This is a particularly clear and succinct explanation of the role of Treasury auctions in monetary operations at Pragmatic Capitalism (hat tip BondSquawk), in a post I urge you to read in its entirety, “The Myth of the Great Bond “Bubble.”
The government bond market is merely a monetary tool that the central bank utilizes to control the cost (or supply) of money by controlling the level of reserves in the system. So, when the government auctions bonds they are merely targeting reserves in the system. This action is mandated by Congress as an accounting tool and so is seen as a source of funding, however, in reality the Central Bank is merely draining reserves that the Treasury already spent into existence – reserves that were deposited at various banks (read this process in greater detail here). Therefore, it’s incorrect to argue that there won’t be buyers of U.S. bonds – with the banks earning 0.25% on their reserves and the government offering anything above that (depending on duration) the trade is a no-brainer for the banks who hold these reserves. The government is basically offering them free money and the Central Bank keeps control of the money supply in exchange (at least in theory). What is not occurring is some sort of funding mechanism. The Fed could care less if the auctions are 2X, 3X or 4X oversubscribed. They don’t get extra money when this occurs. They don’t get a gold coin that can then be spent. So long as they meet the 1:1 bid to cover the auction is a huge success because they drained their targeted reserves and convinced Congress that we aren’t going bankrupt.
Yves here. This is the part most people don’t appreciate: the Federal government spent PRIOR to the bond auction by crediting bank accounts. The government does not fund its spending via bond auctions.
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Bravo!
Brava!
So why not pass a law giving up the fiction of selling treasury bonds and allowing the Treasury to simply spend the money into existence when appropriate? This accounting “tool” is what makes the government beholden to Wall Street and Clinton’s “f***in bond traders.”
FYI–Jamie Galbraith seems to think the Treasury can do this without any change in the laws.
“The government bond market is merely a monetary tool that the central bank utilizes to control the cost (or supply) of money by controlling the level of reserves in the system.”
Not sure if that is the only thing going on. However, I believe that should be more specific. Is one reason gov’t bonds exist to allow the central bank to control the risk free, overnight lending rate (the fed funds rate) by controlling the level of reserves in the system?
We knew the reserve currency could be created at will. Here’s the problem – it’s a confidence game that works until it doesn’t.
After a while of growing federal debt that mirrors Japan’s lost decades, the dollar and treasury bonds will be toast. No one will trust them. Hard to say when though, as tipping points are hard to call for confidence games.
So yes, there is a bond bubble, and at some point, everyone will be trying to get out at once.
“We knew the reserve currency could be created at will. Here’s the problem – it’s a confidence game that works until it doesn’t.”
Uhhhh yeah, but give me an example of a currency system that isnt a “confidence game”. You cant. Gold bugs will say that gold establishes inherent limits but limits that are too restrictive are equally bad to limits that dont exist (MMTers never say limits dont exist BTW only that limits are REAL and not MONETARY). No one can tell you the right amount and price of gold which is right for an entrepeneurial society.
“After a while of growing federal debt that mirrors Japan’s lost decades, the dollar and treasury bonds will be toast. No one will trust them. Hard to say when though, as tipping points are hard to call for confidence games”
It hasnt happened in Japan for over 20 years, they are complaining now about too strong a currency. Explain that using YOUR flawed model!
Mostly your statement is a testimony that nothing lasts forever…….duhhhhh.
“So yes, there is a bond bubble, and at some point, everyone will be trying to get out at once”
Which will make it impossible for ANYONE to get out. I dont agree with your analysis that it is a bubble just that if you are right and you fear a mass exodus…… it wont happen. In order to “get rid” of something you have to find an “acquirer”. That my friend describes a market.
What many dont seem to get is that central banks and their proper function, prevent the type of runs you fear. There cant be runs on banks because they will be lenders and insurers of last resort, there cant be runs on bonds because they will be buyer of last resort.
Lets examine your nightmare scenario closer. You suggest there might be a tipping point where all US bondholders want to liquidate at once. Liquidating in your scenario doesnt just mean converting to US$ (non interest earning cash) but leaving US$…. right? So where do they leave to? How do they acquire what they want? No one else will want the worthless bond either right so they will be stuck. So the CB comes along and says “Ill give you something for that” Are you going to take it? You see the pickle your in? As long as there is a functioning US govt that can demand tax payments for US$ there will ALWAYS be a demand for $US and thus a market for $US treasuries. If our govt collapses we have bigger troubles than just currency troubles……….AND we actually have control (collectively) over whether our govt collapses.
Greenspan said it best in one of his magazine interviews ” I can always guarantee a payment in US$, I cant guarantee what you can GET for it”
I’ll finish for him…… It is up to US to guarantee what we can get for it with our productivity.
“What many dont seem to get is that central banks and their proper function, prevent the type of runs you fear. There cant be runs on banks because they will be lenders and insurers of last resort, there cant be runs on bonds because they will be buyer of last resort.”
Haha. Worked great for Zimbabwe, now didn’t it. Argentina, too, for that matter. Central banking is a scam.
Yeah just throw out the names Zimbabwe, Argentina ……. hey you forgot WEIMAR GERMANY!!! Whats wrong with you Gadoing are you a nazi sympathiser or something???
Why dont you actualy tell me how the US and Zimbabwe are really alike other than the fact YOU think they are spending too much money! Try to actually create a case not just say BOOOOOOO!!!
How many times has Zimbabwe been debunked as an example? But no, you’ll try running that line regardless.
And Argentina was dollarized, it was in the same boat as Greece with the euro, or California. Not germane.
So you’ve just demonstrated you don’t know what you are talking about. Next?
Japan carries on, and it could be a long time before their folly is revealed to everyone. Same with the US – we can look forward to a long slow decline sustained by debt. This is what makes MMT so dangerous. Like Marxism, it could take more than 50 years to expose the bankruptcy of their ideas.
I don’t have a model for this, and believe there is no model to capture when trust is lost in a confidence game. All I know is you can’t fool all of the people all of the time.
No ones FOOLING anyone, Its a matter of people refusing to understand reality.
ALL MONEY IS FIAT! It was BY FIAT that someone determined a value of gold relative to some currency, everything became “priced” relative to that system and eventually things changed and a revaluation was necessary. Those that liked the old values complained, those that didnt supported it.
Every monetary system will have periods of revaluation its a testament to the changing nature of the universe. We will never figure out the price of anything for eternity. Because of human nature there are always a few who rise to the monetary pinnacle and they resist any revaluing, or they simply overtake it and revalue to their benefit. No mystery here.
Naturally the “users” of the currency will become entrenched over time to some “value” or “exchange rate” and will resist change, we are dubious of change as a species, but for anyone to think that money values wont change they are just being pigheaded. That would assume we’ve “properly valued” everything in our economy (No money isnt value but it reflects our perceptions of value). Is oil the “right” price?? Is water the right price? Is gold the right price? Is anyhting the right price?
We are not being fooled by outside forces as much as we are engaging in mass self delusion.
“Yves here. This is the part most people don’t appreciate: the Federal government spent PRIOR to the bond auction by crediting bank accounts. The government does not fund its spending via bond auctions.”
When the federal gov’t credits bank accounts, what is the reserve requirement on them?
Is there a guarantee of 1 to 1 convertibility to currency?
What about rollover risk?
It seems to me that the federal budget is not like other budgets. If I take out a loan, I have to repay both interest and principal so the loan is paid off at the end of the term. I don’t think the federal budget is this way. If so, why?
“Yves here. This is the part most people don’t appreciate: the Federal government spent PRIOR to the bond auction by crediting bank accounts. The government does not fund its spending via bond auctions.”
If there is a bond auction, it seems to me that this is still debt. It brings future demand to the present; it has an interest rate attached; and repayment terms attached (in this case, rollover risk).
If I get a loan, the demand deposit and loan part are created at the same time. With gov’t debt, the gov’t is allowed to create the demand deposit first and then later on attach the loan part. Is that correct?
The unspoken structural underpinnings of MMT (which this article nibbles at), is that the GOVT has the firepower and ability to intervene and purchase demand in the economy in times of reduced economic activity. Its Keynesian in its DNA.
They are proving with science that the destructive periods of a relatively fixed currency serve no purpose, and thus the volatility and pain of recessions and even depressions must, and should be purchased away by the Gov.
In a nutshell, they say – We can, ergo, We should.
They are right, but oh so wrong.
Does one believe this role of Gov to be a better way? Is the public served by this? Would not the greater good be served by allowing excess and misallocations of capital (yes capitalism has this) to go by the wayside? To let the losers lose?
Think and ultimately witness the long term effects of MMT that you have seen unleashed in our banking sector. Yes, we had a Trillion to print. No problem. Was it a smart allocation of capital? I’ll leave that to you.
No,No,No they will tell you. MMT only allows for smart Government. For the people, man. Putting people to work! Populism. Working man!! Shovel ready. Chicken in every pot!
The last ten years of MMT type behavior has been an orgy of wasteful spending. Offensive!!!!!
In debunking the “need” for the GOV to fund itself, have you all convinced yourself more of this is a good thing?
Think of the long term ramifications of MMT, and you will arrive at the old question – how big should GOV be?
Just because the GOV can fund itself AT no cost, doesn’t mean it can fund itself WITH no cost.
Well said scharfy.
It seems to me the MMT’ers believe that they have discovered the ultimate alchemy and that it is possible to use this new “technology” for and by the good, not evil.
What they don’t understand is that this “technology” is the EASIEST of monetary technologies for abuse by financial oligarchs.
And as I posted in the comments section of Pragmatic Capitalism’s website – a fiat monetary system needs to “look” sustainable – i.e. the debt levels to gdp, interest costs as a share of the budget, etc… that’s a large part of the faith in that currency. If the currency is debt-based, then the Ponzi characteristics magnify over time and faith will ultimately be lost along with the currency.
Get rid of the Treasury/Fed Bond market then – do away with sovereign usury – some would say. To which I would reply: How long will resource/goods exporting (surplus) nations comply with the “free lunch” monetary system of their trading partners? Global fairness too, is a requirement for a sound global monetary system.
Sorry, but this “bonds don’t fund the gov’t” argument, albeit technically true, only goes so far. It ignores the most basic prerequisite that makes a fiat currency acceptable in the first place:
It’s supposed to mathematically make sense. It’s supposed to at least look sustainable and rational. Therein lies the faith required in a fiat system.
Must look sustainable? You don’t understand how the monetary system works. Taxpayers do not fund anything – that’s why a treasury auction is not needed.
In reality there is only government spending. Taxes are (or should be) collected to prevent a conflict between the private sector and government over available resources (aggregate supply). Bond sales (or purchases) allow the FED to regulate interest rates.
Government spending is a cash injection into the economy. If the government is in (so called) deficit the government is net injecting demand into the economy. If the government is in surplus then the government is net constraining the economy – and by identity reducing everyone elses ability to save.
According to an accounting identity (this is NOT theory), Net Government Spending/Savings + Net Private Savings – Net Exports = 0. This identity MUST always be zero. Which means that Joe Taxpayer and Uncle Sam can not both be saving (in surplus) when we also have a trade deficit. All the yahoos out there calling for lower government spending and or a balanced budget are actually also (by identity) calling for Joe Taxpayer to take on more debt to keep the economy afloat. Assuming Joe Taxpayer does not want anymore debt after decades of overspending and would like to save, the only way possible is for Net Government Spending to exceed taxes. If you try and force a balanced budget when we have a trade deficit AND Joe Taxpayer wishing to save, automatic mechanism in the economy will force the government back into deficit. How? Falling GDP, rising unemployment, rising unemployment insurance costs and falling government revenues.
So unless you can fix the trade deficit right now, the choices are between bigger deficits (which don’t require bond sales other than by a law which could be repealed); rising private debt burdens and lower savings; or falling GDP and rising unemployment. Take your pick.
It doesn’t seem to look sustainable to you. So, what currency are you using to buy and sell? And what country are you going to move to that doesn’t have a sovereign currency? You could try Greece.
Yes, it must “look” sustainable, and I am perfectly aware that the US is not operationally constrained and can never technically default. Please re-read my post, as you have not directly addressed the issues I raised.
Under the current debt based system, usury has a way of growing faster than the productive economy. Just look at a current debt to gdp chart. Look at the growing interest on the national debt as a growing percentage of the national budget.
As those numbers exceed realistic expectations, there will be currency implications in the FOREX market. Foreign investors may not be willing to finance our debt, and our ability to export inflation can be severely compromised.
Perception is just as important to reality, as a non-operationally constrained system is. Quite the paradox no?
That’s the current system we live under. I understand it perfectly well.
You want to scrap the debt based system and just print away? Imagine you are an Emir sitting on millions if not billions of oil reserves – and I tell you that I am not operationally constrained and don’t need to participate in the sovereign bond market. I can print away and deficits be damned.
You want to sell me that precious non-renewable commodity? I can give you as many electronic digits as you want! I’m not “operationally constrained!” Sure, I will tell you I will be a responsible steward and maintain taxes so that the currency maintains value. But if I’m a politician – is that something you want to rely on? I need to get re-elected, you know?
But heck… should you find issue with my system, I’ll just replace you or drop a few bombs on your country. Problem is, the world is evolving again into multi-polarity. Dropping bombs at will may become just as difficult as printing away at will.
Interesting times. The global imbalances that have grown under Friedman’s free floating currency exchange paradigm are about to topple the system. There will be a new global monetary system well within 5 years. And we in the US will understand what inflation is.
I like that comment about a fiat monetary system needed to “look” like it’s sustainable–that gets pretty near to the heart of the matter. Intellectually, I find myself largely in agreement with the MMT’ers–I can accept that the government can just spend money without having to get it first if it has an accommodative central bank. But the trick is that if most people (or a reasonably large minority) know this, then the currency will become devalued. The fiat currency system really is a mirage (but it’s a wonderful mirage–I mean that seriously) and if too many people realize that we are in trouble.
As a English duchess is reported to have said when being told of Darwin’s theories of human descent: “Let us hope it is not true, but if it is true, let us hope it does not become widely known.”
Fortunately, no one influential reads this blog or comments, right? Right?
“But What Do I Know?” You misunderstand (as do most people) what money is. Money is just a mechanism to allow us to spend the wealth we create. In the very old days we created things and barter traded them for other things. But a barter economy is inefficient at extracting wealth because while the farmer may need a haircut the barber may not need anymore eggs. To improve the efficiency of extraction people moved on to trading commodities that most everyone saw as universally valuable like gold and silver. The farmer now sells his eggs to someone who needs them for gold and then trades his gold for the haircut from the barber. When the world ran short on gold and silver we printed paper and backed it by gold and silver. Backing it by gold and silver was more of a social construct than a necessity.
In the end all we want to do is extract the wealth the economy is capable of generating. A pure fiat currency allows that without binding the system up with commodity supply constraints. Why limit the economy’s ability to produce because you don’t have enough gold and silver to expand societies ability to extract the potential wealth?
The fiat currency is not a mirage. The belief that you have to constrain the economy with a commodity money is the mirage. Granted a fiat currency can be abused and blow up on you, but no currency system is perfect. If you really look at all currency systems, the fiat currency has the most advantages. Commodity currencies tend to be procyclical. There is a reason everyone abandonded them during the great depression – they were destroying their economies.
“If you really look at all currency systems, the fiat currency has the most advantages. Commodity currencies tend to be procyclical. There is a reason everyone abandonded them during the great depression – they were destroying their economies.”
You obviously have ZERO clue how many fiat currencies have completely failed over time.
I’m not disagreeing with you–I love the fiat system! I love it so much, in fact, that I hope it continues. My point is that it can and will continue until enough people stop believing in it. What will make them stop believing in it? When they perceive that it is fundamentally unjust (to them).
To Gadoing:
You’re an idiot. We have centuries of evidence of the cyclical nature of restrictive currency systems. You act as if the relatively newer invention of fiat currency has more. Please, would you be so kind as to clue the rest of us in on where you’re getting you’re information?
Currency is not built on “faith”. It is built on the assurance that everyone who earns income must pay taxes. Currency regimes do not collapse because they abandon some specie standard, nor do they fail because of out of control spending. These are merely proximate causes. What causes currencies to collapse is when government or society itself collapses. In our case, a government empowered with the mandate to promote the public purpose of full employment and output has the best chance of insuring itself against such a collapse.
Excellent comment.
I also can’t help but feel that all abstract discussions of the financial mechanics of an economy divorced from the “political” are merely manipulations of simple algebraic equations. Not that these can’t be illuminating, but they are woefully incomplete as economic theories and obscure more than they illuminate.
It seems that all societal collapses share a few key elements — the breakdown of public trust in institutions and the breakdown of the implicit trust between individuals, a trust that is so unremarkable in a peaceful society that it’s taken for granted at an unconscious level. These breakdowns effectively raise the cost of personal physical and financial security to such a high extent that normal business transactions become impossible, burdened as they are by an effective and implied “survival tax.”
No government regulation or law can reach that level of cost, and so it’s darkly amusing to see the complaints about “burdensome government regulations” as a tax on commmerce. Oh, just wait to see how much more expensive it can get. And of course, one man’s cost is another man’s revenue, so not only is wealth destroyed, but what is left is transferred during such a breakdown from good actors to those who represent the basest elements of human nature.
Moreover, the notion of stimulating an economy can’t be divorced from the institutional structures that compose it. Consider an economy based primarily on gambling, child and adult prostitution, private prisons, private security forces, and manufacture of weaponry for warfare. It sounds like a good joke. But stimulating that sort of an economy would be a surefire route to social collapse, because it would erode the healthy social formations that seem intrinsic to sustainable human relationships.
The price of its goods and services would not include any of the cost of the externalities it produces on a daily basis. And even the very notion of externalities has an inherently subjective element. No doubt, there are those who would enjoy living in such an economy, and who would view their life as a joy ride sure to end in violent death, and they’d be utterly unconcerned about that. We see these personalities in our midst. And some even become celebrities. LOL.
That’s not to say they don’t have an existential point, which is hard to argue. In fact, it’s impossible to argue, based as it is on a fundamentally subjective evaluation of existence that defies all logic.
So one person’s externality and cost is another’s revenue and pleasure. This dichotomy cannot be bridged, with anything. And so social institutions are inevitably subject to tensions that threaten to break them down and, based on history, often succeed in doing so.
I would almost go so far as to say that monetary policy doesn’t matter, only social institutions and social cooperation do, and then money follows as a manifestation of those. This is too severe an abstraction, in reality, becase money itself is a social institution subject to the same laws as all other institutions and the same conflicts and the same threats. So no wonder it’s so controversial and political.
But it seems to be a byproduct of deeper fissures and deeper conflicts that are very hard to quantify and seem analyzable only through forms of thinking that acknowledge and at least try to articulate the instinctive drives in individual and group psychology and how these manifest in social organizations and institutions.
Didn’t the USSR have a policy of full employment?
Government interference in the free market is what got us into this mess. (btw, I believe in regulations, but not bailouts) Government, lacking risk and failure, is more prone to engage in malinvestment than the private sector. The private sector is faced with risk and failure, unlike government.
Such government malinvestment grows over time, one bubble to the next, and makes an economy less robust and more fragile. The economy does not grow naturally thru the failure and success of millions of enterprises, rather, it grows by government “planning.”
Has the government succeeded in some projects in the past? Sure, the TVA is one of them. But the view that government can create “full employment” too me, is laughable. It’s central planning on a level that makes the Federal Reserve look amateurish.
To me, MMTers are economic neocons. They use words like “full employment” the way neocons say “spread democracy” but the end result is economic fascism. A government cannot assume a greater role in the economy without taking economic freedom away elsewhere in the system. No matter how good its intentions.
Government interference in the free market is what got us into this mess
I disagree. The “private” markets did more than their fare share through the unregulated shadow banking system and the various toxic and “innovative” derivatives.
the unholy alliance between our govts and our private financial players got us into this mess.
I agree with your point. Let me be a little more clear, my comment about Gov’t interference may seem too knee-jerk tea party conservative to some. I’ll elaborate:
Could all of this have happened without Fannie and Freddie? Or the Federal Reserve? We have blurred the distinction between private and public sector entities. We have entered the era of privatized profits and socialized losses.
That does not happen without government interference and regulatory capture. So we must be honest with ourselves – what can we influence first, or control the most, the Board of Directors of CitiBank or Goldman Sachs, or the US Congress?
Shame on us. As Ben Franklin responded to a question 200 some years ago at what the colonial representatives came up with:
“A Republic, if you can keep it.”
“The unspoken structural underpinnings of MMT (which this article nibbles at), is that the GOVT has the firepower and ability to intervene and purchase demand in the economy in times of reduced economic activity. Its Keynesian in its DNA.
They are proving with science that the destructive periods of a relatively fixed currency serve no purpose, and thus the volatility and pain of recessions and even depressions must, and should be purchased away by the Gov.
In a nutshell, they say – We can, ergo, We should.”
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You have obviously never really read any MMT thinkers, other than the few spot posts Yves gives them here (Thanks Yves, BTW) or you would never say “We can therefore we should”. NONE have ever advocated such irresponsible behavior.
However in modern USA, aka “the real world”, we DO have economists and politicians and citizens who DO say about unemployed people today “Oh its THEIR fault” or “They just arent looking hard enough” or ” We cant pay UI benefits unless we CUT some teachers or policemans because we dont HAVE any money….. we’re running out of it”. This would be a version of ” We can, but since we dont like you or think you work hard enough or wish to ask someone more well off to give up something………. WE WONT!
So while you freak out about some hypothetical CBer or politician who will just give away everything to everyone because he now realizes that “money” it self is limitless, ponder on the modern reality that there are those ( like bond traders)who truly believe their position gives them the authority to tell Greece (and Ireland and Spain and……) to put more people out of work( destroying their acquired wealth in the process), gives them the authority to proclaim teachers overpaid, gives them the authority to insist that municipalities must downsize and none of these people (bond traders) are ELECTED by nor answerable to the people whos financial well being they affect. Thes guys, some of them, make more interest in a year (off GOVT BONDS!!) than teachers make in 10 or 15 years and they are bitching about govts spending too much. They only want interest rates to rise so they will grow their portfolios not so our govts will be “more responsible”.
“Does one believe this role of Gov to be a better way? Is the public served by this? Would not the greater good be served by allowing excess and misallocations of capital (yes capitalism has this) to go by the wayside? To let the losers lose?”
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Again, read Bill Mitchell and Warren Mosler and Randall Wray and see what they say about winners and losers, capital misallocation and the such. You are widly inflating their irresponsibility for show.
“Think and ultimately witness the long term effects of MMT that you have seen unleashed in our banking sector. Yes, we had a Trillion to print. No problem. Was it a smart allocation of capital? I’ll leave that to you.”
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Again, the allocation of bailout funds to the banking sector was NOT consistent with what MMT academics promote. They would say these rises in “reserves” and increasing the feds balance sheet while certainly not the best way to handle our crisis, are not the seeds of hyperinflation that way too many fear, they are an example of rewarding bad behavior in many instances and better ways to address the crisis are put forth.
“No,No,No they will tell you. MMT only allows for smart Government. For the people, man. Putting people to work! Populism. Working man!! Shovel ready. Chicken in every pot!”
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No MMT encourages smart govt. One which knows the limits and usefulness of monetary policy (actually it does away with monetary policy) and uses fiscal polcy wisely.
“The last ten years of MMT type behavior has been an orgy of wasteful spending. Offensive!!!!!”
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What is “ten years of MMT type behavior”? It has been behavior which still acts like we are on a fixed exchange rate monetary regime. This is an ABSURD claim.
“Think of the long term ramifications of MMT, and you will arrive at the old question – how big should GOV be?”
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The only real valid point you’ve made in the whole post.
“Just because the GOV can fund itself AT no cost, doesn’t mean it can fund itself WITH no cost.”
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Not sure of the word games your playing here, but MMT advocates CLEARLY differentiate about REAL costs. Not these imaginary “funding” problems we get so caught up in.
This argument is so pointless that the only reason that the MMTers keep raising it can be that they enjoy being contrary.
Government borrowing may occur before or after government spending, depending on how bond auctions are arranged – eg on a regular schedule or opportunistically – relative to government net spending. The debt manager may liaise with the central bank about their market impact, but that is likely to affect only very short term issuance. In principle, the government need not even bank with the central bank, in which case borrowing and spending will have no effect on the stock of reserves – although reserves will be redistibuted between banks if not all bond buyers bank at the same bank as the government. While it is true that no currency-issuing country need formally default if the government can instruct its central bank to lend to it, unless that country has or can engineer a very high demand to hold reserves (eg because reserves bear interest), any economically significant amount of monetary financing will generate inflation, after which markets will demand a risk premium just as they would after a default, so the freedom to print money is not worth much, except to can-kickers that is.
Monetary abuse may have contributed to US economic problems, but it will not provide a lasting solution.
Exactly. The US can spend unlimited amounts and print unlimited amounts now because it is the reserve currency and people will hold it, not because it can pay US taxes, but because oil is priced in FRNs. If that relationship ever changes, it’s game over for the US currency in terms of purchasing power – even if there is no technical default. If you don’t believe this, try a thought experiment in which oil states only accept euros for oil. Or god forbid, gold. And please, really think about it.
You have to take logical steps forward. What exactly is the point of the spending? To promote full employment. You are simply assuming it is all spending without any benefit whatsoever, and that is a huge step you seem to completely leave out. The point is, you have to have a strong economy and a strong middle class for one’s country to maintain their status. In other words, you have to grow your way out of a problem, not choke yourself slowly and painfully and get nowhere.
-P
You think the point of government spending is to promote employment, otherwise it produces no benefit whatsoever? Try going around at night with no streetlights!
He didnt say GOVT spending he said spending.
While I might not word it that way I agree with what he’s saying. We all spend to “buy” something that we cant produce ourselves. SO we are contributing to employment, we need it and hope that it continues for others. How many of you wish the closest gas station/convenience store would just close down so you wouldnt “have to” waste your money there and you could drive 5 more miles to get the same gas and same overpriced food? So while employment is not the reason for our spending in our minds it is the result of our spending (or govt spending) and will only continue because of our spending.
Whatever your job is, do this thought experiment. If tomorrow the whole country decided to stop spending on whatever it is you do, how long would your boss continue to pay you?
Sorry Greg, I WAS talking about government spending, and more specifically, deficit spending.
As for you, RebelEconomist…i know that dude, duh.
“Sorry Greg, I WAS talking about government spending, and more specifically, deficit spending.”
Okay.
But my real point is that spending is spending. No matter the source of it it is spending that generates employment. One may not be thinking “I need to go keep someone employed today’ (although that woudnt be a bad way to think of our spending) but the fact remains in a monetary economy there is no employment without spending. Just like one doesnt think “I need to go get some currency to pay my taxes” It is taxation which gives a lot of the value to our currency.
Yes Bruce, please really think about this. Other than for some crazy political reason, there is zero rational reason why the oil producing nations would do this. I mean, your right the dollar would probably fall a lot, but that also means all those dollars the oil nation already holds would become worth a lot less too. Why would they cut their noses off despite their face?
But adam, it goes beyond that. Bruce’s point is that as we continue spending(deficit spending) it will eventually get to a point whereby the oil countries would dump the dollar. My point was that if that deficit spending in general helped the country and developed a functioning class system like what we used to have back in the 50s/60s(ie a larger proportion of a country’s wealth entering the average consumer’s hands) then it would be ridiculous to assume that the dollar would collapse(we’re talking after the immediate short run) as our country would be on strong footing.
Regardless, such a doomsday scenario could not possibly play out anyhow as there is no alternative currency available to the dollar.
the u s govt does NOT print $ the fake central bank does ; as a mortgage on us tax paying cits
A fiat money system ‘works’ because the vast majority has no access to ‘money’ except in exchange for labor. For those who can tap into the banking system, chicane is a viable high octane substitute for labor. For those whose working days are over who hope to live on savings, MMT is the last nail in the coffin.
Incidentally, MMT looks good these days because those surplus countries accumulating dollars are forbidden to spend them in America by accumulating assets. It is because the Chinese have no option but Treasury debt that the Fed balance sheet has not absorbed all those Bonds that were vacuumed up by the Selected Dealers operating on free money from the Fed.
MMT has brought us utterly irresponsible government and predatory monopoly business and toxic finance. Good job guys!
Of course, the ultimate problem is the existence of the Fed. Murray Rothbard was right.
So now MMT is responsible for the deregulation of the financial sector, the great moderation and stupid monetarist policy? Are you nuts?
The article is incorrect in many ways. MMT has a lot of useful things to say, but it misrepresents the dynamics of treasury borrowing at the operational level.
In fact, the government is constrained (i.e. constrains itself) to a banking arrangement with the central bank whereby overdrafts are prohibited. This means that it is impossible for the government to spend beyond the level of current cash in its operating account, since to do so would mean incurring an overdraft position.
The only thing that MMT can reasonably say is that an alternative operational arrangement would be quite possible, whereby the government would in fact spend before borrowing, if such an overdraft limitation were lifted.
The government rules out such an alternative arrangement (i.e. constrains itself) due to the perceived risk that limitless overdrafts would invite continuous monetization of government expenditures without any borrowing at all. The substance of that risk is very debatable, and should be debated, and has been debated in the MMT context. But at the same time, MMT misrepresents this operational alternative as if it were the substance of existing operational arrangements, which it is not.
Something that MMT might also say is that from that starting point of a counterfactual system in which the government spends without borrowing at all, the government could then implement a conversion of that system to the (existing) bond based system. The introduction of bonds would then drain broad money and reserves from the bondless system.
In other words, the usual MMT analysis of the bond reserve drain would actually work in the construct of an architectural regime change, whereby a bond system is introduced to drain reserves from a “no bond” system.
But it isn’t accurate as a description of the borrowing dynamics within the system as it exists now.
I think they’re already well aware of overdrafting with the Fed:
“So what happens when we auction bonds? Well, the NY Fed has accounts all over the country. The Treasury keeps very close tabs on excess reserves so as to avoid overdraft at the Fed. So the Treasury hops on the phone with the Fed and they target some level of bond issuance necessary to soak up these reserves. Why do they do this? Because excess reserves drive down the overnight lending rate so if the Fed is going to maintain the Fed Funds target rate they drain the excess reserves. Some people view this as auctioning off bonds that “fund” our spending, but in reality (because private sector net savings is public sector deficit – TO THE PENNY) it is just a monetary tool that helps the Fed hit their almighty and supposedly omnipotent target rate.”
We’re talking about actual Treasury borrowing here.
Treasury doesn’t issue bonds daily in response to the reserve effect of what they’ve spent that day.
Treasury issues bonds in periodic batch mode. That’s integral to the true dynamic whereby bonds are issued before the money is spent.
Moreover, even though the central bank can offset the reserve effect of Treasury spending as it happens by selling bonds from its own portfolio, or with other adjustments, that offset only pertains to the immediate reserve effect.
The central bank still can’t affect Treasury’s operating account at the Fed with the Fed’s own bond operations. That means the constraint on Treasury’s borrowing is real. If it expects a deficit, it must pre-borrow to prevent that account from going into overdraft.
No impact of a bond auction that has a bid to cover of 1:1??
Surely you jest. When that happens (it will at some point over the next three years) it will be a black swan. It will be the end game of everything that is now going on.
Our capital markets would collapse, as would the dollar. We would look like Greece. Keep in mind the IMF does not have the resources to fund a months worth of US deficits, so a failed auction will just turn the lights out for a decade or so.
sigh, keep up the doomsday talk pal, you’re doing great.
Bruce is a bond trader. He wants to extort more money out of the Treasury for his nest egg of govt bonds. If he gets enough of his cohorts to threaten to stop buying he hopes to get interest rates to rise. He can say the govt just got more “responsible” by paying him 4x as much on his holdings. YAYYYY the country has been saved by Mr Krasting!!!!!
If we dont get Obama, Geitner, bernanke and summers out soon we will be greece. The US is running the largest ponzi scheme in the history of mankind and there too many people depending on a government to deliver them resources that they cant provide
Darn good thing we are clear on this now.
http://www.businessinsider.com/treasuries-arent-supported-china-anymore-20-august-2010
The Pragmatic Capitalist is wrong on so many fronts that hours would be required to correct his errors point by point. He conflates the Fed with the U.S. government, Federal Reserve bank notes with U.S.-government-issued currency, and liabilities with expenses, just to name a few of the more glaring and consistent errors. His notion of the meaning of the bid-to-cover ratio (“the dollar volume auctioned off versus the actual receipts”) is not just ridiculously wrong but internally contradictory. He argues arrogantly – I’ll give him that.
I doubt it would take hours. I understand that he has indeed made a few mistakes, but if you would be so kind as to indulge us on all of them we would appreciate it.
Let’s take just one whopper error. Pragmo writes, ‘The government bond market is merely a monetary tool that the central bank utilizes to control the cost (or supply) of money by controlling the level of reserves in the system. So, when the government [Treasury] auctions bonds they are merely targeting reserves in the system.’
Pragmo asserts that both the Fed and Treasury target reserves, apparently under the delusion that both are ‘the government.’
In fact, only the Fed targets reserves. Since most Treasury debt is non-callable, the Treasury cannot engage in open market operations to manipulate reserves, as the Fed can.
Pragmo goes on to claim that the Treasury ‘spends reserves into existence,’ when in fact only the Fed does so via open market operations — again confusing the two institutions, or erroneously viewing both as interchangeable entities of ‘the government.’
These errors are so egregious, so elementary, so fundamental, that it would be a waste of time to engage in refuting the rest of his misguided thesis.
Pragmo should style hisself as the ‘Magic Carpetist.’ ‘Assume a magic carpet,’ Pragmo grandly declares, as economists are wont to do. Then he hops aboard his ‘oriental’ and sails off gaseously to his goo-goo utopia, his perpetual-payment paradise in the fiat-currency funny farm.
Really, how can anybody take this errant goofball seriously? Please, please, tell me this was an April Fool’s post!
Nope, wasn’t and isn’t. These MMT folks believe this rubbish. Now when interest rates are being set by the Fed based on ZIRP and you get artificially low interest rates. Ergo, we are awash in loanable money, or credit moeny if you prefer.
The created reserves are also air. This is the great benefit and fallacy of a fiat currency. You can inflate the hell out of it until the market begins to recognize that there is no ability to repay the debt that is the credit money.
Now, repay the loan we soon will have to do. It’s coming very much sooner than the MMT folks understand.
Ponzi scheme with people’s savings…the article implies that there’s no limit to how much government leverage can be pushed into the system. How’d that work with bank leverage in 2008? (Took about 10 years to get that wound up so not to worry about the bubble in tsys yet.)
Bubble? not yet but when bond fund subscriptions go parabolic and the 10yr tsy is below 1% then we’ll be close. Also, our debt is 50% in non-US hands so we kinda need those buyers still.
You misunderstand why they buy our debt to begin with. If they were to suddenly stop buying our debt(or reducing their holdings, as is happening now) money would instead enter into the hands of the US’ private sector and out of the public sector, via eventual yuan appreciation and the Chinese economy structuring away from being primarily export-led. What would happen is that we would instead become the exporters and thus wealth would accumulate into the hands of, again, the private sector. This is essentially what MMT is saying when they tell you that every penny that enters the governments hands(ie via taxation for example) is a dollar taken out of the private sector’s hands, and vice-versa. The reason it has not happened to date with China is because they are effectively manipulating their currency, pegging it(a soft peg) to the dollar.
I would appreciate if anyone had any corrections to make to anything I said above or anything to add, as my understanding of this may be a bit confused…but that doesn’t mean you, RichFam, for you obviously know nothing at all.
Actually, buying any asset with dollars would serve China’s purpose – you may recall that the Chinese wanted to buy Unocal in 2005. And when the Chinese buy treasuries, they effectively buy them from the private sector anyway, because the US government does not sell additional debt to compensate for the additional demand from China (hence, arguably, the “conundrum” of low long-term dollar interest rates).
China effectively takes two actions, everyone conflates the two.
It buys dollars to manipulate its FX rate. That could just sit in a currency account. But it moves it into bonds and other assets to improve returns.
So it’s stuck with dollars regardless.
‘The Central Bank is merely draining reserves that the Treasury already spent into existence.’
This is quite wrong. Unlike the Federal Reserve, the Treasury DOES NOT ‘spend money into existence.’ There is no mechanism by which the Treasury can cut checks if its account balance at the Federal Reserve goes to zero. And open market purchases by the Fed won’t suffice either — they only put funds into the hands of Treasury dealers, not the Treasury itself.
The Treasury has no resources to spend except through tax revenues and proceeds from selling debt. It CANNOT issue ‘thin-air checks’ as the Fed can, by engaging in open market operations. And if it did so (illegally), it would be paying securities sellers, not funding its ordinary payments to employees, beneficiaries and contractors.
The ‘Pragmatic Capitalist’ has to be one of the silliest delusionary fairy tales ever posted on the wacky World Wide Web. Oh my god, Yves! — how did you fall for this? I think you can still be saved, but you’ve veered pretty far off into true-believer cargo cult territory, and I am deeply concerned about you. I know it’s summertime, but you must avoid Kool-Aid at all costs!
MMT doesn’t say that the current operational construct is the most efficient or wise.
On the other hand I think its semantics. Even if the Treasury borrows first what happens? The treasury effectively drains reserves. The draining of reserves effectively should push up the Federal Funds Rate and the FED will respond by pushing money into the system. The government then spends those funds.
Obviously it wouuld be more efficient for the Treasry to just spend the money and let the FED manage interest rates.
You just used the key phrase — ‘borrows first.’ And not ‘even if’ — the Treasury always borrows first. It cannot issue NSF (non-sufficient funds) checks. There is no such account, no such mechanism. Show me the overdraft.
Moreover, until recently the Treasury’s general account at the Fed was quite small, averaging around $5 billion up until October 2008.
http://federalreserve.gov/releases/h41/hist/h41hist16.txt
Now the Treasury’s general account is at $30 billion. That’s still tiny in relation to GDP, and small even in the context of reserve management.
Basically, reserves that the Treasury raises via borrowing are quickly recycled into the economy via spending. The Treasury (at least under normal conditions) does not stockpile significant levels of reserves. It’s just a revolving door for reserves.
hay
you have it wrong ; the treasury does acquire money when it issues bonds ; yes the bond dealers get a commission , but not the proceeds of bond sales ; bond [debt] sales are how the treasury and congress get the money they spend;
selling bonds is stupid ; treasury should print money , not bonds
As I usually say when the subject of MMT comes up here, the MMTers are right in principle, but wrong in practice, because they fail to consider the scale of the mechanisms they discuss. Unless the banking system is weak (eg Japan) or interest is paid on reserves (eg the US now), the demand for base money (ie currency plus reserves) is very small in relation to the stock of interest bearing debt. Any attempt to pay out more base money (eg to create extra employment) will weaken the exchange rate between base money and other items (ie the inverse of the price level), unless the base money is made more desirable (eg by increasing the interest rate paid on reserves, in which case you might as well issue more bonds anyway).
You’re obsessed with rejecting MMT to the point of missing the basic message of it entirely.
It’s not about supplying base money. That’s a crippled monetarist perspective.
It’s about filling an aggregate demand gap. Whether that results in bonds or reserves or interest earning reserves is irrelevant to the main point.
“You’re obsessed with rejecting MMT to the point of missing the basic message of it entirely.”
Very common affliction. Its like standing around with your fingers in your ears and saying “why cant I hear anyone talking to me”
Oh, here we go…..”there is none so blind as them who will not see”. What is wrong with the scale argument I made above?
Alright I’l address your scalar issue
“Unless the banking system is weak (eg Japan) or interest is paid on reserves (eg the US now), the demand for base money (ie currency plus reserves) is very small in relation to the stock of interest bearing debt. Any attempt to pay out more base money (eg to create extra employment) will weaken the exchange rate between base money and other items (ie the inverse of the price level), unless the base money is made more desirable (eg by increasing the interest rate paid on reserves, in which case you might as well issue more bonds anyway).”
This is really nonsensical. You are saying any attempt to create more employment by paying out “base money”, will weaken the exchange rate (and I assume you think inflationary)…… unless they pay out MORE money by adding additional interest, to make it more desirable. WTF???????
Yes, that is what I am saying. It is important to realise that paying interest on reserves changes the nature of base money. It makes money less of a “hot potato” as people like Nick Rowe (at WCI blog) put it. You are happier to hold on to base money that pays interest so it has less inflationary effect. This is one reason why the Fed’s massive expansion of base money has not led to the inflation that some naive commentators anticipated. The higher the rate of interest paid on reserves, the more that banks are willing to hold them, so the greater the potential for the government to fund its spending (eg on employment creation) by issuing reserves, but the less the difference from just issuing more treasuries to fund the spending anyway. Reserves that pay no interest at all are such a hot potato that the potential for a government to use them to pay for its operations without causing inflation are very limited indeed – ie way too small to allow employment creation – which is the scale point.
A couple thoughts
“Yes, that is what I am saying. It is important to realise that paying interest on reserves changes the nature of base money. It makes money less of a “hot potato” as people like Nick Rowe (at WCI blog) put it. You are happier to hold on to base money that pays interest so it has less inflationary effect. This is one reason why the Fed’s massive expansion of base money has not led to the inflation that some naive commentators anticipated.”
I think the hot potato analogy is rubbish. The reason people were wrong about “base money” (whatever the hell that means in todays world) is that banks dont “decide” or “not decide” to lend base money. Customers decide to come and ask for it. Its the same bullshit supply side thinking, and gold standard thinking, that is hamstringing our analysis.
“The higher the rate of interest paid on reserves, the more that banks are willing to hold them, so the greater the potential for the government to fund its spending (eg on employment creation) by issuing reserves, but the less the difference from just issuing more treasuries to fund the spending anyway.”
What?? The government ALWAYS ALWAYS ALWAYS “funds” its spending by issuing reserves, theres no other way to do it operationally. They dont make a decision to fund it that way because of decisions by banks to hold them or not. Thats absurd. Banks do not create new money, they create debt. ONLY the currency issuer can create new money………..treasuries NEVER fund the spending
“Reserves that pay no interest at all are such a hot potato that the potential for a government to use them to pay for its operations without causing inflation are very limited indeed – ie way too small to allow employment creation – which is the scale point”
This is a bastardized notion of the quantity theory of money, and the quantity theory of money is just wrong. It fails to explain the macroeconomy in any coherent way. Look where it led you in your original post I responded to:
Somehow just issuing non interest bearing reserves would have a dilutional affect (my term) and cause a weakening of the exchange rate (inflation … no?) but increase the money floating around by adding interest too and things are all better. So in quantity theory adding x is inflationary but adding x AND an amount of interest is not hmmmmm.
See why the neoliberal paradigms EXPLAIN nothing??? They are completely self contradictory. They actually think interest money is not real money I guess AND they think someone who has money to purchase a bond will feel like that bond isnt really money……..HA! Too much feeling involved in this BS paradigm….. “expectations” of inflation, rational “expectations”… blah blah blah.
You don’t think that a bank with reserves received for selling bonds to the Fed might go out and buy other bonds? Remember, loans are only one asset that banks hold. Even if banks do depend on borrowers asking for loans, they are not powerless to influence loan demand, notably by cutting interest rates.
When I write about the government funding itself by issuing reserves, I mean on a net basis. Of course, as long as the government banks at the central bank and government balances do not count as reserves, government spending creates reserves, but borrowing by issuing treasuries destroys reserves first. Note that it is possible for the government not to bank with the central bank, in which case government transactions with the private sector have no impact on the stock of reserves whatsoever.
What makes paying interest on reserves less inflationary is that you only get the interest if you hold the reserves. But you are right that it does accelerate the increase in the stock of base money.
By the way, I am not some kind of economic ideologue. I studied science first, and only came to economics much later out of curiosity. I am interested in what makes sense, regardless of its source; the idea of schools of opinion like neoclassical, Keynesian etc strikes me as unscientific.
“You don’t think that a bank with reserves received for selling bonds to the Fed might go out and buy other bonds? Remember, loans are only one asset that banks hold. Even if banks do depend on borrowers asking for loans, they are not powerless to influence loan demand, notably by cutting interest rates.”
Not sure of your point here, to be honest. What banks do on their balance sheets can NEVER be inflationary. Only when people are spending currency or credit are prices affected. Your initial point was that these reserve transactions if not offset with debt would be inflationary (weakened exchange rate). You’ve failed to show how this might work. People wont demand more loans because a bank owns a particular amount of bonds……. thats a specious claim. People wont withdraw more cash to spend just because a bank has a better bond portfolio. Yes a bank can change interest rates but if they are only getting .25% on their reserves you dont think they would take 5% on a good mortgage customer. I think this is one of the reasons Bill Mitchell and Warren Mosler advocate 0% on reserves always.
“Note that it is possible for the government not to bank with the central bank, in which case government transactions with the private sector have no impact on the stock of reserves whatsoever.”
I THINK this is blatantly false. Govt spending is always and everywhere by a mechanism of increasing reserves. How else could it happen?
“What makes paying interest on reserves less inflationary is that you only get the interest if you hold the reserves. But you are right that it does accelerate the increase in the stock of base money.”
This makes no sense because you only get the interest if you purchase a bond not if you hold reserves. Your original claim was that an increase in a reserve position was inflationary in and of itself by weakening an exchange rate. Draining some reserves and purchasing a bond does not improve the exchange rate in fact it probably worsens it. Imagine paying 10% on those bonds of 1 trillion, thats additional 10 billion in the money markets to affect exchange rate. You dont improve the exchange rate by issung bonds and its the exchange rate mechanism (currency dilution) which seems to be the vector critics are pointing to when they talk about a currency crisis.
“By the way, I am not some kind of economic ideologue.”
Okay, but you seem to be operating (quoting from) mostly out of a paradigm that has very little real world scientific support (thats being charitable in my view it really has NONE). The descriptions this paradigm uses to describe macroeconomic operations (loanable funds theory, quantity theory of money, crowding out to name a few) are so ridiculously wrong they should be laughed out of existence. You have spent some time at billyblog (I remember seeing you comment there before) and you should at least give him credit for scientifically describing the operational realities of our system. You may not agree with all his prescriptions ( he admits that his prescriptions are political his DEscriptions OTOH are scientific) but he does understand that we are no longer under a gold standard, a fixed exchange rate regime nor in a currency area where we dont control the currency, so virtually all the orthodox monetarist descriptions are pathetic. This is NOT a trivial point……………..in fact its the ENTIRE point.
” the idea of schools of opinion like neoclassical, Keynesian etc strikes me as unscientific.”
Yes I agree. It points to the disMALity of the dismal science. But this doesnt mean that there is nothing science can say about economics. Its a scientific fact that banks dont need reserves to make a loan, they seek reserve positions later, they will TELL you that. Its a scientific fact that the govt spends by crediting reserve accounts, thats all they do. I could go on and on but we still have to decide what to do with those facts. The govt can credit a reserve account in the name of Al Qaeda 3 trillion dollars and if they spend it all “over there” it might have little affect on our consumer prices but so what, is it a good policy to undertake?
The problem, I think, is we are asking the wrong questions like can we afford it, or who can we take the money from to get it? We have got to get past these questions because they are diverting us from the right questions, in my view.
I meant that the hot potato effect is not rendered inoperative if banks have to react to loan demand. They can proactively go out and buy a bond (which is of course an existing loan). This can contribute to goods and services inflation, because if the price of financial assets is bid up enough, the incentive is to increase current consumption. That is part of the aim of QE – to stimulate economic activity by lowering long-term interest rates when short-term interest rates are already at practically zero.
You think that a government could not bank with a private sector bank? Why not? The government is just another organisation, like a large firm. If I recall correctly, in the 1980s heyday of privatisation, there were calls for the British government to bank with the private sector.
I shall try to get round to posting my view of MMT in more depth on my blog to which I can refer in debates like this. Although I disagree with MMT’s policy prescriptions I do think that it deserves serious consideration, but does not get it because most of the conventional economists loftily refuse to even discuss it.
“I meant that the hot potato effect is not rendered inoperative if banks have to react to loan demand. They can proactively go out and buy a bond (which is of course an existing loan). This can contribute to goods and services inflation, because if the price of financial assets is bid up enough, the incentive is to increase current consumption. ”
I gotta say I’m having trouble following you here. Earlier when you talked about hot potato effect you were talking about holding onto reserves if they were paying something versus not holding onto them if interest was too low.
This sounds like you think banks make a decision to move reserves around, not hold them. In fact they seek reserves AFTER they make a loan. reserves that are only getting the FF rate and arent needed to settle accounts might be used to purchase a bond, which you then conflate with an EXISTING LOAN. If they buy exisitng loans on the secondary market this is not affecting reserve status at all. They are using reserves to buy something but the seller now has the same amount of reserves, its a wash, is not “dilutional”, and it doesnt affect exchange rates. Its a horizontal transaction within the banking system.
I dont see the link between this and your last two sentences…”This can contribute to goods and services inflation, because if the price of financial assets is bid up enough, the incentive is to increase current consumption. ”
“That is part of the aim of QE – to stimulate economic activity by lowering long-term interest rates when short-term interest rates are already at practically zero.”
Yes and it doesnt work because its the improper vector to stimulate consumption, which IS the goal at this point. Its like having a series of fulcrums and levers. If its only one you apply downward pressure at one end the other end rises, but if that rise is to be transmitted through 47 other levers before your end result, all momentum will likely be lost.
“You think that a government could not bank with a private sector bank? Why not? The government is just another organisation, like a large firm. If I recall correctly, in the 1980s heyday of privatisation, there were calls for the British government to bank with the private sector.”
I suppose they could, Ive never thought about it. My guess is that that private bank would now be acting like a central bank and they could still not tell the govt “Hey you got no money left”
I get the impression that the folks who think QE is affective thinks it works by raosing asset prices and then driving spending. Well you dont need a Phd to realize first.. most assets are owned by a very small group of people who are not consumption restrained, second most asset value increases are looked as simply an opportunity for future consumption…. an increased retirement account value. Not the way to restore demand. Most of the folks out of work are not wishing for higher house or stock prices they want an income.
Then it seems that this is another way of putting the argument for bond-funded stimulus spending to boost employment, a la Krugman. There is nothing modern or monetary about it.
What’s modern is that it uses the correct understanding of monetary operations to reject neo-classical resistance to deficits per se. Krugman is close, except for some lingering confusion about monetary operations.
why don’t you all go over to bill mitchell’s site and read today’s blog. then spend the next several months actually going through the archives and educating yourselves about what he is and is not saying. then if you have questions participate in the forums, or send bill an e-mail. http://bilbo.economicoutlook.net/blog/
I have read some of Bill’s stuff, and I think he would probably accept my scale point, but would argue that the government should effectively boost the demand for base money by coopting private sector banks, which raises a new set of issues. In general though, Bill’s posts are too rambling and too frequent to be worth reading regularly.
Mitchell’s first proposition — that the Treasury and Fed should be consolidated — is straightforward enough. Arguably, from an effective control point of view (President appoints the Fed board, Fed profits turned over to Treasury, etc.), the Federal Reserve should be consolidated with the government sector, as its dot.gov domain implies.
But immediately afterward, the flaky hoodoo nonsense starts: ‘The currency units used for the payment of taxes are consumed (destroyed) in the process of payment.’
HUH? What the hell you smokin’, boy? When the IRS cashes my check, bank reserves move from MonsterBank to a Treasury account. When the Treasury spends the funds (as it does very rapidly), the reserves are tranferred back to the privately-held account of a government employee, beneficiary or contractor. Tax payments merely circulate reserves from private sector to government and back again; they don’t create or destroy them.
Such astounding misapprehension of basic double-entry accounting pretty much obviates anything else he has to say.
Today has been a revelation: I had no idea there was such a teeming contingent of FP (fantasy-prone) space cadets in the field of econ and finance. Like a meat packer attempting brain surgery on the kitchen table, they’ve got the semantic tools, but lack any comprehension of the cranial wiring diagram they’re so cavalierly tampering with. Some even deny it exists.
BEAM ME UP, Scotty! There’s no redeemable currency on this planet!
Exactly what good does “redeemable” do you? Hard metals are accepted only by convention, as “gasp” paper currency is. The Mayans used feathers.
Try spending your gold bars in a war zone or time of social breakdown, which is the sort of doomsday scenario gold bugs love. If you are hungry or need medicine, you won’t get anything resembling the interbank rate.
You’re the one who pointed out, in the link comments thread, that sovereigns face a default/inflation constraint.
A redeemable currency means they default instead of inflate … sooner rather than later. And perhaps — taking another step backward — they didn’t spend profligately to start with.
But this would never do. Then we couldn’t afford permanent wars. So never mind. I was only joking.
Haygood,
When your bank settles your tax liability by debiting its reserve account–which thereby credits the Tsy’s account–reserve balances are DESTROYED (i.e., debited). Those reserve balances are no longer on bank balance sheets, and they are not available for trade in the federal funds market.
And then, when the Tsy spends, reserve balances are CREATED as bank reserve accounts are credited. Now there are more reserve balances on bank balance sheets, and more available for trade in the federal funds market.
Mitchell has it right. Reserve balances are DEFINED as balances in bank reserve accounts. And by this DEFINITION, the balances in the Tsy’s account are NOT reserve balances.
Let me clarify my example using the Fed’s H.4.1 statement. When the IRS cashes my $5,000 check drawn on MonsterBank, $5,000 is debited from the final line of Table 1, ‘Reserve Balances with Federal Reserve Banks,’ and credited to ‘US Treasury general account,’ under the heading ‘Deposits with F.R. banks, other than reserve balances.’
http://federalreserve.gov/releases/h41/Current/
Both of these categories are liabilities of the Fed. Even if the label changes from ‘Reserve balances’ to ‘Deposits,’ the Fed’s liabilities are unchanged. And both are ‘currency units’ — the phrase which Mitchell used, and to which I objected.
Reserves are merely the transfer mechanism to effect payments from my deposit account, to the Treasury’s deposit account, to someone else’s deposit account. Deposits (government + private sector) are neither created nor destroyed by tax payments.
To the extent that the Treasury manages its cash flow to maintain a stable balance in its deposit account (as it evidently did up till Oct. 2008), its operations have no net effect on reserves. Contrary to Pragmo and Mitchell, the Treasury’s operations are ALL about funding.
I don’t see any disagreement with stf or Bill Mitchell, the way you describe it here. The fact is that the Treasury has the only bank deposit account in the system that creates or destroys bank reserves with every single transaction running through it. That’s the characteristic that is under scrutiny here.
Treasury tends to keep its Fed account balance net stable as a matter of cash management discipline and as an assist to the Fed in keeping system reserve levels under the ultimate manageable control of the Fed.
Given the definition of bank reserves as separate from Treasury deposits at the Fed, and given the operational interface between bank reserves and the Treasury account, the language of “create and destroy” is pretty much accurate as a description of the effect of bilateral transactions between them as they occur in real time.
I’m suggesting that deposits (which are neither created nor destroyed by tax payments) are the pertinent issue, not reserves (a mere transfer accounting mechanism).
Mitchell fetishizes reserves, yet the system is not remotely reserve-constrained now.
This monomaniacal obsession, coupled with bizarre inversions of causation, leads to Dadaist mind-effs such as ‘Why Treasury Bonds Do Not Fund Our Federal Deficit.’
Next: ‘Why Moonbeams Do Not Control The Tide.’ Anchors aweigh, space cadets!
JKH is right, Haygood. Go read the NY Fed’s annual reports on open market operations–they explain the process and define terms the exact same way. You’re the one making up your own definitions.
Haygood,
It’s not clear to me what you’re objecting to. The fact that there is currently $ 1 trillion in excess reserves doesn’t change the nature of the reserve effect of individual transactions between the government and the private sector. The language of “create and destroy” is perfectly descriptive of the reserve effect of such transactions. I thought the language and/or the idea is what you were objecting to. As explained, there’s no reason for such objection. But if that’s not the problem, what is?
Is this the same as Marshall Auerback’s thesis on Tuesday, that China is not our banker?
MMT is utterly incomprehensible to me, but apparently I’m in “good” company with Greenspan and half the commenters here. For the visually-oriented among us who can’t verbally track the pea hidden under the walnut shell, is there any good visual/video that explains this stuff? Are bonds the better alternative to cash for those hoping to preserve a modest 401K (now a 301K)?
MMT is well meaning in intent but it is in reality only a remedial patch for the the real problem — the effects of years of aggregate generational corruption.
Implementing MMT would be like wrapping a grossly corroded, very thin gauge, leaky kitchen sink drain pipe with a good quality electrical tape. The leak may be stemmed for a while — if it were even possible to get access to make the repair — but it would be a very short term fix and it may even collapse the now delicate worn out pipe in the process.
Adding to the severity of the situation is that the effects of the years of aggregate generational corruption are now so bad that the trap that the pipe is connected to is almost totally plugged, the water is running into the sink from both taps, and the sink itself is spilling over and soaking the cheap particle board frame and floor. The water has also leaked down into the basement and shorted out the electrical panel. Night is fast approaching and someone has stolen the emergency flash lights and candles. With little light left in the day a decision has to be made. Go down in the rapidly darkening basement and look for the MMT electrical tape for the drain pipe repair. Or might there be some better way to use the little light left in the day?
Yes, MMT desperately needs a one or two paragraph abstract and some basic ‘plumbing’ diagrams to show the differences in approach of monetary systems, but that still won’t fix the real problem.
The aggregate generational corruption has to first be dealt with and excised. That will require that we all realize that ALL of life is political and we are ALL one aggregate human organism that must exist in harmony with the planet that we have thus far so deeply despoiled. Government is in its essence an alliance regulator. That requires that ALL benefit from government and ALL be included in it with equal representation. The real task is to rise above our cannibalistic and deceptive nature and create that honest government.
Craazyman made some insightful comments above, they are worth a reread, especially this;
“But it seems to be a byproduct of deeper fissures and deeper conflicts that are very hard to quantify and seem analyzable only through forms of thinking that acknowledge and at least try to articulate the instinctive drives in individual and group psychology and how these manifest in social organizations and institutions.”
Deception is the strongest political force on the planet.
if they (Fed or treasurey – I’m not following who really creates the money) can just create deposits in accounts, why don’t they create a million or two in mine account?
Big difference between the FED and the Treasury. Makes most of this argument mute. Fact is, when productivity is capped or reduced by excessive taxes and debt, the ponzi fails. We are a free people, not slaves.
What I think is operative here, in these opinions that seem so rabidly against MMT is, is something to do with 1)uncertainty, and how we deal with it and 2) how we view suffering. Maybe I’m over analyzing but Ive really tried to figure out why this paradigm (MMT) which to me was like an AHA moment is so abrasive to others.
Most of the criticisms seem to end up being of the nature, “but what will happen when the end of the world comes?” The seeming comfort of the gold system is to make one think that at least you’ll be able to get gold for your money, you can be certain of that. Why thats comforting is beyond me. Why cant you be satisfied knowing that if everyone (or enough of us) just work to create we wont need gold we can have other things which can really make our life worth living.
Another part is a very human tendency to believe that being willing to suffer some is good and MMT seems to be saying “you can have it all and not pay for it”. I disagree with this characterization of MMT but I agree that we must be ready (so we might say willing) to suffer some, its a part of life. However much we are able to make suffering less for people, and we have done a great job at that over all I think, we will never eliminate it. There are no guarantees. We NEVER have to pretend though that we dont have money for something, we created money. We can create as much as we need.
The problem, Greg, is this.
MMT is an inflationary tool. Inflation is a tax upon savers. You are, in fact, inflicting harm upon a great many people so that you might in some vague way “lessen the suffering” of a different group of people. Can you please identify the constitutional, philosophical or moral imperative that allows you to do this? People have a right to know the name of the god they are being sacrificed to.
“MMT is an inflationary tool”
Not sure where you get off making this claim, its a description of how the monetary system ACTUALLY operates. It is mostly a measurement tool I’d say.
It uses stock flow consistent macromodeling, an understanding of private domestic/ govt / foreign exchange sector analysis and central bank operations to measure activity and suggest remedies for output gaps at the macroeconomic level. Your free to put a derisive label on it of you want but the answer according to MMT is not always inflation.
‘Inflation is a tax upon savers”
And deflation is a tax on borrowers. SO? Are you arguing that savers are more “important” than borrowers.
“You are, in fact, inflicting harm upon a great many people so that you might in some vague way “lessen the suffering” of a different group of people.”
EVERY decision we make is about tradeoffs, thats not even news. Why dont you make the case that the people who are net savers are more important than the net borrowers?
” Can you please identify the constitutional, philosophical or moral imperative that allows you to do this? People have a right to know the name of the god they are being sacrificed to.”
I ask the same of you. Why is deflation a necessary evil while inflation is to be avoided at all costs.? Is this in the bible, quran, constitution, magnacarta?
Let me add this;
ALL MONEY IS FIAT! It was BY FIAT that someone determined a value of gold relative to some currency, everything became “priced” relative to that system and eventually things changed and a revaluation was necessary. Those that liked the old values complained, those that didnt supported it.
Every monetary system will have periods of revaluation its a testament to the changing nature of the universe. We will never figure out the price of anything for eternity. Because of human nature there are always a few who rise to the monetary pinnacle and they resist any revaluing, or they simply overtake it and revalue to their benefit. No mystery here.
Naturally the “users” of the currency will become entrenched over time to some “value” or “exchange rate” and will resist change, we are dubious of change as a species, but for anyone to think that money values wont change they are just being pigheaded. That would assume we’ve “properly valued” everything in our economy (No money isnt value but it reflects our perceptions of value). Is oil the “right” price?? Is water the right price? Is gold the right price? Is anyhting the right price?
We are not being manipulated by outside forces as much as we are engaging in mass self delusion.
Gee I wonder how the wars are being financed and what financed the US Govt spending when there was tax cuts on the wealthiest, the ones whose income actually rose where other Americans earnings was stagnant or fell.
Even David Stockman has come and talked about it.
MMTers ???
BTW ???
somebody please
ty
ex-gold bug
probably the best blog/site
well done Yves!
OK, Treasury offers bonds to soak up excess reserves – and it is those excess reserves that are created by deficit spending. So, splain me this Lucy – why the hell sell debt at all? Why not just print more FRNs or move numbers around on paper or digital media? And if debt must be sold to soak up reserves, why the heck is the margin between the 0.25% paid on reserves and the 10UST almost 3%? And, why is it necessary to soak up those reserves at all. Its embarassing Yves, I really don’t understand money at all. Regardless of the simple logic Pragmatic Capitalist lays out, the idea that the government is free to create as much debt as it pleases without consequence causes cognitive dissonance that’s reached eardrum breaking decibel levels. Next you’ll be telling me that there really is a Santa Claus.
They do it as a favor to banks…you’re quite right at coming to the conclusion that there is no need for them to issue treasury securities at all.
jeez louise what nonsense ; f r n’s are bogus dollars ; the fed prints as an interest bearing debt on us cits ; the fed is not a branch of the govt ; it is a private cartel with the franchise to print money ; the treasury does not issue [sell] bonds to soak up excess reserves ! what nonsense ; the treasury is coerced into borrowing all its operating funds ! from the fed and others ; reserves ? there are none ; reserves is a nonsequitur;
tj said it best :
“I believe that banking institutions are
more dangerous than standing armies….
If the American people ever allow
private banks to control the issue
of currency …the banks and corporations
that will grow up around them will deprive
the people of their property until their
children wake up homeless on the
continent their fathers conquered.”
Thomas Jefferson
1743 – 1826
The warning sign was the constant use of the term ‘inflationista.’ This generally means ‘malarkey ahead.’
This story verges on disinformation, and twists many of the concepts and dependencies of the process by which the US money supply is managed and valued.
Bonds fail, currencies devalue and fail more often than most people imagine.
When I read pieces like this I get a chuckle, at what a piece of work man really is.
Oh yes Jesse, because there is a history of fiat currencies and the countries that use them losing demand for their bonds, and “failing”. BTW, using the term devalue is inappropriate when talking about countries like the USA with fiat currencies…they can depreciate, not “devalue”. The only piece of work is that shit up there in your head you call a brain.
Here is the Treasury’s balance sheet.
http://www.allcountries.org/uscensus/540_united_states_government_balance_sheet.html
Start with that and work down. It might help to understand the role that Treasury debt plays on it.
I can’t get over how bad this essay is or that Yves actually said this..
“Yves here. This is the part most people don’t appreciate: the Federal government spent PRIOR to the bond auction by crediting bank accounts. The government does not fund its spending via bond auctions.”
Do you really want to keep putting your foot in your mouth and chewing? Seriously. Operationally, the statement in the post is 100% correct. The government credits bank accounts. The Treasury bond auctions are NOT a funding mechanism. You seem unable to get your mind around that.
Now you could argue, 100% correctly, that the post misses the POLITICAL constraints, that Congressionally mandated processes mean that there is a difference between ABILITY to pay (as in the government can always credit bank accounts, bond issuance is NOT necessary) versus WILLINGNESS to pay. Governments can strategically default too, Russia in 1998 is a classic example, the markets were stunned because their debt to GDP ratio was very low, there was no practical or operational reason for the default.
I understand it completely, much better than you do.
If I buy a product, and pay for it on my credit card, and then later pay for the credit card bill with an asset sale, did the asset sale FUND the purchase? No, perhaps, since it had not yet happened. But was it necessary to ‘balance the books?’
Look at the Treasury Balance Sheet, and work from there. And maybe you will get it.
You are looking for a linear causality. Its not there because these things are happening simultaneously and with lags.
bork
bond issuance is not necessary nor legal ; bonds put us in debt ; dollars do not ; govt borrowing is a scam a swindle ; we pay the price [ actually the interest on the national debt is paid with our income taxes
Here’s a quote from Gary North:
“There is a war against gold. Politicians hate a rising price of gold. So do central
bankers. A rising price of gold testifies against the politicians, who spend more money
than they collect in taxes or borrow at interest, and it also testifies against central bankers,
whose promises to stop rising prices is a lie that has not come true since about 1939.
So, these people do whatever they can to ridicule gold and gold buyers. They do
whatever they can to drive down the price of gold – everything except the one thing that
would drive it down: cease inflating.”
Since very few people have the nads, or because some just outright think the world is flat because everyone has always thought the world was flat, people WILL lose faith in the yen AND the dollar, and probably soon, say 18-24 months. Why, because by then the rest of the world will start to recover or the world economy will just crash outright. If I had to bet at some point in this time frame interest rates will shoot up like a rocket, 15-10-25% no problem, because when poeple lose confidence, what will happen? They will either print money like mad and crash the currency or do nothing and crash the economy.
Here is this what I think is this guy’s argument in a nutshell.
I buy something with a credit card.
Later that month I receive the credit card bill.
I sell an asset to raise cash to pay the bill and balance my accounts.
The sale of the asset did not FUND the credit card purchase because the purchase happened first.
Start with the Treasury Balance Sheet.
http://www.allcountr…ance_sheet.html
Everything else is financing. What the Fed does is finance the Treasury’s transactions.
To say that there can never be a Treasury bubble is to adhere to the notion that they can never be mispriced, that the market is inherently efficient.
To say that there can never be a Treasury bubble is to adhere to the notion that they can never be mispriced, that the market is inherently efficient.
Do you really think that Treasuries cannot become mispriced? That they can become devalued to the point of default. That their price cannot be artificially manipulated to be out of sync with market forces?
I wonder if he believes this is true of all central banks, or just the US, and if so then why the US?
This guy seems to think that Treasury debt is just a technicality, a Fed mechanism to drain excess reserves or something.
If only life were that simple.
Treasury issues the debt and spends money. The Fed finances it. The creditworthiness of the Treasury is a critical factor in the valuation of Treasuries, and Treasuries of zero duration which are the dollar.
The Treasury Balance Sheet is the scorecard. With lags, the limitations on its financing are the valuations of the dollar and the bond.
To say that bonds of any sovereign govenrment cannot ever be in a bubble is ludicrous on the face of it since they have been. Existence proofs are an excellent indication that words and concepts have taken you down a rabbit hole.
first : the fed is a swindler ; a private bank pretending to be a central bank [ i.e. owned by the govt] second , the borrowing the treasury does is foolish ; govt should not issue bonds ; should only issue dollars which it does not now do
“Yves here. This is the part most people don’t appreciate: the Federal government spent PRIOR to the bond auction by crediting bank accounts.”
If what you say is true. The government can and does overdraw their account at will. California does not, but maybe Federal agencies do. The only way this happens logistically is that all agencies pay their checks as they recieve their funds and the smaller agencies bubble up to the final creditor which has no backing. The smaller agencies have bank account and accountants so they are not creating money, but maybe there is an end of the line, the Treasury, and they issue credits they do not have. I would not attribute this so much to some fancy theory but just check kiting or incorrect accounting.
“The government does not fund its spending via bond auctions.”
This has to be summarily false if the Federal Reserve as we know it exists. If there are timing issues where government agencies spend money that higher agencies have not yet passed credits because they don’t have them but they make the entries anyways, I’ll take that as some minor bending of the rules. I pay my rent every month and I get a paycheck. I have to time one before the other or I am in default. I’ll allow for some bureaucratic realities to maybe say it happens the other way around in government, but the credits for deficit spending never occur unless the Federal Reserve, or a private buyer first debits the Treasuries account through a bond purchase.
Either the Treasury is acting like the Fed, or your statement is false, or the Treasury is printing enough currency notes to cover all their expenses, or you combined the Fed and Treasury into one entity in your logic.
As I understand it, the Fed can buy any asset it chooses to. When it does, it creates a liability (credit) on it’s balance sheet and debits any other parties balance sheet. It could be a used car sale. In return, it creates a debit on it’s balance sheet in the form of a federal reserve note (or electronic equivalent). The only way the Treasury gets the funds to credit accounts it to sell bonds to get debits, normally through open market operations, and then it credits it’s accounts. So, axiomatically, the government funds it’s spending via bond auctions or through tax receipts or any other revenue source. It still has to obtain debits and today, it does that through bond auctions.
I think the subtletly you’re referring to here is that the government can not save to pay for liabilities tomorrow. There are no government savings. Both transactions are equal even though they occur on different dates. The government has done nothing but transfer money from one party to another.
Take out the middle man (the government) and we’re at first principles with a twist. Those that had a lower time preference were willing to give up current consumption for later consumption and they traded their current claims for a government liability to have a later claim. However, when they gave up their current claim, their money went immediately to another person who spent it. The money is spent, hence your statement that the government spends before it sells bonds, not the other way around. Therefore, a bond sale just transfers savings to someone who wants current consumption or investment now and the money is spent.
How is this new? This is the basis for interest theory. This does not mean that the long arm of the government does not impact how money is spent. In the future, if we are running huge deficits and there are not buyers of government bonds, that will mean that there are not enough savings to fund current consumption at current prices at that time. The fact that the government only debits and credits accounts does not solve the fundamental problems, i.e. there are not enough resources to go around.
“The fact that the government only debits and credits accounts does not solve the fundamental problems, i.e. there are not enough resources to go around.”
BINGO!!!!
But ask your self is that not the same criticism of the non MMTers or any money system.? Does getting our debt to GDP ratios better make more resources? NO!!!! Does running “surpluses” (of money) make more resources??? NO!!!
The thing is, if you read the MMT literature form Bill Mitchell, Warren Mosler and others, you’ll see that the whole nature of their arguments is that focusing on MONETARY ratios is MISSING THE POINT. Its all about resource distribution. Who gets what and why. These are POLITICAL decisions and scaring people by saying we are “running out of money” is wrong, disingenuous and misguided. Got bonds fund nothing for the govt, they do however provide work free income for the holder. How much work free income is too much?? I dont know? We can never not be able to send that bond interest payment but we can also not guarantee what you will get for it. And saving more money today is not the same as saving resources so we could arrive at a time in the future where everyone has a billion dollars but NOTHING to buy with it.
The best way to maximize what we have to buy is to get EVERYONE working. One of those unemployed people may have a Eureka moment and invent/discover something really helpful to all of us, but not if they are at home simply trying to put food on their table and make a house payment.
We have the money to do it, do we have the will?
Well said, greg b.
load of crap ; the fed is not federal ; it is a loanshark that counterfeits $ and loansharks it to treasury plus vig; the govt should print its own money and stop borrowing which puts us further in debt we can’t pay off !