THE FED IS NOT MONETIZING THE DEBT

The Fed’s purchases of treasuries continue to attract a huge amount of attention.  Despite solid evidence that the program is failing to have any real fundamental economic impact there are other worries about the program.  None has been more apparent in recent weeks than the Fed’s supposed monetization of the US government’s debt.  These fears of monetization are unfounded due to the various myths that are perpetually touted by the mainstream media, supposed experts on the US monetary system and even Fed officials.

In an article Monday, Bloomberg reported that the Fed has been buying an exorbitant proportion of the recently issued treasury debt:

“More than 40 percent of the government bonds the Fed bought in January for its so-called quantitative easing were auctioned in the previous 90 days, up from 20 percent in December and 15 percent in November, according to Bank of America Merrill Lynch. The central bank is concentrating on newer securities as its $600 billion program depletes primary dealers’ holdings of Treasuries to the lowest since November 2009.”

Why does this matter?  Because it gives the appearance that the US government is directly funding itself via the Fed’s purchases.  This would be nefarious if it were true and would give credence to the endless complaints about the high rate of inflation in the USA (which is currently running at a staggering 1.5%-2.25% depending on the source).  Fortunately, the concerns are unfounded.

When the US government was working under the gold standard the US Treasury would literally print up certificates to purchase gold from the gold mines.  These gold bars would be delivered to the government and the Treasury would issue a check to the miner.  This new money would end up at the Federal Reserve Bank in the form of deposits.  This would naturally increase the money supply.   An increase in the money supply is scary for obvious reasons.   So, the term debt monetization has its origins in the days of the gold standard, but persists to this day despite the fact that we are no longer on a gold standard.  Not surprisingly, the term is still used today despite the fact that the US government can’t monetize its debt via Fed purchases (I elaborate below).

This issue was magnified yesterday when Richard Fisher of the Dallas Fed invoked the evil “debt monetization” term in his speech:

“the FOMC collectively decided in November to temporarily undertake a program to purchase U.S. Treasuries that, when added to previous policy initiatives, roughly means we will be purchasing the equivalent of all newly issued Treasury debt through June.  By this action, we have run the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance. To avoid that perception, we must vigilantly protect the integrity of our delicate franchise. There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity. The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: “Monetary policy responsibility cannot substitute for government irresponsibility.”

The entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we are pushing the envelope with the current round of Treasury purchases. I would be very wary of expanding our balance sheet further; indeed, given current economic and financial conditions, it is hard for me to envision a scenario where I would not use my voting position this year to formally dissent should the FOMC recommend another tranche of monetary accommodation. And I expect I will be at the forefront of the effort to trim back our Treasury holdings and tighten policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream. I am a veteran of the Carter administration and know how easily prices can spin out of control and how cruelly markets can exact their revenge. I would not want to relive that experience.”

Fisher’s implication is that the Fed is directly helping to fund the US government’s spending.  After all, if they’re buying the debt then they’re obviously funding the spending, right?  Wrong.  As regular readers know, the US government is never constrained in its ability to spend.  Our monetary system underwent a dramatic change when Richard Nixon closed the gold window. It removed any constraint on the US government’s ability to spend.  Nonetheless, the operating structure of the gold standard (issuing bonds, etc) still largely remained intact.

It’s important to understand the Fed and Treasury’s symbiotic relationship.  When the US government wants to spend money they do not call China and ask for a line of credit.  They do not count tax receipts.  And they most certainly do not call the Fed to ensure that we have any money left.  The Treasury is actually able to harness banks as funding agents at all times due to the unique relationship between the banking system, central bank and US government.  So the entire implication that the Fed is helping to fund US government expenditures is entirely inaccurate and anyone who implies as much is still working under the now defunct gold standard model and clearly doesn’t understand the workings of the modern monetary system.  Auctions in the USA don’t fail because they’re designed not to fail.

For a brief instant, Mr. Fisher appears as though he is on the verge of understanding the system he now heavily influences as a new voting member of the FOMC.  Mr. Fisher says that the spending effectively comes first:

“But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place….The Fed does not create government debt; Congress does.”

Lights should be going off in Mr. Fisher’s head at this point as he says this. Congress can’t “run out of money” unless it decides to.  That is, the US government is always able to raise the necessary funding through bond issuance if it must (see here for more).  The idea that the US government can’t “run out of money” is so foreign to most people that their minds repel it.

By now you might be thinking that this is all semantics.  Who cares if the Fed isn’t helping to fund the spending?  They’re still buying the bonds and the spending is occurring regardless of the Fed’s actions.  Well, it’s important for several reasons:

1) Someone who understands the modern monetary system understands that a sovereign government with endless supply of currency in a floating exchange rate system has no solvency issue.  Therefore, it should not be treated as if it is a household, business or state.

2) If solvency is not a concern then clearly the concern is inflation or potential hyperinflation.  But as we’ve seen over the last few years the Fed has not succeeded at creating inflation anywhere close to the historical average and certainly not dangerously high levels of inflation.  To someone who understands how the modern monetary system functions it not surprising then, that the Fed has been unable to generate inflation during a balance sheet recession.

3) We have to be very precise about monetary operations and the relationship between the Fed and Treasury.  Although I acknowledge that the US Congress is never constrained in its ability to spend this by no means implies that the US Congress should spend beyond its means.  To do so can possibly result in malinvestment or very high inflation.

4) The idea that the Fed is buying government debt might imply that there are is a shortage of buyers of US debt.  This is impossible due to the government’s symbiotic relationship with the Fed.  Auctions are designed around calculated reserves and are carefully designed so as not to fail.

5) Voting members of the FOMC do not understand the actual workings of the Federal Reserve System and the US monetary system and have played a direct role in the misguided policy response in recent years.  Of course, this is nothing new.  This problem has persisted throughout the entirety of the last 40 years and is largely to blame for the structural flaws in the US economy currently.

6) The overwhelming majority of US citizens have no idea how the US monetary system actually functions and therefore are reluctant or unable to force any sort of real change.  Those with political or monetary motivations tend to invoke fearful language that incites anger and in truth only adds to the problems in the US economy by driving the voter base to react to their emotions and not their knowledge of the system in which they reside.

7) Quantitative easing does not increase the money supply and is therefore not inflationary.  Although this operation can have significant psychological impacts (such as inducing undue speculation) QE can only work in the same manner that traditional monetary policy is implemented at the short-end of the curve.  This occurs by setting a target rate and by being a willing buyer of any size at that rate.  This is NOT how the current policy is designed.  The current structure of QE leaves interest rates entirely controlled by the marketplace and not the Fed.  Therefore, the mixed results should come as no surprise to anyone as the policy was poorly designed to begin with and is likely doing little more than contributing to excessive speculation and promoting the continued financialization of the US economy.  The Fed’s implementation of such policies (such as QE) and complete misunderstanding of such policies does nothing but help create disequilibrium in the marketplace and increase the odds of future instability.


See the QE primer for more details such as the proper discussion of “monetization” with respects to the various QE transactions.

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.

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  • http://www.3spoken.co.uk Neil Wilson

    The Fed can get away from using bonds as reserve drain by paying interest on reserves equal to their target rate. That’s what the Bank of England now does on reserves – paying the Bank Rate.

    That then highlights the current problem with the system. At the moment both financial corporations and non-financial corporations are piling up huge quantities of cash in Japan, the US and the UK. That money is going straight into bonds at a risk free rate well above the current target rate.

    What I find amusing is how the politicians complain about the ‘feckless unemployed’ living off state welfare, when the corporations of the country are doing just that.

    We should stop issuing bonds to get rid of the interest which is nothing more than unemployment benefit for feckless corporations. Then they might start investing their cash pile in productive assets.

  • TPC

    The Fed’s current policy of paying IOER is a step in the right direction.

  • wh10

    Neil, can you please elaborate on “That money is going straight into bonds at a risk free rate well above the current target rate”?

    What is the risk free rate and current target rate that you refer to?

  • Johan

    Hello,

    I have a question regarding eurozone functionning. As there is no government, how does money supply can increase then?

    As for the US, I still would like to know how the difference between what as been spent and the liability recorded in the book. Let say the government is at 0, start their computer, day 1: transfer $1 million to a tank manufacturer to buy 1 big tank. Day 3, (cause it Sunday was between) They will need to issue a $1 million bond to “cover” the spending, right? So my question is, in which account are those $1 million during Sunday?

    It would help me undesrtanding MMT I think.

    Thank you!

  • Yuri

    The links on the article do not work, they link back to the same page.

  • Anonymous

    Cullen,

    I think this analysis is correct, but it has a flaw. It considers only the vertical level QE effect, but QE has also an effect on the horizontal level, which can be extremely powerful – it alters the mix of assets in the private sector by i) increasing the portion of more liquid assets (cash being more liquid than treasuries) and ii) by reducing the level of income in the portfolio it forces a shift toward other income / capital appreciation generating assets (e.g. speculation psychology and later “feel good” economy psychology).

    So it not only misleads people to speculative (which is often inflationary as now in food and energy) activity by pandering to their misconceptions, but also forces them to speculate by having an income reducing effect on their portfolios while also providing the necessary means (more liquid cash).

    So your analysis may be correct (appears to be) regarding the fundamental economic effect on the economy / asset markets, but the psychological indirect effect (portfolio mix effect) may be so much powerful as to create a self-fulfilling “feel good” economy and thus real economic rebound.

    Thus, my issue with your analysis is that it does not predict the correct economic / market effects in the end (at least not with the current market “pavlovian bulls” / “I want an iPad” psychology)

    InvestorX

  • Anonymous

    Ithink he refers to Fed rates at zero, where e.g. banks can borrow at and park the cash at 3.7% in the US Treasury 10yr bond. There is no credit risk involved and, if held to maturity, no price risk in Treasuries. So the only risk in this carry trade is if Fed rates rise above the current Treasury rate.

  • ducksoup

    Point #1 is the crux. We might be the monopoly supplier of $ but we aren’t so for commodities. They are the ‘gold’ standard. Thus QE = “money printing” = monetizing the debt = inflation. End of story. The dead time has passed and now we are starting the lag. Prices (inflation) going up, up, up.

  • http://BBROGS bob brogan

    “The idea that the Fed is buying government debt might imply that there is a shortage of buyers of US debt. This is impossible as government debt issuance serves only as a reserve drain.”

    Reserve Drain?
    Oh, drainning all all those FREE excess reserves from Wachovia, Citicorp, Wells Fargo, Etc.?

    Shortage of Buyers?
    Move over China & Japan, here comes the lender of last resort the US Treas (now the largest holders of US Debt then any FCB in less than 1 year but please let’s not use the “M” word (and it was only an accounting procedure))

    “Monetization is achieved by act of Congress via deficit spending and is independent of the Fed’s monetary policy”

    The FederalReserve was created by an Act of Congress and derives its power from same but has limited accountablity and can & does act under clowd of secrecy.

    “But as we’ve seen over the last few years the Fed has not succeeded at creating inflation anywhere close to the historical average and certainly not dangerously high levels of inflation. To someone who understands how the modern monetary system functions it not surprising then, that the Fed has been unable to generate inflation during a balance sheet recession.”

    Tell this to the Commodity Pits around the world (Food prices up +30% since Sept ’10)and food riots in the Meditranian states (tUNESIA, eGYPT, jORDAN, ETC.)
    Suggest you talk to your Wife about food prices here at home.

    IMHO
    BB.

  • Max

    Since 2008 the Fed has been paying interest on reserves, so it’s no longer true that government debt is needed to implement monetary policy. The only function of government debt today is to manage inflation risk (i.e. to transfer inflation risk from taxpayers to bondholders).

  • P Sean

    There you go again Cullen.
    Hubris, whether The Feds, The Congress, or yours, always leads to destruction.

  • Mediocritas

    I know I’ve said this many times before, but it’s a point worth repeating ad nauseam.

    The trouble with QE2 is that it indirectly, massively, increases systemic risk by artificially suppressing yields (downwards), thereby forcing fixed income into higher risk (primarily equities).

    The mutual fund elephant alone currently has global liabilities around 26 trillion (http://www.guardian.co.uk/business/2011/feb/07/pension-funds-assets-liabilities). Comparably, US muni debt (that is on the radar again) is about 10% of that size, falling short of 3 trillion. (http://static.businessinsider.com/image/4d5014744bd7c8d752120000/bubble.jpg)

    When $26 trillion wants to flow into hugely overvalued stocks, that’s a problem, A BIG problem.

    It was for that reason that I called, repeatedly, for the Fed to stay the hell away from the long end of the yield curve. Just stay left and keep rolling that position indefinitely. There is absolutely NO good reason for the Fed to be on the long end.

    Their justification for engaging the long end is to take heat off the housing market, propping the market by reducing the rates of defaults as a consequence of lower long yields flowing into lower mortgage rates. FORGET IT! The problem with US housing is NOT high rates, it’s INFLATED PRINCIPAL as a consequence of systemic and pervasive fraud. It is the FRAUD that must be addressed.

    QE1 was (and is) the solution here. Just swap the toxic assets onto the Fed’s books then write it down during the fraud exposure process. Let the Fed absorb the loss (because it can), refactor the principal on all those loans out there, backtrace to find corrupt parties in the mortgage origination pipeline and send them to prison, and regulate appropriately to ensure moral hazards are removed. This would restore confidence in the financial system and return the housing market to a healthy state.

    QE2 is a mistake. Either the Fed is making a big blunder or, as I stated earlier, there is a secondary motive in play. I believe this motive exists, and, as I said eariler, I suspect that QE2 is *really* a lead-in to a bailout of the states.

    Of course, the Fed being the Fed, like any low resolution central planner utterly fails to distribute money effectively (at high resolution) leading to certain investment banks ending up far more cashed up than they should be while the underlying real economy sinks into deflation.

    This encourages commodity speculation (which further kills the real economy). However, it is unfair to point the blame only at the Fed here. As Cullen correctly pointed out, Chinese maintenance of the USD-RMB currency peg is the primary problem (Chinese inflation).

    None of this ends well. QE1 was necessary, QE2 was poorly thought out. All will continue to fail while fiscal and judicial activities fail to keep pace with the Fed’s actions.

  • yo

    The thing is, if “our bond market funds nothing and serves only as a reserve drain”, then it only follows that what they are doing now is “undraining reserves”.

    When congress runs a trillion dollar deficit, and it is not soaked up by the bond market, then the money is being printed and available and i don’t see why we should get all hot and bothered by the names they give it or who is being blamed for printing it.

  • Dan

    It would seem that the fed, with these open market purchases, alters the interest rate feedback mechanism – effectively enabling more debt being issued than the market forces would allow (regardless of being able to pay back in inflated dollars or not).

    The other issue, which has been documented over at zerohedge.com buy tracking individual bonds, is that the primary dealers in QE have been effectively been given handouts by the FED as it typically buys the most expensive bonds. They estimated the value of this subsidy to be about $5B/month.

  • JH

    There are several points here where you are not being completely candid. First of all while it is true that Congress is the source of deficit spending it is the FED by way of keeping Treasury interest at its artificially low rate which is enabling the Congress to do what would be politically much more difficult to do if rates were higher.

    TPC – The point is that the govt controls the rate it pays. It is not paying investors to take some risk. It is not funding. Therefore, it’s absurd to even pay a premium for duration. The govt should control the entire curve just like they control the short end. But they let the market control. It makes no sense.

    If you are going to use a range of inflation figures you should also include those of Shadowstats who are more realistic given they have no political agenda. That would put inflation at a much more realistic level in the 5% to 6% range.

    TPC – No one in the world knows where SS gets their numbers from and I don’t know of any other reliable independent gauge that has inflation being even close to 6%. Until they disclose their methodology or some portion of it I find it difficult to believe.

    To say that the government is never constrained in its spending is not true. It is constrained by the public opinion of the voters. By misinforming the voters as to the seriousness of deficit spending, you are helping to enable the government in its crimes.

    TPC – That is only a technical constraint. Not an operational constraint.

    Your piece also completely ignores QE as being the source of funding for the carry trade in which banks are borrowing at practically O% interest and loaning in emerging countries like Brazil at 10+% driving commodity prices which is inflationary worldwide.
    Lastly you do not address the fact that all funds created by the FED are inflationary as soon as they are created due to the fact they are created with interest. As soon as a dollar is created it is worth less than 100 cents because of interest via the FED. The more monetary creation, the more inflation.

    TPC – This “carry trade” is a horizontal transaction which results in an asset and liability. There is no net change in financial assets. Money is not pouring into anything. These speculators are buying an asset from someone else. Can it influence market price? Only if the buyer is more eager than the seller or vice versa. Does it have any fundamental impact? I have never rejected the speculative notion surrounding Fed ops.

  • wh10

    yeah but isn’t the fed funds generally always under the 10 yr? is it not essentially the interest rate floor and one of the primary channels through which the fed tries to control interest rates?

  • Pete

    If your post is true, then do we even have a deficit? we use our dollar which is limitless to buy anything around globe. why cares about the deficit? Bail out anyone in this country by just giving them dollar! states, family, housing….. To a degree this sounds crazy.

  • wh10

    Cullen,

    This is a great post summarizing a lot of what’s been happening over the past several months.

    Question with regards to money creation and fiscal vs monetary policy. If the Fed issues a bond, it must pay interest, above and beyond the principal it initially “swapped” out of the system. Do you not consider that interest to be net new money infused into the economy and thus a form of net govt spending?

    Thanks.

  • wh10

    You have to read Cullen’s posts more carefully. He never says this and in fact often makes sure to preempt these sort of comments.

    “Although I acknowledge that the US Congress is never constrained in its ability to spend this by no means implies that the US Congress should spend beyond its means. To do so can possibly result in malinvestment or very high inflation.”

    More specifically, if spending leads net financial assets > than the productive capacity of the economy, then inflation becomes a threat. He would consider your extreme hypothetical to be extreme malinvestment and would likely lead to crippling inflation.

  • wh10

    to more directly answer your question, the “deficit,” or in other words net govt spending, can be used to promote economic growth and societal well-being. however, if the deficit is mismanaged through inefficient or corrupt spending, then the outcome will certainly not be optimal and potentially severely damaging.

  • http://shareholdersunite.com stpioc

    Cullen, quick question. MMT is right in stating that government credits account when it spends (beyond tax receipts) and hence creates money.

    However, the government cannot spend (beyond tax receipts) without issuing debt. It can sell that debt either on the open market or to the CB. Selling to the open market will retire the money created by the government spending (hence it’s money neutral, or ‘funded’). Selling to the CB credits the government accounts of what they already have spend.

    So expanding the money supply is NOT possible without CB debt purchases. The order of things can indeed be different than traditional monetary theory has it (that is, spending and money creation can precede CB funding), but money creation by overspending has to involve the CB so the issue seems moot to me.

    Unless you’re telling me the government can spend beyond tax receipts WITHOUT issuing any debt at all, I can’t see what MMT brings to the table, but perhaps it’s just my traditional monetary training speaking here..

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

    No, not “bailout anyone”. Malfeasance should never be rewarded. We can spend up to our productive capacity and it should be efficient and promote productive pvt sector behavior.

  • haris07

    Chairman Ryan jumps straight into a QE2 question, and not a bad one: Does the Fed creating money amount to debt monetization? (By definition, some Fed policy makers acknowledge that’s what the Fed is doing.) Bernanke makes an important distinction: Monetization “would involve a permanent increase in the money supply” to pay the government’s bills through money creation. The Fed is planning to reverse it.

    Let’s see about that….my take is that QE3 is coming (because housing is in the doldrums). At some point, this becomes irreversible! And Cullen, you and your MMT’ers are likely going to be wrong – this is going to be inflationary (core and other such nonsense notwithstanding).

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

    The US govt certainly could spend without issuing bonds. Bond issuance is just a reserve drain. And that reserve drain is now done effectively by IOER. So, the existence of the govt bond market is more a political tool than anything else.

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

    I have NEVER denied that fact that we would see inflation during an economic recovery. In fact, I wrote several stories saying that we definitely would see inflation during recovery. And look what’s happening. I have maintained that none of this would be hyperinflationary. I have about a 2.5% inflation target this year. Will be higher if we get an oil shock. But that will likely just push as back into recession anyhow….

  • Anonymous

    The issue is that the psychological effect leads to a real fundamnetal effect. As per Soros reflexivity theory or my attempt to explain the links above. And the second issue is, that the forecast of your theory is not useful / actionable.

    InvestorX

  • http://shareholdersunite.com stpioc

    ["The US govt certainly could spend without issuing bonds"]

    Spending over and above tax receipts and WITHOUT issuing bonds? How does that show up in the national accounts. As far as I’m aware:

    government spending = tax receipts + debt issuance.

    By accounting definition.

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

    Perhaps short-term positive impacts. But it does little to resolve the structural problems that got us into this mess. Sure, QE might cause some speculation, make markets run higher, and make us all feel better for a few years. But what happens when we all wake up in 5 years and notice that the consumer balance sheet is still upside down? Then what? We crash and crank up the Bernanke fix it machina again?

  • Anonymous

    Currently you have the steepest curve ever. And the Fed rate can be > UST rate, e.g. before the 2007-2008 crisis started.

  • http://blogfirstrider.blogspot.com/ first

    Generally if something is to complicated there is a reason.
    There was more information coming out of the State bank of the USSR.

    Its a transfer of wealth. When inflation will hit the fan they will deal with that later as long as they save the Banking system first. For now BB still benefits from exporting inflation. The world is flooded with Dollars. The US is the largest economy in the world and the Federal Open Market comity does not understand the actual workings of the Federal Reserve System. ????
    With all due respect that sounds a bit naive.

  • El Viejo

    So Inflation is not a function of M2, Mx or whatever, but a function of supply and demand of goods (production capacity and money in the hands of people) and can be adjusted down by the tax structure: (more taxes on people – less on corporations so they can expand production) And since we have so many people unemployed NAIRU says no inflation and baby boomer demographics says people with an average of 89k in their 401ks will be saving more for retirement. And corporations have large reserves of cash right now and fear abounds and spending is less. So I don’t believe we will see inflation either. BUT why or how does inflation come after wars? And will that be the spoiler?

  • effem

    While you are technically correct, what you don’t see is the invisible account called “global confidence in the US dollar.” Every time we expand the supply of dollars relative to the underlying productive capacity of the US economy we deduct some amount from the “confidence” account. When the “confidence” account hits zero inflation accelerates and is very, very difficult to contain. This is a rare, but recurring event in the global economy. The problem is we can’t see the value of the “confidence” account. However, for you to simply assume it does not exist is flat out wrong. There is no free lunch…simply an externality you are not accounting for.

  • http://blogfirstrider.blogspot.com/ first

    I noticed that my chocolate bar did not increase in price but its 20% smaller is that suppose to be reverse hedonics?

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

    Was it 20% more delicious?

  • nottpc

    Under mmt framework usa should buy every asset of canada and germany. Than wait a few months …if not inflationary it can buy brazil. After all its just an accounting identity and we hav e the biggest balance sheet on earth. Our natural resource problem would forever be over and suddenly china would be cowering. Politically unfeasible but in theory the us could run 3 to 4T deficits and buy every vale rio tinro bhp potash and heck the housing stock of other countries since we can deficit spend to the moon until some magical point inflation appears.

    Or the fed can create make work jobs in the millions. Everyone would be employed doing unproductive things but if we pay them$ 20 an hour our economy would boom as a virtuous cycle was born. 15M more incomes all ready to shop and buy homes. When they shop and buy homes it creates more jobs and it feeds on itself. If inflation jumps just lay off 1M until inflation subsides. The fed and treasury can take us to prosperity through mmt.

  • http://blogfirstrider.blogspot.com/ first

    Ha Ha Ha “Hedonic pleasures”

  • Tom Hickey

    Excellent explanation. What is happening when the Fed purchases tsys is that risk-free assets are taken off the table by exchanging one form of nongovernment net financial assets for another, that is, non-zero maturity government liabilities (tsys) for zero maturity government liabilities (bank reserves). Non-government NFA does not change. No “money” (purchasing power) is created or destroyed. Only the liquidity of the assets involved is shifted. (However, the interest that would be paid on the tsys is shifted to government through POMO, which is a deflationary influence since it reduces future nongovernment NFA.)

    The net result of POMO is zero with respect to nongovernment NFA, but it does reduce the amount of tsys available in the market. That means some of those wishing to save must seek other instruments. The Fed’s expectation is that this increased liquidity and higher bond prices will induce some of those savers into higher risk financial assets like equities, driving stocks “higher than they would be otherwise,” thereby increasing the “wealth effect,” which the Fed hopes will inspire wider confidence to undertake greater spending. (Quotes indicate Fed officials own words.) In other words, this is another exercise in bubble blowing and the Greenspan/Bernanke put. I don’t know why anyone would have any confidence in that.

  • effem

    “We most certainly can see it. We see it in the value of the trade weighted dollar and in our rates of inflation. There are no worrisome signs in either.”

    This is wrong and entirely inconsistent with how markets actually work. For years people talked about the fiscal deterioriation in the PIGS. The bulls argued simply that there was no evidence of any issue – spreads were narrow and markets were calm. Then one day you crossed that invisible line and spreads went vertical. Financial market events often go from improbable to inevitable without ever arriving at some in-between state. This is critically important for people to understand..there may simply be no major warning.

  • http://blogfirstrider.blogspot.com/ first

    Go back to the top of the page. Take to Aspirins, then go to Tools & Resources, go to understanding the modern monetary system.

  • Anonymous

    On that I agree. But who trades with a 5 year horizon nowadays? The market is up / economy is all “green shoots” for almost 2 yrs now and I cannot argue that I should not be in, because – see – in 3 years the market will crash again…

  • Tom Hickey

    @ nottpc

    Peter Cooper answers this monotonous objection here:

    Straw Men (And Women)

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

    You’re comparing Euro nations to the USA. It’s apples and oranges. They have a solvency issue. There is no such thing in the USA. If your scenario were indeed true we would be seeing very high rates of inflation in the USA. It’s not happening.

  • wh10

    Great explanation.

    The question is, even though the “wealth effect” is spurious, if it does indeed spur spending, would the fundamentals catch up to reality? In theory this is what you would hope for, and then all is well. However, would you say this would be very difficult to successfully implement in today’s economic environment since balance sheets by and large are still over-leveraged? And thus, govt deficits are preferred, so as not to risk further private sector debt trouble? Because, govt deficits are in their own way “bubbles” until they generate further productivity. I guess the difference is deficits would at least buffer balance sheets.

  • http://blogfirstrider.blogspot.com/ first

    It’s also called market manipulations, Its also criminal.

    “Manipulating transactions – trading, or placing orders to trade, that gives a false or misleading impression of the supply of, or demand for, one or more investments, raising the price of the investment to an abnormal or artificial level”.

  • http://blogfirstrider.blogspot.com/ first

    Cullen if they have a solvency issue why is the Central Bank of Ireland financing €51bn of an emergency loan program by “printing its own money” ?

  • jbvo

    Net financial assets in the system may not change but do not system participant balance sheets increase on a gross basis?

    Fed purchases the Treasury from one of its primary dealers by crediting the PD’s bank with a reserve which the bank uses to back a demand deposit payable to the PD.

    At the beginning of this Fed transaction, the financial system had a PD with a Treas asset on its balance sheet. At the end, the system has a PD with a demand deposit (swapped for the Treas); a Fed with the Treas asset and reserve liability; and bank with a reserve asset and demand deposit liability.

    The system appears significantly more liquid to me.

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

    The Euro nations are exactly like states. They are revenue constrained. The ECB permitted the Irish CB to create that currency.

  • http://blogfirstrider.blogspot.com/ first

    That’s not a contradiction ?

  • http://blogfirstrider.blogspot.com/ first

    It seems that the rule is that there are no rules as long as they can find ways to delay reality.

  • rhp

    Cullen, stpioc hits a point i wanted to ask as well………..Is the treasury constrained by law to issue bonds/bills to equal the gov’t spending not accounted for by tax and other revenues? I’m not saying that the tsys FUND the spending, but by law, do the two sides have to match?? if so, then it seems like trsy issuance to soak up targeted reserves is not the entire picture.

    thanks for clarifying.

    rhp

  • El Viejo

    Any comments on how Lag Time confuses the issues? (1.5-3.0 yrs lag time after printing till inflation effects) And when else in the cycle does the FED print money? (so that we can see the effects under different circumstances) If the economic tools are ham handed and are ONLY used a specific times such as printing money now. Then are there ANY OTHER cause and effect examples at OTHER times? So how is theory proven when there are so many variables like fear and demographics and politics and varying tax structures? (not that I am a disbeliever)
    Bernanke seems a little sensitive or maybe fearful of the debt ceiling issue these days. So he says he is looking for other tools. (testing the limits of the law perhaps) looking for a silver bullet maybe. And where are the silver bullets? People look for powerful solutions. If a little does a little good … Print more. It seems like blood letting to me. A vector virus is small, but delivers just the right DNA to the right spot and fixes all. Any silver bullet ideas??

  • wh10

    Yeah but what you fail to realize is that equities are valued based upon the discounted value of current and future cash flows. Thus theoretically, if people start spending again, spending should lead to an improved economy, and should valuations will go up.

    Whether the govt spends to stimulate the economy from a slump or whether private sector does it should in theory lead to the same outcome. The point is just to ignite spending in order to get out of the recession. The only difference (it seems to me) is that with private sector spending again there might be increased risk of a credit crisis again, considering we’re all still highly leveraged. Perhaps by the govt spending, this risk is ameliorated.

  • Mark

    Cullen – I have read carefully and understand all you have written about this subject.

    And I thoroughly understand that the Fed is not monetizing the Treasury’s debt.

    But Perception is Reality in the securities market. At what point does this information begin to influence perception?

  • john

    So, after reading all of these comments, I conclude that no one knows what they are talking about. I mean this sincerely, as if they did this topic would not come up over and over and the fed would not be reinventing ways to screw everyone out of their money. First, money cannot be printing by anyone, last I checked. Congress can spend currency, which is just a marker based on future production of money, that being cars, houses, mined materials and commodities, anything produced, etc. So what we are talking about is merely the manipulation of the currency supply, which is already far greater than the supply of money, thus a constant circle jerk to try and keep living above our means. As a citizen of this country with children, I am rooting for the loss of our reserve currency so that we can all live based on our ability to create. This would usher in the end of the financial sector above it’s basic necessary function and eliminate the jobs of millions of “money changers” that supply no value to the world. The sooner we can finish pissing all over the Constitution, the sooner we can get back to living by it.

  • Silalus

    It’s actually quite important to look at who does what, because in the US system it isn’t unusual to have two opposing political parties share power but work in completely opposite directions at the same time using different government institutions. And arguably the interests of the banking system effectively form yet a third party…

    If congress is trying to do one thing and the fed is trying to do another, then we need to know which one will have which impact, or we won’t be able to predict what will happen. With the current political and banking climate it seems quite likely that we’re entering exactly that place right now.

  • Scott Fullwiler

    Your problem is you, Ryan, and most others do not understand that holding a govt liability with overnight maturity is not inherently more inflationary than holding a govt liability with longer maturity.

  • rhp

    I understand that there is no OPERATIONAL constraint, but as long as there is a mandate that says inflows (including those coming in from trsy issuance) must equal outflows (gov’t expenditure), it seems like the Fed/Treasury cannot specifically control how many bonds they can issue to soak up excess in the system. They can only vary the term structure issued. Am I missing something??

  • Scott Fullwiler

    The core issue is that any solution via monetary policy requires releveraging, whereas fiscal policy deleverages the non-govt sector. So, even if monetary policy “works” as you hypothesize, the fundamentals are actually worsened if you haven’t dealt sufficiently with the balance sheet recession.

  • Boston_AL

    Once again I respectfully disagree with your statement that The Fed is not monetizing the debt. In fact, in two of today’s press articles The Fed even admits to doing so.

    And according to Marc Farber, “Money printing is essentially when the central bank expands its balance sheet”. (Which, by the way, The Fed admits to now.)

    Here are two key snippets from today’s Fed Posts:

    (1) Richard Fisher, the president of the Federal Reserve Bank of Dallas, said in a speech Tuesday: “Barring some unexpected shock to the economy or financial system, I think we are pushing the envelope with the current round of Treasury purchases. I would be very wary of EXPANDING OUR BALANCE SHEET further; indeed, given current economic and financial conditions, it is hard for me to envision a scenario where I would not use my voting position this year to formally dissent should the FOMC recommend another tranche of monetary accommodation.”

    http://finance.fortune.cnn.com/2011/02/08/feds-fisher-vows-to-oppose-qe3/?iid=EAL

    (2) Ben Bernanke himself said:

    …that quantitative easing would not permanently increase the money supply, since the Fed plans to reverse the policy once the economy recovers.

    Bernanke repeated that point several times throughout the Q&A session, constantly reassuring representatives that the Fed fully intends to increase interest rates ahead of a rapid rise in inflation.

    “If the economy begins to grow very quickly, and inflation begins to rise, then we would reverse it,” he said.

    http://money.cnn.com/2011/02/09/news/economy/bernanke_paul_ryan/index.htm

    I believe you can continue to argue the wrong side of this tale all you like, but The Fed itself counters your argument.

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

    Yes! You said it better than I ever could. That’s a really brilliant way of looking at the current environment….Thanks Scott.

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

    I don’t think you actually read my piece because I refuted Fisher’s statements….

  • http://www.spx500dailyindextracker.blogspot.com Klaus Bohm

    …in Europe, a national CB due to the ECB rule and article 123 of the European Constitution as amended by the Lisbon Treaty prevents a national CB from financing a government deficit.

    As a result, EU members need to raise taxes to pay for loans from the ECB

    Kind Regards

  • Silalus

    I have to say this is the single most important distinction I had to grasp first in order to understand Mr. Roche’s commentary throughout the site. The federal government acts as though spending is revenue-constrained, but that is only through current law and is not an axiomatic economic reality. The law can change relatively easily while the monetary system can not, and the economic indicators we see here are often far more useful when you look past the current laws into the reality of the system they govern.

    It might be worth at some point having a more thorough discussion of the specific laws that define those artificial constraints. It would be very interesting and probably would help address a lot of the common confusion on that point.

  • El Viejo

    Until you have proof it’s just religion, but it ‘feels’ right to me and I don’t believe Bernanke is trying to ‘screw’ people out of their money. And I use the term ‘print money’ much too often as a bad habit.

    I am just looking for real world ‘pragmatic’ tools to fix the problems or know when things are getting outa whack. And last time I checked they were looking for ideas in Washington too. (Some send-in-your-ideas by letter campaign) Heard the tail end on NPR .

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

    Klaus, do you know how the ECB disburses new funds? Surely they must over time, right? I am not familiar with the process. Any info would be greatly appreciated.

  • http://www.spx500dailyindextracker.blogspot.com Klaus Bohm

    …in the US, the government may spend till the cows come home, but the Supply of Money out of which debt needs to be repaid is under absolute Fed control…hence Finance Capitalism rules since 1913

    Kind Regards

  • wh10

    Which is exactly what I was suggesting re: the benefit of deficit spending over monetary induced spending.

    However, for the sake of debate, couldn’t one argue that there is the potential for govt spending to reinforce the indebtedness? You say “if you haven’t dealt sufficiently with the balance sheet recession,” but that can apply to both the fiscal and monetary routes at the end of the day. In other words, fiscal policy could introduce moral hazard. I could use the govt’s spending to further leverage my balance sheet, rather than paying it down (that seems to be what is sort of occurring right now). Alternatively, if the government doesn’t spend, then I might think I have no choice but to pay down my debt.

    Would you say, at the end of the day, you would rather take that chance than end up like Japan?

  • Andrew Simon

    Mr Roche,
    So let me get this straight, you understand our monetary system better than government officials, federal reserve officials, or more to the point, anyone who disagrees with you? Or are you suggesting those in positions of power simply perpetuate these myths so as to more easily manipulate the public vis-a-vis their MSM apparatus?

  • John

    Do you have any evidence (money supply data) to support your claim that the world is awash in dollars?

  • Scott Fullwiler

    Yes, I would agree. For MMT, that’s about financial regulation. If you don’t change the financial system, then even fixing balance sheets will just lead to a repeat crisis in due time. It takes longer if balance sheets are fixed, but you still get there.

  • Scott Fullwiler

    As you might have seen in my last presentation, I think the appropriate way to look at monetary policy is that it “works” only if it affects desired leveraging against existing income. Because we talk about monetary policy with terms like “money,” “cash,” and “money creation,” which are generally poorly understood (e.g., most use the term “money” to be equivalent to “income”) even by economists (or especially), we fail to understand that monetary policy is fundamentally about leverage.

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

    No, there are people in government who get this. But most do not. So, do I understand it better than most? Yes. For instance, most Fed officials have been working under the money multiplier theory until just recently. The Fed just recently issued a paper admitting that the theory is entirely incorrect. Nonetheless, you still have people like Richard Fisher claiming that the added reserves pose some sort of inflation threat. Even though I can prove that this is entirely false.

    So yes, I guess I am claiming that I know more than some Fed officials. And in fact, I can prove it.

  • wh10

    I’m on board.

    You guys need get to through to Washington somehow.

    Has the MMT community made concerted efforts to speak with influential figures in DC? Has that been unsuccessful, and that is why the effort is mostly concentrated through online blogs (and seemingly self-contained journals)? I suppose it is a starting point.

    It just must be so painful to dedicate your life to uncovering these truths as society remains oblivious and, to certain degrees, self-destructive.

  • Obsvr-1

    So are you saying that by paying IOER ties up the reserves, effectively draining them from the system ?

    But this is just an overnight lock, the next day the bank can decide to use the reserve to loan out or buy some other asset. If the later path is taken then don’t those funds flow into the economy exerting inflationary pressure.

  • chris

    real simple question here.

    i look at a US dollar and it says it is a note, or obligation, issued by the federal reserve.

    so currency, the simplest form of money supply, is an obligation of the fed.

    now let’s go to QE1. fed buys maiden lane cdos from some private bank and issues in exchange reserves (bookentry rather than issuing a piece of paper currency), which are obligations of the fed. more obligtions of the fed outstanding after transaction than before.

    looks to me like there is more money outstanding than before.

    now lets go to QE2. fed buys obligations of the fed treasury and issues in exchange reserves (bookentry rather than issuing a piece of paper currency), which are obligations of the fed. more obligtions of the fed outstanding after transaction than before.

    so how is it that, looking at the liability side of the federal reserve, that more money hasn’t been created by the fed in these last two situations, as much as if it issued paper currency in those transactions to pay for the cdos and treasury debt?

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    good point. and that’s why you need an understanding of monetary operations and the sector balances, so you can understand the difference b/n releveraging via monetary policy vs. deleveraging vs. fiscal policy (not that other things like financial regulation, etc. aren’t important, too).

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    oops. deleveraging via fiscal policy, not deleveraging vs. fiscal policy.

  • Boston_AL

    Dear sir, are you also refuting the words of The Fed Chairman which are in accord with Richard Fisher’s? Are you implying that even Ben himself does not understand the purpose of his committee’s policy as well?

    For as I shared with you, Ben stated several times before the Congressional Banking Committee today…

    “…that quantitative easing would not permanently INCREASE THE MONEY SUPPLY,…”

    For me, this affirms that the Fed is intending to and has knowingly increased the money supply (if albeit hoped for only a relatively short period of time).

    If Ben, himself, believes The Fed has increased the money supply, then one is obviously lead to the conclusion that the Asset side of the government’s Balance Sheet equation has increased! One is therefore, in turn, to believe that Fisher’s statement is in alignment with Ben’s and also correct.

  • Andrew Simon

    Well, I do like your self-confidence, although I’m sure you understand how it can sound a lot like arrogance. I am certainly open to exploring MMT, esp considering how the current theories haven’t done much, and in fact have seen conditions get worse. Reading through the link you’ve provided, it’s almost like an English speaker learning Chinese by way of Russian. Wonder what Mauldin, Mish, and Denninger would say about this.

  • chris

    cullen,

    you say in that piece (paraphrasing) that no new money is being created through QE because the private party’s B/S remains the same, except for the substitution of fed reserves for the t bond.

    “Because they are not adding net new financial assets to the private sector. The assets already existed! They are merely swapping reserves for bonds.”

    but i think you are looking at the wrong B/S. if you look at the fed’s B/S, as opposed to the private counterparty in the QE transaction, you will see more federal reserve obligations outstanding than before.

    you should look at the federal reserve’s B/S because they are the issuer of money, put simplisticly.

    too take my question to the extreme, suppose the fed issue bank reserves for every mortgage obligation outstanding and held by private parties? in such a case, hasn’t the federal reserve massively expanded its liabilities (read money outstanding).

    i don’t mean to be argumentative, and we may ultimately be simply having semantic differences, but as far as i can see, a t bond is as different from fed reserves as a cdo is different from fed reserves, insofar as we are talking about the federal reserve’s role in creating money. )getting closer in credit quality too.)

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

    I get your point. But it’s kind of like saying that the govt has created new money if it prints up 8 trillion and buries it in a hole. Who cares that they did that? The important factor is whether it gets injected into the pvt sector. Clearly, that is not happening.

  • rhp

    Chris,

    In QE you are dealing with exchanges of monetary assets, not roads, houses, services etc. IN TARP, you could argue that the gov’t was increasing money supply b/o it was exchanging something of value (US$)for something of questionable value (MBS’s marked to banks’ valuation as opposed to market). So, $100 might have been paid for $20 worth of goods. This would be a vertical creation of money as long as the assets being exchanged (troubled assets versus currency) were not of equal value.

    In QE II, the Treasury note already in circulation has an (approximate) equal value to the $$ purchasing it, so it is an equal exchange of assets without anything new being added to the system (private sector). Only the term structure of the instrument is changed from 2-30 years (trsy) to 0 years (dollar bill).

    hope this is correct

    rhp

  • chris

    The Fed has technically increased the monetary base. But that does not mean they are “printing money”.

    now you have really lost me with this one!

    we may have to agree to disagree on this, but the fed is the lender of last resort for a reason: because its obligations are qualitatively different from every other US banks’ obligations.

    you cant just equate the fed’s obligations to a private party’s obligations, and say that they are all financial assets being swapped around, with no new net issuance of financial assets when the fed issues its obligations in exchange for a private party’s (or the treasury’s) obligations.

    the fed issues obligations and they are “money good”. a private party or the treasury issues obligations and they are as good as the underlying credit (and while the treasury may not be solvency constrained, they can certainly be credit constrained)

  • jake wood

    your right chris, it is new money and it is creating commodity inflation and a stock market bubble. that is exactly what bernanke wants, to create inflation and pay for ever increasing government spending. If we don’t stop the fed they will destroy our currency and america’s economic dominance will be over.

  • Tom Hickey

    Interestingly, the run up in equities has been accompanied by a run up in margin debt fueled by low rates.

  • rhp

    Cullen, you’ve got lots of threads to handle in this comment section!

    Following my thread: “The point is that the reserve drain (call it an additional liability if you want) can be achieved without a govt bond market.”

    But my point is that in operational reality there IS a govt bond market mandated by law that MMO (or MMT) has to account for. The point I am trying to understand is what feels like a disparity between MMT’s statement that “bonds are only issued to drain reserves and hit a targeted rate, versus “bonds are issued by congressional mandate to achieve the appearance of an accounting identity”. It seems like the two do not necessarily intersect, thus my confusion…..

    If the second statement is true, then it seems like there is a limitation in the operational reality of MMT, because it is not describing the actual constraint on monetary operations that IS in effect due to congressional mandate…..

    thanks,

    rhp

  • chris

    “The important factor is whether it gets injected into the pvt sector.”

    now that is a horse of a different color. bank demand for money (fed reserves) is greater than willingness to extend bank credit. that can change, and methinks that will change as economic conditions improve, especially as long as the yield spread remains high.

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

    Increasing the size of the Fed’s balance sheet (the monetary base) is not inflationary. It does not directly add to the broader money supply. If this were so inflationary Japan would be up to their neck in hyperinflation by now. Heck, we wouldn’t even be having this discussion if QE1 had generated inflation and that program was TWICE as large.

    “The nonbank public – nonfnancial
    corporations, state and local governments and
    households – cannot use deposits at the Federal
    Reserve Bank to effectuate transactions. Moreover,
    currency is not suffciently broad to be considered a
    temporary abode of purchasing power. For Friedman,
    high-powered money can be properly regarded as
    assets of some individuals and liabilities of none.
    So, let us be clear on this subject. In 2008, when the
    fed purchased all manner of securities, to the tune of
    about $1.2 trillion, the fed was not “printing money”.
    Bank deposits at the fed exploded to the upside, the
    monetary base rose from $800 billion to $2.1 trillion,
    yet no money was “printed”. Deposits did not rise,
    loans were not made, income was not lifted, and
    output did not surge. The fed could further “quantative
    ease” and purchase another $1 trillion in securities
    and lift the monetary base by a similar amount yet
    money would still not be “printed”. It is obvious the
    fed authorities would like to see money, income, and
    output rise, but they cannot control private sector borrowing. If banks were forced to recognize bad
    loans and get the depreciated assets into stronger
    more liquid hands, it could be debated on how much
    reserves should be in the banking system. Until that
    cleansing process is completed it will be a slow grind
    to cure the one factor which makes the fed “impotent”
    and unable to “print money”….overindebtedness.”

    http://www.hoisingtonmgt.com/pdf/HIM2010Q2NP.pdf

  • Tom Hickey

    jbvo, the point is that liquidity increases through POMO but not NFA. Then, the question is where that increased liquidity going to go. No one is going to sell a tsy bond and hold cash absent deflationary expectations. The Fed’s presumption that the funds will flow into higher risk financial assets with, viz., equities.

  • chris

    i just differentiate between a t bill or bond, on the one hand, from a federal reserve bank obligation. these are two different issuers and different obligations.

    the fed issues reserves (money as far as i understand the term, although i know economists go way beyond my simplistic views), while the treasury issues debt, much like any debt a corporation might issue.

    the corporate issuer has monopoly control over the issuance of its debt, just like the us treasury does. they both can create some more, they each are in sole control over that decision, they each just need to make sure they have a buyer for what they create.

    the corporate issuer’s debt is backed by the full faith and credit of its corporate existence (unless it is nonrecourse), just like the us treasury backs its debt with its full faith and credit.

    fed reserves, treasury debt and corporate debt are all financial assets, which can serve as collateral and provide a return on principal. it’s just that the fed reserves are the only one that is money (as i understand the term).

  • chris

    all true but all termporally bound to the past 3 years of recovery.

    but what happens when private member banks start to desire extending credit (holdig private assets) more than holding money (fed reserves)?

    to use your metaphor, what happens when the private member banks go to the fed and say that it is time for them to use their shovels and get at those reserves buried in the ground?

  • Brendan

    @Chris: so currency, the simplest form of money supply, is an obligation of the fed.

    The government is obliged to accept dollars in payment of taxes and it guarantees it will do so.

    Taxes drive the system. They fund nothing. They are used in principle to lower aggregate demand. They also function politically, of course: who gets taxed at what rate.

  • Boston_AL

    From virtually all angles, prices in almost every sector of the economy (except for the obvious – housing) have been increasing; this increase is due to inflation caused primarily by the debasement of our currency by all segments of government; including The Fed.

    “There is nothing more insidious that a country can do to its citizens than debase its currency,” Congressman Ryan (R) said (at the Congressional Budget Committee hearing with Ben Bernanke today).

    I believe The Fed’s primary purpose for QE is two-fold: Get money out of Treasuries and into Equity Assets (stocks & business investment). By pushing down the rates on Bonds to near ZERO, the Fed is forcing investors of all size into the one major area where they can seek to get a decent return on investment — Stocks. If Ben can push up the value of stocks, he will make the economy feel like it is “rich” once again. (So far the banks are not lending to small business in any meaningful way, and big businesses have bee using their own increased REV and EPS returns to eliminate debt and clean up the B/S. Recently, big businesses have been going to the marketplace to reduce old, high rate debt with historically low rates with long durations, or to borrow for future needs at this historically low rates. Thank you Mr Bernanke!)

    Meanwhile, folks who have had to try to live on fixed incomes have gotten the shaft and been subsidizing Ben’s big plan.

    The only thing that keeps this lid on this potential ticking time bomb that Ben has created is the fact that meaningful “new employment” has not returned to the US economy. (I hope he says his prayers each night)

    I completely agree with Chris’ comment above that once new employment picks up again, inflation will begin to show its ugly head and Ben and the boys are going to have a wild bull on their hands with the $2T plus animal they will need to tame!

  • chris

    @brendan

    well this is cullen’s blog, but if i may respond, i think there is as much of a difference, in terms of whether one thing is money or not, between equating citibank’s demand deposits to fed deposits, on the one hand, as there is in equating a t bill to fed deposits, on the other hand.

    forgetting the corporeal character of currency, we dont exchange citibank deposits for goods, just as we dont exchange t bills for goods. we exchange fed deposits (really currency as a form of money) for goods.

    now, once the fed has substituted a couple trillion of its deposits (which i call money) for private assets on the b/s of its member banks, it has expanded the money supply accordingly. it may not have added financial assets to the system, but it has added money to the system (as i understand things).

    cullen is right to say that this money is not circulating, and it has not served as the base to support the expanded creation of private credit.

    but unless i am missing something, if the fed doesn’t reverse its course, it is just a matter of time (assuming continued recovery) until that money expansion serves to support a credit expansion.

    i try to keep things simple in order for me to understand them, and i may have oversimplified. won’t have been the first time.

  • alex

    Of all aspects of MMT, “quantitative easing” is the operation that I find hardest to tackle.

    I understand that QE is essentially swapping commercial banks assets – Treasuries are swapped for cash, adding to banks reserves and reducing their Treasury holdings by the same amount. In turn, the Feds holdings of Treasuries increases, as does their deposits liability to commercial banks. Correct?

    Whilst this operation has not reduced the governments total ‘debt’ outstanding, more of that ‘debt’ is owed to the central bank, rather than the private sector. Is this not significant, or have I got it all wrong?

    And doesn’t this just reverse the process and contradict the reasoning behind ‘soaking up excess reserves’ in the first place? Wouldn’t the Fed Funds rate be sent to 0%? Or does the Fed now pay interest on excess reserves?

    My god this is confusing!

  • casanova

    PC,
    the FED is not monetising the debt, but where all this extra money is going…

    http://jessescrossroadscafe.blogspot.com/2011/02/updated-money-supply-figures.html

  • Obsvr-1

    To sum up, it all comes down to the evils of deficit spending and amassing huge levels of debt both in the private sector (has to be either paid off or written down) and the public debt (which will never be repaid).

    * Interest on private debt comes from productive output or returns on financial assets
    * Interest on public debt adds to the national debt, unless paid for by taxes (assuming a balanced budget thus no deficit).

    As long as FED will enable the UST to create money without restraint then a balanced budget is the stuff of a fairy tale. The FED can continue to try to meet its mandate of low interest and price stability, but it is fighting a beast that can not be controlled (As BB talked about today, fiscal discipline and a long term plan for fiscal responsibility – aka balanced budget). It is not the job of Gov’t to use debt to grow the economy, it is their role to determine the size of gov’t, fund it through taxes and get out of the way of the private sector so it can innovate, invest, grow and expand wealth.

    As long as the FED is more interested in supporting the banks and the FIRE sector, then we will continue to see the mass transfer of wealth from the taxpayers enabled by the gov’t into the hands of the banks/big business whenever they falter, completing the privatize gains and socialized losses cycle.

    Solving these problems would take structural changes to build a self correcting system, but unfortunately we have corruption that runs throughout all of our institutions that are supposed to provide the checks and balances. Any system that becomes corrupted will ultimately fail and what we are witnessing is a failing system. We as a people can demand changes to save, restore and protect a competitive free market capitalism system or witness the corrupted system implode.

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

    Don’t conflate pvt sector and pubic sector debt….There is technically no such thing as “having to pay back” public sector debt.

  • pvk2000

    i saw this headline this morning and knew the comments would come hot and heavy. TPC, you must’ve been itching for (yet another) fight about monetary operations.

  • rhp

    Cullen,

    thanks for your attempts. And I may not simply understand MMT well enough to be able to be in the same question-answer sphere as you.

    To me, the political BECOMES operational reality. If a law creates apartheid, political though it may be, apartheid still exists, even tho’ there is no need for it. If a law mandates issuance of bonds after the spending fact, then those bonds have to be accounted for in the world system. This does NOT mean that bonds fund anything, I totally agree. But the operational reality of bonds becomes much more than “draining reserves”.

    Maybe this is where Kid Dynamite and I have trouble understanding a couple of your points and vice versa. Because of politics, I would say bonds operationally are NOT solely issued to drain reserves, but to conform to a politically induced reality. This then is a part of Modern Monetary Operations describing how the system actually works.

    I’m not sure how to say it any differently either, but hopefully in ensuing conversations something will become more clear to me or you in terms of bridging the misunderstanding.

    Thanks for all you do.

    rhp

  • studentee

    the monetary base and the money supply are different measures. maybe this is where you’re struggling?

  • studentee

    isn’t also important to note that banks do not lend reserves?

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

    Never looking for a fight. Just looking to dispel destructive myths.

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

    YES!

  • studentee

    so the real inflationary risk that may occur once the economy starts gathering steam is the large amounts of cash corporations are sitting on, rather than the reserves the banks hold. and more lending, etc.

  • Obsvr-1

    That is what I said in the first sentence.

    … public debt (which will never be repaid).

  • http://blogfirstrider.blogspot.com/ first

    “intends to increase interest rates ahead of a rapid rise in inflation.

    He is covering is bets but it will be to late when the money supply fires on all cylinders.

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

    Who will it be repaid to?

  • MEB

    The author shows a shocking ignorance of the workings of the modern U.S. money supply. When the Fed purchases a bond, it creates an electronic demand deposit in the name of the bond seller, in this case, the U.S. Treasury. The treasury then spends this money out of this account. The Fed created that demand deposit out of thin air, and in that way “printed” money. This tool, among others, is the key mechanism used by the Fed to manage the monetary base.

    The U.S. Treasury does not “print” money to pay its bills. It taxes and borrows, and in the modern and quite unprecedented case, is selling bonds to the Fed, which creates the money out of thin air as an electronic account entry.

    How else to explain this chart, the growth of the US money supply:

    http://www.chartingstocks.net/2009/03/chart-of-the-us-money-supply-1917-2009/

    Who knows what the author is trying to say? that the US money supply is not increasing, that the government can spend all the money it wants, that debt doesn’t matter? All wrong, sad to say.

  • wh10

    Please see http://pragcap.com/resources/understanding-modern-monetary-system and prepare to have your mind blown.

  • Obsvr-1

    hmm, When a bond matures that holder will be paid with funds receive from the next buyer of new issue bonds (the bond rollover). Step and repeat until such time confidence in UST is so low that the rollover process is affected, then FED the UST can spend/create money to pay back bonds as they mature devaluing the dollar in the process.

  • effem

    “You’re comparing Euro nations to the USA. It’s apples and oranges. They have a solvency issue. There is no such thing in the USA. If your scenario were indeed true we would be seeing very high rates of inflation in the USA. It’s not happening.”

    My point on the PIGS is not that we are in the same situation – I realize we are not. The point was that markets can completely ignore a risk and then literally change its mind virtually overnight with little advance warning. You assume inflation expectations will go from low, to medium, to high. That will give the Fed time to react. I disagree…we may well find that inflation expectations go from 2 to 4% in the span of a month or two. At that point a few things would happen: 1) inflation would become self-reinforcing, 2) the Fed would be too scared to apply the amount of tightening necessary (the “official” reasoning would go something like this: “we have an expectations problem not a money problem so why tighten?”). Voila – lost confidence in a currency and spiraling, self-reinforcing inflation with no advance warning. That is how markets work. You are way too confident that you will be able to spot problems in advance – if markets were that accommodating we’d all be retired by now.

  • eternalhope

    I have followed your blog for quite some time and have found it transformational. Thank you for all you efforts in enlightening and educating. I was curious as to how the shadow banking system relates to MMT, particularly since said shadow banking system has contributed (to some extent) to the problems we now face.

  • D

    In this line of thinking how would QE2 in theory be intended to bailout the states? By lowering the rate at which they are forced to borrow?

    Thx

  • studentee

    “…Step and repeat until such time confidence in UST is so low that the rollover process is affected…”

    this does not follow

  • studentee

    ‘2) the Fed would be too scared to apply the amount of tightening necessary (the “official” reasoning would go something like this: “we have an expectations problem not a money problem so why tighten?”).’

    why on earth would they struggle with this? the fed *loves* fighting inflation, it’s all they can really do anyway. they are all bankers…

  • Hammertime

    I’m starting to understand how the process works. Thank you. Does it really matter if the FED, TSY, or Congress is monetizing the debt? You are technically correct, but does it really matter who monetizes the debt? It WILL be inflationary in the end (after the usual lag time).

  • Gerald P

    Because of changes in US manufacturing, growth in foreign industry, and the low employee to profit ratio of the financial sector, the US in the foreseeable future will continue to have high unemployment. Stimulating equities will make ‘investors’ happy as they reinvest, but this is not how US industry will gain a competitive advantage. Another discovery in the US like the transistor could. Of course foreign tech students often return to their native lands to compete with us. When their universities achieve US quality, we will be worse off than today. The Fed and Treasury cannot cope with this.

  • Anonymous

    excess reserves support bank lending. zero haircut on capital etc…though i am not a fed banking regulatory expert. maybe someone reading this can help here

  • KingPawn

    I think that comes from the FED seeing and treating everything as a liquidity crisis as opposed to a solvency one.

  • Everyman

    If what you say is true here Cullen, then why do we need QE and POMO?

    What is THAT “monetizing”?

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

    Why do we need QE and POMO? Because they think it helps….THINK….We are seeing more and more people admit that QE does nothing or is having little to no effect….

  • rjorj

    The Fed ran out of bullets (interest rate at zero), thus QE was engineered as a de facto method for monetary easing. Mr Bernake stated today that $600B of QE is equivalent to a 75 bps reduction in the Fed Funds rate. We may not be creating new dollars, but the US is essentially assuming the worthless piles of MBS and other toxic papaer laying around. Removal of these assets is another form of bailout, which is aimed to get banks lending again. This in turn will increase the propensity of lending and reduce rates in the short run.

    The issue is that real returns are hard to find nowadays. With the lack of fundamentally sound and underwritten investments coupled with increasing capital availability, it is inevitable that mis-allocations of capital will occur. The idea that the “wealth effect” will save the day is terribly misguided and will blow up in our faces.

    It’s very sad to watch this slow motion car crash.

  • http://blogfirstrider.blogspot.com/ first

    “The idea that the “wealth effect” will save the day is terribly misguided and will blow up in our faces”. It’s not misguided its dishonest.

    This started with Greenspan in 1987 and in 2000 and each time they they more wealth effect. I agree it will blow up in our faces.

  • Obsvr-1

    BB doesn’t want anything to do with deflation, with the private sector debt being paid down and the continued slump in home asset values, perhaps the inflation that would have accompanied QE is offsetting the deflationary pressure.

  • Mediocritas

    @MEB

    The point you’re missing is that the Fed is not legally permitted to buy Bonds directly from the Treasury. Direct monetization of US debt is illegal. Instead, the Fed must engage middlemen, the Primary Dealers.

    The point that Cullen is correctly making is that the Primary Dealers can’t just create money out of thin air in order to purchase Bonds, instead they must use existing money. In so doing, the Primary Dealers draw down their own reserves in order to purchase Bonds. The Fed then swaps those bonds for reserves, reinstating the reserves of the Primary Dealers in the process leading to no change in the money supply. What has really happened in this process is a transfer of debt (therefore money) from the private sector to the public sector, that is all. More technically, according to MMT, vertical money is being generated in place of horizontal money.

    Described another way, when deleverage hits the private sector and lending contracts, the result is deflationary. As the private sector pays down debt, horizontal money is eliminated (the money multiplier breaks) resulting in reserve expansion within the PDs. To prevent deflation, the government must step in to borrow in place of the private sector, which is does through the issuance of bonds. This is only effective if there are buyers for these bonds which can prove problematic if the PDs are under-capitalized. The Bond swap procedure allows PDs to provide an adequate demand for US Bonds (at a reasonable price) by continually refreshing reserves (as Bonds are swapped to the Fed).

    In reality though, there *is* an expansion of reserves because the Fed does *not* swap for Bonds at the price that the Primary Dealers paid. Rather, the Fed routinely overpays in order to provide an incentive for the Primary Dealers to participate at all. Further, the Fed then offers to pay interest on excess reserves in order to emulate the effect of PDs hanging onto the original bonds and taking regular coupon payments. This expansion is countered by debt defaults within the private sector.

    Finally, it must be noted that replacing horizontal money with vertical money results in some scary looking money supply stats. Vertical money and horizontal money provide different contributions to the various money supply measurements. Vertical money is over-represented in MB, M1, and M2 relative to horizontal money. M3 is a better measure but is, unfortunately no longer published by the Fed. Independent measures of M3 don’t show a huge expansion due to the offset of expanding vertical against contracting horizontal money.

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

    Very well said Mediocritas. Thanks.

  • http://www.spx500dailyindextracker.blogspot.com Klaus Bohm

    Cullen Roche:

    In U.S. style central banking, liquidity is furnished to the economy primarily through the purchase of Treasury bonds by the Federal Reserve Bank. Because the European Community does not have system-wide bonds backed by a system-wide taxation authority, it uses a different method.

    Member banks, of which there are several thousand, bid for short term repo contracts of two weeks’ to three months’ duration. The member banks in effect borrow cash and must pay it back; the short durations allow interest rates to be adjusted continually. When the repo notes come due the participating banks bid again. An increase in the quantity of notes offered at auction allows an increase in liquidity in the economy. A decrease has the contrary effect. The contracts are carried on the asset side of the European Central Bank’s balance sheet and the resulting deposits in member banks are carried as a liability. In lay terms, the liability of the central bank is money, and an increase in deposits in member banks, carried as a liability by the central bank, means that more money has been put into the economy

    …the problem in the EU at present is the provision of collateral of member banks of weaker countries like Greece, Portugal, Spain

    Kind Regards

  • http://ralphanomics.blogspot.com/ Ralph Musgrave

    This is an amusing and sarcastic introduction to the Euro system. Best I can do:

    http://blogs.reuters.com/great-debate/2009/07/28/europe-borrows-from-peter-to-lend-to-peter/

  • Anonymous

    Imo many MMT conclusions (e.g. regarding QE2) are only fully correct if bonds were exactly money.
    To get as near as one can to this “moneyness characteristic” of US bonds two things must be ensured by the US:
    a) The Fed has to guarantee indefinitely and in all circumstances that US bonds are accepted as collateral for repos e.g. (and set the discount rate as low as possible, meaning zero).
    b) There is a functional stable extremely liquid secondary market for US bonds (perhaps for all assets).
    The better a) and b) are implemented the more confident the banks (foreign banks included) are in their ability to get reserves (perhaps other assets) no matter what.

    But still you can’t deny the fact that bonds are less liquid than reserves = “money”, even if they are very close to money.
    So QE2 e.g., even if not adding NFA, ultimately increases liquidity.

    MMT is a very good approximation to the real monetary operations, but you still have to see the fine differences.
    Imo this also applies to the question “Does the US finance itself through bond issuance”? As US bonds are not money, but almost (see a) and b) again), the answer is “nearly not”. But imo the answer isn’t no.
    The conclusion “Under the current monetary system the US doesn’t finance itself through bond issuance” is an approximation depending on how well a) and b) are implemented.

  • Anonymous

    I wrote: “MMT is a very good approximation to the real monetary operations, but you still have to see the fine differences.”

    I meant: “MMT is a very good explanation of…”

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    The problem with your analysis is you don’t understand what “liquidity” is in this case. Adding reserves doesn’t help any bank do anything they couldn’t have already done. Trading Tsy’s for deposits doesn’t help anyone spend–they can always sell the Tsy if they want deposits as it’s the most liquid market out there with dozens of bidders who are using the repo market to acquire funds (created out of thin air–it’s not a case of shifting deposits from one person to the other) to purchase Tsy’s from others. Tsy’s, even if they aren’t deposits, are never a constraint on aggregate or individual spending. Again, QE here only “works” if somehow it encourages greater spending out of existing income–having deposits instead of Tsy’s doesn’t mean someone necessarily wants to spend more out of existing income. As an analogy, if the Fed bought my stock portfolio from me and I now have deposits instead of equities, I don’t necessarily go out and spend what previously was my retirement savings.

  • Anonymous

    I wrote a similar comment above.

    InvestorX

  • troll

    I know this is a bit late, but I’d like to say that your point #2 is not my major concern. My major concern is that people DON’T understand the modern monetary system (#6)and that if they were made to understand how it operates, they would generally not believe in it. AND it is belief in the system that makes it work (since the basis for it is some abstract concept of social-production).
    I would suggest that is why the gold standard is being promulgated in many circles: it at least has something concrete (gold) that most people’s minds can grasp.

  • Anonymous

    Your comment is similar to the Anonymous comment above on “moneyness” and also mine on the mix of the private sector’s balance sheet.

    I am starting to get the feeling that MMT confuses in this debate a direct gift by the Fed to the private sector (TARP) with “providing liquidity” or “asset monetization”. It does not matter which asset is monetized (US Treasury or some other). Fact is that in the private sector there are less assets (to be sold for cash to other private sector participants) and more cash (to bid up private sector assets).

    Also this line of thinking at MMT resembles Ben Bernanke’s PROVENLY WRONG assumption that the level of private debt does not matter, as it cancels each other out. As we know the level of private debt is very imporant for the boom / bust cycle, which has very REAL economic impact. Irving Fisher was also of Bernanke’s view, but he had to change his mind and theory after he lost a fortune in the depressionary stock market and came with the debt deflation thory.

    InvestorX

  • Anonymous

    If you think about it, Treasury issuance is indeed intended to bind the private sector’s cash, so that it does not compete with the government’s newly printed cash for increased spending (Is this what you call “reserve draining”? I doubt reserve draining is there to just keep some Fed rate at a level, but rather to decrease the inflationary impact of increased govt spending.). So if you monetize then Treasuries you end up with more unbounded cash in the private sector and it will start looking for a home (yield, speculation, or inflationary consumption unless you increase taxes / decrease govt spending).

    So there are several points on which MMT does not seem to be convincing to me.

    InvestorX

  • Anonymous

    Hmm, here’s the way I see it (correct me if I’m wrong):

    Let’s say I’m a bank that bought US bonds in the primary market (UST auction) with all my excess reserves of $1m. If I want to buy risky securities right now I have three options:

    1) If accepted just use my US bonds as collateral to buy the securities.
    Problem: The margin requirements are e.g. 10% (and can change).
    So I can only buy $900k worth of securities. Also collateral use of US bonds could be prohibited.
    2) Do repos with the Fed by using the US bonds as collateral to again get reserves of $1m . So I can buy $1m of securities.
    Problem: The Fed could stop accepting the US bonds as collateral for repos (not very likely). And: The discount rate at which I have to borrow at the Fed could change and get significantly higher than my coupon of the US bonds when I want to refinance myself.
    3) Sell my US bonds in the secondary market in exchange for reserves.
    Problem: I can incur losses due to price volatility, spreads or other costs. Also the secondary market for US bonds could get somehow instable or could cease to exist etc. (of course not very realistic).

    These are all risks/restrictions for bondholders in the current monetary system.
    I don’t have these risks/restrictions if I just have reserves instead of US bonds (e.g. because of QE2). I’m more encouraged to buy risky securities right now than without QE2.

    This is what I mean when refering to liquidity. The differences between US bonds and reserves are very small, but they exist.

    Even if 1)-3) is not a problem in the US at the moment it could eventually become one in the future. It is improbable, but not impossible.

    Just my 2 cents. Perhaps I’m wrong, but this is how I see it.

  • Anonymous

    Add:
    Of course another possibility for me as a bank is I could borrow reserves from other banks through the interbank market. But almost the same risks/restrictions apply as in 2).

    Also I fully agree with you that QE2 as a pure monetary operation has no direct effects on private spending and so on as it doesn’t add NFA. But it isn’t a non-event (not to mention the psychological effects). If it is the right thing to do is another question.

    Altogether I really appreciate the eye-opening conclusions of MMT and am glad I found this blog (and others).

  • rhp

    Cullen, this thread may be ended already, but I’ll put this out there after losing sleep over it trying to figure it out. With the congressional mandate that bonds must be issued to cover a shortfall in spending, even if after the fact (PLEASE note, I’m not saying the bonds fund anything, I got that), it seems like government spending more money into existence is actually eliminated!

    Here’s my reasoning. If the gov’t spends $1 million into existence but only takes in $500K in revenue, the US Trsy is required by law to issue $500K in bonds, which are bought by the primary dealer with money already in the system. Leaving a net of ZERO plus a piece of paper that floats around the private sector saying the gov’t will pay you $500K one month, 3 months, 10, 20 years down the road.

    As long as this operational reality required by Congress is in existence, no net money is being created, only IOU’s. Seems like this is avoided by the Fed, with its button, purchasing the IOU and dumping “money” into the system.

    What’s wrong with this picture??

    sleepless rhp

  • http://blogfirstrider.blogspot.com/ first

    All Powers that do not respect or have as it’s main objective to protect freedom and sovereign individual eventually destroys its economy. The US was unique and different in that respect until it changed course.

    Gold or no Gold does not stop the leviathan. Spain was on Gold and so was Roosevelt. Cullen often gives the example of the fact that the Federal Government is not like a family and it can not default. He is absolutely correct that’s the way it is but that does not make it right.

    A family needs to be responsible but big Government does not.

    Even if money was Gold for the leviathan it makes no difference at all since it will eventually dismiss its obligation by confiscating that gold or simply progressively dilute there gold coins. They always have paid for there wars by diluting currencies, look at Europe’s multi devaluations, even during the civil war in the US Lincoln printed valueless money,the French paid there soldiers in America (French Colony) with Gold Promissory Note “paper” but the boats never made it. We can find example from Rome to extreme Zimbabwe of various form of debasing the currencies. This is not new its reality and we need to always invest accordingly.

    Its not the Fiat Paper that is the problem its the club that controls it.

    In the past it was the Kings and there ambitious conquest an to day its the Public Serpents,the Banksters and the Crony Capitalists and elites.

    Its time for a big clean up lets hope it happens.

  • Ronald

    The way I understand vertical money in the eurozone is this:
    The ECB creates it when it loans (and these loans expand and are not repaid in aggregate) and when it purchases (which it does very little of). Unlike the US system the treasury liabilities of euro governments, like state governments are not risk free.

    I take some issue with the notion that the government is the monopoly issuer of the currency mantra. Since loans create deposits, the vast majority of broad money aggregates is created by banks. A euro bank could make a loan which is used to purchase something, the receiver of that purchase can use that income to buy a Greek bond. Banks are also large purchasers of eurobonds.

  • http://loandoctorsnw.com Roger Ingalls

    Really? How do you discover that?

    Shouldn’t the government limit (or eliminate) the use of government subsidies to gamble in the stock market?

  • Jerry Rogers

    The United States government spends more than it takes in. Where does it get the money? It orders the U.S. Treasury to sell bonds to cover the difference. Who buys the bonds? The Federal Reserve, at least they are the biggest buyer right now. Where does the Federal Reserve get the money? They create it by book entries. That is, they debit an account called “Bonds” and credit the U.S. Treasury’s checking account. That is the way it works, and there is no getting away from the fact that it is monetizing the debt, dollar for dollar for every dollar the FED creates to buy U.S. Government obligations.

    The article is a steaming, stinking, pile….

  • rhp

    The clear light of morning sometimes obviates the question. OK, I get it now. The US trsy that is issued is not really different from a dollar bill, only the term structure is different. So, once again the only thing the Fed is doing by purchasing the trsy is changing the term structure…..

    Now, I think the term “monetization” needs to be defined more clearly. The way Cullen uses it in his original explanation, in saying: “Monetization is achieved by an act of Congress through deficit spending” equates with vertical money creation, which only Congress, NOT the FED can do. However, many people in the blogosphere (and Wikipedia) are saying that “monetization” is the conversion of “debt” to “money”. The hang up is that people would not consider conversion of a 2 year trsy to a 30 day trsy to be “monetization”. Yet, they would consider conversion of a 30 day trsy to a dollar bill to be “monetization”. Yet the only difference between the two is the term structure……..

    There is an awful lot of needless arguing going on due to confusion of terms….. Monetization has come to be associated with funding spending, which it is not.

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

    What you’re saying is that a checking account is materially different from a savings account. Do you not count your savings account as your money?

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

    Of course it matters. It is the central element. If the spending comes first then it is obviously not being funded….

  • http://www.stuartinvestments.com Mark Stuart

    I am confused by the author’s focus on details.
    When the Fed buys government debt, how does it consumate the transaction with the seller? The Fed gets the bond and the seller gets cash. So, what is the
    source of this cash? Is it old cash, already in the Fed’s possession, or is it new cash?
    The author seems to imply that Congress is printing money via deficit spending, and that it does not really matter? What have I missed?

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

    Your comment displays an extraordinary lack of understanding. You clearly have not taken the time to appreciate the argument….

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

    No, this is crucial. People are accusing the Fed of helping to fund govt spending. That is nonsensical and 100% wrong.

  • http://www.pragcap.com Cullen Roche
  • troll

    I don’t think I made my point clear enough. Gold, also, needs to be believed in if it is to be worth anything. However, gold is something you can hold in your hand, society’s production is not. My point is that most people need something substantive to believe in, especially when it’s backing one’s currency. That and because of the complexity of modern monetary policy, most people are either too ignorant to be aware of MMP or CHOOSE to ignore it. Either way, it makes for poor support for our MMP.

  • Anonymous

    Well that is the thing – the one is money, the other is credit to a bank that is locked-up or has penalties to be withdrawn etc. Savings account is not money, as you need to convert it to cash first. I know the distinction is small nowadays, but with the same logic you can count your equities and car as money.

    So to me this point is where MMT has a flaw, even if it is not a big deal nowadays to differentiate b/w money and credit.

    InvestorX

  • Anonymous

    Well, I agree with this operational reality of MMT – govt debt in the USA is not used for funding. But I doubt this discussion is the explanation for it. It is just the chicken and egg thing – it does not matter which was first, it just is. Before the chicken came it was a fish. Before government money came there was private money or state money or whatever. It was there. That’s all.

    InvestorX

  • Anonymous

    I think nothing is wrong with the picture, MMT is wrong in counting a savings account as money. See my discussions with Cullen above.

    InvestorX

  • rhp

    “No, this is crucial. People are accusing the Fed of helping to fund govt spending. That is nonsensical and 100% wrong.”

    Cullen, I totally agree. I’m not saying this concept is not very important. I’m saying that confusion of defining “monetization” is making things a lot more difficult. Even your definition in your opening statement that: “Monetization is achieved by Congress’s deficit spending” is a different definition from what is commonly used, and is much more akin to money “creation” than “monetization”.

    For the majority of people (me included before starting to read your site), the exchange of US trsys for US $$ is considered “monetization of debt”. I now understand that the Fed is just changing term structure and no new “money” is being created or added to the system.

  • rhp

    Next question in my quest to understand MMT…….

    “The issuance of bonds continues to this day due to Congressional mandate. In reality, our bond market funds nothing and serves only as a reserve drain which helps the Fed maintain its overnight target interest rate.”

    OK, got it. But congressional mandate says that the Treasury must bring to market an amount of trsys exactly equal to the deficit spending??, to be sold to the primary dealers and thus enter the private sector? So, my understanding would be that the Treasury does NOT have leeway to determine HOW MUCH trsys they are issuing. That is determined by the amount of Congressional deficit spending. The only thing they have control over is the term structure.

    So, it seems to me that the draining of reserves cannot be the sole consideration of bringing Trsys to market…….. and how can the Trsy dept/Fed target draining “x” amount of reserves when they are required to issue an amount determined not by the reserves in the system, but by the deficit spending of Congress?

    hope my question is clear….. thanks!

    rhp

  • Ronalds

    The way I imagine it is the fed sets the reserve/treasury ratio held by the non-govt sectors. Is this more or less accurate? When you say monetary policy is about leverage, can you please elaborate?

  • chris

    “YES!”

    well no.

    the more excess reserves that banks hold on their balance sheet, the more that banks can lend because there are no (or very low, i admit to forgetting most of the fed banking regulatory law that i used to know) capital lending haircuts to holding fed reserves.

    to illustrate (and i am using this as an example, don’t hold me to quoting what the exact haircut percentages are because they have flown my memory coup):

    if a bank owns nothing but OREO, it would then be severely restricted in an attempt to leverage its balance sheet (eg issue CP) and make new loans.

    if a bank owns nothing but fed reserves, it would be able to lever up its balance sheet significantly to make new loans.

  • chris

    anon, great minds post alike…

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

    Banks don’t ever lend reserves. They lend first and find reserves later if needed….

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Portfolio shifting, perhaps. The real point is for spending, QE doesn’t add anything except the hope that people will spend more out of current income. Portfolio shifting, where it does occur, may or may not lead to more spending out of current income. Most dealers selling Tsy’s to the Fed will simply use the proceeds to pay down other repo debts or lend it in the repo mkt. But they could and in fact already do all that without QE. And, in the process, QE actually extracts interest income from the non-govt sector via the swap of an interest earning Tsy for reserve balances earning 0.25%.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    wrong. there’s no “new money” doing anything. It’s all psychological because people like you “think” there’s new money.

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

    Yes, and you could also argue that any spending due to the equity “wealth effect” is like spending more money on dinner tonight because your stocks went up only to realize tomorrow that they declined as much. The point being, if there is not a fundamental effect that justifies the increase in these asset prices then the price increase will ultimately revert. It’s impossible to decipher how much of the recent rise in equities is due to the Bernanke Put vs real economic improvement, but I think it’s safe to say that QE has added a level of comfort about the economic recovery that will not be supported by any fundamental effect. We see more and more people slowly beginning to admit that QE isn’t really helping….It’s essentially a replay of the Greenspan years. Blow the bubble, make everyone feel great, get them to spend, and then find out that they’re bankrupt later…..

  • chris

    “The point that Cullen is correctly making is that the Primary Dealers can’t just create money out of thin air in order to purchase Bonds, instead they must use existing money.”

    agreed. but you are looking at the wrong party. look at the counterparty.

    the fed DOES create money out of thin air in order to purchase bonds.

    now if you want to mash up fed reserves with other financial assets and say one is vertical and the other horizontal money (doesn’t help me but i may be spatially challenged), or one is 24k and the other 18k, then go ahead.

    but i don’t see how that helps analysis in this case…

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    for a bank holding the Tsy, it’s always about what they have on the asset side vs. the liability side. since a bank never needs the reserves to “buy” anything, it’s all about the net interest margin of what they buy/hold vs. how they finance it. what really happens in QE vs. no QE if the bank were holding a Tsy before is that the spread b/n the assets and liabilities decreased as the Tsy is replaced with reserves. that’s the net effect of everything you’ve described. Actually less profit and less “fuel” to the economy. An individual bank might buy something with a higher yield with the reserves, but that just shifts them to another bank, doesn’t get rid of them.

    A few other things:
    1. the Fed would NEVER stop accepting Tsy’s for repo collateral–good luck getting that by Congress even if they wanted to. Pretty inconsistent with Fed’s stated desire–embedded in its own operating procedures–to minimize its own risk.

    2. the repo example doesn’t work too well for a bank. If a bank wants to buy something, they buy it, and if necessary, clear an overdraft at the Fed via money markets. Then, if they are holding a Tsy and they don’t want it, they sell the Tsy and could use proceeds to pay down money market borrowings. Possibly a little bit of difference on the edges vs. starting with reserve balances, but not that economically significant, particularly since the spread earned prior to buying something with the reserves was smaller than if the Tsy had been held to that point.

    3. If the bank is worried about capital loss with a Tsy, then they shouldn’t be holding it anyway, with or without QE, or they should be protecting against capital loss via swaps, etc. The discussion of QE and liquidity ASSUMES from the beginning that there is someone already holding a Tsy who clearly thought it was a good financial asset to be holding at least to that point vs. the alternatives. Moreover, there’s already a capital loss to many Tsy holders selling to the Fed WITH QE, since the Fed purposely organized QE to have as little effect as possible on yields, aside from where markets take them, and markets have taken yields up. QE didn’t help with that risk at all.

  • Obsvr-1

    OK lets try this.

    What would happen when the gov’t creates new money by deficit spending and no corresponding tsy bonds are issued ?

    The money supply would increase, which could result in inflation if productive output trails the new money supply.

    The new money will be spent on services or consumables or saved/invested.

    Let the market determine the level of spend/save by allowing suppy/demand for services/products/money work to set a market based interest rate to regulate inflation/deflation.

    Absent gov’t intervention the market has built in discipline through supply/demand and `success/failure principles.

    Gov’ts have proven over and over again that discipline is thrown and corrupts the monetary system to control and transfer wealth to special interest or self gain.

    Removing the tools of monetary manipulation (End the FED) and constraining the gov’t to balanced budgets. This would make the gov’t budget much more transparent and disciplined as any increases, malinvestments, waste, fraud and abuse would get more attention of the gov’t and the taxpayers.

    Replacing the income tax with a consumption tax would help to regulate run away spending and encourage saving/investing. If there is a need to reduce the monetary stock then the tax rate could be adjusted up temporarily (although this would not likely be needed as the market would self regulate). This would eliminate the tax code mess and special interest transfers (deductions and credits) and greatly simplifying tax revenue collection.

    Eliminate all market subsidies as these just distort the market and foster lobbying and special interest favoritism.

  • Hammertime

    Are the UST bonds issued to sterilize the new money created by deficit spending?

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    “I am starting to get the feeling that MMT confuses in this debate a direct gift by the Fed to the private sector (TARP) with “providing liquidity” or “asset monetization”. ”

    WE MAKE A BIG DISTINCTION BETWEEN THIS AND BUYING TSY’S.

    It does not matter which asset is monetized (US Treasury or some other). Fact is that in the private sector there are less assets (to be sold for cash to other private sector participants) and more cash (to bid up private sector assets).”

    BUT FINANCIAL ASSETS DON’T NEED TO BE PURCHASED WITH “CASH” PREVIOUSLY HELD. “CASH” CAN ALWAYS BE ACQUIRED, AND IN THE AGGREGATE, CAN ALWAYS BE CREATED. THAT’S HOW TSY’S ARE ACTUALLY PURCHASED AT AUCTION, FOR THE MOST PART. THAT’S HOW BANKS MAKE LOANS AND PURCHASE FINANCIAL ASSETS. AND THEY MAKE LOANS TO OTHER FINANCIAL INSTITUTIONS (LINES OF CREDIT, ETC.) THAT WANT TO DO THE SAME. ETC. ETC.

    Also this line of thinking at MMT resembles Ben Bernanke’s PROVENLY WRONG assumption that the level of private debt does not matter, as it cancels each other out.

    MMT ABSOLUTELY NEVER SAID THE LEVEL OF PRIVATE DEBT DOESN’T MATTER. QUITE THE OPPOSITE.

    As we know the level of private debt is very imporant for the boom / bust cycle, which has very REAL economic impact. Irving Fisher was also of Bernanke’s view, but he had to change his mind and theory after he lost a fortune in the depressionary stock market and came with the debt deflation thory.

    APPARENTLY YOU HAVEN’T READ MUCH MMT. THERE’S NOTHING HERE THAT MMT’ERS DISAGREE WTIH, EXCEPT FROM THE FACT THAT YOU THINK MMT’ERS ARE SAYING THE OPPOSITE.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    “Well that is the thing – the one is money, the other is credit to a bank that is locked-up or has penalties to be withdrawn etc. Savings account is not money, as you need to convert it to cash first. I know the distinction is small nowadays, but with the same logic you can count your equities and car as money.”

    I DON’T SEE WHERE THIS HAS ANYTHING AT ALL TO DO WITH THE QE DISCUSSION. QE ISN’T ABOUT MONEY BEING LOCKED UP IN SAVINGS ACCOUNTS. IT’S ABOUT TSY’S WHICH ARE ABOUT THE MOST LIQUID FINANCIAL ASSETS AVAILABLE.

    So to me this point is where MMT has a flaw, even if it is not a big deal nowadays to differentiate b/w money and credit.

    MY GOD, YOU REALLY DON’T UNDERSTAND MMT AT ALL. THAT DISTINCTION IS ABSOLUTELY CENTRAL TO MMT.

  • studentee

    “What would happen when the gov’t creates new money by deficit spending and no corresponding tsy bonds are issued ?

    The money supply would increase, which could result in inflation if productive output trails the new money supply.”

    this does not follow. the money supply is separate from the monetary base, it absolutely depends on how the govt gets the money out there. if the govt didn’t soak up excess reserves via tsy issues, then the fed fund rate would fall to zero. mr. roche can probably expound upon this, but i think that’s the only guaranteed result.

    “Removing the tools of monetary manipulation (End the FED) and constraining the gov’t to balanced budgets. This would make the gov’t budget much more transparent and disciplined as any increases, malinvestments, waste, fraud and abuse would get more attention of the gov’t and the taxpayers.”

    ending the fed isn’t a bad idea (turning it into a passive operator i think would be ideal), but your next move is mistaken. you have yet to grasp basic accounting surrounding the effects of a balanced government budget. and it’s not categorically clear that the private sector is somehow less guilty of malinvestment etc than is the public sector. maybe, but it’s far from certain.

    “Absent gov’t intervention the market has built in discipline through supply/demand and `success/failure principles.

    (although this would not likely be needed as the market would self regulate).”

    these are delusional, sorry.

  • studentee

    doesn’t the fed simply use fed fund rates etc. to do this? that is, it’s irrespective of the amount of reserves out there (the amount of deficit spending), they just set whatever rate that would soak up all the excess reserves and it’s done

  • studentee

    i’m pretty sure this is correct, though some portion is soaked up via taxation. from mosler’s soft currency economics:

    “Under a fiat monetary system, The government spends money and then borrows what it does not tax, because deficit spending, not offset by borrowing, would cause the fed funds rate to fall.”

  • Anonymous

    Cullen Roche:

    Actually, you offered no proof that the Fed ‘cant’ monetize the debt even though you started the article saying you would. And you should probably read some of Greenspan’s speaches from the 70s, in which he said the Fed can monetize the debt. I’m assuming he knows more about the Fed than you.

  • rhp

    anonymous,

    considering his legacy, I’m not sure your statement about AG knowing more than Cullen is accurate!

    As to monetization, hopefully, the following questions will elucidate:

    If I hold a 20 year note and you hold a 10 year note and we swap, are you monetizing my debt.
    If we take that further down the road and do a 10 year for a 5 year, does THAT monetize debt,
    If we take it five year to 30 days does THAT monetize debt??

    If we take the term from 30 days to ZERO days (cash), does that monetize debt?

    The answer in all cases is “no”. The only thing that has changed in the asset swap is the term. When the Fed purchases trsys through POMO, the trsys already exist in the private sector. They are just changing the term structure of the instrument from 5-7 years or whatever, to zero…….

    cheers

    rhp

  • Obsvr-1

    “but your next move is mistaken. you have yet to grasp basic accounting surrounding the effects of a balanced government budget. and it’s not categorically clear that the private sector is somehow less guilty of malinvestment etc than is the public sector. maybe, but it’s far from certain.”

    — The point is that the prvt sector can transfer the excess liquidity into investments other than US Trsy’s. If the gov’t chooses to spend more, then they need to adjust the tax (wealth extraction) up; if the gov’t is allowed to spend freely and issue bonds to account for the deficit then they just embark onto the slippery slope of ever accumulating debt, resulting into what we have now. As for private sector investment allocation, indeed there can and will be malinvestments, the difference is that those who invest unwisely are punished with losses or bankruptcy. When the gov’t malinvests (spends into deficit) the losses are socialized.

    ***

    “Absent gov’t intervention the market has built in discipline through supply/demand and `success/failure principles.

    (although this would not likely be needed as the market would self regulate).”

    these are delusional, sorry.

    — The free market works everyday, if non intervention from the gov’t were allowed to take place then when a person, business or bank make bad decisions or malinvestments then the losses or bankruptcy would be suffered by that entity. There is no reason that market based interest rates would not be successful – no different then a competitive free market for any other product or asset. When markets are distorted by gov’t intervention or fraud/corruption they break down.

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

    If bonds don’t fund spending then the Fed obviously can’t monetize anything. I think that was explained fairly well.

    Also, with regards to Greenspan – I’ve proven that he is clueless: http://pragcap.com/greenspan-critics-proves-he-doesnt-understand-u-s-monetary-system

  • http://blogfirstrider.blogspot.com/ first

    There is no debt but there is a deficit. A nice mirage.

    It does not transform in to debt since its a cumulative money credits against nothing. The more money the more the economy needs to produce to avoid inflation.

    Don’t need to borrow simply electronic credit generally called “print” and buy and sell Bonds to monitor the excess. There is no magic in this, it’s invisible, like prestidigitation, We all know nothing is free and if the accumulated debits are not debt and the Bond Market doe not fund any thing that defies logic for any rational person. So who pays for all this.

    The debt is in the currency. I dare say that the currency as a gross valuation and a net valuation. The difference is its valuation when we receive it and its valuation when we use it. We could say that the faster we spend the less we pay.

    The real question is by how much will the dollar be discounted not in relation to other currencies but in relation to goods and services we buy. That will be the price off the excess of the no debt world.

  • studentee

    “If the gov’t chooses to spend more, then they need to adjust the tax (wealth extraction) up;…”

    this depends entirely on macroeconomic conditions

    “…if the gov’t is allowed to spend freely and issue bonds to account for the deficit then they just embark onto the slippery slope of ever accumulating debt, resulting into what we have now.”

    mr. roche has shown repeatedly that issuing bonds is an unnecessary political restraint. regardless, hasn’t the us held some form of debt since the mid 1800’s? it’s not clear that the slope is slippery, nor that it is slippery toward any particular unpleasantness

    “The free market works everyday, if non intervention from the gov’t were allowed to take place then when a person, business or bank make bad decisions or malinvestments then the losses or bankruptcy would be suffered by that entity. There is no reason that market based interest rates would not be successful – no different then a competitive free market for any other product or asset. When markets are distorted by gov’t intervention or fraud/corruption they break down.”

    this ignores a lot of evidence from behavioral economics, and many cogent arguments pointing out that there easily achievable, sustainable, non-desirable free market equilibria. i agree with mr. roche that we need to make sure that those causing disruption and making mistakes are ‘punished’ in some way, but it is, to me, outrageous to think that entire economies should be held hostage to the mistakes of a few actors. you don’t seem to recognize that markets break down on their own, despite massive evidence supporting this…

  • Obsvr-1

    term structure swaps occur up to the point where you swap for money/currency (cash), then you have monetized the asset; meaning you can now go out and buy (spend) products and services.

    You can not use a 30yr, 10yr, 5yr bond on goods and services. You will have to liquidate (monetize) one of those assets to engage the market in goods/services.

    This example conflates the horizontal and vertical discussion, as only the PD can deal directly with the FED. I did this just to make the distinction between a financial asset instrument and a monetary money instrument used for exchange of goods/services.

    I intentionally left of the credit market or credit expansion from this discussion.

  • Anonymous

    Thanks for your comprehensive reply and insight. Your points are convincing.

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

    Not just convincing, but right!

  • Obsvr-1

    mr. roche has shown repeatedly that issuing bonds is an unnecessary political restraint. regardless, hasn’t the us held some form of debt since the mid 1800′s? it’s not clear that the slope is slippery, nor that it is slippery toward any particular unpleasantness

    — agree issuing bonds is not a political restraint; since bond issuance is ex post gov’t spending then the problem is – in the words of the Clintonites “Its the Spending Stupid”, more specifically unrestrained deficit spending. Yes in reality the gov’t will continue to use borrowing (bonds), but without constraining spending the slope is indeed slippery. Yes US has used debt throughout history, it was not until the creation of the CB (1913) and corruption of the system by the banking cartel in concert with the political power that debt expands and dollar devaluation (inflation) is controlled not by the market but by a few “inherently flawed” men. Once the final ties to gold standard, gold exchange was broken (1971) the knee broke on exponential growth in national debt.

    ***

    this ignores a lot of evidence from behavioral economics, and many cogent arguments pointing out that there easily achievable, sustainable, non-desirable free market equilibria. i agree with mr. roche that we need to make sure that those causing disruption and making mistakes are ‘punished’ in some way, but it is, to me, outrageous to think that entire economies should be held hostage to the mistakes of a few actors. you don’t seem to recognize that markets break down on their own, despite massive evidence supporting this…

    — So is it better to have a centrally controlled monetary system (by a few men) over an entire market left to operate in a competitive free manner ? Since those in power (politico’s and money elite) will never police themselves, as witnessed by the current financial crisis; then wouldn’t it be better to let the market operate such that any distortions via fraud/corruption would be distributed and not concentrated ?

  • rhp

    @Obsrvr-1

    True, one cannot buy assets with a trsy note, but they are basically as liquid as cash. The term “monetize” gets confusing (I think) because most people think of it as creating money. Yet Trsys can be considered “money” already, just that their term structure is longer than cash by whatever their maturity rate. It is still an asset swap and not a net creation of “money” in the vertical plane. An asset of equal value is being swapped for another asset of equal value between the private (primary dealer) and the public sector (Fed). So, no net “money” is being created. Because the Trsy that is being bought by the fed was already purchased by the primary dealer using cash spent into existence (fiscally) by Congress….

    However, you are correct. When the banks have cash in hand, the incentive is NOT to hold it and it flows into equities or commodities as we are seeing.

  • chris

    “Banks don’t ever lend reserves. They lend first and find reserves later if needed…”

    true, in normal times.

    these aint normal times.

    this post was good at generating thought and discussion; for that, a tip o hat.

    you probably could find three ideas in these posts that you could use as the basis for further posts

  • chris

    “The problem with your analysis is you don’t understand what “liquidity” is in this case. Adding reserves doesn’t help any bank do anything they couldn’t have already done. Trading Tsy’s for deposits doesn’t help anyone spend–they can always sell the Tsy if they want deposits as it’s the most liquid market out there with dozens of bidders who are using the repo market to acquire funds (created out of thin air–it’s not a case of shifting deposits from one person to the other) to purchase Tsy’s from others.”

    you confuse liquidity with money.

    right now and for awhile, treasuries all along the maturity spectrum are losing value. banks have anticipated this, they sort of thought we wouldn’t have 2% 10yr yields for long. dont need a phd for that call.

    hence, if you are a bank with shareholders (as opposed to a phd with research students), if you want a low-to-no haircut on your capital with no degradation of value, you go for money (fed reserves) rather than treasuries (even if BB will give you a bid to hit).

    a little harsh, but i detected a little ivory tower in your posts. apologies in advance.

  • Obsvr-1

    yep, and worse the bank/finance sector will leverage up their assets, but on margin, trade in derivatives further leveraging their capital. This is where the 10’s, 100’s $T in notional derivatives come from.

    off topic on the “does the FED monetize the debt thread” – but it is the enabling of bubble blowing from the FED that creates the boom/bust/bailout cycles.

    End result, the FED doesn’t monetize the debt; So the question or discussion I would like to see is, what would the impact be if there were no trsy bonds issued to offset the deficit, just spend more money into existence ?

  • Anonymous

    Sorry Cullen, but my intuition tells me that something does not seem right snd I try to find out what… I get the big picture of govt bonds not financing anything, so the only result could be inflation. But the other statements and conclusions seem to be less convincing and very tortured. Still I have learned a lot here and enjoy your other posts about markets, accounting identities, deflationary pressures, “guru” opinions etc.

  • Anonymous

    Ok Scott, I thought that I and Cullen had reached some level of understanding of what each other was talking about and implying. Your somewhat zealous jump in the discussion got me really confused about MMT. So which is your best source of QE relevant MMT literature (or the NFA stuff)?

    InvestorX

  • http://blogfirstrider.blogspot.com/ first

    The bubble is in hiding in the reserve.

  • http://blogfirstrider.blogspot.com/ first

    “cash spent into existence (fiscally) by Congress…”

    Congress gives instruction to the Treasury to write the bonds and the Fed purchases those Bonds with nothing. All it does it creates a book entry to the credit of the Government. The treasury can then spend against there new credit at the Fed. This goes back in the banking system and in a recession it ends up as reserve. Look at the reserve they have been at historic highs. When we start seeing them go down and I think it is starting then we will see how all this will play.

  • rhp

    Obsrvr,

    Yes, good question! Maybe we can get TPC, and Tom Hickey and others to weigh in on the topic in the future. That feels like “advanced speculation” to me! But at least it is in service to knowledge and free flow of information and not so subject to fraud and abuse! (the discussion of your posed question).

  • Carl

    I have some questions on the mechanical aspects of the US Government’s spending (ie creating reserves). I haven’t really found out how this works from reading at the fed website. Maybe someone here knows.

    The US spends from a rather small account at the Fed. The money that is collected from taxes and bonds first go into deposit accounts at a number of commercial banks and is moved into the treasury account as needed.

    Does anybody know which banks?

    Is it possible for the supplier accounts to run dry? What happens then? TPC (Cullen) remarked once that it is technically possible to default. Is it possible, or do the numbers just go negative?

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    you confuse liquidity with money.

    NOPE.

    right now and for awhile, treasuries all along the maturity spectrum are losing value. banks have anticipated this, they sort of thought we wouldn’t have 2% 10yr yields for long. dont need a phd for that call.

    I ACTUALLY MADE THAT CALL SEVERAL MONTHS AGO, TOO. AS I SAID ABOVE, THE FED CHOSE TO DO QE OPERATIONS SUCH THAT THEY HAD MINIMAL EFFECT ON WHERE MARKETS DROVE YIELDS. AS ECONOMY IMPROVES, WHICH IT WAS DOING BEFORE QE, YIELDS MOVED HIGHER.

    hence, if you are a bank with shareholders (as opposed to a phd with research students), if you want a low-to-no haircut on your capital with no degradation of value, you go for money (fed reserves) rather than treasuries (even if BB will give you a bid to hit).

    THAT’S COMPLETELY BESIDE THE POINT I WAS MAKING. THE QE DEBATE IS ABOUT WHETHER THE TREASURIES OR RESERVES ARE MORE STIMULATIVE. YOU’RE SUGGESTING THE BANK WOULD RATHER HOLD RESERVES THAN HOLD TREASURIES (AND IT’S A BIG “DUH!” AT THAT IN A RISING YIELD ENVIRONMENT–MY STUDENTS WOULD FAIL IF THEY GOT THAT ONE WRONG). THAT ACTUALLY MAKES MY POINT THAT QE DOES NOTHING FUNDAMENTALLY TO STIMULATE. GUESS THAT PH.D. COMES IN A BIT HANDY WHEN IT COMES TO UNDERSTANDING HOW TO DEVELOP AN ARGUMENT THAT ACTUALLY DEFENDS YOUR POSITION?

    a little harsh, but i detected a little ivory tower in your posts. apologies in advance.

    AND I DETECT A BIT OF CLUELESSNESS IN YOURS. APOLOGIES IN ADVANCE.

  • T_Boone

    Wow folks, I’m lost. I guess I’m going to scrape back to Yahoo finance or CL MoFo with the rest of the apes. Or pick up a book.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Sorry about the zealousness. Working on it. Maybe someday I’ll be as even-keeled as Cullen. Kind of pisses me off that he’s a lot younger than me and he can already do that while I still can’t. :)

    Anyway, I’d start with the readings on Cullen’s MMT page. There’s also Mosler’s mandatory readings page on his blog.

  • Alex

    Wow, there seems to be a lot of controversy regarding the word “monetize” and the idea of the Fed purchasing securities directly to ‘fund spending’.I think it is time to sort this out.

    Question: What would the accounting dr/cr’s be if the Treasury spent without later borrowing or taxing? (ignoring Fed Funds rate / political and legal voluntary constraints)

    From what I have been taught, this is how it goes – government creates $100 ready to spend:

    Central Bank – Dr govt securities asset 100, Cr Treasury deposit account @Fed 100
    Government – Dr deposit account @Fed 100, Cr govt securities liability 100

    I think that is what people are referring to when they think of ‘monetizing’. Compare those accounting entries to quantative easing. If I am correct here, quantitative easing, on the Feds balance sheet, will involve – Dr govt securities asset, and Cr commercial bank deposits. Is this not the same accounting entry as the one above?

  • Alex

    Thats an interesting point, and I have thought about that occasionally. We know that spending is not accompanied by simultaneous borrowing, as there is a time delay.

    What would happen if there was some major event, the government only had X in its account at the Fed, and the government needed to spend (X+1)?

  • Everyman

    It’s the derivatives that are the problem. THis has to do with the “Big Five” banks, and you know who they are. They hold over $227 in derivatives. It is that simple.

    http://theeconomiccollapseblog.com/archives/is-ben-bernanke-a-liar-a-lunatic-or-is-he-just-completely-and-totally-incompetent

    The “Big Five” need to be stormed and all assets taken by the citizenry. To hell with the “Big Five” banks rights. We are coming to our “Egypt Moment” and this “monetizing” discussion is mental masturbation. It is so beside the point and should not be the focus of any real sane discussion of what is going on in our economy.

  • Mediocritas

    Think of MMT’s vertical money as hard cash (real money) while MMT’s horizontal money is credit money, generated through the fractional reserve system by banks making loans. The two are fundamentally different.

    When talking about inflation, what matters is net money supply in which the fundamental nature of the dollars is irrelevant, all that matters is the total *available* quantity (beware liquidity traps).

    Yes, the Fed prints money out of thin air to swap for bonds and reinstate the PDs cash reserves but remember that a build up of those reserves in the first place meant destruction of horizontal money. If banks have lent money up to their reserve constraint then the money supply will be maximally expanded and banks will not have the capacity to purchase bonds.

    Thus, if PDs are buying bonds then it means there is deflation present in horizontal money. Banks have *not* lent to their reserve constraint and the supply of horizontal money, aka credit (which is the dominant component of money supply) is less than maximal.

    In this environment, the Fed printing up and swapping fresh vertical money into the system does not cause net inflation while the cause of credit contraction remains present (fraud in the housing sector).

    The Fed isn’t doing a great job with QE2, but it isn’t doing a bad job either. Things could be a lot, lot worse.

    US inflation remains no threat until the issue of rampant fraud in the financial system is fully resolved or a Black Swan arrives in the form of the entire world suddenly ditching the US dollar as a trading currency. Forced and rapid repatriation of Eurodollars would indeed be a hyperinflation trigger, but there’s no way the IMF would allow it.

  • Alex

    theeconomiccollapse.com is the Osama Bin Laden of government deficit discussion. Given this fact, it is hard to give credibility to anything on that site. Furthermore, most of the comments are similar to the nonsense you have just uttered. Yes, the banks are a problem, but you don’t need make lunatic comments.

  • paul skinner

    The author of this article is a MORON!!!

    He should try his hand at fishing, leave the rest of us alone.

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

    I fish quite a bit. Maybe if you join me on one of my trips you’d take the time to listen and understand rather than insult and view the world with a closed mind.

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

    Yes, younger, but it just means I’ve wasted more hours on the internet trying to “scream” at people. I realized a few years ago that it was a big waste of time and that you’re better off talking to people as if they’re in your living room. :-)

    Fortunately for the rest of us we have someone like you who is willing to take the time and be patient and help everyone better understand this stuff. It really means a lot that you are even willing to take the time and stop by to clarify. I think I speak for everyone when I say we appreciate it enormously.

  • Anonymous

    Well Scott, Cullen,

    Thanks for your patience and discussion. I read again your section on MMT and vertical money. And I have to say that I still disagree and maintain my position. And it is:

    – I agree that government is not constrained in its spending, because it can always sell Treasuries if it wants or have the Fed print money and buy them (QE). So the only negative result is inflation (or misallocation). China is not the US creditor either.

    – I disagree though that Treasuries are money. They are assets that bind free cash from the aggregate private sector. This works as crowding out / inflation preventing tool, similar to taxes (but works only temporary) or in case of trade deficit, the crowding out can be avoided. This is looking only at the aggregate levels (private vs. government) and only the vertical relationship. That banks then can come and get leverage for their Treasuries or buy them with FRL created money out of thin air is a matter of horizontal money creation and not part of the discussion. That Tresuries have higher moneyness than say cars changes nothing here.

    – Thus I also disagree that Treasuries are only a tool to maintain a target rate. I think they are tool to drain money as described above.

    – I fully agree that deficit spending is often inflationary (e.g. see Hussman on this) and is more inflationary in a balance sheet recession than QE. I also understand the deflationary process at hand.

    – I still think that converting of an asset into cash is properly called monetization, because an asset is taken out of the private sector and cash is increased in the private sector. Not that I expected that it will have such a huge effect on speculation or that I expect it to have a big effect on the real economy. The major reason for this is that 95% of modern money creation is horizontal via FRL and we see banks reluctant to lend and that banks are not reserve constrained in FRL, but are only capital restrained if at all. Also I agree that the change of the portfolio mix of the private sector is not big enough to have any meaningful effect of QE. So the effect is mainly psychological. In times of debt deflation, QE’s monetization is mainly an offsetting factor, so its is not (hyper)-inflationary.

    – The bond vigilantes will only wake up when the USD starts to lose value in an accelerated manner. This will come later than many expect due to its (overabused) reserve currency status.

    – I compared the NFA concept to the concept of private debt cancelling each other out. I am not sure this comparison is correct. But at least the change of the mix of private sector portfolio seems to be absent from the NFA concept. Another reason I think the NFA concept is not right is because of the above described “sterilizing” effect of US Treasury issuance.

  • http://www.NapaWealth.com Tim Ayles

    Cullen – Care to have fun with me in the responses to this:

    http://seekingalpha.com/article/252331-debunking-the-debunking-myths-of-u-s-collapse-post

    “Deficits mean that the federal government is spending more than it is taking in in taxes. Those deficits can be financed in two ways. If they are financed by selling Treasury bonds to the public, then the deficits are not inflationary.”

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

    Seems pretty easily debunked. Anyone who makes the Weimar, Zimbabwe is USA example is severely confused to begin with….

  • chris

    cluelessness….oh no…do you also mark your grades in ALL CAPS too?

    typical

  • http://www.NapaWealth.com Tim Ayles

    I agree- I just submitted a response to SA and referenced and gave credit to some of what you said in this article.

    Thanks for being the pioneer in this fight!

  • Mitch83

    It all comes down to the “moneyness” aspect.

    And in the FINANCIAL REALITY treasuries ARE “money” in the term you use it.

    Keep in mind: As a bank you don’t go out like a individual with cash/credit card and shop at the mall.
    In general there is no need for a bank to have reserves/cash instead of treasuries except for reserve requiremenst regarding private lending (but even reserve requirements are unnecessary as you can see in many countries like AUS, NZ,… that abolished them some time ago), and of course bank runs, when customers demand cash currency.
    There is nothing a bank can’t do with US treasuries that it can with reserves in financial terms.
    If banks wants to lend, they just lend and get reserves later if necessary.
    If banks wants to buy something they just buy as Scott Fullwiler explained above.
    The slight disadvantages in holding treasuries instead of reserves when buying only become evident in the death of an economy (hyperinflation etc.). Then treasuries won’t behave like “money”. But when speaking of the Dollar this should be the point of world economic collapse. Not very realistic/likely, besides the fact that you and I will have other things in mind than treasuries at that time, I guess. ;)

    You also speak about inflation prevention by issuing treasuries.
    But banks act and lend the same no matter if they have reserves or treasuries on the asset sides of their balance sheets. So why should one expect a different effect on inflation by issuing bonds vs. not issuing bonds?

    Regarding QE2: I also say the effects of QE2 on the markets are simply psychologically driven by investors who don’t understand MMT. ;)
    Regarding its effect on the real economy, the only way it could increase private spending is by the notorious “wealth effect”. Will this work? I really don’t know.

  • dootyfree

    What you fail to mention is that in the QE process primary dealers are allowed and encouraged to to sell bonds for their clients. Which in turns gives their clients access to more fluid dollars. What do you think they do with these dollars?

  • http://www.NapaWealth.com Tim Ayles

    I would guess you assume they buy stocks…… which means the clients of these banks now have stocks, and the people who used to own the stocks now have the banks clients cash.

    Does it matter who owns the cash and who owns the stocks?

  • dootyfree

    Apparently they are buying commodities.

    Do you wanna be right, or do you wanna make money

  • http://www.NapaWealth.com Tim Ayles

    Or maybe people who don’t understand the current monetary system think QE will be hyperinflationary and are running, wrongly, into commodities to protect themselves from hyper-inflation that will never come?

  • http://www.NapaWealth.com Tim Ayles
  • http://www.pragcap.com Cullen Roche

    Good stuff Tim. Thanks for passing it along.

  • dootyfree

    I was not disagreeing, just find it interesting that no one mentions that little fact.

  • chris

    this is a sober analysis of the creation of excess reserves by the fed in connection with QE2, without MMT gloss:

    http://scottgrannis.blogspot.com/2011/02/money-supply-update-so-far-nothing-much.html#links

    worth a look

  • http://blogfirstrider.blogspot.com/ first

    Yes, in addition to when I buy Gasoline or go to Walmart look at the estimated dollar carry trade its $1,500bn – which is much bigger by the way than the Japan carry trade was. This is money that as left ultra-low interest rates in the US to purchase higher-yielding assets around the world.

    Its done all day long. Take a very simple example like a high quality Australian paper (4% nice return) plus 28% capital gain in the last 24 months. Net cost close to 0 and yes they can leverage it.

    When rate turn around and bank reserve start to come down we will see if BB can really swims.

  • Obsvr-1

    Assuming you didn’t receive counterfeit cash for your stock.

    Indeed, in aggregate the economy does not have any new financial assets, but it has more liquidity.

    If you look at the FED balance sheet as an SPV outside of the general economy, then FED moved less liquid assets out of the economy and added liquidity (increased money supply, either in base, or circulation depending on where it ultimately goes).

    **** Couple of questions:

    1. What would happen if no bonds are issued to offset deficit spending
    2. Since US Bonds are virtually risk free, then why isn’t the yield curve flat, same return at any duration ??

  • percolator

    Over at Cafe Americain, Jesse just posted his comments about this post which everyone should read.

    http://jessescrossroadscafe.blogspot.com/2011/02/modern-monetary-theory-sophistry-of-us.html

  • http://blogfirstrider.blogspot.com/ first

    What is confusing is that there are Bonds at the FED against which the counterfeit money is issued or credited.

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

    1) There is no need to issue bonds. So, what would happen if we stopped? The markets would likely panic for a while and then settle down and realize that it doesn’t matter.
    2) Because the market does acknowledge that there is some risk. Or it could be that the market has it wrong. Why do they offer CDS on the USA?

  • Obsvr-1

    1) There is no need to issue bonds. So, what would happen if we stopped? The markets would likely panic for a while and then settle down and realize that it doesn’t matter.

    — Then we should give is a try and retire the FRNs and Issue US Money

    2) Because the market does acknowledge that there is some risk. Or it could be that the market has it wrong. Why do they offer CDS on the USA?

    — A CDS on the default of USA, um, another cash machine and free money for the issuer. The buyer would be greatly disappointed if they ever had to make a claim as they would find the issuer in a big smoking hole. I guess the gamblers will trade anything and make money on the volatility of all the game playing. This is another symptom of the derivative market run amok.

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

    I think they would have to gradually move to stop issuing bonds. They’ve made very small moves in this direction though it’s still clear that people think we need it….

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Yes, just the same old stuff from Jesse that we’ve heard hundreds of times. Nothing new. Find anyone who doesn’t understand the monetary system and/or with a chip on his/her shoulder against MMT and Jesse’s just shown you a checklist of how he/she might comment, though Jesse’s far more polite than most.

  • http://blogfirstrider.blogspot.com/ first

    There can not be a debt if there is no real money. The money comes from the Treasury and as no valuation of its own.

    The new money takes its valuation like if a corporation was to issue new shares with out creating any new equity. The new shares are printed with no immediate value until they are commingle with the hold which will then be deluded proportionally.

    Even if later the company creates share holders equity it will still have robed hold investor but most will not notice since the dilution is hidden by new growth “share holders equity” but its never compensated. That is why inflation rate does not show the entire picture. Inflation may not necessarily be the entire dilution.

  • http://blogfirstrider.blogspot.com/ first
  • chris

    cullen, i’ll make two points and then leave off.

    first, go ask a bank cfo under what conditions he can go out and borrow in order to lend. he/she will tell you that the bank needs regulatory capital, and there is no better regulatory capital than reserves. this is not a question of mmt, this is simply a question of bank lending regulatory law.

    but, second, and the more important point, have you ever considered that equating the federal government’s budget to a household’s budget is an important meme in the US’s economic, political and societal affairs.

    evolutionary biologists refer to certain genes as super-replicators, since they are more likely to be passed onto future generations because they enhance survivability. sociologists have borrowed this notion and applied the term, which they call a meme, to certain social theories that, whether or not they are accurate, persist in the social culture because they enhance the survivability of that culture.

    daniel gilbert in his book stumbling upon happiness points out two memes which, while largely inaccurate, hold great importance in the culture mostly because they serve to help strengthen and perpetuate the culture.

    gilbert’s two memes are that having children and acquiring wealth will bring you happiness. social scientific studies of large populations have shown that these two memes have no strong correlation to being able bring happiness. when people are subjected to depth questioning, it turns out that parents think, ex post, that having children was less likely to bring them happiness than they had expected, ex ante. as well, social scientific studies have shown that people will admit that achieving wealth beyond being able to support oneself and family and achieving some measure of leisure simply does not equate with achieving a happy life.

    and yet no one is out trying to debunk these two memes because there is no social utility to doing so. our survivability as a people and an economy depend upon people espousing these memes even if, upon scrutiny and when pressed, people might admit the absence of any strong connection between having kids or becoming wealth and being happy.

    i see the notion that the US government should “live within its means” akin to a family household as being a meme in the same way and having an important societal benefit, whether or not this is strictly true, under certain or other conditions.

    i simply see the indignation of you, the good phd, and other mmts, whether righteous or not, as totally numb to the importance of a meme such as equating nation and family households, and the role it has in furthering our national interest.

    mmt theory is a long run for a short slide, since if you are right, it only emboldens policy makers to use it for potentially inflationary purposes; the national/household budget meme which mmt, as you have expounded it, rails against serves far more important societal purposes than the implications of mmt as you have expounded it ever could. it’s common sense that we are better as a nation economically if we pay as we go, whether or not some economic theory might hold that this is unnecessary.

    and if you are wrong, well then you are wrong (and may even resemble just a little bit the weird uncle at thanksgiving).

  • percolator

    Jesse does say you MIGHT be right and if you’ve been reading Jesse you’d know he thinks we’ll experience stagflation – not hyperinflation.

    I thought he raised some valid points, but I’m not going to waste my time regurgitating his comments because you’re so cocksure you dismiss everything that challenges your view as illogical and nonsensical.

  • percolator

    I’m sorry if I offended you, but I NEVER called you a name. I just stated you’re extremely confident about MMT. I too have been in the deflationary camp for the past few years, pull up my comments on your site for proof. Though I’m now leaning towards stagflation.

    As far as Jesse, he thinks that “a collapse of the dollar is more possible now than at any time in the past” and ONLY IF the dollar completely collapses would this lead to hyper-inflation. If you look at all the hyper-inflationary events in the past they were all caused by the currency collapsing. Now he’s not saying it will happen, only that it’s possible.

    Ok, a couple of points from his article.

    You said the following in your post the Fed does not “print money” only Congress can via deficit spending. But, what about private banks and the shadow banking system, don’t they “print money” through the creation of credit?

    You said the Fed has been unable to generate inflation during this balance sheet recession. But, I agree with Jesse it depends on how you measure it. If you look at stock and commodity prices they’re soaring and prior to the financial crisis the Fed created inflation in housing. I don’t think it’s accurate to only consider the costs of living, assets should also be included when calculating inflation rates. We disagreed about the CPI and true rate of inflation before, so I won’t get into that again.

    You said the following “Quantitative easing does not increase the money supply and is therefore not inflationary.” Jesse said the Adjusted Monetary Based escaped your attention http://research.stlouisfed.org/fred2/series/BASE. Also the Austrian Money Supply is soaring too http://www.zerohedge.com/article/one-chart-von-bernankestein-will-never-see.

    I do agree with you that the USA cannot become insolvent and that spending comes first. Again, I’m sorry if I offended you, but I’m not 100% convinced as you are about MMT, but I’ve got an open mind and yes, I’ve read a lot about it.

  • Anonymous

    Ok I agree that the moneyness of Treasuries is so high that the difference of issuing Treasuries or direct cash spending is marginal in practice, especially due to FRL financing of Treasuries purchase. So we have a mixed vertical / horizontal effect here.

    InvestorX

  • chris

    i would think the private sector would prosper without deficit spending, as there would be less competition for private debt issuance. i suppose that is debatable, but i also suppose that is not an aspect of mmt, but only a consequence which we might debate outside the contours of mmt.

    as i read over your post, jesse’s post (thanks first), and these comments, again i just don’t see the fuss. as you posit, that “[mmters] are most certainly not numb to the idea that govt can’t just spend and spend. I have tried to make that abundantly clear and I have been very critical of many spending programs in recent years,” then you would have to agree that a meme such as “govt b/s is like household b/s” would be alot more effective in combating wasteful spending than the mmt orthodoxy.

    to me banging the table in ponting out that the US faces no solvency issue creates more issues than it solves, as compared to the pay as you go meme.

    remember, economics is a social science. we are talking about human beings having a propensity to act sub-optimally acting in concert.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    I think the source of the confusion here is that everyone is using a different definition of “money.” If you read the core MMT’ers, you will notice that we absolutely never use the word “money” unless we put it in quotes like I have done. “Money” is always someone’s liability; it just confuses things to not be specific about which ones you are talking about.

    Cullen here is defining “money” as net financial assets for the non-govt sector. That’s the vertical “money” of MMT. This is composed of the currency, reserve balances, and treasuries held by the non-govt sector, less loans made by the Fed to the non-govt sector (or purchases of private sector liabilities by the Fed). This total is an net increase in the financial wealth (nominal) of the non-govt sector, by accounting identity. When the govt spends, it creates a reserve balance also a deposit for the spending recipient; when it cuts taxes, it reduces the amount of both that are debited, without creating an additional liability for anyone in the non-govt sector.

    Others in the non-govt sector, like banks, can create “money,” but not net financial assets for the non-govt sector. This is because a loan from a bank that creates a deposit results in both the asset and liability created remaining in the non-govt sector–no change in the net financial assets of the non-govt sector. MMT’ers call this expansion of “horizontal money.” Shadow banks, and the like, similarly result in an expansion of “horizontal money” (the details are a bit more complex, but the effect is essentially the same, though via the banking system to settle payments, whereas the banking system uses the Fed’s balance sheet for this).

    The Fed’s operations never change the qty of vertical money, or net financial assets. They simply change the composition of the existing qty. Open mkt operations, like QE2, simply remove Tsy’s from non-govt sector balance sheets and replace them with reserve balances. Fed purchases of MBS are the operational equivalent of a loan to the non-govt sector, which obviously does not raise the net financial assets of the non-govt sector (unless the non-govt sector defaults or the value of the MBS declines, which is a separate story altogether). I explained all of this in “Helicopter Drops are FISCAL Operations” a bit over a year ago at the KC blog.

    Overall, the only way to increase “money” is to increase non-govt sector debt simultaneously (horizontal “money”) or increase only non-govt sector financial assets (vertical “money”). In a period of significant desired deleveraging by the non-govt sector, only more vertical “money” will enable the entire sector as a whole to do this. Increasing horizontal “money” stops or at least offsets the process of deleveraging.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Forgot to add . . . everything I’ve said here is simply accounting. None of this is “theory.” None of it is ideology. It can all be shown to be factually how score is actually kept in our monetary system very simply by showing how the transactions affect financial statements of those involved.

  • http://howfiatdies.blogspot.com Vincent Cate

    For those interested in understand MMT I have written up a summary here:
    http://pair.offshore.ai/38yearcycle/#chartalism

    The main thing MMT people don’t understand is hyperinflation. So I have tried to explain it in MMT terms here:
    http://pair.offshore.ai/38yearcycle/#mmthyperinflation

    If you rather read about hyperinflation in regular terms then go here:
    http://pair.offshore.ai/38yearcycle/#hyperinflation

  • Gary_UK

    For any buying all of this ‘no inflation’ nonsense (Is Cullen Roche a Fed plant?), please take the time to look at this chart.

    http://www.zerohedge.com/article/one-chart-von-bernankestein-will-never-see

    MMT might be an amusing intellectual plaything for those trying to pull the wool over your eyes, but back in the cold hard real world, people are starving and taking to the streets because of the Fed’s actions.

    Enjoy your pointless discussions in cyberspace though!

  • http://economicdisconnect.blogspot.com/ GYSC

    Nice article again TPC. I have to say I find Jesse’s response compelling. In any case this is the kind of debate that grows brain cells, thanks!

  • dd

    Wow, a lot of talk with no value.

    Comparing commodites to commodities nothing as changed. One ounce of gold still buys 17 barrels of oil (give or take). But the dollars it takes to do this is gone through the roof. Why? There is more money in the system. Period. But lets look at your points:

    1) sovereign government …no solvency issue. Therefore, it should not be treated as if it is a household, business or state.

    That is the problem. Run it like a household and we wouldn’t be in this mess.

    2) But as we’ve seen over the last few years the Fed has not succeeded at creating inflation anywhere close to the historical average and certainly not dangerously high levels of inflation.

    What? Look around! Do you not think inflation that is being experianced in the “outer world” will works it way back home? Pull up a 10 year chart on commodities. Oil at $10ish back in 2000 and $90 today. Inflation!

    3) Only Congress can print money and it’s clear that their actions in recent years have failed to generate significant inflation.

    Total crap. Look at food prices, oil, commodities worldwide. The US buck is the world currency and there is more of them floating around the world.

    4) The idea that the Fed is buying government debt might imply that there are is a shortage of buyers of US debt.

    Who owns the majority of the debt. The US government.

    5) … blah blah ..

    6) The overwhelming majority of US citizens have no idea how the US monetary system …

    True. And you fail to take in the larger view.

    7) Quantitative easing does not increase the money supply and is therefore not inflationary.

    The whole commodities investing market thinks you are wrong.

    8 ) Monetization is achieved by act of Congress via deficit spending and is independent of the Fed’s monetary policy.

    Tell you what. Next time there is a bond issue, only real 3rd party buyers can come to the table. We will see how much gets bought.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Another thing I forgot . . . net financial assets and the monetary base are not the same. The latter is a subset of the former. Recall that Fed operations rearrange net financial assets without increasing them, it’s quite possible to not increase net financial assets while increasing the monetary base, which QE definitely does.

    A bit of an aside: The “adjusted” monetary base is an ideological measure developed by the STL Fed’s research dept, which is heavily monetarist in bias. The “adjustment” is primarily to alter the reserve component of the base for how much reserves would increase if banks weren’t able to avoid reserve requirements. It’s based on the inapplicable money multiplier view that more reserves provide more “fuel” to banks’ abilities to create money. Right now, with extremely large ER, there’s very little difference b/n the “adjusted” MB and the actual MB, but under more traditional circumstances without such large ER, anyone using the “adjusted” MB signals their lack of understanding of the monetary system, or at least a lack of understanding of what is being “adjusted.”

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Care to explain the actual transmission mechanism for QE to do this, besides psychological effects that we said would happen all along? It’s easy to say the other side doesn’t know what they’re talking about–I’m not impressed.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Blah Blah

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    We’ve explained hyperinflation, including the details of actual previous hyperinflations, many times in the past. Did you cite any of those explanations in your critique?

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    “to me banging the table in ponting out that the US faces no solvency issue creates more issues than it solves, as compared to the pay as you go meme.”

    I’ll just say that it’s a really good thing nobody thought that way back in 1941. Imagine saying “we can’t afford to build the tanks and airplanes necessary to go fight Hitler.” That sort of thinking truly would have created more problems than anyone could probably imagine.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    You’re certainly welcome to find Jesse’s arguments compelling, but please know that no MMT’er takes Jesse seriously since he’s just building a complete caricature of MMT and then knocking it down. So, my response to you would be that your understanding of MMT is likely incomplete–not that MMT can’t be flawed, but only that if you’re going to find the flaws, you have to understand it correctly first, and Jesse clearly does not (and the misinterpretations are typical). And I’ve noticed Jesse doesn’t have any way for anyone to comment there to point out the inaccuracies.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Just went and looked. Can’t see that you’ve read any MMT at all. You certainly don’t cite any of the academic work or key blog posts by MMT authors. Complete garbage.

    You say:
    “I have yet to see a full explanation of how hyperinflation starts and why it is so hard to stop in MMT terms.”

    Clearly you haven’t tried to find any of it.

  • http://howfiatdies.blogspot.com Vincent Cate

    As far as citing others, I am not trying to get published in a referred journal. Is that all you can find wrong with it?

  • http://howfiatdies.blogspot.com Vincent Cate

    MMT people think that when inflation gets too high they can just tweek things then but no reason to worry ahead of time. The point I am trying to explain is why you can not wait till inflation picks up to act. This is why hyperinflation destroys so many currencies. MMT people do not understand this.

    I have read all the MMT articles on hyperinflation I could find and they basically just try to explain why the current US situation is different than hyperinflation case X. But every case is different so this is rather bogus. You could say the same thing about two different hyperinflations. The interesting thing is what the commonalities are to different cases of hyperinflation.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    The point about citing others (which includes quoting them when appropriate) is (1) to minimize the likelihood that you’re not misrepresenting arguments, and (2) to minimize the likelihood that you aren’t suggesting MMT’ers haven’t done something (like discuss hyperinflation) when they actually have. In both cases, you’ve failed completely. Yes, would be easily rejected by journal article referees for these reasons, but that wasn’t my point, actually.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    “MMT people think that when inflation gets too high they can just tweek things then but no reason to worry ahead of time.”

    Completely wrong. Like everyone else, MMT’ers know that high inflation is a big deal.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    “I have read all the MMT articles on hyperinflation I could find”

    And yet in your long-winded critique you couldn’t even quote any actual words in any of these to demonstrate you understood what you were critiquing?

    “and they basically just try to explain why the current US situation is different than hyperinflation case X.”

    Name one hyperinflation that that occurred in a nation issuing its own currency under flexible exchange rates without govt debt denominated in another currency.

    “But every case is different so this is rather bogus. You could say the same thing about two different hyperinflations. The interesting thing is what the commonalities are to different cases of hyperinflation.”

    Yes, there are distinct commonalities that are key. Namely, previously operating under some form of fixed exchange rate system, govt debt or the like denominated in another currency. Often significant destruction of productive capacity. Etc.

  • http://howfiatdies.blogspot.com Vincent Cate

    Can any MMTer find a single historical case where a government with a debt over 80% of GNP and deficit spending over 40% of spending with the central bank was buying up government debt about as fast as the government was making it that did not end in hyperinflation?

    Historical reality has to fit your theory for the theory to be correct, right?

    If all previous historical cases like the above ended in hyperinflation and the US is now a case like that, a theory that fit the previous cases should predict that the US is also headed for hyperinflation.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Japan.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Deflation.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    And the US today actually does not fit your criteria.

    “a single historical case where a government with a debt over 80% of GNP”

    US national debt held by the non-govt sector is about 60% of GDP. And that’s the only measure that matters, even in mainstream theory of fiscal sustainability.

    “and deficit spending over 40% of spending”

    Probably about right for now.

    “with the central bank was buying up government debt about as fast as the government was making it”

    Not even close to true for the US right now. Treasuries held by non-govt sector continue to increase even with QE. Deficit last year was about $1.3T, and QE2 is only $600B.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Perhaps US during WWII, too, though I’d have to check on how much Tsy’s the Fed actually purchased. UK at some point, perhaps, as well.

  • http://howfiatdies.blogspot.com Vincent Cate

    I did not say when it gets high, I said when it gets too high then you think you can adjust things. But with hyperinflation by the time people stop buying your bonds it is too late.

  • http://howfiatdies.blogspot.com Vincent Cate

    The Fed is buying about $900 billion in 9 months or $100 billion per month. This is about what the deficit is. The Fed is using money they are making from payments on GSE debt, so it is not all “new money”. But the rate they are buying government debt is about the rate the government is making new bonds.

    My understanding is that Japan borrowed most of the money for their deficit from the Japanese. Has there been any long stretch, like a year or more, where the central bank bought debt about as fast as it was made? The Japanese even unwound at least one of their big quantitative easings and withdrew the liquidity. Does not look like the Fed will ever do that.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Name one hyperinflation that that occurred in a nation issuing its own currency under flexible exchange rates without govt debt denominated in another currency.”

    The US revolution had hyperinflation in “The Continental” that was simply due to printing and spending. They had their own currency, flexible exchange rates, and there might have been some foreign denominated debt but that was not the real problem. The problem, in MMT terms, was that the taxing generated demand for the currency was not high enough.

  • http://howfiatdies.blogspot.com Vincent Cate

    “He essentially claims we are at risk of hyperinflation, but does nothing to actually show how it will occur. I, on the other hand, have spent the better part of the last 2 years explaining to people why low inflation and deflation were the bigger threat and I have backed up these arguments with facts and thorough explanations of why it would play out. Lo and behold, I have been exactly dead right while the fear mongers who tried to scare us all about hyperinflation, have all been wrong.”

    You need to understand that there is a delay between printing new money and the price inflation. This has been studied many times, even Friedman back in the 60s.

    It seems the reason is that at first when the government buys up lots of bonds they lower the interest rate and this lowers the velocity of money. So even when there is a higher quantity of money the lower velocity of money keeps prices from going up. But eventually the interest rates go back up and then prices go up.

    http://pair.offshore.ai/38yearcycle/#delay

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Outstanding Tsy’s are still increasing. And QE is ending in a few months. Yes, Japan drained all excess rb’s since they were raising the target rate temporarily and didn’t pay interest on reserves–operational necessity. May or may not happen here, but it doesn’t matter since more reserves don’t “do” anything. QE in Japan was much larger as a % of GDP, and lasted 4 years, no inflation. Finally, under flexible fx, it doesn’t matter who buys the debt–domestic or int’l.

  • http://howfiatdies.blogspot.com Vincent Cate

    My claim is not that MMT people have never discussed hyperinflation, it is that “I have yet to see a full explanation of how hyperinflation starts and why it is so hard to stop in MMT terms.”

    Hyperinflation is a feedback loop. It is not just caused by “external shocks” or “debts in foreign currency” (though those can help). External shocks come all the time that do not cause hyperinflation. Countries are very willing to write off external debts if they are a bother, so that should not be enough. Yet hyperinflation traps many countries. And once in hyperinflation very few are able to save their currency. Why?

    In fact, some MMT people seem to think governments choose hyperinflation. I am sure there is no case where they decided they wanted hyperinflation.

    What do you think is the best MMT reference on hyperinflation?

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Sorry, US pegged to gold back then. Inapplicable.

    Also, note that MMT’ers don’t say hyperinflation can’t happen here–it certainly could with bad policy decisions that kept deficits high after the pvt sector was ready to spend again (and lots of reasons why that could happen)–but that the past reasons for hyperinflation are different because there isn’t the same trigger as there would have to be here. In our case, the “trigger” is completely under “our” control; not the case when you peg your currency, have foreign denominated debt, etc.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    A sovereign currency issuer doesn’t need anyone to buy its bonds. Self-imposed constraint, and not really even a constraint as I’ve demonstrated in past research.

  • Obsvr-1

    Don’t confuse emergency spending on ‘appropriate’ declared war with Institutionalizing Emergency.

    Saving Banks from their over leveraged, risky mistakes – NOT Emergency
    Sending troops into Iraq and Afghanistan – NOT Emergency
    Bloating DHS and Executive Branch bureaucracies – NOT Emergency

    $14+T in nat debt, $1.5T deficit — the insanity must stop.

  • http://howfiatdies.blogspot.com Vincent Cate

    What makes you think it will really end and there will not be a QE3 or extended QE2?

    If the Fed does not end QE2, but expands it would you (or other MMT types) then get worried? If they say they will be buying government debt as fast as the government is making it, would that be bad? How much is too much?

    The Fed is worried about jobs and we still don’t see any. The employment participation rate is the lowest since Reagan’s first term. Why would they stop?

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    I have never heard an MMT’er say that a govt chooses hyperinflation, and I know them all very well. Maybe they have and I missed it. Certainly bad policy choices lead to hyperinflation, but I don’t know if that’s necessarily the same thing.

    As for MMT on hyperinflation, I would start here, since it deals with Weimar and Zimbabwe (not that those are the only cases, obviously): http://bilbo.economicoutlook.net/blog/?p=3773

    Note there Bill’s explanation of what MMT’ers argue is “responsbile fiscal policy.” That is what we advocate, and we would be against any govt doing otherwise, in either direction.

    Also, note the comment there from my colleague, Dr. Nota, from Zimbabwe, who writes that Bill’s explanation of Zimbabwe’s situation was the best he had yet seen by anyone outside of Zimbabwe.

  • http://howfiatdies.blogspot.com Vincent Cate

    They said that the Continental could be turned in for gold but it was not true. The reality was that it was a floating rate pure fiat currency. So it is like what we have now.

    http://dollarcollapse.com/articles/hyperinflation-history-the-continental/

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    I don’t worry about QE3 or QE4 in the sense of there being a transmission mechanism to inflation. There isn’t one, and it’s very easy to show but most don’t understand accounting well enough to follow, or find it so difficult to break out from the money multiplier model fallacies that they can’t get it.

    I do worry about QE and additional QE’s for the following reasons. First, psychological effects can be significant, and asset-price bubble inducing, as is happening in commodities now, particularly because so few actually do understand how monetary operations work and believe QE is necessarily inflationary. The results at their worst can be either deflationary or inflationary, depending on which assets have the bubble. Second, since QE doesn’t work, we waste our time pursuing a policy that is bound to fail, and, again, if it has any effect, these will likely be bad via the psychological route that could end very badly. Third, because monetary policy can only “work” to stimulate the economy if it somehow encourages additional spending out of current income (i.e., leverage), it’s exactly the wrong medicine for ultimately overcoming the “balance sheet recession.” Again, that route simply pushes back the ultimate reckoning.

  • http://howfiatdies.blogspot.com Vincent Cate

    “A sovereign currency issuer doesn’t need anyone to buy its bonds. Self-imposed constraint, and not really even a constraint as I’ve demonstrated in past research.”

    Sure. Of course, the Fed can clearly buy all the bonds. Or we could not have any bonds and the treasury could just spend money. But history shows that if you do not have enough taxation to reduce demand and just create money for all government spending you get inflation. This is basic MMT, right?

  • http://howfiatdies.blogspot.com Vincent Cate

    “I don’t worry about QE3 or QE4 in the sense of there being a transmission mechanism to inflation. There isn’t one, [...]”

    Historically when other countries have made lots of new money to buy up government debt or simply to spend it did cause inflation. Why do you think QE is different?

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    My mistake. I somehow thought you were referring to a later currency.

    Regardless, note that the explanation in your link fits perfectly the MMT explanation–taxes are what give the currency value, and if you can’t or won’t do it, then keep spending beyond capacity, that’s trouble. Margaret Myers, in “A Financial History of the United States,” writes “Benjamin Franklin saw this [the inflation problems of the continental] clearly at the time [note that he was the one who designed the continental] but could devise no alternative since Congress had no effective taxing power” (p. 51). Also, such outcomes are much more likely during war, too, which is another important contributor to hyperinflation since it’s a key reason to continue spending without bothering to tax or worry about collecting taxes. (That would be included in my “etc., etc.,” above.) Randy Wray went through some key historical examples in his 1998 book explaining our approach, including the Confederacy, which follows a similar path, except they lost and it truly was a hyperinflation (whereas the continental was “just” a really bad inflation, with only 1/40 face value in 1780).

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    The deficit’s the issue, not who or if someone buys the bonds. Deficits without bonds aren’t more inflationary–actually deficits with bonds are more inflationary since you get an additional interest payment. The problem with nobody buying the bonds is for a fixed exchange rate system, since then the interest on the national debt isn’t a policy variable and markets can bid the rate up, raising interest payments, and raising inflation.

    That’s the standard textbook view of unsustainable fiscal policy. But it doesn’t apply under flexible exchange rates, since there the rate on the national debt can always be a policy variable. Even in some non-flexible fx cases it might not apply as when the ECB starts buying up Greek debt to stop rates from rising (at least it worked temporarily–I wouldn’t want to bet too much on it, though).

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    It’s the creation of net financial assets that matters, the deficit, not whether or not you’re buying up bonds. Buying up bonds doesn’t create income, and in fact reduces income by reducing net interest paid to the non-govt sector. Deposits are not income, and they don’t require QE to be created. A deficit, however “financed,” actually raises income AND deposits for the recipient. That’s the “fuel.” QE is not “fuel,” since it doesn’t add anything that couldn’t be done without QE, doesn’t make it any easier to do any of these things, and like all monetary policy it requires a desire to spend more out of income to “work.” The exception is if directly cuts interest rates or bids up asset prices, which the Fed is explicitly trying its best to avoid doing (again, directly, but not indirectly).

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Of course, Friedman admitted in his later years that it could take 30 years.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Also, note that “printing new money” by a central bank in QE is not “creating income” as a deficit would. It’s a portfolio shift. Portfolio shifts don’t necessitate spending–more deposits instead of Tsy’s doesn’t add any “fuel.”

  • exit

    I wish to commend the founder of this website as well as regular contributors for their valuable insight on current economic and financial issues. It used to be that we would have to wait for upcoming publications by the Fed or the next quarterly issue of academic journals before reading such technical and up-to-date commentary on monetary economics and public finance. Well done.

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

    I spend the time because I believe this is an incredibly important topic. There is, arguably, nothing more important than the management of our economic system and if we fail to even understand that system then how can we ever expect prosperity?

  • Obsvr-1

    OK – given congress (gov’t) can spend without the necessity of a bond market and does not need to (nor should they have to) borrow to spend.

    Given no one seems to make a definitive case that QE is either inflationary or deflationary, which in either case is not good, why do it ?

    Given that gov’t spending is actually a claim on a future revenue streams through taxes, fees, levies, etc (“TAXES”) such that deficit spending increases the liability on those that pay those “TAXES” (the debtors). Therefore the gov’t is extending CREDIT to the future payers of “TAXES”. The gov’t spends money/credit into existence and extends via fiat a virtual “you owe us” to the debtors.

    Given the discussion about accounting techniques and mathematical balance, then:

    * End US tsy and bond issuance (gov’t is not the debtor, gov’t is actually the creditor)

    * Setup a “Taxes Due” account, effectively Accounts Receivable which increases with spend and decreases with revenue (taxes). This tracks the deficit spending.

    * End the FED, no need to have a CB for monetary control, fiscal malfeasance (QE1) or loss transfer to the gov’t (taxpayer) and flip side of that coin wealth transfer to banks/cronies

    * UST to take on the operational (clearing), economic monitoring, statistics collection, regulatory functions from the FED

    * End TBTF doctrine — Banks on their own, no gov’t backstop or bailouts; Enable competitive free market banking system. Market discipline enforced by owners and investors as the risk is retained by the institution. This would constrain or end the massive bank lobby machine.

    * Repeal the 16th amendment to eliminate income tax, replace with consumption tax (e.g. fairtax.org). This eliminates special interest tax loopholes, deductions and credits and the associated lobby machine. Sets up a real time feedback governor for taxes based on GDP dynamics, change in spending/saving reflected in taxes collected – dampens interest rate volatility and constrains the growth in the “Taxes Due” account (the deficit).

    * Eliminate or radically reduce all gov’t special interest subsidies — with further reductions in the lobby machine

    Seems this would be a good step in restoring faith in a competitive free market and averting the impending disaster.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    I’m with you. I’ve started a new career path, actually. Trying to get over this money stuff. Not easy.

    Also, Warren stopped managing any of the funds back in 1998.

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

    I don’t agree. There are few things that impact more lives on a daily basis than the monetary and fiscal decisions of our leaders. If they are working under false premises then you are doing an enormous service by helping to teach and explain the truth to people. Sure, it might be more rewarding to cure cancer, but you’re an expert on banking and monetary/fiscal policy. There is absolutely no reason to apologize for doing what you’re doing.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    I don’t find much there to really disagree with, except this:

    “Given that gov’t spending is actually a claim on a future revenue streams through taxes, fees, levies, etc (“TAXES”) such that deficit spending increases the liability on those that pay those “TAXES” (the debtors). Therefore the gov’t is extending CREDIT to the future payers of “TAXES”. The gov’t spends money/credit into existence and extends via fiat a virtual “you owe us” to the debtors.”

    That’s not given at all. In fact is almost completely wrong.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    True. I’m talking more about my own sanity.

  • Obsvr-1

    Help out with the discussion here,

    if gov’t creates money/credit and spends it into existence instead of borrowing (issuing bonds) as done today, then what conceptual and operational model should be used to help explain this difference.

  • http://howfiatdies.blogspot.com Vincent Cate

    Yes, I had seen that paper. It says that “Hyperinflation is just inflation big time” which shows a lack of appreciate the treachery of hyperinflation.

    Again, this just looks at one case and says the US is not like that.

    Are there any MMT papers that look at more than these 2 cases of hyperinflation and try to explain all the cases in a general theory of hyperinflation?

    There are cases that do not have debt in a foreign currency. Also, countries are very willing to default of foreign debt (does not hurt any voters), so there is no way they would accept the destruction of hyperinflation if all they had to do was default on foreign debt.

    Again, the US revolution case was not caused by foreign debt and it was not really pegged to gold no matter what anyone said.

    It is not very helpful to say “if you don’t have a good policy you get hyperinflation”. What is the boundary between good policy and bad policy? Any reason to argue with the debt 80% of GNP and deficit 40% of spending? You have any better numbers? These are in a book by Bernholz who studied like 40 cases of hyperinflation.

    http://www.amazon.com/Monetary-Regimes-Inflation-Political-Relationships/dp/1845427785/ref=sr_1_1?ie=UTF8&qid=1297640506&sr=8-1

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    and thanks.

  • http://howfiatdies.blogspot.com Vincent Cate

    “The deficit’s the issue, not who or if someone buys the bonds. Deficits without bonds aren’t more inflationary–actually deficits with bonds are more inflationary since you get an additional interest payment.”

    This seems to be another flaw in most MMT people. They think that cash and 30 year bonds are the same. But when someone buys a 30 year bond they give up their cash for 30 years and so there is a delaying of their demand. If the government prints money and buys that bond back then the person is able to demand things again right away. The exchanging of new cash for bonds brings demand forward. And in MMT terms this increases inflation.

    Most MMT people seem to think it is a “non event”. Also, if you look at other cases where a government could not sell bonds and hand to print money for bonds that came due there was lots of inflation. So the evidence is that the “non event” claim is false.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Regardless, note that the explanation in your link fits perfectly the MMT explanation–taxes are what give the currency value, and if you can’t or won’t do it, then keep spending beyond capacity, that’s trouble.”

    Yes. I know. Most of what MMT says makes sense to me. To me it is a different way of looking at things. The main place I think it fails is in not understanding the hyperinflation feedback loop. As inflation goes up, bond sales go down, as bond sales go down, the government prints more money, the inflation rate goes up, the interest rate goes up, this drives the velocity of money higher, which drives prices higher, which is more inflation, which …

    The problem is that once you get sucked into this you can not just raise taxes a bit and get out. This is what MMT people fail on. It is not like your typical inflation, where you could just raise taxes a bit. There is a very dangerous feedback loop in hyperinflation.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Gee, Vincent, never heard that one before. It’s wrong, though. Completely wrong.

    First, “cash” can always be created in the aggregate. There’s nothing special about it, unless you’re in a crisis and the Fed has to be LOLR. More deposits or reserve balances doesn’t mean more lending is possible, since they don’t oprationally constrain lending or bank financial asset purchases. More deposits doesn’t necessarily mean more spending out of current income (note that current income hasn’t changed); I might put the funds in a time deposit instead–I was saving after all if I was holding a Tsy.

    Second, a Tsy is the most liquid financial asset outside of the money market (and some of them are in the money market). Primary dealers actually don’t buy Tsy’s at auction with their own “cash” very often. They raise the funds in repo markets, by selling Tsy’s they already own. Tsy’s are leveraged many times over in repo markets to create a multiple of credit from the value of the Tsy. That doesn’t happen with a deposit. Dealers receiving “cash” for the Tsy’s they own (and note that it is dealers that are doing the actual QE trades with the Fed) don’t all of a sudden have more ability to expand their balance sheets than otherwise.

    Third, nobody with a Tsy was ever constrained in his/her spending or investing compared to holding “cash.” Again, it’s the most liquid financial asset if one wants to sell it. And it can be repoed at virtually the cheapest rates available anywhere to obtain additional funds to invest.

    I’ve never seen anyone come close to refuting even one of these three points.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    “As inflation goes up, bond sales go down, as bond sales go down, the government prints more money, the inflation rate goes up, the interest rate goes up, this drives the velocity of money higher, which drives prices higher, which is more inflation, which” …

    That chain of causation is inapplicable to a sovereign currency issuer under flexible exchange rates in modern times. It does work for others.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Vincent,

    The basic flaw in your argument, since you’ve been pointing out what you think that is for MMT, is that you have an econ 101 view of the monetary system, and it’s completely wrong.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    “Also, if you look at other cases where a government could not sell bonds and hand to print money for bonds that came due there was lots of inflation. So the evidence is that the “non event” claim is false.”

    Again, inapplicable. You still analyze as if we’re under a commodity system.

  • http://howfiatdies.blogspot.com Vincent Cate

    “That chain of causation is inapplicable to a sovereign currency issuer under flexible exchange rates in modern times. It does work for others.”

    We have had many cases of hyperinflation in modern times and they seem to have this feedback loop. Why do you think MMT has a problem with this feedback loop that hyperinflation has? You don’t think that someone turning in a bond and getting newly created cash increases demand and inflation?

    MMT says that taking money from people in the form of taxes reduces demand. Taking money from people and giving them 30 year bonds temporarily reduces demand. Not understanding that bonds delay demand is another failing of most MMT people. This is probably why they don’t understand hyperinflation.

  • http://howfiatdies.blogspot.com Vincent Cate

    “The basic flaw in your argument, since you’ve been pointing out what you think that is for MMT, is that you have an econ 101 view of the monetary system, and it’s completely wrong.”

    I really can see things in the MMT world view and mostly do not have any problem with it. I kind of like it actually. And in some things I find it far better than the standard view. For example I think it is far more accurate to view the central bank as part of the government than as a separate entity.

    My only real gripe with the MMT view is that they do not fully comprehend how difficult hyperinflation is. They don’t see the feedback loop that traps so many governments.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    OK, I’ll leave it there, then, for now. Just know that MMT’ers are very strongly against getting on that path in the first place. That path is inconsistent with the “responsible fiscal policy” we advocate.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    2 reasons:

    1. Bond sales are not less inflationary than not selling bonds.

    2. The rate of interest on the national debt is, or at the very worst can be, a policy variable.

    Once you understand those two, then it is clear that the chain of causation isn’t applicable, or the worst needn’t be.

  • http://howfiatdies.blogspot.com Vincent Cate

    “I have never heard an MMT’er say that a govt chooses hyperinflation, and I know them all very well. ”

    Here is one:
    “I do not understand why Krugman prefers to believe that our policymakers would choose hyperinflation over more rational policy.” – L. Randall Wray

    The problem is that Wray writes like he thinks the government committee takes a vote, “all in favor of a hyperinflation policy raise your hands” and clearly the smart US government would never choose a hyperinflation policy.

    But that is not how it works at all. Governments get themselves in a corner. If people stop buying US bonds and $5 trillion in bonds come due over the next year, then along with the regular deficit the government will print an extra $5 trillion for these bonds coming due. This releases a lot of demand that was tied up in bonds. This suddenly release flood of demand (or cash in the standard view) causes inflation. If this happens it is not that the Fed voted for hyperinflation, it is that events got out of control.

    http://smarttaxes.org/2010/08/13/randall-wray-explains-deficits-do-not-matter-per-se-under-modern-monetary-theorys-mmt/

  • http://howfiatdies.blogspot.com Vincent Cate

    “OK, I’ll leave it there, then, for now. Just know that MMT’ers are very strongly against getting on that path in the first place. That path is inconsistent with the “responsible fiscal policy” we advocate.”

    I think the US is already so far down the not responsible path that they probably can not avoid hyperinflation. Do you think the US has a “responsible fiscal policy”?

  • http://howfiatdies.blogspot.com Vincent Cate

    “1. Bond sales are not less inflationary than not selling bonds.”

    So you don’t think that taking someone’s money away for 30 years reduces aggregate demand and so reduces inflation for awhile?

    “2. The rate of interest on the national debt is, or at the very worst can be, a policy variable.”

    If you control the interest rate then you do not control the money supply or the inflation rate. You can’t control both. Ask Volker.

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

    Vincent,

    Hyperinflation is essentially the death of the currency. So, I partially agree with you that Prof Mitchell is overly simplistic in his definition. But that does not mean his definition is wrong.

    Ultimately, the death of the currency occurs when the population rejects it and no longer has a need to transact in it. Throughout history this has almost always occurred due to govt corruption, govt mismanagement or a collapse in the productive output of a nation. Personally, I don’t see how anyone can believe that the USA is at risk of the any of the latter….

  • studentee

    i could be wrong, but i think part of the point prof. fullwiler tried to make earlier was that it isn’t very often the case that someone chooses between investing in a 30-year tsy or using the money to fund current period consumption. most likely the individual would be saving anyway. and individuals would be more likely to use the interest payments from bonds to support current consumption

    “Second, a Tsy is the most liquid financial asset outside of the money market (and some of them are in the money market). Primary dealers actually don’t buy Tsy’s at auction with their own “cash” very often. They raise the funds in repo markets, by selling Tsy’s they already own. Tsy’s are leveraged many times over in repo markets to create a multiple of credit from the value of the Tsy. That doesn’t happen with a deposit. Dealers receiving “cash” for the Tsy’s they own (and note that it is dealers that are doing the actual QE trades with the Fed) don’t all of a sudden have more ability to expand their balance sheets than otherwise.
    Third, nobody with a Tsy was ever constrained in his/her spending or investing compared to holding “cash.” Again, it’s the most liquid financial asset if one wants to sell it. And it can be repoed at virtually the cheapest rates available anywhere to obtain additional funds to invest.”

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Yes, with almost 10% unemployment and falling labor force participation, US fiscal policy is highly irresponsible.

  • Obsvr-1

    The most important point in these mmt threads is:

    There is no real need for US trsy bonds to be used to “account for”, offset, soak up reserves or whatever you want to call it in the first place. All of the other arguments and complexity of the incestuous relationship between the FED/Govt/Banks is just keeping everyone distracted.

    If more people could understand this single fundamental point, a wave of outrage calling for systemic change would ensue.

    —–

    mmt establishes, and it should indisputable, that there is no need for the US gov’t to borrow to spend

    There is no need to use bonds to try to control/manage interest rates, taxes (especially a tax system with a built in counter cyclical feature like a consumption tax) and the competitive free market will provide interest rate stabilization.

    Therefore there is no need for the FED.

    Society has been duped since the 1913 FED creation by the banking cartel in collusion with the gov’t. Follow the money to see the results in boom/bust/bailout and wealth transfer from the masses to the few. Time for a monetary revelation and revolution.

  • Greg

    The “money printing” In the hyperinflationary regimes of Zimbabwe and Weimar Germany was a RESPONSE not a cause. The hyperinflation was a REAL supply shock that the monetary authorities decided to respond to with the issuance of more currency. Yes it was the wrong response but it WAS the response not the cause. The hyperinflation was a REAL event. In Weimar Germany it was the confiscation of German production by the French and in Zimbabwe it was the confiscation of productive and necessary farm land by the govt. It wasnt some bond market phenomena in either of those situations.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    I know Randy very well, and I remember that post. You’re taking him way too literally.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Pretty good, studentee!

    Also, regarding the second point, central banks can’t directly target monetary aggregates. This is well known, and thinking otherwise is what I mean when I say someone is still stuck on an econ 101 understanding of the monetary system. I explained it in detail here, with lots of citations of others who’ve found consistent evidence (though several others, even in the mainstream, have recognized the same since I wrote it): http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1658232

  • Greg

    Chris

    I simply cannot see the value in perpetuating the idea (meme) that our govt is like a household when the idea is responsible for restricting our govt form doing what it is perfectly capable of doing………. achieving full employment. Why should we pretend we cant “afford” to give everyone a living wage job when in fact we can? Why should a subset of people, randomly chosen by the market, not because they are dumber, lazier, uglier or smellier, be removed form the ability to pay their bills and provide for their family simply because some simple minded people are more comfortable thinking their govt has financial constraints just like they do?

  • Obsvr-1

    Another mess created by these spending/borrowing and US Bond issues is in the SS system (and other FED gov’t programs that have replaced money funds with US Trys).

    1) Forced participation by implementing a payroll tax, collecting funds for the SS ‘lock box’.

    2) Instead of purchasing private sector annuity, bonds, commodity (e.g. gold) or other private sector investment instruments (wealth generating) with those funds – they get the bright idea to purchase US Trsy Bonds (Wealth draining). And what are these bonds, interest bearing debt obligations of the US gov’t.

    3) Where does UST get the money to pay the interest on these bonds ?
    –> from the tax payer.

    4) when a bond matures, where does UST get the funds to payoff the bond ?
    –> from the taxpayer.

    Um, the taxpayer ends up paying not once (payroll tax), but also the interest and the bond redemption as well. WTF — FUBAR !!!

    [[ I don't agree with the SS system in the first place, much better to have individuals create there own 'annuity' with their own money instead of having a huge bureaucratic agency (mis)manage the grand ponzi scheme. ]]

  • Obsvr-1

    100% agree … now to get this message to the masses, your site provides great information for folks to get educated, spread the info and start a campaign to their congressional delegation to take action.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Throughout history this has almost always occurred due to govt corruption, govt mismanagement [...]”

    Of course we can all agree after a government has caused hyperinflation that it did things wrong. The real trick in a scientific theory is to be able to explain and predict things ahead of time. So, aside from foreign debt, what other sorts of government mismanagement does MMT see as potentially causing hyperinflation? Do you agree that there is a real difference between regular inflation and hyperinflation? Regular inflation can be reduced by raising taxes. I say that does not work for hyperinflation. Do you agree?

  • http://howfiatdies.blogspot.com Vincent Cate

    “Yes, with almost 10% unemployment and falling labor force participation, US fiscal policy is highly irresponsible.”

    So as long as there is unemployment you think they should be spending more money? Is there anything short of high inflation that you would count as a warning sign to worry about hyperinflation?

    Do you agree that hyperinflation is a different problem than regular inflation? As MMT say, I agree that regular inflation can be tamed by raising taxes. Historically this is not a solution to hyperinflation. Do you agree?

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    The problem is that the other triggers you see aren’t applicable to a sovereign currency issuer under flexible fx, or are much more within the control of policy makers. Again, you haven’t shown that you understand the monetary system well enough to understand this. You still think QE or “money printing” adds “fuel,” whereas bond sales reduce “fuel,” and you think CB’s can target the money supply, as just 2 examples. Neither apply. I’ve explained it many times. I’ve published on this issue. You haven’t responded except to say “do youreally think . . .?”

  • http://howfiatdies.blogspot.com Vincent Cate

    “The problem is that the other triggers you see aren’t applicable to a sovereign currency issuer under flexible fx, or are much more within the control of policy makers.”

    So if China decides they don’t trust the dollar and starts selling their US dollar bonds how does the US control the situation? They want the following:
    support bond sales – requires higher interest rates
    support economy – lower interest rates

    So how can they do both? Your view is bond sales don’t matter, so lets say they just keep interest rates really low and nobody wants to buy US bonds. Historically having large deficits and a bunch of short term debt that you can not roll over because people stop buying your bonds results in hyperinflation but your theory says paying off the bonds with new money does nothing. Your theory is wrong. Reality contradicts your theory. Keep watching and you will see it contradicted again. You really do not get hyperinflation and need to study it more.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    If China sells dollars . . .

    1. US net exports increase, which improves the economy, since China by definition doesn’t want to run a trade surplus w/ the US anymore and the dollar depreciates a bit, at least temporarily.

    2. Not much happens to US Tsy rates, or at least not much needs to. First, most of China’s holdings aren’t in long-term Tsy’s. Second, Tsy’s are mostly driven by expectations of the Fed, so they will rise if Fed raises rates due to state of the economy, but not much otherwise. If they do rise, it will be temporary because the opportunity to profit from the carry trade would be too great–I know several in markets who have taken advantage of this in other countries (with flexible fx) and would do it here, and they aren’t the only ones by any means. It’s a basic arbitrage. Third, most research has shown that you would need a really big change in the supply/demand for Tsy’s to affect them in an economically significant way–QE2.0 isn’t doing it, for instance. Fourth, failing the other reasons, the Fed can buy Tsy’s, just as the ECB is buying Greek bonds–is that leading to hyperinflation in Greece?

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Forgot to mention that if the trade balance improves, MMT’ers advocate a smaller govt deficit in response.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Third, most research has shown that you would need a really big change in the supply/demand for Tsy’s to affect them in an economically significant way–QE2.0 isn’t doing it, for instance. Fourth, failing the other reasons, the Fed can buy Tsy’s, just as the ECB is buying Greek bonds–is that leading to hyperinflation in Greece?”

    The ECB breaking the rules and buying non-investment grade bonds does risk hyperinflation in the Euro. Once it is clear that the central bank does not follow rules you can more or less count on them destroying the currency.

    QE2 is impacting interest rates. They have jumped up as people anticipate inflation coming. This QE2 proves there is no “exit strategy” and the Fed will just keep printing more and more money. Three year rates have gone from like 1.1% to 2.4%. That is a huge impact.

    http://www.fxstreet.com/rates-charts/bond-yield/

  • http://howfiatdies.blogspot.com Vincent Cate

    You forgot the part about how when the dollar goes down the cost of all the imports, like oil, go up and America gets more poor.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    “The ECB breaking the rules and buying non-investment grade bonds does risk hyperinflation in the Euro. Once it is clear that the central bank does not follow rules you can more or less count on them destroying the currency.”

    My guess is deflation is the more likely scenario. That’s what the purchases have avoided, for sure, and depreciation, too–remember the $ was rising fast when Greek default was a possibility. And the purchase of Greek bonds is keeping their rates from rising, which is removing one of your triggers. If the ECB stops, then because Greece can’t print Euros itself, you get deflation, not inflation. Unless Greece leaves the Euro, then you could get it going the other way for their new currency, maybe.

    “QE2 is impacting interest rates. They have jumped up as people anticipate inflation coming. This QE2 proves there is no “exit strategy” and the Fed will just keep printing more and more money. Three year rates have gone from like 1.1% to 2.4%. That is a huge impact.”

    It has more to do with a strengthening economy that is for the time being at least not in danger of a double dip. A 3-year rate at 2.4% or a 10-year rate at 3.6% is hardly a sign of significant expectations of inflation.

    There’s not really much point in discussing further with you. I think we’ve taken this as far as we can. You think QE is “printing money” and thereby inflationary. I don’t. It’s not, for a sovereign currency issuer. If it were, Japan would be Zimbabwe. You think markets set rates on debt, and if the CB does, it’s by definition inflationary. I don’t. Fine. We’ll see who’s right over time, won’t we?

  • http://howfiatdies.blogspot.com Vincent Cate

    “We’ll see who’s right over time, won’t we?”

    Yes we will. It has been interesting.

    Cheers,

    — Vince

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Best wishes.

  • Adam

    Again, Cullen, Scott et al. thanks for your generousity of time, effort and patience to help explain this. I have read many of the articles several times, and do believe I understand the broad idea, but i get hung up on some details as I really am not that smart with this stuff.

    I was recently arguing MMT with some ‘Austrians’ and have a few more questions if you guys dont mind:

    is the basic flaw in Austrian Econ that the theory was developed before our system began working the way it does?

    How do you prove that spending (in name) is no more inflationary than taxing is deflationary? (I know thats way simplistic, but…)

    also, connect the dots a bit further regarding why if there are no reserve requirements, how does bank lending not create new money? does this have to do with the Fed mandating the banks buy bonds from them i.e. POMO/bond auctions?

    thanks again!

  • http://howfiatdies.blogspot.com Vincent Cate

    “Bank lending does not create net new financial assets. The banks asset is your liability. These two net to zero.”

    Standard economist count demand deposits and cash as money. When a bank takes your demand deposit and loans it to someone for 20 years they now have your cash. So now when economists count up the total money they count your checking account and the guy that has the cash, so there is more money.

    The flaw in this system is if too many people at the same bank want to take out their money at the same time. A safer banking would be if banks had to sell 20 year bonds to make 20 year loans instead of just using demand deposits. Most economists would not then count this as “making money”. We also would not have banks failing so often.

  • http://blogfirstrider.blogspot.com/ first

    “reduces income by reducing net interest paid to the non-govt sector”.
    Where do the interest go ? To the Fed and the Fed pays 98% of its return back to the Government so that money the Treasury does not need to raise (create) or tax.
    = Neutral

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    It’s just accounting 101, Vincent. Standard economics, unfortunately, doesn’t understand accounting. The problem there is that every actual transaction in the economy affects the financial statements of those involved. If you don’t get the effects on financial statements right, you didn’t understand the transaction. And if supply/demand is inconsistent with the effects on financial statements–as in the standard loanable funds model–then the supply/demand model is inapplicable.

  • http://blogfirstrider.blogspot.com/ first

    “When a bank takes your demand deposit and loans it to someone for 20 years they now have your cash.” They do but its there also liability to you.
    Its a “demand” deposits.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Victor writes: “When a bank takes your demand deposit and loans it to someone for 20 years they now have your cash.”

    Victor, this is what I mean when I say you have a flawed, econ101 view of the monetary system. This statement is 100% wrong, and more and more mainstream economists are understanding this (finally, though not with attribution to those of us who’ve known it for a long time). Banks don’t lend anyone’s money. They create a loan and a deposit out of thin air. It’s just accounting 101. And if you know accounting 101, you know that it can’t actually work any other way.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Hi Adam,

    “also, connect the dots a bit further regarding why if there are no reserve requirements, how does bank lending not create new money?”

    Reserve requirements don’t matter either way, first of all. Whether new “money” is created depends on how “money” is being defined. I explained this above–MMT economists stopped using the word “money” many years ago. It just confuses things. Money is always someone’s liability. Better to be clear about whose liability you are talking about. Cullen is defining “money” as net financial assets, the net financial liabilities of the govt sect to the non-govt sector, since this is the only way the non-govt sector acquires net financial assets. When a bank creates a loan, though, it creates a deposit, which is a liability for the bank. This bank liability is “money” to most people, and is included in most definitions of “money” like M1, M2, etc. But the creation of bank liabilities by the non-govt sector is not within the definition Cullen is using, since both the asset and the liability remain in the non-govt sector–no net financial asset has been created for that sector.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Money is always someone’s liability.”

    Except for gold and silver coins, these are nobodies liability.

    Paper money can fail and governments backing them can also fail. The US had the Continental in the revolution, then around 80 years later the Confederate money in the civil war fail, and then around 80 years later paper money almost failed during the Great Depression but they made it illegal to own gold and so saved the paper money. It is now about 80 years since the last time paper money ran into trouble in the US and we might be about due for another failure. Conditions look ripe for failure to me.

    http://pair.offshore.ai/38yearcycle/

  • SS

    Scott,

    Thanks for all of your thorough responses. What will happen when the government’s interest payments reach 100% of the national debt? Isn’t that the endgame?

  • http://howfiatdies.blogspot.com Vincent Cate

    >>When a bank takes your demand deposit
    >>and loans it to someone for 20 years
    >>they now have your cash.

    >They do but its there also liability to
    >you. Its a “demand” deposits.

    The “time value of money” makes the relative value of these things change as the interest rate and inflation rate change. So they are not really the same. In any case, if too many people demand their money and the bank does not have it for another 20 years the bank can go under. It is a bad way of doing business that causes all kinds of financial crisis again and again.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Banks don’t lend anyone’s money. They create a loan and a deposit out of thin air. ”

    Imagine I open up a brand new bank. My first customer comes in and I make up a loan out of thin air for $1,000,000. I credit his checking account and debit his loan account and I am OK. But next my customer says, “I would like to cash a check for $1,000,000 and put the cash into my suitcase here”. Now what do I do next?

    In the MMT view I go to the Fed and borrow some money from them. They print it up and send it to me. Right?

    There are still some banks that do loan out private money. Not everyone gets all their money from the Fed. Though with 0.1% interest the Fed is increasing market share. But depending on the Fed’s short term interest rate can be trouble for a bank if Fed interest rates rise, which they probably will when inflation finally comes. If a bank loans out money for 30 years at 4.5% and then the Fed rate goes to 10% they will be in trouble.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Yes, of course commodity money is only an asset, just like any commodity. And as long as we’re talking about failed fiat currencies, note that every commodity money has failed, too.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    You’d need a 100% interest rate on average on the debt for that to happen. Yes, that would be very bad, depending on the size of the national debt. Note, though, that some countries, like Turkey, had rates that high for many years.

  • Obsvr-1

    and all goes well for a couple of years, ever expanding the credit bubble, banks and people expanding leverage … and then the proverbial SHTF and pop, the asset bubble deflates leaving the debt bubble in its wake. People and business’ default on loans and some declare bankruptcy. Now the bank has liabilities greater than the loan assets. Further pressure on the economy further weakens the loan portfolio leaving risky loan assets on the bank balance sheet.

    This is a broad brush picture of where we are, so help reconcile what has occurred and likely scenario moving forward in terms of mmt operations.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    This isn’t the MMT view, it’s how it works. I’ve published on this and provided dozens and dozens of citations of primary sources. And again, it’s accounting. In not just the US, but every country not operating on a currency board or similar system, the central bank provides and overdraft, and usually (in the US case, for sure), the bank must clear the overdraft by the end of the day either by borrowing in money markets or borrowing collateralized from the central bank. But there’s always enough reserves in circulation to do this at the central bank’s target rate, since that’s what it means to set an interest rate target.

  • http://howfiatdies.blogspot.com Vincent Cate

    “… the central bank provides and overdraft, and usually (in the US case, for sure), the bank must clear the overdraft by the end of the day either by borrowing in money markets or borrowing collateralized from the central bank. …”

    The only difference is that you mention the collateral. So when my new bank customer puts up his house to get this $1,000,000 loan I then have to put that collateral up to the Fed for my new bank to get $1,000,000 from them. Why do you say what I said is not the MMT view?

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    I posted a reply but it’s not showing up. Tried reposting, but it said it was a duplicate. I’ll try again below:

    Collateral is if you borrow from the Fed overnight. There are other places to borrow uncollateralized, and those are used much, much more.

    It’s not the MMT view because it’s how it works. Read through the NY Fed’s annual report on open market operations, or any number of official documents–it’s the exact same thing, because that’s where we get it. Also, Ulrich Bindseil, researcher at the ECB, did a book on comparative central bank operations, and it’s virtually identical to what we’re saying. Same with Claudio Borio at BIS, one of the foremost experts in comparative central bank operations.

  • Hooper

    It seems all a central bank can do is slosh around debt (in other words tax cash and give it to equities), which of course may help eliminate one barrier to national productivity and thereby improve national income which can help pay down the debt. However, if the other barriers to productivity are so high that even cheap debt cannot overcome them, then the central bank is essentially impotent. When I look at our economy, I ask have we done anything to materially remove our barriers to productivity? We have messed some with tax policy, but we haven’t really changed it. Therefore no material change their. We have talked some about freeing up trade, but we have actually increased some tariffs. Finally, we have talked some about reducing regulations, but in the last two years regualtions have actually increased (Health Care, Dodd Frank, EPA, etc.). On the whole I would say we have increased our barriers to productivity, thereby increasing our costs to produce. Current monetary policy is simply blowing on the embers of business which cause them to glow for a little bit, but no additional fuel is being added that would allow the fire to burn on its own. In fact we have actually taken some of the fuel away. The question that I don’t know anyone can answer is how long can Bernake blow on the embers before he gets dizzy and passes out. Until we address the fiscal side barriers to production, namely regulations and trade barriers, Bernake is going to have to blow for a long time.

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

    Got hung up in spam for some reason. Sorry about that.

  • http://howfiatdies.blogspot.com Vincent Cate

    “And as long as we’re talking about failed fiat currencies, note that every commodity money has failed, too.”

    The way commodity money fails is to first become fiat money. Real gold and silver have never failed.

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

    Yes, but the only reason they ever move to fiat is because of the ridiculous constraints that a gold based system caused. For instance, not being able to spend money during war time just because you don’t have gold reserves is beyond insane. The gold standard failed for logical reasons.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Right. Gold standards and the like fail because their constraints create unemployment, financial crises, depresssions. They rarely withstand even simple disruptions to the payment system. So we got rid of them.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Right. Gold standards and [...] So we got rid of them.”

    You may think they are gone. Gold is still here. I even have some. And prices for the CRB are steady in gold but up by huge amounts in paper money. When paper money fails gold often makes a comeback.

    http://howfiatdies.blogspot.com/2011/02/commodities-already-priced-in-gold.html

  • studentee

    thanks for the valiant commenting efforts here prof. fullwiler…here’s hoping that even if you switch careers, you still take some time now and then to improve the discourse…

  • studentee

    gold standards are gone. just because someone can jangle gold coins in their pocketses and calculate relative prices with them doesn’t indicate anything.

    you are just conveniently redefining what ‘failure’ means

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Exactly, studentee. there are still cowrie shells, too, but they aren’t currency anymore.

  • http://howfiatdies.blogspot.com Vincent Cate

    Vince: “Also, if you look at other cases where a government could not sell bonds and hand to print money for bonds that came due there was lots of inflation. So the evidence is that the “non event” claim is false.”

    Scott: “Again, inapplicable. You still analyze as if we’re under a commodity system.”

    This evidence of hyperinflation is not from commodity money systems, it is from modern fiat money. It is exactly applicable. You, and every other MMT person I have come across, need to look at the history of hyperinflation more. I recommend:

    http://www.amazon.com/Monetary-Regimes-Inflation-Political-Relationships/dp/1845427785/ref=sr_1_1?ie=UTF8&qid=1297718283&sr=8-1

  • http://howfiatdies.blogspot.com Vincent Cate

    “Someone who understands the modern monetary system understands that a sovereign government with monopoly supply of currency in a floating exchange rate system has no solvency issue. ”

    While it is true that a government that can print money does not have a solvency issue exactly like you or me, it does have one. The way a government that can print money goes bankrupt is to get hyperinflation to where nobody wants their money any more. Then the obligations to take care of real people such that they can buy real food (government employees, pensioners, the unemployed) make them bankrupt. Some how MMT people just don’t get this or think it does not happen in the real world. But it does, many many times. You need to read more about hyperinflation.

  • Greg

    Hank

    I think you are wrong about Russia and China not “using” US$ to buy their oil. They’ve never had to use US$, the numeraire for oil prices has been US$, thats all. What they are now doing in Russia and China, as I understand it, is pricing oil in their own currency. SO WHAT! It has ZERO economic affect on our ability to spend, our exchange rates, or the price of oil for us.

    This development is not a harbinger of doom. China is still selling us stuff and acquiring US$ at their recent historical rate.

  • http://howfiatdies.blogspot.com Vincent Cate

    “gold standards are gone.”

    Central banks still hold lots of gold and are buying more. Also, the value of gold has gone up by about a factor of 5 in the last 11 years. So the fraction of central bank reserves that is in gold is going up. Gold is still money, really. Like it or not, it is an operational reality in the modern monetary world. :-)

  • http://howfiatdies.blogspot.com Vincent Cate

    “The Fed can get away from using bonds as reserve drain by paying interest on reserves equal to their target rate. That’s what the Bank of England now does on reserves – paying the Bank Rate.”

    In the last few years the Fed has been paying interest on “excess reserves”. If you view the central bank as part of the government (an MMT view I totally agree with) then the Fed paying interest on money is not really different than the Treasury paying interest on money. They both reduce aggregate demand, as long as the money is tied up. However, bonds are more stable as they can lock money up for many years. Interest on excess reserves does not lock the money down, people could take it out and spend it at any time. If people decide we are headed for hyperinflation that money could come out and contribute to the sudden demand.

  • studentee

    “Also, if you look at other cases where a government could not sell bonds and hand to print money for bonds that came due there was lots of inflation…”

    there is no printing money for bonds. if we wanted to pay off the bonds, we would simply change numbers in a spreadsheet. then that formerly tsy-holding entity, which had its bonds turned into currency, may do what it will with them. you seem to be arguing throughout this whole comment page that it will automatically start using that currency to buy up goods in the real us economy, which is not true, and misunderstands why many entities purchase tsy’s in the first place. prof. fullwiler has explained this numerous times to you, but you don’t seem to be making an effort. the idea that the us will not be able to sell bonds at any particular time given that the bonds are purchased with low-earning reserves is silly. mr. roche and prof. fullwiler have already shown that the us does need to issue bonds in order to spend, and that *issuing bonds is almost always more inflationary not*, so the idea that bond-purchasers will someone hold the us hostage to their whimsical demands is misguided.

    your examples of hyperinflation under strictly non-controvertible, floating exchange rate currencies are pathetic. really, the us during the revolutionary war? the south during the us civil war? i think you need to read more up on the taxation abilities and the political economies of states during civil wars

    how about, instead, you take a look at japan. take a good hard look at it.

  • studentee

    i’m really having trouble trying to figure out what exactly it is that you’re objecting to about mmt and what prof. fullwiler are arguing? of course hyperinflation is a bad thing, but mmt’s explanation of exactly how monopoly issuing currency states function won’t suddenly force hyperinflation. that’s what mmt offers, just the best explanation of how such economies function. it’s not inherently political. you can not like the categorical existence of fiat economies, and lobby for for the reintroduction of a commodity currency. fine, do this, have fun. but what exactly are you objecting to in prof. fullwiler’s and mr. roche’s positive explanations?

  • dehbach

    There are a bunch of comments up-thread on “What if China stops buying US debt.”

    If you want to have a serious conversation about China, this post my Michael Pettis is required reading: http://mpettis.com/2010/02/what-the-pboc-cannot-do-with-its-reserves/

    Short answer:
    -they won’t because it means abandoning the Yuan peg
    -they can’t because it will kill their export economy

    MMTers would add:
    -it doesn’t matter if they do, because the US issues debt for reasons unrelated to funding.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Gold is a store of value, like any asset. But it’s not money. Try paying your taxes with gold.

  • http://howfiatdies.blogspot.com Vincent Cate

    “there is no printing money for bonds. if we wanted to pay off the bonds, we would simply change numbers in a spreadsheet.”

    I have 120 different ways people say “central bank making more money”. But by far the most common used today is “printing money”. MMT guys think they are so clever because they know that sometimes it is just done on a computer. Well, others know this too and still like to say “printing money”. Here is my list of 120 ways to say it:

    http://howfiatdies.blogspot.com/2010/11/euphemisms-for-printing-money.html

  • Obsvr-1

    Here, here … announce that the Emperor has no clothes and make the structural changes to stop this BS game of “Enriching the Banking cartel”

    Stop all further US Bond issuance

    * All new spending is exposed for what it is, US gov’t spends “money” into existence on the Full Faith and Credit of the USA – End the idea that US has to borrow to spend.

    * All new currency “US Dollars” issued, FRNs removed out of circulation over time.

    * Credit US Bond holder account with “money” when the Bond matures (soften the impact of a full $9T non-gov’t bond call). Bond investors will find private sector or state/muni bonds to covert their “money” asset back into a interest/growth bearing asset.

    * Immediate credit to gov’t held Bonds, inter agency (e.g. SS) – Those program mangers will need to find where to invest those funds in the private sector for market based returns (this would take care of the other $5+T (this also could be a multi-year program to soften any impulse impact)

    * Congress/President now exposed to the reality will need to implement a responsible budget to balance spending with revenue (taxes, fees, duties, etc)
    as a “Taxes Due” account at the Treasury will track deficit spending for all to see.

    * This will End the FED as they would have no purpose in life any longer — with UST absorbing all the remaining operational, management and regulatory responsibilities.

    * This would also end the “Borrow to Spend” myth thereby ENDING all interest payments on “money” or accruals to the “Taxes Owed” account

  • studentee

    most of this seems unobjectionable to me except:

    “* Congress/President now exposed to the reality will need to implement a responsible budget to balance spending with revenue (taxes, fees, duties, etc)
    as a “Taxes Due” account at the Treasury will track deficit spending for all to see.”

    this is silly. why would we want to balance the budget? or perhaps this isn’t what you’re arguing…

  • http://howfiatdies.blogspot.com Vincent Cate

    “i’m really having trouble trying to figure out what exactly it is that you’re objecting to about mmt and what prof. fullwiler are arguing? of course hyperinflation is a bad thing, but mmt’s explanation of exactly how monopoly issuing currency states function won’t suddenly force hyperinflation.”

    Honestly I kind of like the MMT way of looking at things. And in many ways it is a more correct view of the world.

    However, MMT people don’t give hyperinflation the respect I think it deserves. If you define it as 5% per month inflation or 80% per year I think there are over 100 cases of hyperinflation. Some of these had foreign debts in foreign currency that they did not default on and so MMT, after looking at a couple cases, seems to have decided that as long as you don’t have debts in foreign currency hyperinflation is nothing to worry about. But this is very wrong.

    Obligations to employees, pensioners, unemployed people are, at the end of the day, obligations in the real world, not just in paper money. These obligations in the real world are really more difficult than foreign debts because local voters never have much trouble with defaulting on foreign debts but if people are starving the government will fall.

    My problem is that MMT has to match the real world and it does not really match the real world as far as hyperinflation at this moment, except for my MMT description of hyperinflation. Normal inflation is sort of a linear problem. A linear increase in taxes can produce a linear decrease in inflation. But in hyperinflation things are no longer linear. But MMT people don’t think hyperinflation and inflation are really any different. They are wrong. Check out the math for hyperinflation and you can see what I mean:

    http://pair.offshore.ai/38yearcycle/#hyperinflationmath

  • http://howfiatdies.blogspot.com Vincent Cate

    Pettis said China had to keep buying and over the next year they had no net purchases. Pettis is wrong.

    “Short answer:
    -they won’t because it means abandoning the Yuan peg
    -they can’t because it will kill their export economy”

    They can pet their currency to commodities and back it with gold if they want to. Or they could peg to the dollar and back with gold. Or they could buy shares in mining companies all around the world. Or farm land. How then invest is really up to them. The really are not forced to buy treasuries, as they have shown by not buying them.

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

    Wrong again. They peg it to the dollar in order to maintain export stability. Because we are their largest export market they essentially manipulate the market in order to sustain their low FX rate. The only way they can do that is to continue buying USD. So no, they can’t just peg their currency to gold and accomplish their economic goals.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Wrong again. They peg it to the dollar in order to maintain export stability. Because we are their largest export market they essentially manipulate the market in order to sustain their low FX rate. The only way they can do that is to continue buying USD. So no, they can’t just peg their currency to gold and accomplish their economic goals.”

    China can make so many new yuans that the value goes down. If you don’t understand this you are missing a key operational reality of fiat money. China really own less Treasuries in Nov 2010 than they did in Nov 2011. See URL below. Pettis is really wrong.

    http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

  • studentee

    you still aren’t separating normative from positive analysis. many of the mmt guys you are probably reading are politically progressive and support increased gov’t intervention in the economy, others not as much (i think mr. roche is more in this latter category). you seem to assume that the opinions of certain mmt guys (i’m guessing you are thinking of prof. bill mitchell) are part of the mmt analytical framework. i can’t find anything at all said here by prof. fullwiler that would suggest he discounts the destructiveness of hyperinflation. he’s just explaining exactly how the system works, do with it what you will. everything you say in this comment here is banal and isn’t addressing any of the complaints i’ve made of your criticism

  • http://howfiatdies.blogspot.com Vincent Cate

    “So no, they can’t just peg their currency to gold and accomplish their economic goals.”

    I was not saying peg to gold. I was saying use gold as reserves. This is not the same thing. As long as the value of gold goes up faster than Treasuries they could use gold as reserves and still peg to the dollar. If China was buying gold for their reserves you can well bet that the price of gold would be going up. And if the dollar totally crashes and burns and American’s are so poor that their market does not account for much any more, they would have the value in their reserves to change the peg to something better.

  • studentee

    what is going on here? you didn’t respond at all to the argument mr. roche made. why would china want to lower the value of the yuan relative to the dollar?

    “China really own less Treasuries in Nov 2010 than they did in Nov 2011.” ?? 2009?

  • studentee

    “And if the dollar totally crashes and burns and American’s are so poor that their market does not account for much any more, they would have the value in their reserves to change the peg to something better.”

    i’m sorry, but this is jibberish

  • http://howfiatdies.blogspot.com Vincent Cate

    “i can’t find anything at all said here by prof. fullwiler that would suggest he discounts the destructiveness of hyperinflation. he’s just explaining exactly how the system works, do with it what you will. ”

    It is not the destructiveness of hyperinflation they miss. It is how easily it sneeks up on a government and traps them. Everyone agrees that hyperinflation is really really bad once you have it. But the MMT people seem to think you only get it if you have debts in a foreign currency and the US does not have that so there is no reason to worry. This is wrong and shows they have not looked at enough cases of hyperinflation to really understand it. You do not need to have debts in a foreign currency to get hyperinflation.

  • http://howfiatdies.blogspot.com Vincent Cate

    Yes, Nov 2010 compared to Nov 2009.

    If the dollar is going down China needs to make the Yuan go down. But in a fiat money this is a trivial thing. Just keep making more money and buying up anything (copper, oil, gold, silver, iron, whatever) till the prices go up and the value of the money goes down to the level you want.

    It is not down relative to the dollar, it is down relative to real things so that it stays the same relative to the dollar.

  • http://howfiatdies.blogspot.com Vincent Cate

    “That’s not how China executes their peg. You’re just flat out ignoring reality. ”

    China has reduces their Treasury holdings over the more recent year of data. The ones who are ignoring reality are the people like Pettis who think China is forced to keep buying dollars to keep their peg. Not true.
    Look at the data:

    http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

  • studentee

    your examples of hyperinflation, they are pathetic. there is no comparison between what you’ve presented here and that of developed fiat currency issuing nations like the us. really, what do you got, besides the third-world and the war-torn?

  • studentee

    even if the number of dollars they’ve purchased has declined somewhat over the past year, they still seem to have a huge amount of them, more than almost any other entity. why do they have them?

  • Whatever It Takes

    Vincent, I believe you are at the wrong blog. This blog is not the “Hyperinflation will destroy the U.S. Dollar, so grab all the physical gold you can” blog.

    Prehaps you would be better served at Tyler’s site or similar.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Who cares what Pettis wrote. This isn’t about Pettis. You’re trying to change the topic so as to not look wrong. As I explained before, China accumulates dollars due to their desire to export to the USA.”

    The point is they are not “accumulating” them any longer. They have reduced their holdings. Anyone who thinks the Chinese need to accumulate dollars is wrong. This is a common error in MMT types as well.

  • http://howfiatdies.blogspot.com Vincent Cate

    “even if the number of dollars they’ve purchased has declined somewhat over the past year, they still seem to have a huge amount of them, more than almost any other entity. why do they have them?”

    When China sells a plastic toy to someone in the USA they get paid in dollars. They are not purchasing dollars to have dollars.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Vincent, I believe you are at the wrong blog. This blog is not the “Hyperinflation will destroy the U.S. Dollar, so grab all the physical gold you can” blog.”

    My point is that MMT people have not developed a sufficiently accurate theory of hyperinflation to correctly model historical hyperinflations or predict future ones. I have not been ranting about buying all the physical gold you can. I really really believe MMT people are not appreciating how hyperinflation really works.

  • studentee

    if you think that china hasn’t bought dollars to improve its ability to export to the us, then you aren’t arguing with mmt, you are arguing with almost all economics

    also:

    http://www.census.gov/foreign-trade/balance/c5700.html#2010

  • studentee

    so, what is your argument? how is this not conceding the point? are you simply arguing that there is more than one way that china can lower the value of the yuan relative to the dollar? because if that’s what you’re arguing, it’s correct, but banal

  • studentee

    yes, but china did accumulate those dollars to improve its abilities to export to the us, correct?

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

    No, the point is – who cares if they accumulate them? What China does with the dollars they import is entirely up to them. If they want to peg their currency then so be it. If they want to buy tsys then fine. But you’re ignoring the one point we keep telling you – it’s not funding anything…..

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

    Vincent, tell me what you think hyperinflation is and then we can take it from there….

  • Whatever It Takes

    I really really believe that Vincent Cate does not appreciate how MMT really works.

  • http://howfiatdies.blogspot.com Vincent Cate

    “yes, but china did accumulate those dollars to improve its abilities to export to the us, correct?”

    No. They got those dollars because they sold more things in US dollars than they bought in US dollars. Having them in no way improves their ability to export to the US. The “orthodox currency peg” is to hold the currency you are pegging to. And China may have started out with an orthodox currency peg, but that is not the only way to peg and they are clearly not doing that any more.

    http://en.wikipedia.org/wiki/Currency_board

  • http://howfiatdies.blogspot.com Vincent Cate

    “No, the point is – who cares if they accumulate them? What China does [...]. But you’re ignoring the one point we keep telling you – it’s not funding anything…..”

    I really understand MMT more than you give me credit for. I get your view. I understand that the government can make new currency to spend. Really really. In fact most everyone knows that the government can print money.

    The point I am making is that MMT is not correct about hyperinflation and bond sales failing. If everyone stopped buying US bonds and got currency when their bond came due the US would have to create like $6 trillion new US dollars over the next year. Historically this type of problem (debt over 80% of GNP, deficit over 40% of spending, and bond sales failing) marks the start of hyperinflation. Since MMT is trying to describe the real world it needs to explain this. But instead most MMT people just think that as long as the US does not have foreign debt it is safe. Wrong.

    It is like you guys think that because most of the money is kept track of on computers (though it could be printed if people all wanted to take out their money in real paper) there will not be hyperinflation. This is just so silly.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Vincent, tell me what you think hyperinflation is and then we can take it from there….”

    One definition of hyperinflation is where prices are going up so fast that inflation is reported in monthly or shorter time periods. This seems to happen with even 5% per month, which is 80% per year. I like that cutoff, though clearly there are other people use other numbers.

    But the real crux of the matter is that there is a feedback loop of falling bond sales, rising prices, more currency creation, increasing velocity of money, and lowering real GNP. Once you get caught in this feedback loop it is very very hard to get out. People realize that that currency is not a good store of value and so hold it for as short a time as possible. It seems that once in this loop the currency keeps going down, and people hold it for shorter and shorter times, till they won’t hold it at all and the currency is dead.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Well, that goes without saying. :-) And it’s doubtful that he can ever accept it. After all, he pens a website entitled “how fiat dies”. People like Vincent are so heavily invested in a prior way of thought that admitting that MMT is right is essentially admitting that you have been wrong for a long time. Most people are not willing to ever do that.”

    So is it your position that MMT claims fiat currencies never die? That hyperinflation is not a real thing? That anyone who believes in hyperinflation can not believe in MMT?

  • http://howfiatdies.blogspot.com Vincent Cate

    “I really really believe that Vincent Cate does not appreciate how MMT really works.”

    I have written up my summary of MMT and if you can point out any errors in my understanding I would appreciate it. I think I get it. It is really only the understanding of hyperinflation that I am complaining about.

    http://pair.offshore.ai/38yearcycle/#chartalism

  • dehbach

    How, exactly, do you think China defends the yuan peg?

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

    So we agree that hyperinflation is death of the currency. What do you believe causes this?

  • Moneta

    All I have to say is that this whole debate, for me, is like dejà vu all over again. It brings me back to my University years when my roommate’s boyfriend became a live-in and started to eat my food.

    When I approached her on the subject, she said: “He’s not eating your food, I am.”

    MMT just seems like a big case of semantics.

  • http://howfiatdies.blogspot.com Vincent Cate

    “So we agree that hyperinflation is death of the currency. What do you believe causes this?”

    No. Hyperinflation is the transition period where a normal currency is on the road to death.

    I think it is the feedback loop that makes it so hard to get off the road to death once on it. The non-linear nature of hyperinflation.

    I think it takes a debt to GDP over 80% and deficit spending over 40% of spending and then bond sales slowing so that the government has to make more currency to cover spending obligations.

    MMT people think it is only debt obligations that you have to worry about, and as long as they are in the local currency there is nothing to worry about. However, I think it is really the commitments that the government has like a huge number of employees and other people that depend on government to support them. These obligations are not really just in nominal dollars, they are “there are X people that have grown accustom to the government giving them a comfortable lifestyle”. MMT people miss this.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    There’s really no reason why China buying fewer Tsy’s has to mean it stopped its peg. The Fed can hit its interest rate target with more or fewer reserves depending upon what the desired balances are of the banks at the target rate. For China, it could simply mean that its peg can be hit by buying fewer Tsy’s now. And, of course, it’s not the purchase of Tsy’s that affects the peg anyway–that’s just trading one dollar asset for another.

  • http://howfiatdies.blogspot.com Vincent Cate

    “MMT just seems like a big case of semantics.”

    It is describing the same world that other monetary theories are also trying to describe. Any theory has to fit with the experimental results. So if they are all talking about the same world at the end of the day their predictions should be similar. However, it really is a different view of things. But I think you get a deeper understanding if you can work through to where you “get” this view.

    http://pair.offshore.ai/38yearcycle/#chartalism

    PS Anguilla is on TV’s Bachelor show right now! See where I live!

  • studentee

    “No. Hyperinflation is the transition period where a normal currency is on the road to death.”

    a banal distinction

    “I think it takes a debt to GDP over 80% and deficit spending over 40% of spending and then bond sales slowing so that the government has to make more currency to cover spending obligations.”

    bond issues are not relatively deflationary…

    “MMT people think it is only debt obligations that you have to worry about, and as long as they are in the local currency there is nothing to worry about. However, I think it is really the commitments that the government has like a huge number of employees and other people that depend on government to support them.”

    honestly, how is this guy not just trolling at this point? mmt is very well aware of the relationship between the amount of govt purchases and the real resources available in an economy.

  • http://howfiatdies.blogspot.com Vincent Cate

    “honestly, how is this guy not just trolling at this point? mmt is very well aware of the relationship between the amount of govt purchases and the real resources available in an economy.”

    Can you find any MMT discussion of hyperinflation that mentions the government’s obligations in real resources? I have not found any.

  • studentee

    “As long as an economy is productive, the sovereign nation can enforce the use of said currency, and as long as we don’t issue excessive currency there should always be demand for it. In other words, trust in the national currency is safe as long as the rule of law is maintained, corporations are productive and I maintain my ability to tax you. If my government becomes corrupt, spends well in excess of productive capacity or mismanages the economy then there is an increasing chance of currency collapse (hyperinflation).”

    http://pragcap.com/resources/understanding-modern-monetary-system

    two clicks away

  • http://howfiatdies.blogspot.com Vincent Cate

    “Has govt mismanaged our finances? Debatable, however, the markets certainly don’t appear too concerned about it with int rates at 3.5%, the trade weighted USD trading at the same levels it was 35 years ago. If markets were really worried about hyperinflation we’d be seeing MUCH higher int rates and a collapsing real trade weighted dollar.”

    One of the amazing things about hyperinflation is that you often get deflation right before hyperinflation. Hyperinflation kind of hits suddenly. It is sort of everything is ok and then its not ok. Many of the Austrian economists say we are getting close to hyperinflation and it seems like they have been the best at predicting the future.

    http://pair.offshore.ai/38yearcycle/#austrian

  • Greg

    ” I really really believe MMT people are not appreciating how hyperinflation really works.”

    Ooooooh….. really really huh? Well gosh darn you must be serious then. We better listen to you I guess.

    I really really dont think Vincent Cate understands how hyperinflation really really works.

    Youve added nothing to this discussion except a lot of emotion about hyperinflation.

    Look, you really really seem to be concerned about “real” terms of trade. So lets have some hyperinflation to the point where money is worthless and then we can be back to real terms of trade…….. BARTER!! An economy in hyperinflation is just the same as an economy without money. If money is worthless it might as well be absent. Hyperinflation should be nothing to fear but to hope for. Return our existence to real terms. You should be cheering it on.

  • Greg

    Vincent

    When a bank moves money from your savings to your checking are they creating any NEW money???? NO

    Redeeming every treasury tomorrow would not involve printing any new dollars it would simply be a shift from an interest earning account to a non interest earning account. NO NEW MONEY!

  • Alex

    Vincent, I liken hyper-inflationists and gold bugs like yourself to those that build bunkers in their homes in case of a meteorite strike or the end of the world. There are some things that are just not worth preparing for – and a collapse of the USD is one of them.

    It is quite clear that hyperinflation doesn’t occur by chance. One way or another, the government will make a severe, outrageous mistake, the country will become unproductive/corrupt, and people will refuse to acknowledge the currency. Needless to say, not one of these three problems is currently (has more than a 0.0001% chance of) facing the United States, Canada, Australia, UK, Japan and so on. If I were an Egyptian, I would be a bit more, but not overly worried.

    And not only that, but I find it ridiculous that anyone would try and ‘protect’ their portfolio from a USD collapse by buying gold or whatever. Just say the USD collapsed over the next 5 year – the world economy would collapse. I would liken it to a worldwide outbreak of Sars that threatened to wipe out half the population. In short, nobody would care how many gold ETF’s you owned, or whether your portfolio was doing this or that. If I were selling vegetables, and you wanted to pay with gold, I’d deny you. Gold wouldn’t matter, but rather guns, petrol, food and water would.

  • http://howfiatdies.blogspot.com Vincent Cate

    “and as long as we don’t issue excessive currency there should always be demand for it.”

    So what do you count as excessive currency?

    Historically it seems that debt in excess of 80% of GNP and deficit spending over 40% of spending result in hyperinflation after awhile. Does that fit with your idea of excessive currency?

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

    Vincent, I appreciate that you are at least being inquisitive and not just shrugging us off as most fiat haters do….At least you’re more open minded and that says a lot about you.

  • studentee

    so, do you admit that mmt does in fact address the importance of real productive capacity? i didn’t have to even look outside this very website. where were you looking?

    “Historically it seems that debt in excess of 80% of GNP and deficit spending over 40% of spending result in hyperinflation after awhile. Does that fit with your idea of excessive currency?”

    what are your observations here? are you still using that sample with the confederacy and the revolutionary us gov’t? it could quite possibly fit with your critical stats there (the us currently has a deficit to gdp ratio of under 10). but who knows! dumb ratios like that aren’t relevant. japan seems to be missing hyperinflation by a pretty massive margin even though it’s working with a debt to gdp ratio of almost 200%…

  • studentee

    meanwhile, many of the mmt guys saw this one coming since the 1990’s, and some of the more mainstream keynesian economists were worried as well.

    once again, your list is pathetic. not saying there weren’t austrian economists who predicted the current mess, but really, mises in the 1920’s? didn’t he also predict that the us was on its way to a communist dictatorship?

  • Moneta

    That’s where I don’t agree.

    In 2005, everyone was arguing about the semantics of the word bubble. That was followed by fascism and free markets. For the last few quarters, it’s been inflation. Now it’s money printing.

    They’re all red herrings.

  • studentee

    so, hyperinflation can be predicted by the ratios you’ve presented, but it is also like some sort of mysterious force, unpredictable in its habits and showing up at our doorstep with no sign or signal? so what are we supposed to do about this hyperinflation?

  • http://howfiatdies.blogspot.com Vincent Cate

    “There are some things that are just not worth preparing for – and a collapse of the USD is one of them.”

    Really paper money collapsed during the revolutionary war, during the civil war, and during the great depression it almost did. They saved paper money by outlawing gold. The Fed only had 40% of the gold they would have needed as people tried to turn in their paper money for gold. The Fed was bankrupt and the paper money would have soon been worthless.

    “It is quite clear that hyperinflation doesn’t occur by chance. One way or another, the government will make a severe, outrageous mistake, …”

    So if the government said, “it is against the constitution to force people to buy health insurance but the government will still guarantee universal health coverage” that is the kind of mistake that would push things over the edge?

    “Needless to say, not one of these three problems is currently (has more than a 0.0001% chance of) facing the United States,[...]”

    The US seems to have local paper money collapse about every 80 years and we are about due. I don’t think your 0.0001% chance is accurate.

    “And not only that, but I find it ridiculous that anyone would try and ‘protect’ their portfolio from a USD collapse by buying gold or whatever. Just say the USD collapsed over the next 5 year – the world economy would collapse. I would liken it to a worldwide outbreak of Sars that threatened to wipe out half the population.”

    Hyperinflation in the US dollar would be bad, but the rest of the world can drop the dollar like a hot potato and go on with things. The US will feel all the pain. Importing oil would require exporting things of equal value. The US could be really poor all the sudden.

    “In short, nobody would care how many gold ETF’s you owned, or whether your portfolio was doing this or that. If I were selling vegetables, and you wanted to pay with gold, I’d deny you. Gold wouldn’t matter, but rather guns, petrol, food and water would.”

    I think you will find that gold bugs favor gold and silver coins over ETFs and agree on the guns, food, and water. But I think you will be surprised as the dollar collapses how fast gold and silver take up the role of money again. I am sure that in all cases of hyperinflation so far gold and silver coins were good things to hold.

  • studentee

    “The US seems to have local paper money collapse about every 80 years and we are about due.”

    so is there really no difference between the state of the us economy 80, 160, 240 years ago, and now? we’re just f*cked because it’s about that time again?

  • http://howfiatdies.blogspot.com Vincent Cate

    “I think it is TERRIBLY unfair for warren to be talking about tax rate enforcement when I am certain he is paying 3% or less down in the USVI, and me and the other joe 6 packs are paying many multiples of that.”

    The US is still free in the sense that you can leave. I did. I even renounced my US citizenship, though most don’t bother with that.

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

    You’re taking the comments to an extreme to build a straw man argument….

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

    Where do you live now?

  • http://howfiatdies.blogspot.com Vincent Cate

    “so is there really no difference between the state of the us economy 80, 160, 240 years ago, and now? we’re just f*cked because it’s about that time again?”

    I think by 80 years people who were old enough to remember how painful the last currency trouble was have died off and the new people just don’t think it is something they have to worry about. You get guys saying the chance is only 0.0001% and foolishness like that. Then the market punishes you for printing too much money and you behave for another 80 years.

  • Alex

    Like Cullen asked, where do you live now? And why did you leave?

    Please, please… don’t tell me that you left because you thought the USA was going to enter a period of hyperinflation and the country would be destroyed. I’ve heard of one guy that renounced his citizenship in part because he thought the USA was either going to default to China, hyper-inflate, or become a socialist country by taxing the rich to pay for Social Security.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Where do you live now?”

    Anguilla. No income tax, no sales tax, no inheritance tax, tropical weather, fresh air. Has a few things going for it. :-)

    You could see Anguilla on TV this evening on a 2 hour episode of “The Bachelor”. But it is over now.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Like Cullen asked, where do you live now? And why did you leave?

    Please, please… don’t tell me that you left because you thought the USA was going to enter a period of hyperinflation and the country would be destroyed. ”

    I left in 1994. Anguilla (see previous post). I left because it seemed like I could have more fun if I got to keep all the money I earned. If you are self employed there is a lot of paperwork in the US and none in Anguilla. Also, if I did save up some wealth I would rather be able to give it all to my kids than half to the government and half to my kids when I die. The higher the tax rate the more it seems like slavery. I went to Cancun on spring break and decided that when I left school I would like to move to the Caribbean, so I did.

  • studentee

    the us spent a massive amount of money about ten years after your most recent crisis…

  • Alex

    What do you mean “printing too much money”? You think the deficit is too big, and too inflationary? If I had the time, I could provide you with the testament of probably 50 million unemployed or impoverished Americans who know that there isn’t enough “money” moving around.

  • studentee

    it seems mmt emphasizes it more as it needs a constant response to spendthrift-esque caricatures…i’m not sure why mr. cate thought otherwise

  • Alex

    And what do you do for a living in Anguilla?

    I’m quite interested in the currency in tax havens. According to Wikipedia, the East Caribbean Dollar is used throughout a few states in the region. As we know, nobody would demand and accept fiat currency if there were no taxes, so there must be some tax somewhere. If income, sales and inheritance aren’t taxed, what is?

  • studentee

    you should love mmt then! federal taxes need not match federal spending…

  • http://howfiatdies.blogspot.com Vincent Cate

    “What do you mean “printing too much money”? You think the deficit is too big, and too inflationary? If I had the time, I could provide you with the testament of probably 50 million unemployed or impoverished Americans who know that there isn’t enough “money” moving around.”

    Look at the graph at the URL below. The bigger the government the slower the economy grows. The US government is too big. If you count up Federal, state, and local taxes, property taxes, gas tax, sales tax, income tax, inheritance tax, etc etc. the government is so big the economy can no longer really grow.

    http://pair.offshore.ai/38yearcycle/#governments

    Part of why I chose Anguilla is that they had a revolution in 1969 so the government was not too big and fat in 1994. It is growing, like all governments seem to, but still not too bad compared to most places.

  • http://howfiatdies.blogspot.com Vincent Cate

    “And what do you do for a living in Anguilla?”

    I was a founder in some Internet companies, one which has done well.

    “I’m quite interested in the currency in tax havens. According to Wikipedia, the East Caribbean Dollar is used throughout a few states in the region. As we know, nobody would demand and accept fiat currency if there were no taxes, so there must be some tax somewhere. If income, sales and inheritance aren’t taxed, what is?”

    Yes yes. We have taxes. This island has like 14,000 people and mostly earns money from tourism. Probably over 99% of the stuff we buy comes from off-island and is taxed as it gets here. So they can collect money similar to what a sales tax or a VAT would do but with only some tax collectors at the port and post office, and still letting us have financial privacy. We do have property tax but it is very low by US standards, around 0.1%. Electricity and phone are taxed, but maybe 7%. Hotels are taxed at 10% of what they collect on rooms. This is a big one for the government but does not bother me personally.

    The EC dollar is for many islands so we can not print them here (a bit like the Euro). So we are not “fully sovereign in our currency”.

  • studentee

    “Look at the graph at the URL below. The bigger the government the slower the economy grows. The US government is too big. If you count up Federal, state, and local taxes, property taxes, gas tax, sales tax, income tax, inheritance tax, etc etc. the government is so big the economy can no longer really grow.”

    that graph is unimpressive. there is no telling what observations you are using here. it would be nice if your put in dummy variables for different continents, time periods. all of the most developed countries, the countries with the highest standards of living, have large governments. i can’t at all tell what your theory of growth is. what is your causal mechanism between gov’t spending and growth rates? taxes don’t figure in this graph at all

  • studentee

    nope

  • http://howfiatdies.blogspot.com Vincent Cate

    “so, do you admit that mmt does in fact address the importance of real productive capacity? i didn’t have to even look outside this very website. where were you looking?”

    I never said MMT ignored real productive capacity, what I said was they don’t take into account the governments real world obligations when looking at hyperinflation, they just focus on debt.

    Vince – “Historically it seems that debt in excess of 80% of GNP and deficit spending over 40% of spending result in hyperinflation after awhile. Does that fit with your idea of excessive currency?”

    studentee – “what are your observations here? are you still using that sample with the confederacy and the revolutionary us gov’t? it could quite possibly fit with your critical stats there (the us currently has a deficit to gdp ratio of under 10). but who knows! dumb ratios like that aren’t relevant.

    These come from Bernholz who studied 40 cases of hyperinflation and wrote a book about what he learned. Search his name on Amazon.

    The deficit ratio is deficit over total government spending, not deficit over GDP. The US Federal deficit is about 40% of spending. We are in position for hyperinflation.

    studentee: “japan seems to be missing hyperinflation by a pretty massive margin even though it’s working with a debt to gdp ratio of almost 200%…”

    Japanese were really amazing savers and the Japanese government has been able to get further into debt for more years before hyperinflation that any other I am aware of. But this is not typical and you would be wrong to focus on Japan and ignore all the typical cases of hyperinflation.

  • http://howfiatdies.blogspot.com Vincent Cate

    “that graph is unimpressive. there is no telling what observations you are using here. ”

    The link at the bottom of that section takes you to the paper where I got it from. They have more info about how they made the graph. The URL is:

    http://www.house.gov/jec/growth/function/function.htm

  • studentee

    okay, i see where the samples are from. they need to put in dummy variables, badly. there’s no obvious interpretation here. there’s also no indication that these guys have any idea how to construct a relevant model. this isn’t real econometrics, show me an actual statistical analysis, a research paper. bad theory (they assume crowding out), nothing but correlation here, they don’t cite any past empirical research. there is no addressing of the fact that the wealthiest countries, the countries with the highest standards of living, have large governments.

  • studentee

    that’s also probably the laziest application of the law of diminishing returns i’ve come across

  • Alex

    I had to laugh – you said there is no sales tax – yet there is an imports tax, and 99% of goods are imported. Hmm. Thanks for talking about it though. It’s always good to hear about different tax structures in other parts of the world.

    Personally, I think the worst type of tax is the income tax. It’s terribly inefficient, makes a lot of paperwork, enriches useless tax lawyers and accountants, and worst of all, has lots of loopholes and special interests. I’d prefer 0% income tax, a reasonable size sales tax, and much higher taxes on property, petrol, and financial transactions.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Vincent, I appreciate that you are at least being inquisitive and not just shrugging us off as most fiat haters do….At least you’re more open minded and that says a lot about you.”

    Thanks!

    Let me encourage some open mindedness the other way too. :-) In the same way that I recommend that anyone take some time and understand MMT, I also recommend that anyone take some time to understand Austrian economics, particularly the Austrian theory of the business cycle. Many great investors believe in Austrian economics (Faber, Schiff, Jim Rogers, James Grant). Now an open minded person should wonder, why? Are there any really great investors who believe in MMT? If not, why not? The great investors have to understand how the world really works and be able to predict what is going to happen with some success.

    http://en.wikipedia.org/wiki/Austrian_business_cycle_theory

  • http://howfiatdies.blogspot.com Vincent Cate

    “so, hyperinflation can be predicted by the ratios you’ve presented, but it is also like some sort of mysterious force, unpredictable in its habits and showing up at our doorstep with no sign or signal? so what are we supposed to do about this hyperinflation?”

    Imagine you have a brick in held at once end in a vice and the other end has a 55 gallon barrel attached to it. You then drip water into the barrel. From past experience you know that before the barrel gets all the way full the brick is going to crack. But no matter how many times you repeat the experiment you have never been able to accurately predict at which drop number the brick will crack. It turns out that the materials in each brick are slightly different so while you can say it will break you can not say exactly when.

    Hyperinflation is like this. You can tell it is coming, just not exactly when it will hit.

    What can you do? Read a little about it. As someone else said, guns, food, and water. Maybe solar power. Might want gold and silver. More ideas:

    http://pair.offshore.ai/38yearcycle/#beprepared

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

    Just so we’re clear – are you predicting hyperinflation in the USA?

  • SS

    So, you left the USA, started a company using a US invention, reap most of your revenues from the USA and now denounce what the USA stands for and hope it collapses? Yeah, you sound like someone we don’t want around. You’re the ultimate freeloader Austrian. You want all the benefits and none of the downside. The truth is, without countries like the USA the world is a much worse place. You want to tear it down, but without America the world would pretty much suck.

  • wh10

    Woo-ee!

    Cullen, this has to be archived somewhere. A treasure trove for those learning MMT. These debates are just as essential to reading the primers.

    Can’t thank you, Scott, etc, enough for going head to head with everyone.

  • remcoxyii

    I am now actively studying MMT for a year (thanks to this site!) and am really convinced it describes the factual working of the current monetary system.

    However, I am not totally convinced about some of the consequences that leading MMTers promote to solve economic woes.

    For instance, MMT suggests that as long as the economy is not at full capacity, the government can run a deficit, as large needed to get the economy to full capacity. My question is if this is desirable from a broader “happiness/wealth” perspective. If a government always tries to run a deficit to get the economy at full capacity, it basically created a “government put” for the corporate sector. The private sector could alway expand its capacity, knowing that the government will fill up the gap if private demand isn’t large enough. But do we really want that? Do we want resources be used for products that don’t necessarily increase happiness/wealth? Now I know MMT does not imply the government MUST run a deficit when capacity is below 100%, but a lot of MMTers suggest this is an optimal solution. I truly wonder if this is the case and would love to hear some feedback.

    My second question relates to the desirability of the current monetary system. It creates a lot of flexibility and in the hands of a government which truly wants to promote maximum happiness/wealth for society, it gives them maximum tools to do so. However, the opposite is also true. The flexibility of the system also easily allows for corruption and misuse; there are almost no operational constraints. I would also love to hear some views on this.

    Thanks!

  • http://howfiatdies.blogspot.com Vincent Cate

    “okay, i see where the samples are from. they need to put in dummy variables, badly. there’s no obvious interpretation here. ”

    This data as a very obvious interpretation. The larger the fraction of the economy the government is the slower the growth rate. How can you miss that? They even put a line in so it was very clear. You need more than that line to understand what the data shows? Why?

  • http://howfiatdies.blogspot.com Vincent Cate

    “Just so we’re clear – are you predicting hyperinflation in the USA?”

    Yes, I predict the US dollar will get hyperinflation. I think Japan and the UK are also headed for hyperinflation. I suspect that when one of these 3 starts the other 2 will follow. I think it is in the next 2 years but feel it is nearly certain within the next 10 years. But partly it starts with a loss of confidence, which being a human thing, is not something where you can exactly predict the timing.

  • http://howfiatdies.blogspot.com Vincent Cate

    “That is a catastrophic misrepresentation of MMT. I don’t even have the time to begin refuting it, but one thing that I keep seeing is that you seem to believe that MMTers think the govt creates wealth for the real economy. That is not what we believe. We fully acknowledge that the real economy is where real wealth is created. We simply understand that the govt can purchase as many of those goods and service as they desire. ”

    The MMT position is that if there is unemployment the government should buy more goods and services and that this will make the economy better. Right? How is this not the same as “If we make more money we can fix the economy”? And even more amusing to me, MMT people understand that most money is entries in a computer, so it is really like “we can change some numbers in the computers and the economy will get better”.

    But people have been trying government spending for a very very long time and the results are not so good. Historically the bigger and fatter the government the slower the economy grows over the next 10 years. Search “graph” in this page.

  • http://howfiatdies.blogspot.com Vincent Cate

    “That is a catastrophic misrepresentation of MMT. I don’t even have the time to begin refuting it, [...]”

    It is only a few paragraphs. No other MMT person has had time to point out any errors in it either. :-)

  • http://howfiatdies.blogspot.com Vincent Cate

    Cullen: “Well, that goes without saying. :-) And it’s doubtful that he can ever accept it. After all, he pens a website entitled “how fiat dies”. People like Vincent are so heavily invested in a prior way of thought that admitting that MMT is right is essentially admitting that you have been wrong for a long time. Most people are not willing to ever do that.”

    Vince: So is it your position that MMT claims fiat currencies never die? That hyperinflation is not a real thing? That anyone who believes in hyperinflation can not believe in MMT?

    Cullen: “Where have I ever said that? Now you’re just making stuff up….I have never said that hyperinflation can’t happen here. I have said it is highly unlikely….”

    You seem to think that because I have a blog, “how fiat dies” about hyperinflation that there is no way I could admit MMT is right without “essentially admitting that I have been wrong for a long time.” To me this sounds like you think there is a conflict between my belief in hyperinflation (a real thing that has happened over 100 times) and the MMT theory. If there were a conflict between real world experimental results and a theory, it would be the theory that is wrong. But if you did not mean there is a conflict between hyperinflation and MMT what did you mean by your comment in the first paragraph above?

  • http://howfiatdies.blogspot.com Vincent Cate

    “I don’t see how that is relevant. First of all, ending the govt bond market wouldn’t happen overnight. It would have to be a very gradual progress. Second, there’s no reason the govt couldn’t offer a CD or other equivalent to sustain some semblance of the rentier class. Your notion that there would suddenly by $6 trillion floating around is not realistic and not even remotely close to how the govt would actually implement this process.”

    When it has happened in other places it is kind of sudden. It will be talked about as “a loss of confidence”. It won’t help if the government calls the debt “CDs” instead of bonds. People will not want to tie up their dollars for long periods of time at the interest rates the government is willing to pay. At the interest rates people will want the interest on the $15 trillion debt would be more than the taxes, which would make confidence even less. So the government will just make new money, which also hurts confidence.

    Deep down the core problem is that if you make lots of new money then existing dollars each have less value. So once it is clear that the government will be making lots of new money nobody wants to commit to holding that money for long periods of time, so nobody buys their debt any more. It has sort of started in that people have been shifting from long term debt to short term debt.

  • http://howfiatdies.blogspot.com Vincent Cate

    The US has an “exit tax” if you renounce your citizenship. Part of my idea in leaving right out of school was that it was better to get out while I had nothing to tax than after I had accumulated something later in life.

    However, I was told that if you said you were leaving for tax reasons they gave you a much harder time so officially my reason for leaving was because of US laws at the time about cryptography.

    http://online.offshore.com.ai/publicity/nyt-citizenship/

  • http://howfiatdies.blogspot.com Vincent Cate

    “How, exactly, do you think China defends the yuan peg?”

    If the value were too low they would use some of their reserves to buy back some yuan and support the price. But that has not been a problem. The problem is that the US and other countries are making so much new money that China has to make new money to keep the same relative value. So they make lots of new yuan. The problem with this of course is they now have inflation.

    The US has been lucky that some countries are using an orthodox currency peg and so do buy up more dollars as they issue more of the local currency to keep the value as low as the dollar. For example, where I live in the Caribbean we have an orthodox currency peg. So the Caribbean helps reduce the inflation problem in the US and imports it to the Caribbean. People think China has to do the same thing but the Chinese have figured out they don’t. As more and more places figure out they don’t have to buy up dollars to keep their currency going down as fast as the dollar the US will be keeping more and more of its own inflation.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Redeeming every treasury tomorrow would not involve printing any new dollars it would simply be a shift from an interest earning account to a non interest earning account. NO NEW MONEY!”

    Right now there are like $3 trillion dollars total. If everyone stopped buying US government debt then about $6 trillion will come due and be paid over the next 12 months. So 12 months from now there would be $9 trillion dollars out in the wild. This means NEW MONEY!

    Now MMT says if there is inflation you just increase taxes. But if there is an extra $6 trillion you can not adjust taxes to take this much back out. So the MMT solution will not work.

  • dehbach

    Really? Cites?

  • http://howfiatdies.blogspot.com Vincent Cate

    “So, you left the USA, started a company using a US invention, reap most of your revenues from the USA and now denounce what the USA stands for and hope it collapses?”

    I moved here right out of school without any invention. A few ideas maybe but those did not make me money.

    I think the original constitution and ideas of America are very good and fully support that. Note that in the constitution it says only gold and silver coins are money. It also was designed for a very limited central government with “The states” being sovereign. But over the years this has changed and now there is a very powerful central government. A big part of this was due to the Fed and the ability to print money. With this they can pay the states to do whatever they want them to do.

    “Yeah, you sound like someone we don’t want around. You’re the ultimate freeloader Austrian. You want all the benefits and none of the downside. The truth is, without countries like the USA the world is a much worse place. You want to tear it down, but without America the world would pretty much suck.”

    I am not trying to tear it down. If anything I am saying that MMT guys with their eagerness to make more money are helping to destroy America. I am trying to keep it from being destroyed, even though I really think it is a lost cause.

    When America falls the world will pretty much suck. There will probably be a bunch of wars as different places make grabs for resources and the US is not able to police the world any more.

  • dehbach

    Do you want to make it interesting? Seriously. We can bet in CAD or Gold or whatever you like.

  • http://howfiatdies.blogspot.com Vincent Cate

    “The “money printing” In the hyperinflationary regimes of Zimbabwe and Weimar Germany was a RESPONSE not a cause. ”

    Hyperinflation is a feedback loop. You have a bunch of things that feed on each other and reinforce each other, making it hard to get free once it starts:
    More central bank buying of bonds (sometimes called money printing)
    lower bond sales to private parties
    higher prices
    higher velocity of money
    loss of confidence in the currency
    lower real GNP (esp if price controls)

    Now trying to claim that one of these in the feedback loop is the “cause” and others are the “response” is like try to argue which came first, the chicken or the egg? It misses the point that it is a feedback loop and is very very wrong. These things go together.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Standard economics, unfortunately, doesn’t understand accounting.”

    When MMTers say this kind of thing it makes MMT seem like a cult or religion. The reality is you have a scientific theory that makes certain predictions and you hope it is more accurate than the other theories. You should find the historical experiments where you think MMT predictions fit and other theories were contradicted.

    I think the current MMTers need to patch up their theory a bit to accurately account for historical hyperinflation results. There have been many cases of hyperinflation in conditions that MMTers think don’t cause hyperinflation.

    Perhaps the problem is bonds vs money issue. If a 30 year bond comes due and the government pays it off with new currency then there is some demand that has been held back for 30 years that is now released. The fact that the person who owns it now may not have been the one that held if for all of the 30 years does not matter. Even if it had a new owner each year there is still demand that has been on hold for 30 years and is now released.

    Imagine that the government taxed someone and then gave a rebate 30 years later. At the point of the tax the demand is reduced. When the rebate comes 30 years later demand is increased.

    I really think my explanation makes MMT consistent with reality and historical evidence. It also then has no trouble with hyperinflation.

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

    Spending must always be efficient and well targeted. I cover this pretty thoroughly in my 101 piece.

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

    Well, you’re doing your part in scaring people into believing they should be scared! Not being an American I would expect nothing less from you!!!!!

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

    It is not accurate. I will tear it apart when I have the time….

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

    You really think people are losing confidence in America? I don’t want to paint a rosier picture than it is, but people aren’t losing faith in America. They’re just frustrated with the direction. They’ll demand change and ensure it happens. But they won’t let it fall off some cliff into a black hole. That’s just not a reasonable or realistic position. It makes for good TV and websites, but not reality….

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

    So what is your solution? Rather than telling us all how it’s going to collapse why don’t you tell us how to fix it? I propose many fixes. I don’t just rant about how the world sucks. Personally, I think this is the best country on earth and I am enormously optimistic about it. I am not blind to our problems, but I am also not some unrealistic fear mongerer, which, no offense, you sort of sound like….

  • http://howfiatdies.blogspot.com Vincent Cate

    “But they won’t let it fall off some cliff into a black hole. That’s just not a reasonable or realistic position. It makes for good TV and websites, but not reality….”

    Hyperinflation (by my 80% per year or 5% per month definition) has happened like 100 times. You think people in all those other times (at least 2 times in America’s history) just “let it fall of a cliff”? It is not that they “let it” it was they could not stop it. Hyperinflation is where the government loses control of the situation.

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

    I am fully aware of that. But you’re not being realistic. The currency collapse only due to extreme exogenous events. War, economic collapse, etc. We just don’t have any of the ingredients that are consistent with past hyperinflations….Now, if we were talking about China I might agree with you, but the USA? Nope….

  • Obsvr-1

    one of the problems in the discussion is in intermingling the political and economic operations with the foundational monetary system.

    mmt defines the monetary system, period. How the actors within the economic and political systems utilize the monetary system is where the controversy lies.

    Any monetary system can be corrupted and fail, history shows the myriad failures most if not all underpinned by a corrupted regime by force or war.

    It is an interesting and healthy debate in regards to monetary systems of the past, what isn’t working today or what could work better. However, this does not change the fact that the current US monetary system is mmt based on fiat currency since decoupling initially from the gold standard and in absolute fiat after the 1971 dissolution of the gold exchange.

    The problem with our current mmt is not only in the misunderstanding of the system, but the thorough understanding by those who use it with fraudulent intent and corrupting the political stewardship to their advantage.

    The Austrian economic principles based on competitive free market sitting on top of a mmt fiat system would work only when those who are corrupting the system through institutionalizing and legalizing crime and fraud are removed. When corruption reaches to the top of our leadership and endemic through our political system of check and balances we are screwed.

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

    Superb comment!

  • http://howfiatdies.blogspot.com Vincent Cate

    “I am fully aware of that. But you’re not being realistic. The currency collapse only due to extreme exogenous events. War, economic collapse, etc. We just don’t have any of the ingredients that are consistent with past hyperinflations….Now, if we were talking about China I might agree with you, but the USA? Nope….”

    The common characteristic of past hyperinflations is high debt/gdp and deficit/spending ratios. The USA is consistent with past hyperinflations. China does not have debt or deficit so how could it possibly get hyperinflation? Without a bunch of bonds coming due what would force China to print money faster than is good for the economy?

  • http://howfiatdies.blogspot.com Vincent Cate

    “You keep saying that hyperinflation is caused by a loss of faith in the currency. There are practically zero signs of a loss of faith yet you continue to say that the debt levels will lead to hyperinflation. You’re twisting your own words. There’s an obvious disconnect between reality and what you say. So, how do we get to hyperinflation if 2008 couldn’t cause it? Are you saying that debt:gdp is going MUCH higher?”

    The US has only recently cross the 80% debt:gdp and 40% deficit/spending ratios. It can take several years before the loss of confidence hits and people stop buying the bonds. When it hits it can be very sudden. It is not like we gradually inch up in inflation rates. When people decide the currency is not good to hold things happen fast.

    Where is the twisting or the disconnect?

  • Obsvr-1

    Thanks, and thank you for your site and thoughtful post/discussions. It is critical that more people understand the fundamentals of the monetary system before launching into debate, critique and problem solving.

    Unfortunately the fundamental concepts get lost in the mass of noise, clutter and sound bite information perpetrated by MSM and polarized political pundits.

    It has taken me some time to fully digest and appreciate the mmt information. This has opened my mind to better understand the actions of the FED, banks and government in general and with respect to the financial crisis and the current state of the economy. When more people become enlightened then a coarse correction can be demanded to avert further decay and future crisis. Unfortunately this may take some time as those in power will not go down without a fight, which means more economic pain is likely (NOT confused with hyper-inflation scare/fear).

  • remcoxyii

    “Spending must always be efficient and well targeted. I cover this pretty thoroughly in my 101 piece.”

    I understand that, but isn’t that easier said than done?
    A bubble is per definition a gross misallocation of assets. If this bubble bursts (causing an economic downturn), isn’t that a natural way to restore an equilibrium and isn’t there a very real chance government spending causes the misallocations to persist?

    So, basically my question comes down to: how does a government decide which spending is efficient and well targeted? Or should government stimulus for instance always come in the form of tax holidays and leave the decision where to spend on to the private sector?

    Also, I’m still very interested how you view the fact that a monetary system with almost no operational constraints might be very susceptible to corruption and misuse. Do you for instance view this negative part less important than the flexibility the modern system offers?

  • http://howfiatdies.blogspot.com Vincent Cate

    Cullen: “Okay. You’re missing a key component in your analysis though. Bonds don’t fund anything in the USA.”

    I am not arguing that point.

    You agree with the MMT idea that taxes reduce aggregate demand and so reduce inflationary pressure, right? And clearly sending stimulus checks out to people, a sort of reverse tax, would increase aggregate demand and inflationary pressure. Right?

    My point is that similar to the way taxes reduce aggregate demand, bond sales delay it. It is logically the same as if you taxed money away from the population and then gave them a stimulus at the period. While you are holding the taxes you have reduced aggregate demand. When you pay out the stimulus there is an increase.

    Can you get your mind around this idea? This is the crux of where I think MMT theory needs to be patched up.

    If you can see this, then if people stop buying bonds and bonds are paid off as they come due there is some aggregate demand that is released. The quantity that can be released in 1 year can be huge because the debt was made over many years. This flood of demand is far too much for any increase in taxes to compensate for. It is like a dam breaking, it just wipes things out.

    Cullen: “So, your comment that there might not be buyers of the debt is illogical. That can’t happen.”

    If MMT theory claims there must always be buyers for government debt then there are like 100+ historical cases that contradict MMT theory. If this is really the case MMT clearly needs to be modified or tossed out. Are you sure this is a claim of MMT?

  • studentee

    that’s not new money. it already existed as tsy’s. there’s no reason to believe money kept as currency is more inflationary than money kept as tsy’s. this has been made clear to you time and time again.

  • studentee

    “These come from Bernholz who studied 40 cases of hyperinflation and wrote a book about what he learned.”

    no. i want you to tell me what some of the most relevant cases are.

    “I never said MMT ignored real productive capacity, what I said was they don’t take into account the governments real world obligations when looking at hyperinflation, they just focus on debt.”

    this doesn’t make any sense. you’re just redefining terms to suit what you’re arguing. that quote right there suggests that mmt focuses like a laser on the importance of real actual resources. there is no difference between “gov’t real world obligations” and this.

    “Japanese were really amazing savers and the Japanese government has been able to get further into debt for more years before hyperinflation that any other I am aware of. But this is not typical and you would be wrong to focus on Japan and ignore all the typical cases of hyperinflation.”

    nicely done, there. remove any glaring outliers that annoy your conclusion…

  • studentee

    gov’t should simply target underutilized resources with glaring opportunity costs of disuse (the unemployed)

  • studentee

    part of the problem here is that you continue to focus on these ratios as some sort of causal effect in the creation of hyperinflation. couldn’t it simply be the case that states struggling in the aftermath of wars, etc. simply end up with these ratios as a sign of their struggling, and that it’s not a causal factor?

  • http://howfiatdies.blogspot.com Vincent Cate

    Scott: “Gold is a store of value, like any asset. But it’s not money. Try paying your taxes with gold.”

    A 30 year bond is a store of value, like any asset. But it’s not money. Try paying your taxes with a 30 year bond.

  • remcoxyii

    Maybe I do not understand you correctly, but are you saying that the government should target sectors, where there is a large underutilization resulting in high unemployment?

    If so, then consider for instance the Spanish housing market. During the boom years, everyone in Europe wanted a second home in Spain. This drove up prices and resulted in lots of newly build homes. After the collapse, there now is a large overhang of new houses and almost no new orders in construction, resulting in high unemployment in that sector. Are you saying the government should spend to keep construction going? Is that really what is desirable from a social perspective? To me it seems during the bubble years, there was a gross misallocation. For the government to keep spending on construction might perpetuate that misallocation.

    If I misunderstood you, can you please explain your position a bit more? Still learning on the subject ;)

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

    REM,

    This question is way too broad. You’d have to look at it on a case by case basis….

  • http://howfiatdies.blogspot.com Vincent Cate

    “Why does this matter? Because it gives the appearance that the US government is directly funding itself via the Fed’s purchases. This would be nefarious if it were true …”

    “Fisher’s implication is that the Fed is directly helping to fund the US government’s spending. After all, if they’re buying the debt then they’re obviously funding the spending, right? Wrong. As regular readers know, the US government is never constrained in its ability to spend.”

    The MMT view is that the central bank is part of “the government”. The reason “the government” is never limited in its ability to spend is because the central bank is part of the government. If this is nefarious then MMT fully supports nefarious operations.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    I don’t ever call a 30-year bond “money.” I call them net financial assets for the non-govt sector.

    Beyond “horizontal money” and “vertical money,” I NEVER use the term “money,” unless I am quoting someone else or something along those lines (as in this discussion, since you started with “money”). Even those two terms (H and V “money”) should not be understood as the equivalent of what everyone else normally calls “money”–and I’m well aware that MMT’ers in this case have created their own definitions for their own purposes (though we still fall far short of, say, Austrians in creating our own definitions for things) and so I try to be very clear.

    That said, far different from gold, a 30-year Tsy does give you a claim against the govt that must legally be serviced and ultimately paid off in “that which is necessary to pay taxes.”

  • http://howfiatdies.blogspot.com Vincent Cate

    “Well, you’re doing your part in scaring people into believing they should be scared! Not being an American I would expect nothing less from you!!!!!”

    If a hurricane is coming and you tell people a hurricane is coming it is not scaring people. It is giving them time to get prepared and so ride through it better. They would be much more scared when it hit if they did not have time to get ready.

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

    What? That’s like saying that banking is part of capitalism and since the banks have gotten out of control then capitalism doesn’t work.

    You are creating all sorts of alternate realities to try to prove something wrong that you can’t even come close to disproving. You’re only hurting your own case by making these foolish assertions.

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

    You’re not telling anyone how to prepare. All you’ve done is come here and build a series of strawman arguments in an attempt to debunk something you don’t understand. You’re just trying to scare people through extreme rhetoric and hatred for a country that you don’t love, but have no problem exploiting.

    The hyperinflation nonsense has been the same since the 1940s. They tell us to buy gold, avoid US paper, avoid US stocks, avoid US bonds, etc. Meanwhile, America kicks everyone’s ass in everything and you reap the benefits from your island nation while denouncing everything that America stands for. I’ve been hearing and reading this rant about hyperinflation and the collapse of America for as long as I can remember. And I have yet to hear one single convincing case. And not surprisingly you’ve all been horrendously wrong.

    Me personally? I can’t wait for this little banking episode to be done with in America. Then people might stop being scared by you, Glenn Beck and Peter Schiff and they might actually have the confidence to invest their money in real human ingenuity and not some silly rock. Then we can get back to kicking everyone’s ass in innovating and gold can get back to going back to $200.

  • Obsvr-1

    Is this paper available online ?

  • http://www.pragcap.com Cullen Roche
  • Pearl

    To the people who know everything, and those of you who are interested in learning more. I am not a prognosticator and therefore I will offer only the information. If you want to understand what is going on now and in the past in our money system, read MODERN MONEY MECHANICS, written by the Federal Reserve. The book is no longer in publication, so you may have to look around a bit. If you understand US Dollar is created out of debt, you will get the picture and understand that commodities of any kind are not a bad thing.

  • The Dork of Cork

    Ok – the Fed is not monetizing the debt , fair enough.

    But when the US goes into deficit particularly extreme deficit it is taking real resourses from the rest of us and spending it , in the zero sum diminishing resourses world of today that is net negative in my view.
    If you used this deficit or surplus from the rest of the world to engage in real technological development such as you did before Nixon – I personally would not have a problem with the dollar being the reserve currency on the planet but oil complicates things tremendously.
    Since 71 I believe real capital spending has been slashed as I believe Gold is somehow a symbolic representation for capital and once it was nearly eliminated from financial discourse all talks of building capital at the expense of todays consumption was no more.
    This talk of Apple or Microsoft as raw capital is false – although these products and organisations utilise resourses brilliantly they do not create technology to replace them , the slow debt of the nuclear industry with the exception of the French during the dollars glory days of the 80s and 90s points to this phenomena.
    Having said all that I do get your criticisms of the euro system and its crazy 3% deficit rule – this has crippled once semi-independent countries which had a excellent goverment spending systems that created capital – the initial Paris hostility to the ECB’s dictum’s in this area while weak were not without weight.

    One final question – the Irish central bank appears to be printing unbacked euros – is this a form of MMT withen European castle walls and is this a form of dry run for the ECB or will its sister CBs save its blushes.

  • http://howfiatdies.blogspot.com Vincent Cate

    “I never said there must always be buyers of the debt. I don’t even know where you’re getting that from.”

    You said they “can always take down the entire auction”. What this really means is if there are no buyers then they won’t sell any. So?

    However, from from this nothing you then conclude, “So, your comment that there might not be buyers of the debt is illogical. That can’t happen.”

    Saying that it can’t happen that there are no buyers is logically the same as saying there must always be buyers. This however is simply not true. It could well be there are no buyers, in which case they would “take down the auction”.

    This could happen again and again, where only the Fed was buying. You claim the chances of this are so small it is like aliens coming. Get ready for aliens then. :-)

  • http://howfiatdies.blogspot.com Vincent Cate

    “So, it’s illogical for you to conclude that the buyers will dry up. That’s impossible. ”

    Do you think you are saying there will always be buyers again or are you not saying that again?

  • http://howfiatdies.blogspot.com Vincent Cate

    “I think you’re making all sorts of hypotheticals based on a faulty understanding of the subject matter.”

    History is on my side. Bond sales have failed time and again around the world. Why do you think the US bond sales will be any different?

  • http://howfiatdies.blogspot.com Vincent Cate

    Ok, I think I see your view. You think the only reason the Treasury sells bonds is that people want to buy them and it is not really needed as they can always spend money anyway.

    So, have you thought about my argument that selling bonds and then paying them off is logically the same as taxing people and then later giving them a stimulus check? After the government has collected money there will be less demand and then after it gives it back there will be an increase in demand. Right?

  • http://howfiatdies.blogspot.com Vincent Cate

    “I get what you’re saying. You’re saying that the bonds lock up the demand. But those bonds represent a desire to net save so your assumption that this would immediately turn into consumption is illogical. Are you saying that people will stop saving money just because the govt bond market goes away? They won’t find other ways to save? Or the govt couldn’t provide another instrument that?”

    There are other ways to save than to buy government bonds. When the government holds the interest rate below the inflation rate it is a losing investment to buy government bonds. If it becomes clear that is going on then bond sales can fall off.

    Commodities and gold have been a much better investment than treasuries for a decade. If people decide that is going to continue to be so they could decide not to save by buying government bonds but to save by investing in commodities and gold. But this type of savings/investment looks like “demand” when it comes to inflationary pressure.

    It has happened in many other countries. This is not some crazy hypothetical I am making up with no possibility of really happening.

  • Obsvr-1

    Vincent,

    I think it would be helpful if you separate the US Bond program from the fiscal budget process, think of them as completely independent operations.

    Then a US Bond is purchased as an investment, the buyer is exchanging “money” for a financial asset (Bond) and on the flip side asset exchanged for “money”. The buyer could have bought any other financial asset or commodity (stocks, ETF, gold, state/muni bond, etc), just because he/she chose a US Trsy Bond does not change anything. The act of exchanging “money” for the Bond reduces the demand for goods/services from that one individual, but remember the other side of the exchange is someone trading a Bond for “money” who may or may not spend on goods/services.

    When the US Bond is subsequently sold, the seller may or may not spend the “money” on goods/services, he/she may invest into another financial or commodity asset.

    Whatever the dynamic between buyers/seller and spending/saving from these US Bond transactions is independent of the US Gov’t fiscal activities.

    On the Fiscal spend side, we can debate over what the Gov’t is spending “money” on, but it is being spent on goods/services and not financial assets. It doesn’t mean they are efficient or directed appropriately – but that is for a different thread/debate on US Gov’t Budget.

    One thing is for sure, if the US Gov’t would just spend “money” (US Dollars) into existence and End the Bond program then the Interest on Debt would phase out over time once the existing bonds are matured.

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

    Okay, so when the demand for govt bonds goes away we’ll get hyperinflation in the USA. I think we get your point.

  • http://howfiatdies.blogspot.com Vincent Cate

    “The act of exchanging “money” for the Bond reduces the demand for goods/services from that one individual, but remember the other side of the exchange is someone trading a Bond for “money” who may or may not spend on goods/services.”

    You are not thinking in MMT way, you are thinking as if the government needed to sell bonds to fund itself. In the MMT view you can imagine the government burning all money collected from taxes and bond sales. Any money government spends can come out of thin air. So if the government is spending money out of thin air, then when it collects money from bond sales and burns it the demand is reduced, till it pays the bond some time in the future. So while taxes reduce aggregate demand, bonds reduce it while the bond is out.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Okay, so when the demand for govt bonds goes away we’ll get hyperinflation in the USA. I think we get your point.”

    A meeting of the minds! Ya!

    So now the question is just what are the odds that bond sales fall off. Prediction is hard, especially about the future. :-) If the inflation rate goes above the interest rate the Fed has picked, or people have reasonable fear that it will, then they will probably fall off. The Fed likes to hold interest rates down. There are some hints inflation may be on the way (commodities up sometimes indicates inflation coming). Not sure the odds, but I am sure they are higher than the 0.0001% chance that someone put out in these comments.

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

    Good luck with your bets.

  • al green. Span

    Jesse’s cafe knocks pragCap’s mistakes / assumptions on sophistry, Jesse
    adds comments 16 2 ’11. . .

  • Obsvr-1

    perhaps, but you are still connecting the US trsy Bond trades with fiscal, monetary and macro economic events.

    It is progress that the understanding on the fiscal side gov’t spends “money” into existence (out of thin air).

    Now, since gov’t can spend w/o borrowing, kill the US Trsy issuance and let a competitive free market provide investment options for those wishing to invest/save and determine market based interest rates. No more FED intervention, no need for FED.

    The fiscal budget spending, taxing left for another debate and thread.

  • http://howfiatdies.blogspot.com Vincent Cate

    “Now, since gov’t can spend w/o borrowing, kill the US Trsy issuance and let a competitive free market provide investment options for those wishing to invest/save and determine market based interest rates. No more FED intervention, no need for FED.”

    The US would be in a far stronger position if it had never borrowed and there was a free market on interest rates. No more Fed would be a huge improvement. It would be a far more honest system if the Treasury alone was in charge of money creation and there was no national debt.

  • http://howfiatdies.blogspot.com Vincent Cate

    In fact, I think there would be zero chance of hyperinflation if there was no national debt.

  • http://howfiatdies.blogspot.com Vincent Cate

    Maybe zero chance is too strong, but far far less chance. Having the debt makes hyperinflation much more non-linear. It can hit much more suddenly and be far harder to control. I believe that without debt the MMT idea that you increase taxes if inflation is getting too high would work fine.

  • Peter

    Roche completely misunderstands how the Treasury and Fed work. This article is so badly founded that I wonder if it is meant as satire. The worst part is that it appears to make fun of the statements of folks who do understand what debt monetization really is and how debt monetization produces inflation. Inflation is already here. The statistics that say it is only in the 2% range discount raw materials and important commodities like food and fuel. Once inventories of unsold goods from the recession are sold off, prices will go up.

  • Obsvr-1

    yes, now that we have converged on removing the FED from monetary intervention (End the FED), while letting the free market determine interest rates.

    By issuing ‘money’ into existence, a new US Dollar would replace the FRNs and debt based issuance. FRNs can be retired over time.

    The concept of National Debt goes away, as the new monetary system is not debt based — instead an account at the US Treasury “Tax Owed” would track the accumulated deficits. Fiscal policy and consumption tax rate would be the responsibility of congress and bureaucratic bloat the responsibility of the executive branch.

    The next move is to remove the lobbyist & congress from tax system intervention (repeal 16th amendment to eliminate income tax, replace with a consumption tax – e.g. fairtax.org). This would put in place a taxing system that has a built in governor, increase taxes when the economy heats up GDP++, decrease taxes when contracts GDP–.

    Putting a consumption tax in place would eliminat the special interest tax deductions, credits and loopholes, upending the special interest lobby.

    Congress can then focus on fiscal responsibility in reducing the size of gov’t and regulatory policy to re-establish a competitive free market.

    Ending the TBTF doctrine would return market discipline to banks/business as the risk would be retained by the firm with the owners and investors absorb losses/failure thereby putting pressure on executives to implement sound risk/business management.

    Now this is all ‘mutiny’ in the eyes of the political powerful and money elite, so a call from the masses (We the People) would need to demand such changes. Fundamental changes, starting with the MMT non-debt based monetary foundation and reduced gov’t size and intervention should be the manifesto of the Tea Party.

  • http://howfiatdies.blogspot.com Vincent Cate

    Sadly we all will be caught up in this, not just those that knowingly place bets.

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

    Well yeah, that’s 99% of why your thesis is wrong. The whole world would sink into an economic black hole in your USA hyperinflation scenario. And that’s exactly why no one will ever let it happen.

  • Obsvr-1

    Interesting views from Kyle Bass

    Kyle Bass: Be Warned…

    http://market-ticker.org/akcs-www?post=180164

    Kyle Bass’ Latest Must Read Letter: “The Cognitive Dissonance Of It All”

    http://www.zerohedge.com/article/kyle-bass-latest-must-read-letter-cognitive-dissonance-it-all

  • http://howfiatdies.blogspot.com Vincent Cate

    “Well yeah, that’s 99% of why your thesis is wrong. The whole world would sink into an economic black hole in your USA hyperinflation scenario. And that’s exactly why no one will ever let it happen.”

    Most places would stop using dollars before it was very bad hyperinflation. Hyperinflation is not an economic black hole, it is just the death of a currency. Commerce goes on, though if the government tries hard to force people to keep using the dieing currency life can be very hard for awhile.

    But this idea that “no one will ever let it happen” makes it sound like they get to vote “all in favor of hyperinflation” but it is not like that. If China, Brazil, Japan, UK, Russia, etc stop buying US bonds the US dollar will get hyperinflation. Not like Obama, or anyone else, has to “let it happen”, he will not be able to prevent it no matter how much he wants to. Hyperinflation is where things are out of control.

    Now it has happened around 100 times before, twice in America. You think all these other places just “let it happen” without wanting to stop it?

  • http://howfiatdies.blogspot.com Vincent Cate

    “Now, that doesn’t mean it couldn’t happen, but the odds are extremely low because the human race knows there is too much at stake….”

    I think only a tiny percentage of the people in congress really understand how hyperinflation starts and the feedback loops that makes it so hard to get out of. I think there will not be enough votes to change anything till after hyperinflation hits, and by then it is too late. You really think I am wrong on this point? Before you answer please watch this video where Obama says he has been to 57 states:
    http://www.youtube.com/watch?v=EpGH02DtIws

  • http://howfiatdies.blogspot.com Vincent Cate

    “See Vincent – this is what you can’t comprehend. The USA is 25% of world GDP. That’s because a huge portion of what the world makes and consumes is due to the USA.”

    After the dollar crashes it might only be 5% of the world GDP. I highly recommend this 3 minute video for understanding how American consumers do not drive the world:

    http://www.youtube.com/watch?v=IlWpGm9POwQ

  • http://howfiatdies.blogspot.com Vincent Cate

    “I get your position. You think the world’s largest economy is going to sink into some sort of uncontrollable spiral. I also think the world will get sucked into a black hole one day, but I am not egocentric enough to try to convince myself that it will happen during my lifetime. ”

    I think the US dollar is going into hyperinflation. This need not be an economic black hole. Many countries have had hyperinflation. Some have had it several times. It probably means the death of the dollar; however, we can expect them to make a new currency and a new system designed so that it won’t have hyperinflation for awhile.

  • http://howfiatdies.blogspot.com Vincent Cate

    “We get it”

    If you really understood things you would stop pushing for more money creation.

  • http://howfiatdies.blogspot.com Vincent Cate

    “And if you understood things you would know that it is impossible to have a growing economy and population without an expanding money supply. But that simple reality seems to escape you.”

    Wrong. The US stopped making silver coins in 1873. The economy kept growing fast but the supply of gold was not growing as fast, so prices went down by 1.7% per year from 1875 to 1896. The increasing value of money is hard on debtors, and may not be ideal, but the economy was growing far faster back then than it has over the last 10 years when the government has been making money like crazy. Reality is you are wrong.

  • Obsvr-1

    Is this the longest thread in PragCap history :-)

    Lots of good discussion and information.

  • http://howfiatdies.blogspot.com Vincent Cate

    “So, is this check mate yet?”

    You said: “it is impossible to have a growing economy and population without an expanding money supply.”

    I provide a counterexample showing how foolish your claim is and you think that because there was a financial crisis during that time, even though it totally contradicts what you said, that you are now right?

    In that crisis the government had issued more paper money than it had gold to back it and people lost confidence in the government paper money. It was only when JP Morgan was able to get $65 million worth of gold that the Treasury was saved.

    http://pair.offshore.ai/38yearcycle/#1895

    Losing confidence in government paper money is what I think is coming next now.

    The reason growth rates are lower today is that the government is an overhead on the economy and the overhead is far larger now. You can see this in this graph that shows places where governments are a larger fraction of the economy grow slower.

    http://pair.offshore.ai/38yearcycle/#governments

    So is this checkmate?

  • http://blogfirstrider.blogspot.com/ first

    In the modern money world it appears that true wealth for the Governments is a ledger entry.

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

    You provided a historical example during which the US suffered one of the worst depressions of its history. Of course there can be growth during monetary contraction. I should have said “sustained growth”. You read my work. You know that I discuss how the private sector gets driven into debt when the sovereign collapses the money supply. And a debt bubble was exactly what happened in the 1890’s. You got a few great years of growth because of debt binging and then it all collapsed.

    How does that prove that the economy can be great without a flexible money supply? It doesn’t at all. In fact, it proves my entire point…You just make things up to satisfy false claims. Your example is like saying that you eat McDonalds every day and have no side effects! For a full decade you lived prosperously and ate nothing but MCDs. But you leave out the part where you died of a heart attack at the end of the decade. How convenient….

    The govt reduced its debts by 50% during the period in which you cite. Yet, it still collapsed the economy. That totally contradicts all the nonsense you’ve been discussing.

    We fundamentally disagree. That’s fine. But I hope you’ll be man enough to come back every few months and remind us why you are wrong because you will be. THEN, it will be check mate.

  • http://blogfirstrider.blogspot.com/ first

    A) Russia is an oil producer.
    B) China will sell as long as it gets paid and can use the dollar to buy oil and other goods. If the dollar goes down they will ask for more dollars thats is the same as refusing the dollar as it stand now.

  • studentee

    “The reason growth rates are lower today is that the government is an overhead on the economy and the overhead is far larger now. You can see this in this graph that shows places where governments are a larger fraction of the economy grow slower.”

    that graph is embarrassing, lazy. it says nothing of value, any introductory econometrics student creates more meaningful scatterplots as a homework assignment. there is worthwhile research showing how government interventions can stifle economic growth, this particular piece is not among them

  • http://howfiatdies.blogspot.com Vincent Cate

    >that graph is embarrassing, lazy. it says nothing of value,

    Do you have a better source showing how government spending as a fraction of GNP impacts 10 year growth rate?

  • Mediocritas

    I found this quite enlightening

    http://econfaculty.gmu.edu/bcaplan/whyaust.htm

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

    Thanks! Looks long, but I’ll get around to it one of these days….(you should see my pile of reading….overwhelmed)….

  • studentee

    “Do you have a better source showing how government spending as a fraction of GNP impacts 10 year growth rate?”

    this doesn’t show this…i’m really not sure how to respond here, where does one have to start with you? correlation is not causation? have you read any growth theory at all?

  • http://howfiatdies.blogspot.com Vincent Cate

    “this doesn’t show this…i’m really not sure how to respond here, where does one have to start with you? correlation is not causation? have you read any growth theory at all?”

    My mistake. Correlation does not prove causation.

    I understand that if a government borrows or prints lots of money people can feel better for a couple years. But this is similar to if I spend lots of money on my credit card I can live better for awhile. But long run I am worse off.

    This 10 year growth rate data seems to fit my theory (Austrian) and contradict your theory (MMT). Shall we toss out your theory or do you have other data that would contest the accuracy of my data?

  • http://howfiatdies.blogspot.com Vincent Cate

    “Had a chat with Warren about your bond market concerns last night. What he proposes is simply changing the term structure of the market. Eliminate the long end. Reduce tsy’s holdings to short duration only. ”

    The shorter the duration on the bonds the faster people can convert them to cash. Part of why the US it at risk, in my view, is that 1/2 their debt comes due in the next 12 months. If it were spread out over 30 years there would be much less risk as only 1/30th could come due on any given year.

    The problem with interest rates lower than inflation rates is people are losing value. Eventually they get pissed and leave. They may go to commodities or gold.

    So what he is proposing will make the risk of people suddenly getting out of bonds higher. If all the debt came due in the next 6 months they might have to print for the whole deficit in 6 months. This is not a fix at all.

  • http://howfiatdies.blogspot.com Vincent Cate

    “People don’t “get out of bonds”. Investors exchange existing securities. They don’t just get rid of them. The govt never has a problem rolling over these securities because the desire to net save is always high.”

    You are not looking at the history of the real world. Sometimes people stop buying and as bonds come due they just get their cash. This means they are getting out.

    Many governments have had problems rolling over debt. Ever hear of Greece? Anyway, many governments that can print their own money just start printing when they can not roll over debt. If Greece could print they would.

    The more the Fed buys US debt the worse an investment it will be, so less people will want to buy, so the Fed will have to buy more. Feedback loop is already starting really.

  • studentee

    agh. even if the data were relevant, how do they contradict mmt?

    i don’t know what to tell you. it’s really, really bad econometrics, amateurish. people need to read their ed leamer. why pick gov’t spending at the start of each decade? what possible economic theory supports just picking those years?

    was nothing else happening during those four decades? such as rising inequality, rising oil prices?

  • http://howfiatdies.blogspot.com Vincent Cate

    “Can you give me an example of a country in a floating exchange rate system with monetary sovereignty that suffered hyperinflation? ”

    All 100 of them had monetary sovereignty. How else were they print the money for the hyperinflation? You think someone can have 100% inflation per month and really be pegged to some other currency? I don’t know of any case like that with a real peg. Perhaps the official exchange rate was pegged to something but probably nobody could really exchange money at that rate. I think all of the cases of hyperinflation had floating exchange rates, at least on the black market. In hyperinflation it is the black market winning over government control and the currency failing. Check out the stages of how things evolve:

    http://pair.offshore.ai/38yearcycle/#hyperinflationstages

  • http://howfiatdies.blogspot.com Vincent Cate

    “Greece is in a single currency system. They are a currency user. Not a currency supplier. It’s not an apples to apples example. They have no monetary sovereignty. Wanna try again?”

    If Greece could print their currency people would be fleeing their bonds even faster. It would mean that they would be printing lots of money and making each unit have less value. Not a good time to hold bonds.

    Again, I think in every case of hyperinflation people drastically slowed or stopped buying government bonds (at least in real terms). It is a key part of the feedback loop of hyperinflation. The worse things get the less people want to buy bonds and the more the government prints, so the worse it gets… Why would anyone want to lock their wealth into a currency that might not be worth anything a year from now? Once people see things going south they stop buying bonds.

  • http://howfiatdies.blogspot.com Vincent Cate

    “even if the data were relevant, how do they contradict mmt? ”

    Most MMT people seem to think the more the government spends the better things will be. While there is a bit of truth to that in the short turn, this data contradicts that idea for the long term. The Austrian’s think a smaller government is better for long term growth rates. Leaves more of everything in the hands of the productive parts of society. This data supports the Austrians. Do you have any data that long term (like 10 years or more) it is good to have governments that spend lots?

  • studentee

    inequality was rising in most oecd countries during that time period. why is this not an explanation for the falling growth rates. you have to account for confounding variables if you want to do econometrics. this paper is embarrasing

  • studentee

    that may contradict the political desires of ‘most mmt people’ but it says nothing about mmt in and of itself. think harder

  • John

    You described bits and pieces. Not the big picture.

  • http://howfiatdies.blogspot.com Vincent Cate

    “No, most of them were not really sovereign even though you think they were. For instance, Weimar had foreign denominated debts. Argentina had a peg. Zimbabwe had foreign debt, Etc. Give me real examples.”

    Sovereign means nobody tells them what to do. Sovereign countries can drop a currency peg and/or defaults on foreign debt if they want. That is so easy (voters don’t really care about defaulting to foreigners). Hyperinflation is very destructive to an economy but defaulting on foreign debt or relaxing a currency peg is no big deal. In your world view why doesn’t any country at risk of hyperinflation from these 2 problems just get rid of the problems with a rule change?

    As for examples of hyperinflation, this URL has a nice list. How about staring with Bolivia.

    http://www.sjsu.edu/faculty/watkins/hyper.htm

  • http://howfiatdies.blogspot.com Vincent Cate

    I will concede that Weimar had questionable sovereignty so lets just ignore that one. But how in what other cases of hyperinflation was a government not fully in control of what it was doing? I am not aware of others under threat of invasion if they defaulted.

  • Gary_UK

    Keeping it real.
    I have read that the US Govt is using blogs to put forward its views (views such as QE2 is NOT inflationary, just an asset swap etc.). So, just in case our host Mr Roche is a fake, please read this….

    http://www.zerohedge.com/article/tired-all-qe-just-asset-swap-rhetoric-then-read

  • Ddvex

    For starters i would suggest reading “ECONOMICS IN ONE LESSON”

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

    My response:

    http://www.zerohedge.com/article/tired-all-qe-just-asset-swap-rhetoric-then-read#comment-978538

    And this govt “fake” wants to end the Fed. I don’t think that’s exactly in-line with their policies….Not EVERYTHING that disagrees with your thinking has to be a conspiracy theory….

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

    Good book, but dated. The monetary system has changed a great deal. You might benefit by throwing out all econ books based on a gold standard based monetary system.

  • MPP

    Help me here. Allow me to paraphrase, please – “The Fed is not printing money, the congress is….”

    A hypothetical. Congress has approved a budget and authorized a fictional $24 deficit. So now it is up to treasury to fund the cash shortfall. Again, assuming cash flows are smooth, this occurs each month…

    US Treasury
    Cr Cash $2
    Dr USTBond or USTBill liability $2

    When the Fed buys on the open market what is now a public security the transaction looks like:

    US FRB
    Cr Bond asset $2
    Dr Cash $2

    Security Holder
    Cr Cash $2
    Dr Bond or Bill Asset $2

    Where does the Fed get its cash (or digital equivalent) to settle the transaction? I understand that the FRB balance sheet has grown with assets and liabilities to match, but as a seller of an open market security want to see the Credit of $2 in my account. Where does it come from? Is treasury the one who settles the account in lieu of the FRB? If so then it gets worse..

    Treasury
    Cr ???? $2
    Dr Cash $2
    where ???? = ????

    MPP

  • Bc

    On one hand we have created aggregate debt levels equalling 3.5 times GDP. Recently a lot of these loans
    As assets have been transferred onto the Fed’s balance sheet at nominal book value in exchange for cash and cash equivalents issued by the Fed. Simultaneously we are running deficits which axiomatically enter the economy as cash and equivalents like bonds.
    The two are not unrelated. In fact one cannot happen without the other because the fair market value of the assets the Fed is buying is lower than the price paid. This is where the complaint that banks privatize profit but socialize losses comes from. Fundamentally we’ve all been caught in a Ponzi scheme. The answer to that is: Don’t do that. Time will tell how much damage we have done to the private economy. Unwinding the debt will cause further dislocations and misapplication of resources. Understanding MMT can help but we still have big trouble coming.

  • E.B. Mill

    I think you’re a little off on your belief in money creation and your assumption that insolvency issues are moot because of our fiat currency. Here’s why.

    When the federal government spends more than their general revenues from taxes, they borrow to cover the rest of it. You seem to think this is analagous to creating money to cover the deficit. I don’t think so.

    First, though the Federal Treasury owns the printing press, they can only print federal reserve notes. Correct me if I’m wrong (and I’d like to see proof. Not to be a prick, but I’d like to have a source for my own works), but the indenture of the Fed has the explicit control over the US government’s permission to print cash – because it’s supposed to be backed by the collateral of the Fed’s Reserves.

    That, I believe is why they borrow the money instead. Short of getting the Fed to ‘monetize’ the debt, they can’t just print money. And though the federal government can borrow past the point of what would be total insolvency in the private sector, as the amount they borrow increases the more interest payments erode their general revenues.

    At a certain point, there is a real risk that the federal government can’t make payments, and as we continue deficit spending that threat grows. Of course I agree that even though the national debt is right around our total GDP we can still take on a much greater debt load and come out the other side ok. But as deficit spending grows, it shows the economy is out of balance and inefficient. At some point, the government will have to pay more for its debts unless by the fed decided to buy them all and forgive the interest payments.

    I think before that would occur though the US would remove the FED. It’s the only way to enable themselves the right to print money and inflate their way out.

    But here’s a very unorthodox solution – and I think it could be done without spurring excessive inflation. Allow the Federal Government to pay all of it’s deficit spending, and potentially that of the budget shortfalls of the heavily indebted states, with freshly printed money to the extent that new money equals the lost value of the housing market from a 2004-2005 level (there’s a few trillion dollars there). Overlooking the fact the FED wouldn’t allow it here’s what I think would happen.

    First, I need to backtrack. QE is only an increase in the monetization of assets, increasing the monetary base. Unlike yourself, I do believe that ‘new money’ has been introduced to the system. But I think it’s negligible when, without a reserve requirement, banks themselves can actually create the money themselves if there were worthy investments to put it in. But here’s what makes it really ineffective. Because QE is, in its most basic form, the exchange of equivalent promissory iou’s from the Fed to the Government, all money introduced in this way is actually credit.

    This is the problem with how banks, including the fed, make ‘money’. If all money is credit, the money supply can only grow with a proportional increase in debt. When excessive leverage is the issue there’s no way out but default or the introduction of real money to be used towards deleveraging.

    Ideally, it would inject cash into the areas hurting the most – Main Street. The cash wouldn’t be caught up fueling commodity and junk bond bubbles betting on inflation for some time – it would take a while for Wall Street to get it’s hands on it. Further, it would stop your everyday employee’s like teachers and labor union members from taking a hair cut that’s killed spending. All the while, it would subsequently allow the federal government and states to use general revenues to deleverage themselves for a short time.

    Of course, it would shock the markets and by fear alone, ‘devalue the dollar’. But with a negative savings rate and spending declines, that money would be absorbed pretty quickly and it would probably only be enough to counter the growing deflationary pressures. If it did devalue the dollar it would boost exports and production, lower the real interest rates, save jobs and wages before they’re gone, and potentially put people back to work.

    In a very odd way, it may even out the disproportional growth Wall Street is enjoying during a trying time for the American people because of it’s disproportional influence and safety net derived from the Federal Reserve. Instead of stimulus being injected into the financiers (yes, I can sip my wall street hatorade… I’ve accepted a job at an ibank on wall street. And really I don’t blame the street, but I don’t like our current solutions either) it would go to the average joe’s and states who need it the most.

    In theory, it would be a stimulus to rival Greenspan’s removal of the Fractional Reserve Requirement in 94, freeing up 10% of banks deposits, switching money creation from endogenous limitations to exogenous growth determined by the market. It ushered in the greatest boom of all time.

    But then again, delaying the bursting of the largest credit bubble in history that’s developed around the financial deregulation of the last 40 years may only hurt us. I don’t think a world where banks are leveraged up on average 30:1, they record 1.30 or so in assets for every dollar of deposits, and unregulated derivatives carry a notional value around 25x the world’s GDP (and climbing by the day) is sustainable. The system may simply need to reset. I just hope we can do it quick, smart, and with a calm head on our shoulders.

    Hope I’m entertaining ya.

    Best,
    E.B. Mill