Is coin seignorage Obama’s magic bullet?

Here’s Felix Salmon on a crazy idea that’s been making the rounds:

Tools like the 14th Amendment or even crazier loopholes like coin seignorage would be signs of the utter failure of the US political system and civil society. And that alone could mean the loss of America’s status as a safe haven and a reserve currency. The present value of such a loss? Much bigger than $2 trillion. (Coin seignorage, if you’re wondering, is the right that Treasury has to mint a couple of one-ounce, $1 trillion coins and deposit those coins in its account at the New York Fed. It could then withdraw cash from that Fed account to make all the payments it wanted.)

It seems that some of the MMT-types have been pushing this idea, for instance here’s Joe Firestone:

Throughout the next six months, a number of other posts appeared at various sites provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint’s costs in producing the coins and the credit provided by the Fed is the US Mint’s profit. The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values e.g. $2 Trillion, could close the revenue gap entirely, and technically end deficit spending, while still retaining the gap between tax revenues and spending.

So is this a brilliant masterstroke that will solve all of Obama’s problems, or a loony idea that he should avoid touching with a ten foot pole.  Even though I only learned about this idea 30 minutes, ago, I can confidently answer “both.”

Let’s start with the easy part, the idea seems completely nuts.  The public would instinctively recoil from this idea, mainly because the public’s instincts are pretty good.  Roughly 99% of the time this sort of plan would produce hyperinflation.  It doesn’t really matter whether the idea is actually nutty, Presidents simply can’t be seen doing wild and crazy things with the currency.  FDR did something analogous (in a milder form) in 1933.  His policy led to the resignation in protest of a number of his top aides, including Secretary of the Treasury.  In the end FDR was forced to retreat.  And his political position was much stronger than Obama’s.  So if Obama’s political advisers are reading this, tell him to avoid the idea like the plague.

The harder part is whether it would work.  I don’t know if it’s legal, but Firestone seems to think so.  If it is legal it could not only solve Obama’s debt ceiling difficulties, it could also allow him to generate a fast economic recovery (in NGDP, or aggregate demand.)  In other words, he could do an end run around the Fed and run monetary policy right out of the White House, just as FDR did in 1933.  Or he could threaten the Fed to get his way, just as FDR did in 1933.  (FDR devalued the dollar, and basically told the Fed that if they tried to stop him he’d start printing fiat money, which was authorized by Congress in the devaluation bill.)  Of course either of these moves would delight Paul Krugman, and cause heart attacks amongst all the Very Serious People who run the country.  (You know, the ones who don’t understand the distinction between NGDP and RGDP.)  Just as FDR’s decision to torpedo the World Monetary Conference was called “magnificently right” by Keynes, but horrified all the Very Serious People of 1933.

I have to admit that as a contrarian, a quasi-monetarist, and a former coin collector, the idea of minting two $1,000,000,000,000 platinum coins as a way of solving our economic problems fills me with delight.  Remember, I’m the guy who once claimed the recession was caused by too few nickels.  Yes, I am slightly embarrassed to be in with the MMT people.  (Firestone seems to think we have 30% excess capacity, and that we could monetize the entire debt without creating hyperinflation.)  But not so embarrassed that I’m afraid to risk ridicule from the more respectable bloggers who dismiss this idea.

I hope the Fed has a safe place to store those coins—wouldn’t want to “misplace” two trillion dollars.

PS.  I’ve done about 900 posts.  The ”nickels” post that I link to above might be my favorite.


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89 Responses to “Is coin seignorage Obama’s magic bullet?”

  1. Gravatar of MarkS MarkS
    19. July 2011 at 13:21

    You’re “embarrassed” to be in with the MMT crowd – one of the only group of economists who have consistently predicted the economic environment of the last 20 years accurately?

    This coming from a former monetarist who had to rebrand his theory after monetarism was largely debunked? The same guy who pretends to be an expert on monetary policy and admits that he “doesn’t understand banking very well”.

    Is this a comedy blog?

  2. Gravatar of Luis Enrique Luis Enrique
    19. July 2011 at 13:32

    A tangental question: whilst people were worried about deflation, the deficit and unemployment, why wasn’t a big one-off monetisation of govt. debt an option on the table? It can be done without being announced ( just never ‘exit’ from QE) but I never really saw it discussed as something the Fed could announce as an official policy (we’re going to buy this debt and roll it over forever so henceforth a huge chunk of that debt you are all worried about the government will owe to itself) outside of the MMT crowd. My impression is much of what MMTers come up with is either wrong or not half as interesting as they think, but this policy looks to me like something perfectly mainstream economists might countenance. Evidently it is not, so I must be missing something. What?

  3. Gravatar of Marcelo Marcelo
    19. July 2011 at 13:42

    Quick question: I know that this answer involved printing more money, but isnt it a Keynesian answer? The treasury gets credited $2t and then pays everyone to dig holes and fill them up again? Or do you think the treasury would just buy back all it’s tbills? Isnt this essentially just christie romer’s $2t stimulus with no congressional approval?

  4. Gravatar of John John
    19. July 2011 at 13:59

    @Marcelo – I think Congress implicitly approved the possibility of something like this when they approved the legislation granting Treasury this power in 1996.

    As far as the question of hyperinflation is concerned, Joe Firestone addresses the possibility of this in the article though not in the part quoted by Scott:

    “Second, why would coin seigniorage in itself cause inflation? Coin seigniorage creates money to spend Congressional appropriations. As long as those appropriations are not so great that they exceed the potential productive capacity of our economy — and right now our output gap is around 30%, and there is no sign of Congress deciding to spend enough to close that gap — there will be no demand-pull inflation.

    Would there be cost-push inflation? Not from coin seigniorage. The coins would just go into a Fed vault forever, and again the spending will be only what Congress appropriates. Coin seignorage will add to aggregate demand whenever spending exceeds taxes; but it will not cause cost-push inflation. That is caused by suppliers or speculators who are distorting markets. And the remedy for that is criminal investigations, price controls, rationing, and a thoroughgoing belief that markets must be very closely regulated by independent adversarial enforcers if they are to remain free.”

    In other words, the question is what would the Congressional appropriations do to influence AD, not how much additional “headroom” Congress has to possibly make additional appropriations in the future as a result of the Treasury Sec using this method to retire additional treasuries.

  5. Gravatar of MarkS MarkS
    19. July 2011 at 14:13

    Guys, this wouldn’t put $1 trillion into the economy. It would get stored in a vault and the accounting would change. This wouldn’t change a damn thing. It’s a political ploy to get around another meaningless political constraint.

    Scott’s assertion that this would cause hyperinflation is downright embarrassing. This wouldn’t add one single penny to the private sector money supply.

    I am really baffled how people read this website and take Sumner’s analysis seriously. It’s remarkably incorrect.

    - Scott’s favorite banker, MarkS

  6. Gravatar of Mike Sandifer Mike Sandifer
    19. July 2011 at 14:20

    Scott,

    Obviously this seems a dangerous idea, but what if Obama supported a bill in Congress to take away his authority to do this after he does it? Maybe that would help control inflation expectations. Of course, no one knows what would happen.

    It seems like he should just try to pressure the Fed in every way he can first, and make his case for more monetary stimulus very public.

  7. Gravatar of Jim Glass Jim Glass
    19. July 2011 at 14:22

    Reminds me of an “easy fix” for funding Social Security and Medicare that was proposed by a friend in sci.econ back in usenet days, seems like a thousand years ago.

    I.e.: Incease the interest rate paid on the bonds in the trust funds. (For all the public controversy about the SS trust fund, everybody forgets that Medicare has a trust fund too, that is in much worse shape.)

    Increase the interest rate enough and then SS is fully financed forever, Medicare too. Why not? The rate on the trust fund bonds is set by Congress, so why not have Congress improve it with a better rate?

    The idea was meant as a joke but some people started taking it seriously and it began being circulated by people who approved. IIRC, Dean Baker at one point endorsed it.

  8. Gravatar of Mike Sandifer Mike Sandifer
    19. July 2011 at 14:25

    MarkS,

    Much like Austrianism, this chartalism stuff’s been around for many decades, yet has never broken into the mainstream, or anywhere near it. That doesn’t mean it’s wrong, but coupled with the certainty with which many promoters seem to speak and completely ignoring evidence that monetary stimulus works when they say it shouldn’t, it makes you guys look like cultists to me.

    How about you link to the theoretical papers and evidence that supports this “theory”?

  9. Gravatar of MarkS MarkS
    19. July 2011 at 14:34

    Mike,

    MMT is actually pretty new. At least in its actual modern form. Warren Mosler is the founder and he only wrote “soft currency economics” 20 years ago. It has some roots in chartalism, but modern banking and the post gold standard era has actually resulted in an entirely new theory and line of thought.

    Warren founded this by trading the other side of the Fed and recognizing the actual workings of the banking system (the same banking system that Scott has admitted he doesn’t know much about).

    It’s the only accurate portrayal of modern fiat money that currently exists. Monetarists, quasi monetarists and Keynesians are all bogged down in pre-gold standard era thought processes. Quantity theory, money multiplier, etc all that stuff is nonsense. It’s defunct.

    If you’re open minded and willing to learn you might review the following pieces. Warren’s SCE is here:

    http://moslereconomics.com/mandatory-readings/soft-currency-economics/

    Cullen Roche also wrote a very good primer here:

    http://pragcap.com/resources/understanding-modern-monetary-system

    If you’re not open minded then don’t bother wasting any time on this stuff. You will reject it before you ever even give it a chance. It requires some seriously outside the box thinking.

  10. Gravatar of John John
    19. July 2011 at 14:36

    @Mike Sandifer – Chartalism and MMT are not synonymous with one another. MMT incorporates charatlism, but it also incorporates Lerner’s Functional Finance, as well as Godley’s sectoral financial-balances model.

    I wouldn’t say that there are any papers that are “theoretical”, per se, concerning chartalism, but there has been quite a bit of historical research done. Check out the writings of Randy Wray, Friedrich Knapp (the State Theory of Money). Keynes’ “Treatise on Money” is, I believe the first time the word “chartal” or “chartalism” is used AFAIK.

  11. Gravatar of malavel malavel
    19. July 2011 at 14:38

    This idea seems equivalent to Ron Paul’s suggestion to default on the debt that the Fed holds.

  12. Gravatar of Mike Sandifer Mike Sandifer
    19. July 2011 at 14:55

    John,

    If you’re right about there being no theoretical papers published, what am I to make of that? That doesn’t necessarily speak well for these perspectives in general. At least monetarism and New Keynesianism may have extensive published theoretical foundations.

    Again, that doesn’t make ideas wrong, but I’ve been reading some MMT blogs and what I read are mainly just assumptions, many based on the GDP identity.

    That does not a scientific theory make. Economics is a behavioral science and no matter how confident you are in the way things work, observations are required.

    Can you link me to specific evidence that supports the MMT framework, but is incompatible with more conventional macro?

  13. Gravatar of Benjamin Cole Benjamin Cole
    19. July 2011 at 15:03

    As I believe what actually happens in the real world is more important that the anal ledgers of money gnomes at the Treasury or Fed, I like this idea.

    Factory output, jobs, etc are what count. Not some effing balance sheets, or 1.6 percent inflation rates.

    Hell yes, put $2 trillion into circulation. And the more inflation we have, the less our debts are worth. Remember, the USA can pay don its debts with dollars. We should do that, with lots of them, minted up fresh.

  14. Gravatar of Jason Jason
    19. July 2011 at 15:12

    The advertisement in my RSS feed that came with this article was for silver coins. Priceless.

  15. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2011 at 15:20

    I’d love to impeach Obama!

    SCOTUS is just itching to make itself more important.

    The progressive left will only maximize its potential long term out comes when:

    1. It admit the bottom 90% (and the progressive left) are just the C power and MUST spend their time coddling A and then B back and forth.

    C can never claim to be A or B.

    C can never side too long with A or B.

    2. It admits that those who spend some part of their earning lifetime the next 90-99% are the true A power.

    3. It turns on the top 1% (who fund it) and reduces them aggressive to B power status.

    MMT’ers all desperately want to believe that money is a function of government, and a tool of Democracy.

    It isn’t.

    The moment an idea like this got put into place the A power would clam up like the body’s asshole and make everything rot.

    The A power holds the votes, guns, and money to veto anything the progressive left doesn’t wait for technology to deliver.

  16. Gravatar of lambert strether lambert strether
    19. July 2011 at 15:57

    What an odd post. Will Dr. Karl Gruber please pick up the white courtesy phone?

  17. Gravatar of martino martino
    19. July 2011 at 16:03

    Scott, the “crazy” idea of 100% Money of the late Fisher, was exactly intended to increase the government seignorage without flood the economy with more debt. The idea of reflation by gov. debt was flawed: according to Lacy Hunt “in 1933, Fisher held out some hope that fiscal policy might be helpful in dealing with excessive debt, but within several years he had completely rejected the “Keynesian view”. By 1940, Fisher had firmly stated to FDR in several letters that government spending of borrowed funds was counterproductive to stimulating economic growth.”

    More info here: http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2011/07/18/three-competing-theories.aspx

  18. Gravatar of John John
    19. July 2011 at 16:27

    @Morgan – a State money, is, by definition, a creature of the government which exists at the will of the government. I bet that if you withdrew every dollar from your bank accounts they would all have pictures of dead government officials on the same and say “Federal Reserve Note” and also would be adorned with the signature of a Treasury Secretary. Fiat currency is a simple government monopoly. No more, no less. Keynesians and Monetarists alike (ones of the quasi- variety included) all recognize that regulation of the medium of exchange is integral to macroeconomic stabilization. Some people believe it’s done through something called monetary policy and some people think it’s done through something called fiscal policy but at the end of the day, saying that money is not a creature and convention of the state is silly as the state is the originator of all money in civil society.

    @Mark Sandifer – I’m posting from my phone so I don’t have specific URLs at my disposal but the link that Scott provides in his original post (to a website called New Economic Perspectives) is a good collection of MMT writings. Like I said in my original post, there has been an extensive amount of historical research done concerning the origins of money from a chartalist perspective. What I should have said (and meant when I stated there wasn’t any “theoretical” writing) was that there really isn’t any formal, mathematical modeling available concerning chartalism and the taxes-drive-money view if only because it’s not really something thats “modelable” in the traditional sense.

  19. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2011 at 16:51

    Lacy Hunt is a genius, as I learn more about him, second only to Mundell!

    John,

    sorry bub, money AND government is CREATION OF THE COMPETENT – see my description of the A power. Think Tea Party. Think the big fish in small ponds all over this country.

    I’d urge you to go catch a Ted Speech about what happened day-to-day when the government fell in USSR.

    basically, government exists to make sure that the smart little guys are in charge of the big guys.

    after that, government just keeps asking the guys in charge if there is anything it can do to be helpful.

    MONEY is storehouse of value. It serves the people who ACTUALLY HAVE MONEY.

    —–

    Governments come and go… the US’s has lasted so long because it has historically remembered what and who it serves.

    1913-1980 was your one shot, now we just spend all the money, and use the debt to kill off the worst parts of Democracy.

  20. Gravatar of Jeff Jeff
    19. July 2011 at 17:04

    Martino,

    Milton Friedman was also an advocate of 100 percent required reserves, but not because it would result in more seignorage. He thought it would insulate the money supply from volatility in credit markets.

  21. Gravatar of martino martino
    19. July 2011 at 17:18

    Jeff, one way for a government to enhance it’s seignorage is to impose a reserve requirements on banks, which enhances the real demand of base money by compelling banks to hold more base money than they otherwise would.

    I think Fisher idea of nationalize money was based on this ground: more seignorage, less debt.

    But I can be wrong…

  22. Gravatar of libfree libfree
    19. July 2011 at 17:44

    Much like Jason, the advertisement on my google reader suggested buying gold. These computers are getting so smart.

  23. Gravatar of Matt Waters Matt Waters
    19. July 2011 at 17:44

    “Scott’s assertion that this would cause hyperinflation is downright embarrassing. This wouldn’t add one single penny to the private sector money supply.”

    Making a trillion dollar coin to fund government expenditures is a trillion dollars which the government has not issued in bonds. If we are truly in a liquidity trap, that trillion dollars from the private sector not spent on bonds will stay completely in vaults and inflation will not increase at all.

    However, as we print more and more trillion dollar coins, inflation expectations increase. When inflation expectations increase, the money not spent on treasury bonds due to the trillion dollar coins will be spent somewhere else in the economy. At that point, we’re basically Zimbabwe or Weimar Germany.

    On the other hand, I do not see seigniorage causing hyperinflation because we do not have Zimbabwe’s central bank. If seigniorage started to increase the CPI, the Fed would sell the bonds on its balance sheet to offset the seigniorage, essentially destroying money with every bond sold. Eventually the Fed runs out of bonds to sell, but I would hope we get our fiscal house in order to reduce trillion-dollar-coin-making way before hyperinflation becomes an issue.

  24. Gravatar of Matt Waters Matt Waters
    19. July 2011 at 17:51

    I will also say I never heard of MMT before this post, which I guess may make some people here consider me a huge imbecile.

    When I looked it up and Wikipedia redirected me to “Chartalism,” I first thought it was a joke where MMT redirects to “Charlatanism.” From my first impression the two concepts don’t seem too different. Or at least it seems like a tautology like MV=PY, as DeLong calls it. Tautologies may help shed some light, as MV=PY does, but ultimately do not create a solid economic theory.

  25. Gravatar of Philo Philo
    19. July 2011 at 17:51

    By the way, what is supposed to be the use of a Balanced Budget Amendment when the Fed or, apparently, the Treasury (via seignorage) can create as much money as they want at will?

  26. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2011 at 17:54

    Usually Jon Chait is worthless, but this is gold:

    “The only chance Obama has to escape this trap is to maneuver the Republicans into killing off the middle-class tax cuts, by refusing to compromise on tax cuts for the rich. Failing that, the only two fiscal options are high deficits or insufficient outlay.”

    http://www.tnr.com/blog/jonathan-chait/92204/why-obama-should-think-medium

    —–

    This is why I’m right about who is the A power.

    The moment that the middle class have to give up taxes in order to pay for “sufficient outlay,” the progressive dream dies.

    To run a progressive government, you must run a frugal government… and a frugal government has no power block called “public employee unions.”

    This is why “spending all the money” is an unbeatable gambit for the right to take down the worst parts of FDR style Democracy.

    Too many Americans spend time some of their time in 90-99%, for the one who never do to take control of this.

    Good progressives KNOW they are only and will always be the C power and strategize accordingly.

  27. Gravatar of Scott Sumner Scott Sumner
    19. July 2011 at 17:54

    MarkS, You said:

    “This coming from a former monetarist who had to rebrand his theory after monetarism was largely debunked?”

    My first published article was on NGDP futures targeting (in 1989). That’s hardly monetarist. Indeed I was way ahead of the MMTers in criticizing monetarism. So I don’t know where you get the “former monetarist” claim.

    In any case, I’d rather be a monetarist than a MMTer.

    Luis, Most mainstream economists would have feared the inflationary effects of the policy.

    Marcelo, Why dig holes?

    John, I assure you Congress did not intend platinum coins to be used for monetizing he debt. And as for 30% excess capacity, I hardly know what to say.

    Mike, It’s a dangerous idea, but if he made me monetary dictator, I’ll bet I could make it work. I’d do a deal with Bernanke–give me 6% (annual) NGDP futures targeting for two years, and 4.5% thereafter. Do that and I won’t pull the trigger. Refuse and I’ll try to run monetary policy out of the White House. I say he’d take that deal.

    Jim Glass, Yes. Nothing fancy here, just monetizing the debt.

    Mark, Monetarism is not pre-gold standard stuff, it’s post gold standard theory. Monetarism is the monetary theory of the fiat money world, it doesn’t work nearly as well under a commodity standard.

    martino, I thought 100% mioney was aimed at stablizing the money multiplier.

    I see Jeff had the same thought. But I agree it would increase seignorage, so that might have been a factor.

    I will try to address MMT tomorrow in a post.

  28. Gravatar of Matt Waters Matt Waters
    19. July 2011 at 18:01

    I should elaborate some on “When inflation expectations increase” in my post above. If all the money which would have gone to treasury bonds (instead of new trillion dollar coins) stays in vaults forever, then inflation expectation would never increase. But in practice, people do eventually draw down their cash reserves and spend it on something.

    Let’s say that the debt limit stays at $14T and we never raise it. But we also never get our fiscal house in order and instead finance deficits through $5T of coin seigniorage over the next few years. Without coin seigniorage, the debt would have increased to $19T and now there is $5T somewhere in the private sector.

    With zero inflation expectations, much of that $5T could remain in vaults. But if 10% of that is spent, that is $500 billion new dollars in the economy. Eventually there is enough new money to increase that percentage, because the new money increases inflation expectation. The percentage of that $5T going into the economy then increases because people get worried about inflation. And so on. Because of this positive feedback loop, seignorage will eventually increase inflation unless the Fed counteracts the new money in the economy through selling bonds.

  29. Gravatar of Scott Sumner Scott Sumner
    19. July 2011 at 18:02

    Matt, Just to be clear I wasn’t claiming one or two coins would produce hyperinflation, but rather monetizing the entire national debt.

    Philo, The debt ceiling is one of the most stupid ideas ever conceived by Congress. Obama should tell the public in a speech that he’ll simply ignore Congress, as the debt ceiling cannot be enforced. It’s like trying to hold back the tides.

    Morgan, You said;

    “Too many Americans spend time some of their time in 90-99%, for the one who never do to take control of this.”

    This is a very shrewd observation, a point I often make as well. And it’s also something progressives seem totally unaware of. They actually think that only 10% of Americans are in the top 10%. It’s probably more like 25% or 30% over their lifetime, and they vote heavily. Progressives believe a Boston cop making $125,000 is rich, but Americans instinctively know he’s not rich. He lives in an average house, not a mansion.

  30. Gravatar of Scott Sumner Scott Sumner
    19. July 2011 at 18:04

    Matt, The effect depends entirely on expectations, and hence is impossible to model. If Obama announced the plan with the Zimbabwe flag flying behind his desk at the Oval Office, I guarantee prices would take off like a rocket. Even without a single coin!

  31. Gravatar of Barnley Barnley
    19. July 2011 at 18:12

    They have to be careful that Mr. Burns or Fidel Castro don’t steal the coin

    http://www.watch-simpsons-online.net/Watch_The_Simpsons_Online_Season_9_Episode_20_The_Trouble_With_Trillions.html

  32. Gravatar of MarkS MarkS
    19. July 2011 at 18:42

    Really Scott. You “guarantee” it? You really think the government can say things and that private sector agents will just jump through hoops? That’s not how it works. In order for hyperinflation to actually occur we’d have to have a real change in the money supply. Not just a change in expectations. That’s as stupid as saying that a company that issues $1 EPS guidance for FY 2012 will end the year with a higher stock prices because their guidance was 25% higher than their 2010 FY results. No, they have to actually follow through and generate the actual $1 earnings.

    It’s the same with inflation. If you tell everyone there is going to be inflation you might get a whole bunch of speculation, etc in the markets, but if the money never actually enters the economy and causes a fundamental change in the economy then there’s no reason to expect any price changes to be anything other than temporary.

  33. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2011 at 19:40

    Scott,

    You couldn’t make it work.

    You REALLY don’t seem to get that Ben is AFRAID of the Tea Party.

    It isn’t him vs. Obama.

    Obama represents the C Power, he is meaningless.

    Obama’s TOTAL VALUE is that he’s the left’s attempt to try and not submit like Clinton did when “all the money is spent.”

    Ben is just a timid, less personally secure Greenspan.

    But the dynamic is exactly the same.

    Greenspan KNEW, like Ben KNEW that you can only promote the interests of bankers so long before the A Power (those who’ll touch the 90-99%) will take control.

    Obama is bound and determined to not be Clinton. He didn’t want his only job to be broader social rights and cuts to the safety net.

    Obama is cooked. The real point is what a one-term Obama teaches future Dem Presidents – since the right gets to spend all the money, you ONLY get to make cuts.

    Ben can’t save him, doesn’t want to save him (even a timid Greenspan doesn’t want to save Obama), and he CERTAINLY isn’t going to feel threatened by Obama printing some money.

    The GOP would impeach Obama. SCOTUS would stand behind the GOP.

    This game strategy has been afoot since 1980, and nothing will prevent the lessons from being learned. Democracy as preached by the left only works when the right cares about debt, once both sides spend all the money – Democracy gets pruned.

  34. Gravatar of Alex Godofsky Alex Godofsky
    19. July 2011 at 19:45

    “In order for hyperinflation to actually occur we’d have to have a real change in the money supply. Not just a change in expectations.”

    This is nonsense, of course. If people expected that the government was going to print $14tn dollar bills a year from now, it would absolutely create hyperinflation today.

    And if the government promised to remove $1tn fewer dollars from the money supply over the next 30 years (by collecting $1tn less in taxes), then yes, it will affect inflation today. This should be blatantly obvious to an MMTer.

  35. Gravatar of John John
    19. July 2011 at 19:52

    The comparisons to Weimar and Zimbabwe are both expected and ultimately inapplicable. Outsourced to Bill Mitchell: http://bilbo.economicoutlook.net/blog/?p=3773

    As far as the issue of “monetizing the deficit/debt” is concerned, also inapplicable under a floating exchange rate fiat monetary regime. When the government runs budget deficits they do so by crediting private bank’s accounts which as a matter of accounting increases reserves in the banking system. If the CB has a non-zero interest rate target then as a matter of necessity CB interventions in the reserve market becomes 100% non-discretionary. Assuming the CB has an interest rate target it sets and defends the buildup of reserves in the banking system as a result of deficit spending must be drained lest the CB lose control of its target rate and the actual FF rate falls to zero (obviously this isn’t a problem now as the target rate [i]is[/i] zero). This means that at the end of the day the CB is going to own an amount of T-secs equal to the amount issued by the treasury to deficit spend. It is a legal dance that the Treasury-Private Banking Sector-Central Bank are entangled in as a result of the ‘no overdraft rule’ between the Treasury and the Fed. However, the end result ends up being exactly the same.

    PS: Just as a side note, technically the CB no longer has to do this as it can now control its policy rate with IOR but in the event it didn’t have IOR authority the above is true as a matter of operational necessity.

  36. Gravatar of MarkS MarkS
    19. July 2011 at 19:58

    “This is nonsense, of course. If people expected that the government was going to print $14tn dollar bills a year from now, it would absolutely create hyperinflation today.”

    So, if a company says they’re going to earn $1 this year that means the stock price will remain at the new level following the announcement? Or will it adjust as the actual earnings come in? The fallacy in your logic should be obvious.

    Or do you have an example of a government ever creating hyperinflation by waving a magic wand? Because I sure can’t think of a single example.

  37. Gravatar of Alex Godofsky Alex Godofsky
    19. July 2011 at 20:00

    You’re begging the question by assuming that the government either can’t actually create expectations or that any expectations it creates won’t be well-founded. Of course if the government reneges on its promise to print trillions of dollar bills then the hyperinflation will be reversed. So what?

  38. Gravatar of Matt Waters Matt Waters
    19. July 2011 at 20:01

    The issue seems to be that MMT gives a certainty about monetary Velocity where no such certainty exists. Why exactly are Fortune 500 companies keeping so much cash on their balance sheets? Because CFO’s don’t want to invest it. Why don’t CFO’s want to invest it or at least return it as dividends? Well, that goes to psychology about future inflation expectations and, well, why people do what they do.

    A better analogy than EPS is some news about the future profits of a company. Let’s say the company has a bunch of assets in Venezuela. Then let’s say Hugo Chavez says he will expropriate the assets a few months from now. No monetary transaction has taken place but the future EPS expectations, and thus the stock price, would plummet because Chavez would likely actually expropriate the assets in a few months.

    Similarly, if Obama credibly promises to monetize the entire debt, no new money is printed today but the market expects dollars to lose a lot of value in the future. Nobody wants to hold on to a currency they expect to become much less scarce in the future. Those expectations of the future decreases the value of a dollar today, leading to immediate hyperinflation.

  39. Gravatar of MarkS MarkS
    19. July 2011 at 20:10

    This whole conversation is flawed. Minting a $1T coin and putting it in a vault wouldn’t change anything. Just like minting a $30T coin wouldn’t. Would it cause a big market move? Not if it was explained properly. Creating new money and burying it in a hole (or locking it away in a vault as would be the case here) wouldn’t change anything. It would be a simple accounting change whereby the debt is “retired” and the shenanigans with the debt ceiling are circumvented. The hyperinflation notion is absurd.

  40. Gravatar of MarkS MarkS
    19. July 2011 at 20:12

    Now, if the President came out and said, “I am printing $14T and it will go into circulation tomorrow” then that would be different, but that’s not the case here. No one is printing new money.

  41. Gravatar of Alex Godofsky Alex Godofsky
    19. July 2011 at 20:16

    MarkS: by minting the coin now, the federal government needs to bring in $1tn less in future tax revenue to pay off those bonds. Thus the expected future money supply is larger.

  42. Gravatar of John John
    19. July 2011 at 20:17

    @ Matt Waters – If “monetizing” the whole debt is potentially inflationary it would be so as a result of its impact on the spending decisions of Congress and the direct effects that has on AD. It would not have anything to do with a buildup of bank reserves sitting in the banking system.

    If the existence of massive amounts of excess reserves were any indication of the proximity of hyperinflation then we’d really have some problems right about now. But being that core CPI is hovering around 2% there doesn’t seem to be much of a causal relationship running from reserves >>>> hyperinflation.

  43. Gravatar of MarkS MarkS
    19. July 2011 at 20:20

    Exactly John. Lots of people have been shrieking for years about the relationship between bank reserves and hyperinflation. They’ve ALL been wrong. Even some notable quasi monetarists who backed QE2 were dead wrong about its impacts.

    When do people learn?

  44. Gravatar of Fed Up Fed Up
    19. July 2011 at 21:09

    “Mike, It’s a dangerous idea, but if he made me monetary dictator, I’ll bet I could make it work. I’d do a deal with Bernanke–give me 6% (annual) NGDP futures targeting for two years, and 4.5% thereafter. Do that and I won’t pull the trigger. Refuse and I’ll try to run monetary policy out of the White House. I say he’d take that deal.”

    About the thereafter, what if real GDP is 1% or lower?

  45. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2011 at 21:33

    Why is there so much pretending going on here? Why all the hypothesizing about paper money – without owning up to WHY it exists?

    The government is not an accessible thing to be controlled by a bunch of professors and people who do not OWN STUFF.

    Money exists ONLY IF it serves the interests of people who own hard assets and create shit that other people will trade hard assets for.

    The government is a servant to strong minority of folks with real ownership stakes in current system.

    Just being lucky enough to be born here, does not empower you with a Democratic vote to somehow count equally – you have to either EARN IT or be born to someone who views giving it to you as a personal luxury they are exercising.

    Ok, so now that we have identified WHO money is for, the question then is WHAT DO THEY WANT?

    MMT fails for the same reason Keynes fails, the people who matter don’t like the people who don’t matter – pretending they matter.

    DeKrugman is a fat bearded guy angry with his betters who long ago sold himself out for Enron $ – he’s the maternal voice of white guilt. Certain kinds of people NEED TO HEAR him speak, so that they can figure out how much penance to pay before they reap the benefits of living in a system they didn’t create… and loathe themselves for that fact.

  46. Gravatar of Matt Waters Matt Waters
    19. July 2011 at 22:08

    “This whole conversation is flawed. Minting a $1T coin and putting it in a vault wouldn’t change anything.”

    MarkS, I’m not sure how to put it any more clearly about how minting a $1T coin would definitely change the money supply than my posts earlier. But again, a $1T coin to finance the deficit it $1T that is not issued in Treasuries which would have been otherwise. A $14T coin to monetize the whole debt would be $14T of Treasuries not issued (or taxes not collected).

    John, I think your misunderstanding my post. I was just giving the CFO’s of cash rich companies as an example. In normal times, banks have zero excess reserves and companies keep less cash on hand. These large reserves are why CPI is so low.

    If it became clear that we will commit to monetizing federal spending, i.e. Zimbabwe, nobody would want to hold onto any cash for very long. Banks would have to because they have reserves but everybody else would spend cash on something once they got it. To argue that monetizing government spending does not lead to hyperinflation is like arguing against gravity.

  47. Gravatar of Matt Waters Matt Waters
    19. July 2011 at 22:21

    “About the thereafter, what if real GDP is 1% or lower?”

    Well, why would not having NGDP at 6% produce a higher RGDP? Why does NGDP targeting (at a reasonable level) lower RGDP?

    The real production of an economy is based on many factors. If we suddenly lose oil supply from Libya, our real production will have to go down since our production capability is limited by raw inputs. Also, as our economy becomes more dominated by inefficient government spending, our production will likely go down as well.

    One of the biggest RGDP factors though is unemployment. People sitting at home on monster.com earning 99 weeks of unemployment checks do not contribute to RGDP. One can read through this blog’s archives to see why NGDP/inflation affect unemployment so much, but if unemployment came down as it has in England, we would see a higher RGDP than we would without lower unemployment.

  48. Gravatar of Luis Enrique Luis Enrique
    20. July 2011 at 00:46

    Scott,

    But there was a time when more inflation was desirable. Why not take advantage of that moment and erase some government debt? Anyway, I’m not so much arguing that it would certainly be the right thing to do, more puzzling why it wasn’t at least discussed more.

  49. Gravatar of Jim Glass Jim Glass
    20. July 2011 at 02:11

    MMT is actually pretty new. At least in its actual modern form. Warren Mosler is the founder and he only wrote “soft currency economics” 20 years ago

    Gee, I knew Mosler 15 years ago via sci.econ on usenet. Almost there at the creation! Now he’s got a whole school of economics. Well, if L. Ron Hubbard could create a religion good enough for Tom Cruise and Kirstie Allie… (Although there are stories that L. Ron did it as a joke.)

    Warren and his acolytes explained the “horizontal supply curve for money” to me several times, but the lesson never really took. When they told me the dollar was enforced — created even — by the US government’s refusal to accept tax payements in any other currency, they didn’t appreciate my citing the Tax Code section that allows tax payments to be made in other currencies, and the govt’s long record during its early days, during the dollar’s emergence as the national money, of accepting revenue (especially tariffs collected portside, the big revenue source of the time) in any currency the party who owed the tax possessed at the moment and could happen to pay with.

    Warren used to have a great story on his web site, which received many “oohs” and “ahhhs” from his fans, about how he once explained the Paradox of Thrift to Larry Summers. It seems Summers was at first amazed, but Warren assured him things were so and continued the explanation, as Summers assumed a continuing look of disbelief. Thus did a US Treasury Secretary and Famous Professor of Economics learn about the Paradox of Thrift!

    I don’t doubt for a moment that Summers was amazed and disbelieving, but I don’t think he was amazed and disbelieving at what Warren thought he was.

  50. Gravatar of Rien Huizer Rien Huizer
    20. July 2011 at 03:48

    Scott,

    From a Washington point of view it might be a better idea to fashion these coins out of plutonium (say about 40 pounds each) in appropriate casings. That might prevent them from being used in vending machines and as subway tokens.

    Incidentally, maybe the Chinese would prefer coins to book entry securities or scrip. They were the people who invented paper money, saw it becoming a bit too popular during the Yuan Dynasty (not the Renminbi one) and abolished it again under the Ming. Upon which China’s economy grew much faster than before. There must be a lesson somewhere, but it would be worth a try to sell them a couple of dozen, with a buy back guarantee from the Mint of course

  51. Gravatar of W. Peden W. Peden
    20. July 2011 at 03:57

    MarkS,

    “Or do you have an example of a government ever creating hyperinflation by waving a magic wand? Because I sure can’t think of a single example.”

    Amazingly, no government has announced a hyperinflation policy. Naturally, that doesn’t save you: the end of hyperinflation in Weimar Germany began with the ANNOUNCEMENT of a new money supply policy, not the initiation of a new money growth rate. In fact, this is one of the famous objections to old-style monetarism: hyperinflation, once it gets going at least, is a product of expectations having an effect on velocity rather than some hydraulic pumping system of money-printing.

    Again- to use an example that should be rammed down every social scientist’s throat- if you think that expectations don’t matter, then tell someone you’re about to kick them. Do they move when you kick them, or do they move before you kick them?

  52. Gravatar of W. Peden W. Peden
    20. July 2011 at 04:04

    Calling flow5! Calling flow5!

    How does this 14th Amendment malarky fit in to the modern US monetary system, which (contra MMT et al) is a managed currency system rather than a fiat currency system? If the Federal government started monetizing the debt, would the US become a fiat currency country?

    MarkS,

    Wasn’t US annual NGDP growth >5% in Q1 2011? As opposed to about 2-3% in Q2 2010? It’s as if “mere asset swaps” are about as important as quasi-monetarists think, rather than MMT would suggest.

    (Of course, anyone who has read the literature on the role of asset prices in the transmission mechanism of the money supply to the non-financial economy would never use the phrase “mere asset swap”.)

  53. Gravatar of MikeDC MikeDC
    20. July 2011 at 04:14

    “The moment good taste knows itself, some of its goodness is lost”.

    * What do we suppose the EMH suggests will happen? The fact it can’t be modeled doesn’t mean we can’t venture a prediction. My prediction is utter chaos and financial destruction.

    * Zimbabwe isn’t the country to think about here. How do China, Japan, and Europe feel about all that US debt they’re holding? What stupid ideas to their politicians get?

    * Whether its a good idea is inseparable from whether it will work. If it can’t be made to work, but seduces people to wasting time and energy on it (or even worse, trying to make it work when it won’t), then it’s a bad idea.

  54. Gravatar of K K
    20. July 2011 at 04:23

    Matt Waters: “MarkS, I’m not sure how to put it any more clearly about how minting a $1T coin would definitely change the money supply than my posts earlier.”

    The problem is you aren’t understanding just how little MarkS understands.  He thinks Geitner is going to put 2 coins in a safety deposit box at the Fed. He doesn’t understand that in exchange for those coins the Fed is handing over $2T of M0 which will quickly turn into M2.

    For those who think the Fed could just reverse any potential inflation, don’t forget that they only have $2.8T of treasuries on balance sheet.  The coins being actually worthless, the Fed will be insolvent. So they could buy back $2T but not e.g. $5T.  Eventually taxation would have to be used to withdraw money from the system and recapitalize the Fed.

    But would there be inflation? Unlike QE which has created nothing but reserves, the new money would quickly turn into checking and savings deposits.  There is currently about $9T of M2 so about a 20% increase.  Maybe just what is needed.  I vote yes.

  55. Gravatar of Morgan Warstler Morgan Warstler
    20. July 2011 at 05:12

    K,

    Fortunately, you don’t REALLY get a vote!

    That’s what all of this comes down to: money is FOR the people who OWN capital.

    It is not for the people who are not sitting on hard assets.

    There was a brief time 1913-1980, where there was a chance that the society as a whole was in charge of money and in charge of government…

    Then the right started massive deficit spending, and the jig on Democracy was up.

    There isn’t a MMTer with a real pile of mine to his name.

    And that’s WHY it won’t happen.

    $ talks, votes walk.

  56. Gravatar of W. Peden W. Peden
    20. July 2011 at 05:18

    K,

    I’m not familiar with the rules governing Fed policy, but can’t the Fed overfund the US Federal borrowing requirement? Or raise IOR? Or introduce (actually restrictive) supplementary deposits for commercial banks?

  57. Gravatar of John John
    20. July 2011 at 05:37

    And this would be better than default how exactly? If I were a US creditor, I’d rather see the government default and pay me back less than pull shenanigans like this. A default is honest, and I think if the US did that people would lend to the US treasury again pretty quickly. If Obama pulled a scheme like this I think the US would end up with the credit rating of Zimbabwe. Maybe that’s a good thing, I certainly want smaller government.

  58. Gravatar of John John
    20. July 2011 at 05:46

    The issue of the CB being technically balance sheet insolvent is not really an issue as it creates that which would be used to recapitalize itself anyway. Balance sheet insolvency is meaningless without the presence of some kind of liquidity issue. No one ever went out of business because they were technically insolvent on their balance sheet, operations are shut down when an organization is presented with a bill they can’t cover. In other words, balance sheet insolvency is only an issue insofar as it is a precursor to future cash flow problems. Being that the Fed creates reserves by hitting keystrokes there really is no way for the Fed to be illiquid. Interfluidity did a good post about this a while back.

  59. Gravatar of K K
    20. July 2011 at 06:46

    Morgan: “Fortunately, you don’t REALLY get a vote!”

    It was, of course, merely figurative. Nor do I have any illusion that this could happen.  It absolutely will not.  My support is motivated by a secret desire to debase the Fed’s balance sheet, thus destroying any residual illusion of the ridiculous Real Bills doctrine, and underscoring the power of taxation as the real gold in fiat money. The FOMC is going to turn the US Japanese if nobody does anything about it.  Emasculation via balance sheet debasement would be a suitable punishment.

    W. Peden: “can’t the Fed overfund the US Federal borrowing requirement?”

    As in overvalue treasuries in asset swaps with the Treasury?  By a lot? I don’t know.  They did overpay for a lot of subprime garbage a few years back. But then they could claim ignorance about the true value.  Tougher with treasuries.

    “Or raise IOR?” They could. But possibly long term inflationary since it actually raises the base money supply? (only a semi-serious complaint since it would obviously reduce broad money more than increase M0 until we are closer to a state of 100% reserves)

    “Or introduce (actually restrictive) supplementary deposits for commercial banks?”

    Good point.  They can take out excess money by raising reserve requirements (financial repression tax). This is an additional mechanism that makes the whole scheme far less risky, from a hyperinflation perspective.

  60. Gravatar of Morgan Warstler Morgan Warstler
    20. July 2011 at 07:16

    K,

    Ron Paul wants to debase the Fed balance sheet. And I’d support it, just retire all the stuff it holds, suddenly the debt ceiling isn’t an issue, and in one fell swoop we END THE FED. The A power, the Tea Party goes war path, and the Fed goes into a fetal position.

    What I don’t support is Treasury printing. Money is not a democratic tool, monetary policy isn’t run for short term utility. It doesn’t exist for the masses.

    The importance of this lesson cannot be understated.

    In dreamland, what I’d like to see is the Fed get tough with Treasury and push to have all the shitty MBS stuff it holds unwound and have the hard assets sold at $1 auctions in 90 days.

    The Fed has a basic MO:

    Bankers > Republicans > Democrats

    said another way:

    Top 1% > 90-99% > bottom 90%

    This is of course wrong. The real truth is:

    90-99% > Top 1% > bottom 90%

    The Fed KNOWS this in its soul. Whenever confronted with the force of truth, it will fold.

    What’s happened is that the C Power (Obama/progressives/Dems) has pushed aggressively behind the B power (Bankers / Fortune 100) and created oligarchs.

    The A power has shut down, like the body’s asshole and nothing will work until the B and C power’s interests are split and the the interests of the SMB / Tea Party crowd are put front and center.

  61. Gravatar of Scott Sumner Scott Sumner
    20. July 2011 at 07:54

    Thanks Barnley.

    MarkS, You said;

    “Really Scott. You “guarantee” it? You really think the government can say things and that private sector agents will just jump through hoops? That’s not how it works. In order for hyperinflation to actually occur we’d have to have a real change in the money supply. Not just a change in expectations.”

    Of course, but the money supply increase need not occur right away.

    Morgan, The Tea party people benefit from more NGDP.

    John, You said;

    “If the CB has a non-zero interest rate target then as a matter of necessity CB interventions in the reserve market becomes 100% non-discretionary.”

    Of course, but in that case the price level becomes indeterminate.

    You said;

    “This means that at the end of the day the CB is going to own an amount of T-secs equal to the amount issued by the treasury to deficit spend.”

    I don’t follow, most new T-bonds go into the private sector, not to the Fed.

    MarkS, Stock prices only adjust to the unexpected part of new earnings information.

    Matt, I read the links on MMT that someone sent me above. The ideas are expressed so oddly that it is hard to follow, but the basic idea seems to be that fiscal policy drives monetary policy (and hence NGDP.) That’s true in Zimbabwe, but not in the US. OMOs do matter when interest rates are above zero.

    MarkS, You said;

    “This whole conversation is flawed. Minting a $1T coin and putting it in a vault wouldn’t change anything.”

    But it would be expected to move into circulation at some point in the future (since it’s non-interest bearing.) So it could easily lead to higher inflation expectations (unless accompanied by a promise to withdraw before inflation could develop.)

    Fed up, You said;

    “About the thereafter, what if real GDP is 1% or lower?”

    It’s the Fed’s job to target NGDP, they should pay no attention to RGDP.

    Luis, A little of that is appropriate, but no where near as much as you were suggesting.

    Jim Glass, I agree that the government accepting fiat money plays little or no role in its having value. Theories similar to MMT developed in the Great Depression, and were later forgotten.

    Rien, Good idea.

    MikeDC, It’s not a workable idea in practice, but technically it could work. But the political opposition would be too great to actually try it.

    John, You asked;

    “And this would be better than default how exactly?”

    It depends on what happened to the price level.

  62. Gravatar of MarkS MarkS
    20. July 2011 at 08:18

    “Of course, but the money supply increase need not occur right away.”

    You’re changing the entire premise of the introduction of the coin. No one ever proposed that we print up $14T of new money. We proposed that you mint the new coin, retire the debt and put the coin in a vault. You’re just backpedaling to save face from your inaccurate hyperinflation comment.

    “But it would be expected to move into circulation at some point in the future (since it’s non-interest bearing.) So it could easily lead to higher inflation expectations (unless accompanied by a promise to withdraw before inflation could develop.)”

    Again, no one said to print up $1T and inject it into the private sector. You’re changing the argument in an attempt to backpedal.

  63. Gravatar of flow5 flow5
    20. July 2011 at 08:26

    How stupid (& I’m talking about everywhere this idea was presented on the web), you first have to have $2 trillion dollars worth of the metal (platinum), to mint $2 trillion dollars worth of coins.

  64. Gravatar of K K
    20. July 2011 at 08:39

    MarkS: “Again, no one said to print up $1T and inject it into the private sector.”

    Uh, yes they did.  That’s the whole point.  Treasury takes a worthless coin and exchanges for $1T of currency at the Fed.  Treasury spends said $1T. Just like exchanging a $1T T-Bill of $1T currency *except* since its a worthless coin the Fed can’t ever buy back said currency.  This increases upside risk of future inflation, which increases expected inflation which (thanks to Milton Friedman) increases inflation.  Or so the story goes.

  65. Gravatar of Contemplationist Contemplationist
    20. July 2011 at 08:48

    flow5

    I think the suggestion was to mint a coin with the DENOMINATION of $2T.

  66. Gravatar of Morgan Warstler Morgan Warstler
    20. July 2011 at 09:42

    Scott,

    The A power, the Tea Party does’t benefit until policies are written to favor them OVER the B power (top 1%) and C power (bottom 90%).

    There has to relative shift of gains. Lots more to the A, a small bit to the C, and less to the B.

    So, increased NGDP only benefits them during certain parts of the narrative.

    We can target NGDP immediately AFTER more bankers are driven into insolvency and the public employee unions are gutted.

  67. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. July 2011 at 10:53

    Jim Glass wasn’t making it up that distinguished economists were taking seriously the sci.econ joke (made by someone who very infrequently posts a comment on this blog) back in 2001 in a paper at the CBPP. The names were Aaron, Blinder and Munnell, they wrote in all seriousness:

    ————–quote————–
    To restore Social Security’s long-term financial balance, three options exist:
    . Increase revenue (either by raising Social Security taxes or by transferring funds from the rest of the budget to Social Security),
    . Reduce benefits, or
    . Raise the returns earned on the Social Security Trust Fund.
    —————endquote————-

    As our friend put at the time: ‘
    “I say it here, it comes out there!” ‘

  68. Gravatar of Morgan Warstler Morgan Warstler
    20. July 2011 at 11:58

    Paul Zrimse

  69. Gravatar of Jim Glass Jim Glass
    20. July 2011 at 12:09

    Paul Zrimsek

    Remember that k!

  70. Gravatar of Jim Glass Jim Glass
    20. July 2011 at 12:10

    ” you first have to have $2 trillion dollars worth of the metal (platinum), to mint $2 trillion dollars worth of coins.”

    Not at all. That’s the beauty of the legal tender law.

  71. Gravatar of johnleemk johnleemk
    20. July 2011 at 12:31

    On another Scott, I agree with you that your nickel post is probably one of the best, if not the best post you’ve ever written here.

  72. Gravatar of Fed Up Fed Up
    20. July 2011 at 12:43

    Matt Waters, here are some scenarios I am thinking of:

    6% NGDP can consist of 2% RGDP and 4% price inflation (close enough).

    4.5% NGDP can consist of 1.5% RGDP and 3% price inflation (close enough).

    4.5% NGDP can consist of 1% RGDP and 3.5% price inflation (close enough).

    4.5% NGDP can consist of .5% RGDP and 4% price inflation (close enough).

  73. Gravatar of Fed Up Fed Up
    20. July 2011 at 12:49

    Scott Sumner’s post said: “Fed up, You said;

    “About the thereafter, what if real GDP is 1% or lower?”

    It’s the Fed’s job to target NGDP, they should pay no attention to RGDP.”

    That’s what I thought. I just wanted to see it in print so there will be no mistake. I’m going to check some things out. My response later.

  74. Gravatar of Jim Glass Jim Glass
    20. July 2011 at 13:31

    In the spirit of Paul Zrimsek, since doesn’t seem to have visited here lately, I have to ask about one thing I don’t understand about the “$1 trillion coin” proposal:

    Why be so penny ante about it?

    Why not mint a $1 quadrillion coin and take care of the govt’s expenses for the next 100 years?

    Or a $1 quintillion coin, take care of the govt’s finances forever, and pay for a generous foreign aid program too?

  75. Gravatar of Morgan Warstler Morgan Warstler
    20. July 2011 at 13:35

    Fed Up,

    and if RGDP is 8% then we need 3.5% price deflation.

  76. Gravatar of HarPe HarPe
    20. July 2011 at 23:28

    Money relies on the state.

    Give me a society without money and i’ll love the neoclassical market society i live in, that will naturally tend towards full employment and provided there’s democracy, differences in income and wealth are small.
    That would be soo nice! Except it doesn’t exist and probably never will. Until then, history supports money being a creature of the state and markets require state intervention through a. direct employment and b. slight gov’t deficits, to work in a socially acceptable manner.

  77. Gravatar of Scott Sumner Scott Sumner
    21. July 2011 at 06:32

    MarkS, you said;

    “You’re just backpedaling to save face from your inaccurate hyperinflation comment.”

    I never backpedal. What happens here is that you gradually get a better understanding of what I am saying.

    flow5, Look up the word “seignorage.” It means the face value of the coin exceeds the value of the metal.

    K, That’s right.

    Patrick, That’s funny.

    Thanks johnleemk.

    Jim Glass. As I quoted someone saying last week “make no little plans, they lack the power to stir men’s blood.”

    Harpe, As Australia shows (with almost no government debt) you are wrong.

  78. Gravatar of MarkS MarkS
    21. July 2011 at 09:25

    I get a better understanding of what you’re saying? So says the man who claims to be a monetary expert while also admitting that he doesn’t understand modern banking.

    How can you be so smug when you it’s evident to everyone (including yourself) that you’re not an expert on this stuff?

  79. Gravatar of Fed Up Fed Up
    21. July 2011 at 19:02

    “It’s the Fed’s job to target NGDP, they should pay no attention to RGDP.”

    Here are some possible to likely scenarios I am thinking of:

    6% NGDP can consist of 2.5% RGDP and 3.5% price inflation (close enough).

    6% NGDP can consist of 2% RGDP and 4% price inflation (close enough).

    4.5% NGDP can consist of 2.2% RGDP and 2.3% price inflation (close enough).

    4.5% NGDP can consist of 1.5% RGDP and 3% price inflation (close enough).

    4.5% NGDP can consist of 1% RGDP and 3.5% price inflation (close enough).

    4.5% NGDP can consist of .5% RGDP and 4% price inflation (close enough).

    Let’s also assume productivity growth of +2.5% or a little more.

    See any problems with those scenarios?

  80. Gravatar of Fed Up Fed Up
    21. July 2011 at 19:18

    Morgan, if price deflation of 3.5% happened in the developed economies, I don’t believe there would be 8% RGDP.

  81. Gravatar of W. Peden W. Peden
    22. July 2011 at 02:29

    K,

    That’s not quite what I had in mind (though I agree it’s an interesting idea) but rather I meant this: can the Fed ensure that more bonds are sold than are necessary to fund the Federal government’s borrowing requirement? Now that I put it that way, it’s apparent to me that this is almost certainly a Treasury matter rather than a Fed matter.

    As for IOR, recent experience suggests that its effects on the demand for base money vastly outweigh its own effects on base money.

    RR are a destabilising way to control hyperinflation, but if it’s true that the Fed still has the power to alter them e.g. creating a new mandatory supplementary deposit for the coin component of M0 to mop up the effects of $1 trillion coins, then this suggests that the Fed could always (technically if not politically) offset the effects of an attempted “Treasury monetary stimulus”.

  82. Gravatar of Scott Sumner Scott Sumner
    22. July 2011 at 12:32

    MarkS, I didn’t know that an expert on monetary policy needed to understand modern banking.

    Fed up, You asked;

    “See any problems with those scenarios?”

    None that can be addressed with monetary policy. I see supply-side problems that call for economic reform.

    If NGDP is on target, I don’t care if inflation is a million percent, or negative 99%. The Fed has done it’s job. Now it’s up to the real economy to get its act together.

  83. Gravatar of Fed Up Fed Up
    23. July 2011 at 13:44

    The problem I see is employment falls in most of the scenarios.

    If RGDP is 2.5% and productivity growth is 2.5%, then I believe employment will stay the same. In all the other scenarios, employment falls.

  84. Gravatar of Fed Up Fed Up
    23. July 2011 at 14:04

    “None that can be addressed with monetary policy. I see supply-side problems that call for economic reform.”

    Here is where we are going to disagree. In the developed countries, some to most items aren’t supply constrained. Here is an example. Coca-Cola (KO) raises prices by say 2% per year and volumes (Q) grow by 1%. If KO dropped prices by say 4% per year, then volume would still be around 1%. In the first case, revenue rises. In the second case, revenue falls. People don’t need to drink more.

    Next, prime real estate doesn’t count.

    If more houses are created, I’m not going to buy a bigger one, buy more often, or buy more of them. Same with vehicles. Same with eating out. I read an article when the recession hit that one lady had to eat at home more often. She lost 30 pounds. She claimed that she would not eat out more often if “things got better”.

    Here are a couple of things that might go up in Quantity a lot if prices fall, solar panels and flash drives. I’m not sure about solar panels, but I am thinking there will not be a lot of hiring if flash drives “take off” in Quantity.

  85. Gravatar of Scott Sumner Scott Sumner
    24. July 2011 at 07:35

    Fed Up, I have no idea what you are talking about. Those examples show what?

  86. Gravatar of Fed Up Fed Up
    24. July 2011 at 18:05

    With the employment example, if RGDP is less than productivity growth then employment falls.

    With the “supply-side problems” example, I assumed you meant that supply needs to increase until prices fall. I was trying to show how an economy can be mostly demand constrained, not supply constrained and that falling prices do not always lead to rising quantities (RGDP).

  87. Gravatar of Scott Sumner Scott Sumner
    25. July 2011 at 06:45

    I certainly agree that an economy can be held back by lack of demand, and that falling prices don’t always lead to higher output.

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