    The US is “already insolvent” in that some checks already got bounced? You don’t know what you are talking about. The US “pays off” ~60T of bonds every year by crediting reserve accounts to the tune of 50T, it is a non-issue, there are no hickups there, so no insolvency.


  • http://www.orcamgroup.com Cullen Roche

    Rolling over debt is not the same as “paying it back”. I’d stop with the MMT hyperbole. It doesn’t help the point you’re trying to make. Better to just say the US govt is a contingent currency issuer who can’t run out of money.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    “contingent currency issuer?” … Cullen I must have missed this. Have you talked about this before? Is this at all related to JKH’s description of coins as being a “contingent liability” of the US Tsy (BTW, I asked JKH about that recently (in comments to his latest post)… he forgot that he’d used that description… but I think he re-confirmed the idea). If not what do you mean by that phrase? Thanks!

  • http://orcamgroup.com Cullen Roche

    Contingent currency issuer refers to the fact that the US govt could, if it wanted to, just print off dollars to “repay” any debts it has. It’s “contingent” because this is not the way the govt actually operates today. We live in an MR world, but the MMT option of becoming a pure currency issuer is always there. That’s what I mean by “contingent currency issuer”.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Makes sense! Thanks.

  • Suvy

    Add FX movement. If your deficits get out of control while government debts balloon, nonlinearities begin to form. When government debt/income ratios get really high, any small shock can force the central bank to effectively peg the yield curve. When a central bank pegs the yield curve, what happens to the value of the currency?

  • Suvy

    You have to remember that almost every single financial crisis is usually related to international imbalances. You can’t really exclude the flows of capital in any of this as that is the most important part.

    I’m actually starting to think that most of the economic cycles are related to the flows of capital across the world. I’m not sure on this, but it’s starting to creep in my head.

  • LVG

    Auburn is a MMT person so he likely doesn’t think external shocks are all that problematic because they think the government can just print the money to offset any problem. MMTers says big current account deficit are a good thing without understanding how they can lead to other problems. This is one of the big areas where they diverge from other Post-Keynesians.

  • Mr. Market

    You confuse “Solvency” with “Liquidity”. The US is insolvent because the value of the assets of the US is smaller than the value of the debts.

    But that Insolvency only becomes a problem when the US doesn’t have enough income (e.g. taxes) to pay the interest on that debt and is able to roll over that debt at an acceptable interest rate.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Mr. Market: are you counting all the assets of the US there? All the government land, monuments, national labs, military bases & HW, buildings, parks, museums, coastal waters, highways, electromagnetic spectrum, air spaces, etc. (I’m not sure all the stuff I should count here… but it seems the US may be in a financial asset hole, but has many non-financial assets worth a whole lot)

  • Mr. Market

    Yes, US “assets” are still worth A LOT. But are they worth $ 57 trillion ? I don’t believe a word of it.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    I was just listing Federal government assets (which is hopefully at least $17T).. if you’re going to include private assets, that’s a whole other can of worms.

    Also recall that social security, Fed retirement funds and other intra-gov agencies hold a LARGE percentage of total Tsy debt (about 1/3). Some of that represents OUR assets.

  • Johnny Evers

    Those assets are valuable in that they add value to living standards and very often create income — however, selling them would not really add to living standards or create income (unless the new owners used them more productively.
    If you start selling off assets — well, unfortunately, isn’t that what a lot of the finance economy is these days, just moving around assets from one owner to another and creating debt (deposits) but without actually adding value.
    Another thought, the pyramids are no doubt a huge value to the Egyptian government; maybe you could sell them to an outside agency that could unlock their value, but Egypt’s real problem is that they have a system that degrades economic activity. Selling assets helps them only in the short time.
    Another example: We have a case here in Detroit, which is going bankrupt and considering selling off the local art museum. It would help pay off creditors, but wouldn’t add anything to the city’s economic activity or the benefits of the citizens.
    All our debts have just pinned us down. We can’t build new art museums or highway systems because the debts are hindering growth.

  • http://pragcap.com abgary1

    ‘QE did nothing’ if you consider artificially high stock markets and commodities nothing.

    Freeing up the big banks to speculate in the markets is something in my opinion.

  • Adam P.

    Well, communism did that, building entire countries almost without bank money, we can even say without private money. Sometimes it worked, but al last id didn’t. Would you like to try ?

  • Suvy

    From what you said, it seems like MMT ignores the single most important part: the flow of capital across borders.

  • Johnny Evers

    A better response would be:
    When I borrow, even if I keep rolling the loan, it creates a burden on my to pay interest and may limit me from making other loans.
    But if money is deficit spent into my account, it increases my net worth but puts no future burden on me, nor does it limit by potential to borrow.
    See how not all deposits are the same.
    I think I’m talking myself into the Fed crediting our savings accounts with money that doesn’t have to be repaid, provided I can be convinced it won’t lead to inflation.


    You may be in for a surprise as will most.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Hi Johnny… sure, the amount of debt and deposit on each individuals balance sheet will vary. Didn’t I cover that by implying that borrower and depositor need not be the same person? I made them the same for simplicity. Me Ex 5 covers such a case… and throws in a 2nd bank to boot.

  • InvestorX

    Well, look at what he said:

    “When the Fed creates money to buy Tsy or MBS securities it is doing the same thing mathematically that a bank does when it creates a loan.”

    There is nothing wrong with that statement. Besides what is so important if it is a loan or a bond? What are bonds – securitized loans or what? As I have also said – QE is debt monetization and money printing. It has added $3tr to deposits and M2 has grown from $8tr to $11tr. There is no need to debate this. The question is: Is this M2 growth hyperinflationary in the face of other deflationary forces? It seems not to be the case. So QE has added “just right” M2 growth to “facilitate” nominal GDP growth of several percentage points p.a. It seems a huge success in that sense.

  • Geoff

    X-man, your argument would be stronger if you said that QE “plus deficit spending” is debt monetization and money printing. The “deficit spending” part is critical. Without deficit spending, there will no hyperinflation.

    BTW, have you noticed that the US deficit has been shrinking rapidly?

  • http://highgreely.com John Daschbach

    No, QE is a loan. Go back to your basic description of the monetary system and work through it. The basics are pretty simple. I would say it’s clear you don’t understand them.

    Here are some things that MR gets correct that you don’t seem to understand in detail:

    1) Banks can create money out of thin air when they issue a loan. Work it out in the single bank limit with no cash.

    2) A single bank with a single loan after complete repayment of the loan yields zero net money creation.

    3) Net real money creation is perfectly measured by the integral of the fraction of all loans outstanding that can be traced back to money creation via rule (1).

    4) The Fed is a bank.

    These are the basics of MR. To argue that QE only swaps a loan(bond) for a reserve completely violates the basics of MR that money creation is the net of all bank processes that result in bank assets being created without offsetting liabilities.

    The view that it is an asset swap ignores the very basics of understanding the monetary system and very basic accounting. It doesn’t matter if the Fed buys a bond from a private person or directly from the Treasury, just like it doesn’t matter if a person gets a car loan directly from a bank (which can create the money out of thin air) or through a third party which can’t. What matters is if there is net money creation via banks. All other entities in the system have an offsetting accounting entry for the money that funded the loan.

    These are the very basics of MR. Thus, the Fed, being a bank, can create money out of thin air. If you don’t understand the basics of accounting and MR then you might argue that it is an asset swap in the case of a person selling a bond to the Fed because the person earlier bought the bond with money. But of course this is not correct if you understand simple arithmetic. It’s the net over all transactions, the others (mostly) net to zero. If the Fed balance sheet increases via making loans (with money created out of thin air) then, because it is a bank, the money supply increases. If and when the Fed balance sheet contracts, the money goes away, just like any other bank.

    These are the basics of MR. Very easy to understand. Apparently some people who discuss MR don’t understand the basic mathematics of it.

  • http://orcamgroup.com Cullen Roche

    I am the original FOUNDER of MR. To claim that I don’t understand it is preposterous! Of course QE creates money. I said it doesn’t create net financial assets and is nothing more than an asset swap resulting in a change in the moneyness of pvt financial assets. It is not a loan though and it’s absolutely wrong to describe it as such! If you describe it as a loan then you are not using the MR understanding or even any understanding at all! The Fed certainly doesn’t describe it as a loan and neither does MR. In fact, I don’t know anyone who does beside you.

    I’ve written about this stuff in detail for 5 years now. It’s on my site in excruciating detail and I’ve been explaining it the same way for years now. What you’ve just described is just a version of something you learned from me and have reworded incorrectly. Please review the basic accounting again:



  • LVG

    That is the funniest thing I’ve read on here in a long time. I don’t think John even knows you founded MR. LOL.

  • http://orcamgroup.com Cullen Roche


  • InvestorX

    I do not subscribe to the MMT view, if this is what you are implying. Besides I am not worried about hyperinflation at all.

    All I am saying is that QE with public = money printing. What is purchased with the money – debt. So it is also a debt monetization. Has it added any equity to someone – not. Is it going to lead to GDP growth – maybe but not directly, as it would work via investment overstimulus, money illusion, psychology etc. QE is also similar to loan creation for the CB – it creates money ex nihilo and increases its assets by a loan / debt instrument.

    Now fiscal stimulus is the way to inject this newly created money from the financial markets into the real economy directly. That is why it has an effect on CPI and GDP growth (over the short term – over the long term the effect is most likely negative).