Where MMT went wrong

I must be a masochist.  I feel like Humphrey Bogart, about to slide back into that leech-infested water.  But here goes:

Suppose we pick a fairly “normal” year, when NGDP growth and nominal interest rates and unemployment are all around 5%.  It might be 2005, 1995, 1985, whatever.  The exact numbers aren’t important.  Now the Fed does an OMP and doubles the monetary base by purchasing T-securities.  They announce it’s permanent.  What happens?

One MMT answer is that the Fed can’t do this.  It would cause interest rates to change, and they peg interest rates.  But the more thoughtful MMTers seem to be willing to let me do this thought experiment, as long as I acknowledge that interest rates would change and that it’s not consistent with actual central bank practices.  I’m fine with that.

So let’s say they double the base and let rates go where ever they want.  I claim this action doubles NGDP and nearly doubles the price level.  MMTers seem to disagree, as I haven’t changed the amount of net financial assets (NFA) at all.

But here’s the Achilles heel of MMT.  Neither banks nor the public particularly wants to hold twice as much base money when interest rates are 5%, as that’s a high opportunity cost.  So they claim this action would drive nominal rates to zero, at which level people and/or banks would be willing to hold the extra base money.  Fair enough.  But then what?  You’ve got an economy far outside its Wicksellian equilibrium.

The MMTers like to talk about cases where large base injections did coincide with near zero rates—The US in 1932 or 2009, Japan in the late 1990s and early 2000s.  But those were all economies that were severely depressed and/or suffering deflation.  I find it hard to believe that you could cut rates from 5% to 0% in a healthy economy without triggering an explosion of AD, especially if the economy was already experiencing normal levels of NGDP, normal growth in NGDP, and normal unemployment levels.  The closest example might be the US after WWII, but remember that people (wrongly) expected deflation after the war, and by 1951 the Fed gave up on that policy due to rapidly rising inflation.

MMTers forgot that the nominal interest rate is the price of credit, not money.  The Fed can’t determine that rate, it reflects the forces of saving supply and investment demand.  Hence an attempt to set interest rates far below their correct level in savings/investment terms (the Wicksellian natural rate), would trigger an explosion in AD, and much higher inflation.  Central banks know this, which is why after the inflationary 1965-1981 period they adopted the Taylor Principle.

That’s the flaw with MMT; it’s not net financial assets that matters, it’s currency.   And the Fed doesn’t set interest rates, markets set interest rates.  The Fed can briefly push them out of equilibrium (due to sticky prices) but this triggers big changes in AD and the price level.

The whole point of my Quantity Theory of Money post (and especially the Canadian/Australian comparison) was to smoke out their views of currency and the price level.  It was hard sifting through all the comments, which were often on side issues, but it seems they regard base money as just another financial asset.  But it’s not, which is why their view of monetary policy is wrong.  Indeed in a sense they don’t even have a theory of monetary policy, they have a fiscal theory that implies open market operations don’t matter.   But the Canadian/Australian data tells us that currency does matter, and NFA is the wrong aggregate to look at.

This is my very last MMT post . . . until the next one.

PS.  Quiz question:

1.  Sumner claims that a 5% NGDP growth rule will lead to roughly 5% NGDP growth, 5% interest rates, and 5% unemployment.  What would a 3% NGDP target lead to?

Answer:  About 3% NGDP growth, about 3% interest rates, and about 5% unemployment.

PPS.  The previous MMT post has 292 comments, and counting.  I may not have time to answer all the comments here.  In that case I’ll answer the 1% or 2% that actually comment on what I say here.


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208 Responses to “Where MMT went wrong”

  1. Gravatar of Brito Brito
    28. July 2011 at 05:05

    In before sh*tstorm

  2. Gravatar of Scott Sumner Scott Sumner
    28. July 2011 at 05:13

    Brito, One response done, 291 to go.

  3. Gravatar of W. Peden W. Peden
    28. July 2011 at 05:26

    Prof. Sumner,

    What role do assets play in your account? Doesn’t the increase in M0 increase the demand for appreciating alternatives? Though I suppose this is just part of the story of how interest rates get lowered by the increase in M0.

  4. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 05:44

    In the previous comments thread, I posted an explanation of how quantitative easing could increase NGDP which didn’t depend expectations. I challenged MMTers to explain what was wrong with my story, but only a few even responded, and they seem to have not read closely. I am going to re-post that explanation here, make the same challenge, and then anticipate some of the objections. (The following has been edited for brevity and clarity.)
    __________________________________________________________

    How can open market operations today increase aggregate nominal expenditure and reduce unemployment tomorrow? The Federal Reserve is likely to be frustrated by a temporary increase in the natural rate of unemployment, but the greater part of additional unemployment since 2007 has been due to a shortage of money.

    When the Fed purchases, perhaps indirectly via its primary dealers, long term government bonds from banks, firms, and households, the banks receive additional reserves, while and firms and households receive additional cash balances.

    When the demand for credit is low, creditworthy borrowers few, and bank capital fragile, banks may prefer to hold base money rather than issue additional loans. The traditional story of how open market purchases increase nominal expenditures will not hold. This is the situation which currently prevails; it is why the supply of base money has increased tremendously while inflation has been below average.

    But what will the households and firms do with their additional cash balances? If they simply hold the money in place of bonds, then quantitative easing will not raise nominal expenditures. Therefore, it is necessary to purchase assets from people who do not demand money to hold, but demand it for transactions.

    Short term government bonds with near zero interest rates are extremely close substitutes for money, and so purchasing short term bonds may increase the money supply, but is also likely to increase money demand in proportion, and total nominal expenditures will remain unchanged. Purchasing longer term bonds with higher interests rates, however, exchanges quite different assets. Households and firms that sell long term bonds are unlikely to hold all their new money. Instead, they will begin spending it on various consumer and capital goods, because they now have more money than they want.

    The increase in nominal expenditures by households and firms will increase total nominal incomes, reduce the real burden of debt, and, therefore, increase the demand for credit. and As the balance sheets of banks strengthen, they will discover more creditworthy borrowers and begin using excess reserve to finance additional loans.

    Higher levels of nominal expenditures will not be caused by more bank reserves leading to more lending, but rather more lending will be the effect of higher nominal expenditures. This doesn’t fit the standard textbook story of how open market purchases increase nominal expenditures; that is because the standard textbook story begins in monetary equilibrium. If there is an excess demand for money, the channel by which an increase in the supply of money satisfies demand changes.

    When nominal expenditures begin to rise, the Fed will need to begin contracting or sterilising the monetary base so to prevent high levels of inflation. To the extent that unemployment has been caused by an excess demand for money, higher nominal expenditures will increase unemployment.
    _________________________________________________________

    MMTers in the previous comment thread seemed to make two mistakes.

    (1) They assumed this story depended on the classic textbook channel of more reserves leading to more lending. I explicitly state this was not the case, and I have made that point more explicit in this comment. My suspicion is that they did not read it closely the first time.

    (2) They assume that banks, firms, and households would only sell to the Federal Reserve (i.e. exchange bonds for money) because they want to hold larger cash balances. That is, they seem to deny that people may have a transactions demand for money. This is what led me to accuse MMTers of taking money out of their monetary theory, because what makes money different from every other financial asset is precisely this transactions demand.

  5. Gravatar of Mikko Mikko
    28. July 2011 at 05:53

    So what happens if you have a central bank that targets 5% NGDP growth and then switches to target 3% NGDP growth?

  6. Gravatar of John John
    28. July 2011 at 06:13

    Prof. I just wanted to see if you had seen this new post at New Economic Perspectives?

    http://neweconomicperspectives.blogspot.com/2011/07/two-theories-of-prices.html#more

    It seems to be a direct reply to your previous QTM post, of the sort you were asking for.

  7. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 06:18

    I want MMTers to answer this question: why do banks lend base money rather than T-bills?

    For me, the answer is simply that one can spend money but not T-bills. (More accurately, T-bills only function as media of exchange in very particular markets, and most borrowers do not wish to buy on those markets.) Borrowers are demanding real goods and services rather than money, but they accept money anyway because it is a means to get those goods and services.

    The way MMTers talk about money, this is all inexplicable. When interest rates are near zero, borrowers should be indifferent to receiving T-bills rather than base money.

  8. Gravatar of JKH JKH
    28. July 2011 at 06:19

    If the funds rate is at 5 percent and the Fed floods the system with reserves to the degree you suggest, and doesn’t pay interest on those reserves, there is no question that the funds rate will head for zero.

    That doesn’t mean the curve won’t be severely steep after it does that – i.e. that longer market rates will be less affected, and relatively unaffected the further out the curve you go.

    I think they view the effect of such a decline in the funds rate on aggregate demand as ambiguous, due to the “fact” it would drain income from short duration NFA.

    The short duration financial intermediation component is pretty important, so I would view it as almost certainly stimulative (NFA or no NFA).

    But if the curve remains steep, the long duration financial intermediation component isn’t affected by the MMT NFA income phenomenon or otherwise.

    In addition, they would say, as I would (for my own reasons), that bank risk lending is a function of capital, not reserves. The only significant lending you would get immediately from those expanded reserves per se is incremental acquisition of risk free assets – which is what drives t bill yields to zero as well in those circumstances, through arbitrage. All risk lending would then be adjudicated as it always is – according to risk, expected return, and capital requirements.

    Moreover, it doesn’t require much of an expansion in uncompensated bank reserves in order to drive short rates to zero – there is tremendously leverage through arbitrage from banks trying to unload uncompensated excess reserves – but they won’t rationally take capital-using risk just to do that – they will exhaust arbitrage for risk free assets first and foremost.

    Also, because the t bond curve might be steep, there would be considerable interest rate risk in your scenario. BTW, banks also set aside capital for interest rate risk.

    MMT might then go in a different direction. They might say that they would then prefer a policy that set the funds permanently at zero, which is an area where I think you and Nick have big problems with them, among others. They would say they can set the funds rate at zero permanently, if they so choose, and then regulate AD via tax policy. If they could do that successfully, then by definition and implication, they could affect the curve as well because they would obviously affect expectations for fed policy.

    I’m not one of the 1 – 2 per cent, so maybe you’ll respond whether or not I’ve addressed the subject of your post.

  9. Gravatar of John John
    28. July 2011 at 06:40

    @Lee Kelly – You said:

    “When the Fed purchases, perhaps indirectly via its primary dealers, long term government bonds from banks, firms, and households, the banks receive additional reserves, while and firms and households receive additional cash balances.”

    It’s the end of this statement that I don’t understand. When the Fed does an OMP with Bank of America (which is where I have my accounts), the balances in my checking and savings accounts goes up? I think you might have invented a step there. The reason MMTers focus so heavily on the bank lending channel is because you can’t just make a statement like the one you just made.

    Similarly, a household cannot take a Treasury Security it owns and sell it to the Fed. Why? Because the Fed would pay me with a Reserve debit that occurs at a reserve account (basically a CB checking account) THAT EXISTS ONLY AT THE FED. It works the same way for banks that enter into purchases/sales with the Fed. This is the same point Professor Fulwiler made in one of the previous posts. There is nothing the private banks can do with these reserves other than trade them in the reserve market with other banks that need them.

    “Higher levels of nominal expenditures will not be caused by more bank reserves leading to more lending, but rather more lending will be the effect of higher nominal expenditures.”

    This I agree with completely. 🙂

  10. Gravatar of Warren Mosler Warren Mosler
    28. July 2011 at 06:43

    why don’t you ask me first before making this silly post?

    You are addressing two separate issues.

    The first involves ramifications of altering the duration of govt. liabilities.

    The second the effect of interest rates on the price level.

    Your combination of the two would be one several policy options with regard to each.

    Warren Mosler
    http://www.moslereconomics.com
    MMT First Generation

  11. Gravatar of KRG KRG
    28. July 2011 at 06:52

    ” I find it hard to believe that you could cut rates from 5% to 0% in a healthy economy without triggering an explosion of AD, especially if the economy was already experiencing normal levels of NGDP, normal growth in NGDP, and normal unemployment levels.”

    I don’t think MMT really disagrees with you there except:
    -The only would only be released in as much as there was demand for loans to release it. If the economy is basically healthy then it’s a generally safe bet to say that there would be such a demand, and that the extra supply of funds to lend would either lower rates a bit or lower lending standards, depending on which was less constrained.

    -You need to show where the expansion constraints were such that the money that was loaned out would then fight for those limited resources to bid up prices. MMT generally seems to take the stance that production is elastic unless you explicitly point to a constraint on it, so it would predict that production would first expand, keeping prices constant, until we hit that limit, only then would we see inflation. Since you specify that the economy is in a healthy state, and not in a resource constrained one, the basic assumption is that there is no near term factor to prevent more production to keep the price level flat.

  12. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 07:03

    John,

    Not all holders of government debt are banks. When the Federal Reserve purchases government debt, either directly or indirectly, firms and households will receive additional cash balances. Even if the Fed only buys directly from banks, the bank may in turn have purchased the government debt from firms and households just to sell to the Fed. Either way, firms and households end up with larger cash balances than before. Supposing they do not want to hold all of that money, all else being equal, nominal expenditures will rise.

    Of course, this is not what happened with QE1, because that was not about increasing nominal expenditures — its purpose was to remove toxic assets from bank balance sheets. In that case, the exchange of assets for base money was neutral in the sense that MMTers describe.

  13. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 07:15

    John,

    Suppose the Fed buys a $100 bond from your bank. The bank credits its bond account by $100 and debits its reserve account for $100. The chequing accounts of the banks customers are unchanged.

    Now suppose the Fed buys a $100 from you directly. You credit your bond account by $100, your bank debits its reserve account for $100, and the bank debits your chequing account for $100, and you have more money to spend than before.

    Now suppose the Fed only buys from banks. In anticipation of open market purchases, banks begins buying government bonds from households and firms. Households and firms receive larger cash balances which they wouldn’t have if the Fed didn’t do open market purchases. The banks then receive reserves in exchange for the bond.

  14. Gravatar of John John
    28. July 2011 at 07:40

    Lee,

    But is this what we see happening empirically? Do banks solicit individuals/households to buy TSecs from them in order to sell them to the Fed? I’m asking honestly because I don’t know.

    I think one of the problems with thinking about it this way is that you need to start by pre-supposing that banks have a certain amount of cash/currency on hand to buy the TSecs from households in the first place. If this is the case to begin with then why the need to come to the table with the Fed at all? Private banks have to voluntarily enter into OMO’s with the Fed. Now, if you’re starting from a situation where a private bank NEEDS additional reserves, they turn to the FF market, not the Fed itself. If the private banking sector in aggregate is deficient reserves then the Fed has to inject reserves into the market to stabilize the FF rate and we’re right back to where we were in the last thread I believe.

  15. Gravatar of KRG KRG
    28. July 2011 at 07:51

    ” In anticipation of open market purchases, banks begins buying government bonds from households and firms.”

    Actually, in these case, Don’t the banks buy the bonds from new treasury issues to sell to the Fed? That’s why the affect current market rates on the bonds rather than simply clearing the market of older bonds. I’d agree with others that evidence of any significant solicitation of private investors would need to be shown first here, especially when the Treasury provides a fountain of fresh bonds to pick from.

    Now, if we crack up against the debt ceiling and the supply of new bonds available bonds drops significantly, then we may well see banks hunting for bonds from private investors to hand in on response to such a purchase, but we’ve not yet hit that kind of action.

  16. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 07:59

    KRG,

    To the extent that banks purchase directly from the Treasury and sell to the Fed, then the Treasury has larger cash balances, just like firms and households would if the banks bought from them. Unless the Treasury just sits on the new money, then nominal expenditures will rise. This is how a fiscal stimulus is supposed to work. That said, I would rather the Treasury not issue new bonds and have banks purchase existing bonds from households and firms, or just have the Fed make those purchases directly, because I would rather stimulate with private rather than public expenditures.

  17. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 08:06

    One slip: a fiscal stimulus can, in principle, work even if the Fed isn’t purchasing government bonds (and increasing the money supply), because, all else equal, an increase in the supply of government bonds decreases the demand for money.

  18. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 08:21

    John,

    http://www.newyorkfed.org/markets/pridealers_current.html

    Here is a list of the New York Fed’s primary dealers.

  19. Gravatar of rogue rogue
    28. July 2011 at 08:34

    Lee

    Is there a sizeable number of private households that own government bonds, and have a sizeable demand for money for transactions? Aren’t people who buy longterm bonds those who are saving up for retirement and therefore will not sell the bond prior to retirement? Those who may suddenly need money for transactions never buy longterm bonds. There’s too much duration risk and they may end up selling when bond prices are down.

    The only agents who buy longterm bonds and who also may have a sizeable demand for money for transactions remain the banks. That’s why banks don’t solicit individuals/households to buy TSecs from them. There’s just not much of them.

  20. Gravatar of Benjamin Cole Benjamin Cole
    28. July 2011 at 08:47

    OT:
    Well, someday I want to discuss the fact that when the Fed buys Treasuries, and kicks interest back to the Treasury, it has essentially retired the debt. By printing money.

    Supposedly, this leads to inflation. Right now we have core CPI YOY at 1.6 percent, and that may overstate the case. In any event, with the one-time oil shock ($100) through the system we may head back to deflation. Unit labor costs are flat to down, and real estate rents across all commercial sectors are very soft.

    QE is like having your cake and eating it too, I would say.

    Moreover, I think we need a long slug of moderate inflation for sticky wages and to deleverage, and get real estate above water (bank loans are made in nominal dollars).

    What if in the real world, QE does not lead to too-high inflation, at least QE in the range of few trillion dollars?

  21. Gravatar of Stephan Stephan
    28. July 2011 at 09:12

    OK. The first question by Scott regarding the price level and MMT was thoroughly answered by Eric Tymoigne over at the “New Economics Perspectives” blog. My impression of all these MMT posts here is that it isn’t about the “theory” as such “” I don’t like the word “theory” in this context and would prefer practice “” but to ridicule the people who dare to say how things actually work in reality. Which is OK for me. If some academic minion who has never traded a piece of paper in his life wants to have some fun so be it.

  22. Gravatar of timmy timmy
    28. July 2011 at 09:23

    “Hence an attempt to set interest rates far below their correct level in savings/investment terms (the Wicksellian natural rate), would trigger an explosion in AD, and much higher inflation. Central banks know this, which is why after the inflationary 1965-1981 period they adopted the Taylor Principle”.—-The real story is far more complicated than that. What really caused the higher inflation of the time period between 1965 and 1981? It was driven by escalating Cold War spending, Walter Heller’s tax cuts,a series of oil shocks, and union wage demands. What ended the inflationary trend? The decline of unions, off shoring of manufacturing, and the recession caused by Volker’s experiment with high interest rates.

  23. Gravatar of Scott Sumner Scott Sumner
    28. July 2011 at 09:56

    W. Peden, Yes, and the nominal quantity of assets will respond endogenously (and will eventually double.)

    Thanks Lee,

    Mikko, Unemployment rises a bit in the short run, then returns to 5%.

    John, I did read that, but it doesn’t really answer my question. Wages are also a price, the price of labor. I’m trying to understand how the entire price structure (including input prices) is determined. You can’t model high trend rates of wage inflation by pointing to things like bargaining power. You need some sort of nominal anchor in your model, and wages are endogenous.

    In addition, I still think the Canadian/Australian comparison causes big problems for any non-QTM explanation of the price level.

    JKH, You said;

    “If the funds rate is at 5 percent and the Fed floods the system with reserves to the degree you suggest, and doesn’t pay interest on those reserves, there is no question that the funds rate will head for zero.”

    There is a great deal of question about that (although it’s not really an issue I address in this post.) That could easily lead to hyperinflationary expectations, causing credit demand to explode. Rates could easily go higher.

    You said;

    “That doesn’t mean the curve won’t be severely steep after it does that – i.e. that longer market rates will be less affected, and relatively unaffected the further out the curve you go.”

    Yes, but if the yield curve is steep, then short term rates are expected to rise above zero. When that happens base demand will plummet and prices will explode higher. So you are assuming extremely high inflation expectations, which is contrary to the MMT assumption.

    You said;

    “I think they view the effect of such a decline in the funds rate on aggregate demand as ambiguous, due to the “fact” it would drain income from short duration NFA.”

    Perhaps in their model, but obviously not in reality. There is no stable equilibrium where AD does explode higher.

    I’ll pass on your lending comments, as I have never argued the lending channel is central to AD.

    I have no problem with the notion that interest rates can stay at zero for a long time–look at japan. But it depends on the inflation rate. Suppose the trend inflation rate is 10%, do you really think you could drive nominal rates to zero, without the whole thing blowing about? If so, how about 20% trend inflation?

    Warren, You said;

    “why don’t you ask me first before making this silly post?”

    That sort of comment doesn’t help your case. Is the MMT claim that prices would double, or that OMPs don’t matter?

    KRG, Then why don’t countries just print more money to get richer? And didn’t we try that in the 1960s?

    Timmy, You said;

    “The real story is far more complicated than that. What really caused the higher inflation of the time period between 1965 and 1981? It was driven by escalating Cold War spending, Walter Heller’s tax cuts,a series of oil shocks, and union wage demands.”

    That’s a common view, but wrong. We did not run large budget deficits in the 1960s and early 1970s. There were no oil shocks in 1964-70. Unions were no stronger than in the previous 6 years. It doesn’t really explain much.

    We’ve fluctuated between massive deficits and budget surpluses in recent decades, with no effect on inflation. We have had two big oil shocks in the last decade, and an average inflation rate of roughly 2%. So oil doesn’t explain the high inflation 1970s. Military spending plummeted in the 1970s. Unions don’t drive inflation, they react to inflation.

    Everyone, Again, I’m still looking for the MMT model of different trend rates of inflation; 5%, 10%, 20%, 40%, 80%, etc, in different countries. And I’m not seeing anyone present such a model.

  24. Gravatar of W. Peden W. Peden
    28. July 2011 at 10:28

    Prof. Sumner,

    I see. As a I see it, those asset price increases are a central part of the transmission mechanism. Specifically, they link M0 with broad money (because they boost creditworthiness) and it’s the public’s broad money balances which are the salient mover in nominal expenditures, especially in periods of major monetary disequilibrium.

    On the MMT explanation of the price level, I suspect the circularity problem is probably a symptom of (very old) Keynesian thinking. The income-expenditure approach to the economy has it running somewhat like a perpetual motion machine, with incomes determining expenditures and expenditures determining incomes; prices are just an epiphenomenon in the middle, determined exogenously by worker power. Of course, when one introduces private property into this cosy little model, it collapses pretty quickly, which is why Keynesians sometimes say unbelievably stupid things.

    But, as you say, all this is (very) academic, since a theory of the price level based on wages isn’t a theory of the price level at all. IIRC, there were Marxists who made the same mistake when trying to empirically test the labour theory of value by relating wages to prices over the long-term, apparently unaware they were correlating some prices with other prices.

  25. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 10:40

    rogue,

    At some trade-off, people would rather have consumption right now rather than more consumption in the future. The Fed promises it will pay whatever is necessary to purchase longer term government bonds, and so primary dealers are willing to pay whatever is necessary to purchase such bonds from households and firms (or the government).

  26. Gravatar of Jim Glass Jim Glass
    28. July 2011 at 10:57

    >I must be a masochist.

    Only 293 comments under the last post.

    300 or Bust!

  27. Gravatar of Nick Rowe Nick Rowe
    28. July 2011 at 11:44

    To a first approximation, AFAICT, MMTers don’t believe in a Wicksellian natural rate of interest. Desired savings and desired investment are (approximately) independent of the real rate of interest. S and I are (nearly) both vertical. The IS curve is roughly vertical. Think back to the Keynesian Cross model, where interest rates don’t appear. That’s roughly where they are coming from.

  28. Gravatar of wh10 wh10
    28. July 2011 at 12:21

    Lee Kelly-

    “I want MMTers to answer this question: why do banks lend base money rather than T-bills?”

    Banks don’t lend base money. When a bank makes a loan, the accounting is the bank creates a deposit (their liability and the customer’s asset) and a “loan asset” (the bank’s asset and the customer’s liability). If they need to acquire reserves due to the reserve ratio, then they borrow on the interbank market or engage in OMOs with the Fed, selling them their treasuries. This is *part* of why MMT rejects the money multiplier (banks don’t lend reserves).

    Same goes for purchasing t-bills. Net, base money is not affected when they are purchased at auction. This partly is why MMT has a problem with people saying that we are loaning the govt money. What happens is banks mark up the Treasury’s TTL account by whatever amount of money the govt wants to deficit spend; the only loan created is a loan to the Treasury using no pre-existing financial assets (see explanation above) already in the economy. In return for the markup, the economy gets a bond. Here’s an article with the accounting http://neweconomicperspectives.blogspot.com/2010/11/yes-government-bonds-add-to-private.html

  29. Gravatar of wh10 wh10
    28. July 2011 at 12:45

    Dr. Sumner-

    Seriously, why don’t you set up a telephone or video conference with some of the MMT folk (Mosler, Wray, Fullwiler, Galbraith, etc.), or at the very least email them and discuss there? Why be a masochist and suffer all these comments, most coming from people with a much inferior mastery of econ relative to you? Think about the time you spend reading and responding to all this noise. Much more productive to spend it talking with people that know this obscure stuff, and then maybe coming back with your account of what happened.

  30. Gravatar of rogue rogue
    28. July 2011 at 12:45

    Lee: “At some trade-off, people would rather have consumption right now rather than more consumption in the future.”

    The more accurate statement may be ‘at some tradeoff, selling becomes more advantageous to holding bonds’. But the number of private households that hold longterm bonds to begin with is small. And any households that do (and sell bonds to the Fed) will probably save the proceeds in alternative ‘savings’ investments like equities and commodity funds. They’re not likely to spend their retirement savings on consumption.

    So this new money does not necessarily go directly to those in need of money for immediate transaction. If you ask people who truly need money for capital investment, they would have sold any government bonds they had without need for more monetary easing. In fact, the easing may have only made the cost of their needed capital investment more prohibitive.

  31. Gravatar of StatsGuy StatsGuy
    28. July 2011 at 12:57

    There are a couple fundamental things missing from theoretical debate. One is the source of constraints on spending money.

    Someone who is poor can’t buy stuff because they don’t have enough money. Or, if you prefer, they can’t get credit.

    Many of us, especially those who have money, are constrained not because we can’t get credit, but because we choose not to get it. Let’s call these groups the Haves and the HaveNots. MMTers seem think the latter constraint is more real. Both are quite real.

    In the former case, the lack of AD is due to banks being unwilling to grant credit. In the latter case, the lack of AD is due to individuals not wanting credit (or not wanting to spend cash). One can certainly average across the two models, or use macroeconomics to link these two constraints (through expectations) and the money cycle, but they are quite separate mechanisms of action.

    Point 2:

    If you consider this simple two type model, we can immediately see the problem with the idea that interest rate on bank reserves will stimulate more lending and more AD (unless we believe that this action will trigger a change in expectations among the “Haves”). Quite simply, this would only trigger a change in bank behavior at the margin, and if they are already lending out to everyone who is creditworthy, then the margin is to lend to the marginally uncreditworthy… But if there’s a 20% risk of default, is a 1/4% point change in RR going to do much? The RR would need to be high enough to actually be punative… unless it operates through expectations. Of course, to operate through expectations, the Haves would need to really believe that the Fed was willing to engage in a punative RR, and would keep adjusting RR until the Haves either started to borrow/spend OR the banks actually started lending to the HaveNots. Of course, by this time, regulators might fear the banks would go insolvent.

    3:

    My chief complaint with Sssumner’s thoughts here is that it does not do full justice to the distributional impact of monetary action. If you consider the two groups above, if more money is put into circulation, there is a lag time between asset appreciation and improved creditworthiness of the HaveNots (they need to get a job, and often wait for bad credit marks to fade due to the backward-looking nature of credit ratings, which impose a 7 year lag factor). Banks do not REALLY make decisions to loan to poor people based on capacity to repay, but generally on credit rating, and the market is quite imperfect here.

    This means that the main beneficiaries of monetary action are those with assets, those with access to credit who use it. By the time the poor recover enough assets to “invest”, asset prices will have risen. Sure, the poor have jobs, but the long term wealth distribution keeps skewing.

  32. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 13:00

    wh10,

    The purpose of borrowing money is to spend. When the borrower begins spending his deposit, he will either withdraw base money or write cheques. Any cheques he writes end up at other banks and come back for redemption in base money. Unless the bank can satisfy the withdrawals and/or redemptions, then it will become illiquid. The borrower has a promise from the bank that it will provide base money to him or fulfill payments on his behalf. The borrower doesn’t care how the bank gets the base money, whether it borrows from other banks or sells assets to the Fed, but providing access to base money is crucial to the whole arrangement.

    A T-bill would not be an acceptable substitute.

  33. Gravatar of W. Peden W. Peden
    28. July 2011 at 13:04

    StatsGuy,

    How much is lending to the poor in relation to the total broad money?

  34. Gravatar of W. Peden W. Peden
    28. July 2011 at 13:04

    * total broad money supply.

  35. Gravatar of Stephanie Kelton Stephanie Kelton
    28. July 2011 at 13:06

    wh10 is exactly right. Indeed, we can go further: it is impossible for a bank to “lend reserves.”

    mosler has a great property in St. croix (I’m told!). Let’s get the MMT folks together with Sumner, JKH, and other critical but interested folks and hash out our differences.

    S. Kelton

  36. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 13:07

    rogue,

    It doesn’t matter whether they spend it on consumption so long as they spend it. You said yourself, “And any households that … sell bonds to the Fed … will probably save the proceeds in alternative ‘savings’ investments like equities and commodity funds. They’re not likely to spend their retirement savings.” That would increase nominal expenditures.

    I assume they will initially use the money to finance more present consumption, partly because a lot of alternative investments are offering low returns and high risks at the moment. All that matters is that they are less likely to just hold the money than someone currently holding a near perfect substitute for money.

    Personally, I think the Fed should start buying corporate bonds and other private financial assets.

  37. Gravatar of Scott Sumner Scott Sumner
    28. July 2011 at 13:18

    W. Peden, I agree about wages. I don’t see net financial assets as the driver of AD, but more as an effect of higher NGDP, an endogenous response.

    Nick, It seems that way to me too. But think about it. If you double the money supply and argue there’s no inflation because rates fall to zero, then rates must stay at zero. That means long rates will also fall close to zero (perhaps a 1% term premium, a la Japan.) So you’ve got a healthy economy, and suddenly the Fed doubles the money supply and short rates fall from 5% to zero and long rates fall from 6% to 1%, and what? . . . Nothing happens, except borrowers get some incredible bargains. Such a pleasant scenario!

    Your explanations always have such troublesome implications for the MMTers, but I can’t see any reason to assume you are wrong.

  38. Gravatar of Scott Sumner Scott Sumner
    28. July 2011 at 13:22

    wh10, They’ve sent me things to read, but I’m not seeing anything persuasive.

    statsguy, I’;m not focusing on the beneficiaries of a doubling of the money supply, I’m trying to figure out how and why it affects the price level.

  39. Gravatar of Scott Sumner Scott Sumner
    28. July 2011 at 13:24

    wh10, The other problem is that to have a conversation, one must be able to speak the same language. I don’t understand how they use various terms.

  40. Gravatar of Scott Fullwiler Scott Fullwiler
    28. July 2011 at 13:43

    Scott,

    Thanks once again for the free publicity.

    As Warren suggested, we see these as two separate issues. First, the doubling of reserves or the monetary base in and of itself isn’t inflationary. We’ve also always said that if this does in fact reduce interest rates the pvt sector borrows at, then it could be inflationary. We’ve always said monetary policy “is about price, not quantity,” price being the interest rate (price of the bonds, price of credit, etc.).

    It is true that we see the effects of lowering the fed funds rate as “ambiguous,” but that doesn’t mean it couldn’t be inflationary, only that the inflationary effect of lower rates would have to more than offset other effects. (That is, the IS curve is not necessarily vertical in our view–depends on several things–though we prefer not to deal with IS curves at all.) I don’t see that being much of a problem in the scenario you’ve built (economy’s already doing well, interest rates fall by a lot, no fiscal policy response, no change to the current structure of the financial system), though whether it would raise inflation from, say, 2% to 5% or to 25% would require more information.

  41. Gravatar of wh10 wh10
    28. July 2011 at 13:48

    Lee Kelly- yes, all that stuff happens and the bank does not give the customer a T-bill; your comment was just technically wrong, and I was correcting you. Didn’t read the rest of your post so maybe my correction was irrelevant; if so I apologize. I was just answering a direct, isolated question.

    Seems rogue is in a more direct discussion with you; you should continue it there. This is coming down to you assuming the trade results in meaningfully more spending, whereas the opponent is saying not necessarily and probably not. in addition to rogue’s last comment, please see point 7 here ( http://neweconomicperspectives.blogspot.com/2011/07/qe3-treasury-stylego-around-not-over.html ). It explains how the existence of treasuries does not limit ability to sell them and spend if they want in a non zero-sum game fashion; thanks to PD market makers. Meaning, if people wanted to spend more before, they could have.

    So, I will ask, why not sell them before and spend vs. sell them to the Fed and spend, taking out expectations and interest rate changes and all the psychological stuff you wnated to? What changes meaningfully between the two scenarios? BTW, QE2 didn’t change interest rates meaningfully- http://www.fma.org/Napa/Papers/treasuries.pdf

    If the Fed announced a bid to buy treasuries at a higher price than market price, that’s a different story, but we aren’t talking about that and that’s not what they did.

  42. Gravatar of wh10 wh10
    28. July 2011 at 13:55

    “wh10, The other problem is that to have a conversation, one must be able to speak the same language. I don’t understand how they use various terms.”

    Even more reason to engage in direct convo and ask for clarifications!

  43. Gravatar of W. Peden W. Peden
    28. July 2011 at 14:03

    Prof. Sumner,

    (1) I don’t think that it’s the quantity of financial assets that matters, so much as it is the price of those assets.

    (2) The important factor with those financial assets is their effects on the growth of broad money, which has an obvious relation to NGDP.

    The line of causation, as I see it, is new M0 > cash balances > financial assets > nominal wealth > bank lending > broad money > NGDP.

    That’s not the only transmission mechanism, of course. People do use notes & coin to buy things sometimes, but transactions in notes & coin are ridiculously insignificant at the macroeconomic level in a modern economy. There’s also the exchange rate and I’ve disgracefully not mentioned expectations. However, as I see it, the hydraulic effect of an increase in M0, ceteris paribus, is to boost asset prices and eventually to boost broad money.

  44. Gravatar of MamMoTh MamMoTh
    28. July 2011 at 14:18

    Scott: The other problem is that to have a conversation, one must be able to speak the same language. I don’t understand how they use various terms.

    You said that before. And I find it strange because many people with no training in economics are able to understand Mosler’s articles.

  45. Gravatar of Stephanie Kelton Stephanie Kelton
    28. July 2011 at 14:27

    Barring that, how about a panel at the ASSA in Jan 2012? I’ll organize it. Scott S., are you game?

    S. Kelton

  46. Gravatar of Scott Sumner Scott Sumner
    28. July 2011 at 14:41

    Scott, Thanks for replying, Here’s where I see things differently:

    1. I see the price of money is 1/P, not i.

    2. In my view there is nothing ambiguous about the effect of doubling the money supply in normal times–you will roughly double the price level. I see the effect on interest rates as ambiguous, depending on the flexibility of prices, among other things. Circa 1980 Brazil or Argentina, you’d probably have a fast price reaction, and little or no fall in nominal rates–maybe an increase.

    I think you have an interest rate/banking view of monetary policy, I have a currency/price level view. They are hard to reconcile.

    wh10, That’s what I’m trying to do over here.

    W. Peden, OK, I’m pretty close to that. I see more base money (if expected to be permanent) leading to higher future NGDP (via hot potato effect.) Expectations of that raises current asset prices, and that raises current AD. As you said, there are lots of other channels as well.

    Mammoth, Maybe it’s my problem. But consider this, Nick Rowe says he has a hard time following the arguments, and he might be the most knowledgeable monetary economist on the internet, conversant in all sorts of schools of thought.
    This doesn’t mean they’re wrong, but they aren’t communicating their message in a way that’s appealing to either mainstream Keynesians, quasi-monetarists, or Austrians. We aren’t “getting” why the money supply doesn’t matter–to me it seems obvious it matters, especially when I look at data for places like Canada and Australia. Without the QTM I’d have no way of making sense of their vastly different level of government liabilities, and similar price levels.

    With all due respect, the fact that average people “get” the argument doesn’t impress me, as macro’s very counter-intuitive, and I think the most “common-sense” views of macro are wrong (i.e imports hurt jobs, or saving reduces AD.)

  47. Gravatar of Scott Sumner Scott Sumner
    28. July 2011 at 14:49

    Stephanie, I suppose I could do that, as long as I don’t have to write a long paper. Are you just thinking of a panel discussion/presentations? BTW, hasn’t the deadline for ASSA sessions passed?

  48. Gravatar of Lee Kelly Lee Kelly
    28. July 2011 at 14:58

    wh10,

    I think my answer to rogue was sufficient. In fact, he answered his own objection, in my opinion.

    In any case, I am going to bow out of the debate for now and spend some time studying MMT.

  49. Gravatar of W. Peden W. Peden
    28. July 2011 at 15:02

    Prof. Sumner,

    “W. Peden, OK, I’m pretty close to that. I see more base money (if expected to be permanent) leading to higher future NGDP (via hot potato effect.) Expectations of that raises current asset prices, and that raises current AD. As you said, there are lots of other channels as well.”

    I think we basically agree, except my (well, Condgon’s) hot potato effect works first through banks and those who sell financial assets to the banks. I agree that expectations are the initial movers and provide a direct channel to AD, but M0 affects expectations because of the hydraulic system that are the basis of the process.

    The hot potato affect is probably the most important thing, and on that we are in agreement. No-one wants to hold depreciating wealth if they can avoid it.

  50. Gravatar of Jose Jose
    28. July 2011 at 15:18

    Prof. Sumner:

    Two questions:

    1. “there is nothing ambiguous about the effect of doubling the money supply in normal times-you will roughly double the price level”. So, if times are not “normal”- say, this is year 2011- then doubling the money supply might not double the price level. May I conclude you and the MMTers agree on this point – the really relevant one for the present times?

    2. “you have an interest rate/banking view of monetary policy, I have a currency/price level view. They are hard to reconcile”. May I suggest you and the MMTers start a discussion on this point on an empirical – as opposed to a theoretical – basis?

    Frankly, I am always struck by the ability of economists to discuss their models without referring to empirical reality – the huge data base outside their heads.I recently had to study the macroeconomics textbook by Mankiw and I just couldn’t believe my own eyes – beautiful diagrams and nice algebraic equations following one another but facts…well, generally absent from the picture(s).

    So, maybe this interesting discussion will provide us with a different starting point, a real opportunity to watch different schools of thought discussing over how reality may validate (or invalidate) their models…

    Thank you for your attention.

  51. Gravatar of Adam2 Adam2
    28. July 2011 at 15:30

    Hi Scott, Post-Keynesians say money supply is endogenous to the economic system. They say loans create deposits. So money comes from the desires of the consumers and the loan officers who grant the loans. That is why they predicted that QE2 didn’t cause inflation. Because reserves didn’t make consumers more likely to get loans or loan officers to grant them.

  52. Gravatar of rogue rogue
    28. July 2011 at 15:39

    Lee
    1. “It doesn’t matter whether they spend it on consumption so long as they spend it. You said yourself, “And any households that … sell bonds to the Fed … will probably save the proceeds in alternative ‘savings’ investments like equities and commodity funds.” ……… That would increase nominal expenditures.”

    But I thought your question was “How can open market operations today increase aggregate nominal expenditure and reduce unemployment tomorrow?”

    I say: People putting money into equities and commodities does not reduce unemployment.

    2. You said: “I assume they will initially use the money to finance more present consumption, partly because a lot of alternative investments are offering low returns and high risks at the moment.”

    I say: Not if the original intent for holding longterm bonds is for retirement.

    3. Further up you said: “The increase in nominal expenditures by households and firms will increase total nominal incomes, reduce the real burden of debt, and, therefore, increase the demand for credit. and As the balance sheets of banks strengthen, they will discover more creditworthy borrowers and begin using excess reserve to finance additional loans.”

    I say: again nominal asset values may have increased, but increased expenditure need not follow. Not if new income wasn’t created. Increase in nominal asset values reduces the burden for existing borrowers, but it certainly INCREASES the burden for new borrowers. So how are new businesses, and new employment going to be created? How does this increase demand for credit?

    And though this may strengthen balance sheet of banks, increasing nominal asset values does not increase the number of creditworthy borrowers.

    4. You said: “All that matters is that they are less likely to just hold the money than someone currently holding a near perfect substitute for money.”

    Says that again? How did you conclude this?

    5. You said: “Personally, I think the Fed should start buying corporate bonds and other private financial assets.”

    I say: Bankers will thank you for this. But again, how does this encourage more lending, or reduce unemployment? Are you suggesting banks start lending to less creditworthy borrowers because the fed will crowd them out of lower risk bonds?

    6. you to WH10: “I think my answer to rogue was sufficient. In fact, he answered his own objection, in my opinion.”

    WH10 beat me to responding to you. But anyway, what of my objection did I answer?

  53. Gravatar of rogue rogue
    28. July 2011 at 15:41

    Lee: “In any case, I am going to bow out of the debate for now and spend some time studying MMT.”

    Good, make sure you get to understand the rationale for why income is emphasized over increasing nominal values

  54. Gravatar of Scott Sumner Scott Sumner
    28. July 2011 at 15:44

    Jose, You said;

    “1. “there is nothing ambiguous about the effect of doubling the money supply in normal times-you will roughly double the price level”. So, if times are not “normal”- say, this is year 2011- then doubling the money supply might not double the price level. May I conclude you and the MMTers agree on this point – the really relevant one for the present times?”

    Not quite, I did predict the QE2 would have only a slight effect on the price level, and I think MMTers agree. But I believe that even now a permanent doubling of the base would be highly inflationary (assuming no interest on reserves, of course.) And expectations of future inflation would drive up prices right now.

    You said;

    “2. “you have an interest rate/banking view of monetary policy, I have a currency/price level view. They are hard to reconcile”. May I suggest you and the MMTers start a discussion on this point on an empirical – as opposed to a theoretical – basis?
    Frankly, I am always struck by the ability of economists to discuss their models without referring to empirical reality – the huge data base outside their heads”

    Yes, I’ve been trying to do this. I’ve argued that the Canadian/Australian price levels strongly support the QTM over MMT.

    Adam2, My first response is to ask if you have any comments on my post. But if not, I’ll just say that loans don’t create deposits, banks create deposits. Banks make decisions on how many loans to have and how many deposits to have according to very complex criteria. Sometimes they increase loans w/o increasing deposits, and vice versa.

    Regarding QE2 and inflation, I’m afraid it’s far more complicated than that, and revolves heavily around expectations. See my answer to Jose.

    Whether money is endogenous or not is more a philosophical question that an economic question. At some level everything is endogenous. But for many (policy) purposes, it’s useful to think of money as being exogenous, even if it isn’t.

  55. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. July 2011 at 16:10

    ‘We’ve always said monetary policy “is about price, not quantity,” price being the interest rate (price of the bonds, price of credit, etc.).’

    There’s the core of your problem, that’s in error.

    First, price and quantity are inextricably intertwined; more quantity, caeteris paribus, means lower price. But, as Scott pointed out, the price of money is not the interest rate at which it is lent, but the price at which ownership changes. I.e., the amount of goods and services for which it exchanges.

    In Scott Sumner’s example of an economy without idle resources, when the central bank doubles the amount of money by expanding bank reserves the first effect will be that the banks have to cut the price at which they rent the money out (the interest rate charged). But that’s only the first step.

    Those entrepreneurs who borrowed the newly created money have to sell it, say, to owners of buildings suitable for business activities, and to skilled widget makers in order to produce products on which the entrepreneurs can earn profits with which to repay the loans and the interest agreed upon.

    Remember, though, there are no idle resources, so the entrepreneurs will have to sell their borrowed money at lower prices to entice resource owners to do business. A landlord who might have been buying $1,000 from businessmen in exchange for 30 days use of his building, now will find that he can get that same $1,000 for 15 days of use–sure he’ll talk of raising the rent to $2,000 a month, but that’s just the way people who don’t understand economics talk.

    Similarly, skilled widget workers who’d been buying $10 for an hour of their labor might now be willing to pay only half an hour for that $10–as they might call it, work for $20 per hour.

    And, it doesn’t stop there. The landlords and widget workers now have more money that they have to sell for food, clothing, shelter, NFL season tickets, whatever. They also must take less in exchange.

    Eventually the entrepreneurs who borrowed the newly created money to open new businesses will become money purchasers themselves and will discover they can buy money with their products at lower prices. Or, what is the same thing, sell their widgets at high money prices.

    And, they can repay their loans with interest, and enjoy a profit. Which might just encourage them to borrow even more money and go through the same routine all over again. And not just them. Others will have observed the easy profits available and add their demand for borrowing, which will have the effect of raising the price of borrowing; the interest rate.

    So, we seem to have an increase in the quantity of money created out of thin air, initially lower interest rates but ultimately higher ones, and higher prices of goods and services. Do MMTers deny this chain of events?

  56. Gravatar of MTD MTD
    28. July 2011 at 16:27

    Scott – This post suggests that if the Fed switched to a credible NDGP level target – one that would require NGDP to rise 10% and plateau at the 5% trend line – they would not necessarily have to add one additional dollar to the base. Expectations of higher expected future NGDP would boost base velocity today. This is why single digit base growth in the 70s created double digit inflation while periods of double, and recently, triple-digit base growth in the 80s, 90s and 00s was associated with low or falling inflation or deflation. Indeed, a credible expected reflation may require a reduction of the current base as higher expected future NGDP would drive the Wicksellian natural rate up in it’s wake. Thus, maybe the Fed can do more heavy lifting by working on expectations instead of doing any further temporary base injections/asset purchases.

  57. Gravatar of MamMoTh MamMoTh
    28. July 2011 at 16:41

    Scott, mine was an innocent and curious question. You seemed to mean that you couldn’t understand the terminology not the theory which surprised me. I do find Mosler’s articles in his mandatory readings quite clear to understand by people with no background in economics (but probably not the average person). I don’t think I could say the same about his blog posts or comments though. So I hope someone with a solid knowledge of MMT will help you understand what you didn’t get because I am really interested in the point you are addressing here which to me is not adequately addressed in the MMT literature.

  58. Gravatar of beowulf beowulf
    28. July 2011 at 16:43

    “But here’s the Achilles heel of MMT. Neither banks nor the public particularly wants to hold twice as much base money when interest rates are 5%, as that’s a high opportunity cost…”
    Unless the Fed’s interest on bank reserve rates the Fed pays are pegged to policy rate. Alternately, if you want to be mean, peg FDIC’s insurance premiums rate (since April levied on bank assets) to policy rate.

    “For me, the answer is simply that one can spend money but not T-bills.”
    That’s for the Secretary of the Treasury to say now, isn’t it?

    The Secretary of the Treasury, in his discretion, when inviting tenders for Treasury bills, may provide that Treasury bills of any series will be acceptable at maturity value, whether at or before maturity, under such rules and regulations as he shall prescribe or approve, in payment of income taxes payable under the provisions of the Internal Revenue Code.
    http://cfr.vlex.com/vid/309-5-acceptance-bills-various-purposes-19743305

  59. Gravatar of Jim Glass Jim Glass
    28. July 2011 at 17:10

    “For me, the answer is simply that one can spend money but not T-bills.”

    That’s for the Secretary of the Treasury to say now, isn’t it?

    No, actually it’s up to the people at the grocery market whether they want to accept your $10,000 T-bill and give you change for it over the cost of your bag of groceries. Same with all the other retailers.

    With all the signs about around here saying “no bills accepted over $50”, I think you’d have rather a hard time doing your daily spending in T-bills. Even if they were legal tender, which they aren’t. And even if Treasury decided to accept them in payment of taxes.

    I mean, as a matter of the real world, as opposed to arcane theorizing.

  60. Gravatar of Alex Godofsky Alex Godofsky
    28. July 2011 at 17:42

    MTD:

    As I recall Scott made precisely that observation a while ago: that if the Fed were to make a helicopter drop in order to return NGDP to trend, the optimal size of the drop might be negative.

  61. Gravatar of RobertM RobertM
    28. July 2011 at 17:47

    Lee said: “why do banks lend base money rather than T-bills?”

    Are you suggesting banks lend actual pre-existing money such as deposits? That’s not the way the FED describes it. Banks lend “credit” created out of thin air through double entry bookkeeping, both as a credit and a liability at the same time. As that “money” is paid back, it is extinguished.

    Maybe I’m just misunderstanding you….sorry if that’s the case.

  62. Gravatar of Ron T Ron T
    28. July 2011 at 18:13

    My understanding of MMT perspective, fwiw.

    The wrong assumption by Sumner is that the Fed commands and the banks obey (money multiplier mentality, again). If anything, it is the other way round.

    So, we double the money supply – it means the banks WANTED the reserves more than the stuff they sold. Why?

    2 different scenarios:

    1. Private sector went on a crazy credit binge and doubled its loans volume. Yes, the prices indeed might go up twice, if we are at full employment and there is no extra supply to meet the extra demand. If we are below full capacity, the extra demand will drive output, output will reach the max possible level, and from there only prices will rise (less than 2x).

    2. We have a depression-like situation, there is a flight to safety, banks are dumping everything illiquid on the Fed and grab reserves. We will have tons of excess reserves. This scenario calls for FALLING prices (vide Bernanke’s doubling of monetary base and deflation 2009).

  63. Gravatar of JohnH JohnH
    28. July 2011 at 18:22

    Scott Sumner –

    Not sure I understand banks increasing loans without increasing deposits. Surely if there’s any increasing lending done, there must be a borrower.

    Sounds like you (and others) were talking about a difficulty in communicating across paradigms? Might that be coming in to play?

    Just a HS grad here, a layperson.

    What I do understand is that (most nations) have a currency that you can’t demand anything for but the currency itself. It’s fiat, backed by nothing finite and can be produced in any quantity needed. This alone would seem to obviate the need to tax for revenue or borrow for revenue. This is, of course, an aside to your point that I brought up; just wanted to let you know my understanding of the currency involved.

    JH

  64. Gravatar of Morgan Warstler Morgan Warstler
    28. July 2011 at 18:24

    Patrick, the answer from MMTer’s is always the same:

    The state will tax those extra dollars out of the supply.

    There are fools, for that state is run by those with money.

    —-

    I’ll say this and once again will get no response from the Mosler crowd, other than anger at my position:

    MONEY AND GOVERNMENT are monopolies run by the people who matter.

    Democracy can not will “everyone” to matter.

    We’ll call it MORGAN’S PARADOX: In as much as money is a monopoly of the state, the state is a tool of those that have money.

    Which makes MMT impossible.

    Because clearly, at no time do those without money come in control of the state.

    Thus we can remove the state from the equation and say:
    “monetary policy is run by and for those with money.”

    ————

    Let’s call those with money AND votes, “the Tea Party”

    Let’s call those with money by no votes, “the oligarchs”

    And those without without money, but votes, “the Democrats”

    Money is not a democratic social good. Until Mosler can prove it is, he’s just yodeling in the valley.

    I look forward to any logical, politically realistic response.

  65. Gravatar of Jim Glass Jim Glass
    28. July 2011 at 18:54

    em>This is why single digit base growth in the 70s created double digit inflation

    Well, looking at the data via FRED I see double-digit increases in money base during the 1970s immediately preceeding inflation going into double digits.

    Money base growth surged during 1977-79 to quarterly rates of 11%, 12%, 11%, 12%, 11%, 13%, some 9s thrown in. Inflation followed upward from 6% in 1977 to 14% in 1980. One can give a pretty straightforward Milton Friedman quantity money reading of that.

    >while periods of double, and recently, triple-digit base growth in the 80s, 90s and 00s was associated with low or falling inflation or deflation.

    Following the very deep recession of 1981-82, with 11% unemployment (worse than in the recent recession — and preceded by Volcker’s inflation-busting crunch on money base growth to as low as -2.9% in 1st Q 1981) the base grew 10%-11% through 1983. Seems a not unreasonable counter-cyclical response by the Fed to the worst recession post-WWII.

    It also grew 10%-11% after the 1990-91 recesssion/S&L crisis, and touched 10% briefly after the 2001 recession and bust of the Internet bubble, presumably for the same reason.

    And of course it grew hugely (if largely “sterilized” by IOR) *after* the big fiscal crisis of the great recession, when the Fed vowed to stop the deflation of 2008, and succeeded. Thank ye gods!

    All looks very normal via standard monetary readings by me. One case of double-digit base growth getting out of hand, big inflation followed. Three times double-digit base growth followed a big drop in demand, as a policy response to mitigate it. In all four cases the results look to be what the standard econ textbooks predict.

    I do think that Volcker bought a lot of credibility for the Fed (at considerable cost) and Greenspan did a pretty good job of preserving it, so “expectations” response is likely to be stronger today than in his time.

  66. Gravatar of Matt Franko Matt Franko
    28. July 2011 at 19:20

    Jim,
    Checked your house value lately? Resp,

  67. Gravatar of JohnH JohnH
    28. July 2011 at 19:50

    Morgan –

    I think the idea is to get an operationally realistic response, as politics and realism are (currently) more likely to be mutually exclusive, especially with respect to economics.

    So, can we agree that the USD is a non-convertible, free-floating fiat currency (as are most)?

  68. Gravatar of Alex Godofsky Alex Godofsky
    28. July 2011 at 20:03

    Ron T:

    So, we double the money supply – it means the banks WANTED the reserves more than the stuff they sold. Why?

    Because everyone always wants money, because money can be exchanged for stuff? If an asset costs $X on the market, a bank will always be willing to exchange it for $X + 1 cent, because the bank can immediately go purchase another one and pocket the extra penny. So the Fed can ALWAYS give the banks more dollars unless the price level actually his infinity. The fed just has to get one bank to accept a dollar bill and then the banks, or the public, are stuck with it and have no way to give it back.

  69. Gravatar of JohnH JohnH
    28. July 2011 at 20:46

    Ron T:

    There are always sellers in the T-bond market, for whatever reason. Why would banks sell at the bid? Was it greed or fear?

  70. Gravatar of JohnH JohnH
    28. July 2011 at 20:49

    Oops! Should have replied to Alex on that one….

  71. Gravatar of Morgan Warstler Morgan Warstler
    28. July 2011 at 21:24

    Alex,

    The Fed works for banks.

    Denying this will confuse you.

    The order of importance as a RULE follows this MO:

    Bankers > Republicans > Democrats

    It is very very hard to take any given economist seriously, if they do not admit reality.

    On COUNTLESS occasions at this blog Scott and multiple posters have said, “morgan, I fear you are right”

    That’s when they all prove they are rank amateurs. They ADMIT what they know is happening, but refuse to internalize those facts into their science.

    DARWIN is science. Theirs is a faith based religion.

    My analysis is evolution.

    Scientific economics must accept that a game is afoot, and that game play affects behavior.

  72. Gravatar of Oliver Oliver
    29. July 2011 at 03:05

    Scott Sumner says:

    I’ll just say that loans don’t create deposits, banks create deposits. Banks make decisions on how many loans to have and how many deposits to have according to very complex criteria. Sometimes they increase loans w/o increasing deposits, and vice versa.

    Sounds like the heart of the disagreement here, even though this may not be main theme of your post. If you’ll allow a layman’s attempt to mediate:

    As far as I’ve understood the MMT analysis, the key is to distinguish between horizontal and vertical transactions both of which run through the banks.

    Horizontal transactions (loans and their corresponding deposits, i.e. they’re always in balance!) are determined by demand for loans but limited by the banking sector’s capital buffer and risk appetite.

    Vertical (fiscal) transactions, create deposits and their balancing assets (reserves). These deposits are credited to members of the private sector in exchange for goods and services – thus one of the mechanisms by which prices are said to be a public monopoly.

    Current legal arrangements have it, that the latter type of money creation is accompanied by debt issuance to drain the ‘excess reserves’ it creates. This can be countered by re-exchanging this debt for reserves / deposits, either by buying it back from banks directly or by buying it from the public in the open markets (?).

    Now, your point seems to be, that this last transaction (these last two transactions?), if driven to extremes, will affect the price level of goods (and assets?), because the public will not wish to hold the excess reserves / deposits. And, as far as I can tell, the MMT answer is: not so sure. Yes, exchanging debt for deposits is possibly an unfavourable proposition to those holding it, and lower interest rates may enhance the desire of potential debtors to borrow, (although not necessarily that of creditors to lend) but firstly, the exchange is voluntary and at market prices (!) and secondly, it may well have a deflationary effect wrt savers (those who usually hold gvt. debt), beacuse they will desire to accumulate more money / save more due to lost interest income.

    So, will people spend more on goods and services and borrow more money if rates are lowered / there are ‘excess reserves’ (in excess of what?)? To freely quote Wray from his recent interview: if the economy is running hot, the rate hike needed to have a slowing effect on asset bubbles would need to be very large indeed, whereas when it’s running cold and especially when the private sector is over-levered anyway (as now), low rates do not induce lending activity, nor do they cause cunsmption and thus, eventually (beyond full capacity, so they say), prices to rise (which, I hope, gets back to your initial question).

    To recap: at best, the effects of asset swaps are highly non-linear. MMT also claims to know of better tools to control demand, namely by controlling income through fiscal policy, by discouraging saving by stabilizing transfers of real goods and services such as care and medication, by guaranteeing a job to those who are willing and able to work, and by limiting the pontential of the financial sector to blow asset bubbles through more effective regulation.

    Right, hope I haven’t made too much of a fool of myself and at least tangetially skimmed your original question.

    Oliver

  73. Gravatar of Scott Fullwiler Scott Fullwiler
    29. July 2011 at 03:52

    OK, I was either unclear or misinterpreted.

    Let me try again. The point of the post was to show that MMT’ers miss that a doubling of the monetary base would reduce interest rates (assuming no interest on reserves) to zero and be inflationary. As Scott writes:

    “MMTers forgot that the nominal interest rate is the price of credit, not money. The Fed can’t determine that rate, it reflects the forces of saving supply and investment demand. Hence an attempt to set interest rates far below their correct level in savings/investment terms (the Wicksellian natural rate), would trigger an explosion in AD, and much higher inflation. ”

    Then, I said the following:

    “First, the doubling of reserves or the monetary base in and of itself isn’t inflationary. We’ve also always said that if this does in fact reduce interest rates the pvt sector borrows at, then it could be inflationary. We’ve always said monetary policy ‘is about price, not quantity,’ price being the interest rate (price of the bonds, price of credit, etc.).”

    Then, in my following paragraph, I discussed how the low interest rate (price of credit set by monetary policy, as in my previous quote) COULD in fact be inflationary from an MMT point of view.

    It would clearly–at least to me–appear that I was showing that the low interest rate resulting from a doubling of the monetary base can be inflationary according to MMT, which is what Scott suggests we “forgot.”

    Somehow, though, my comment was incorrectly interpreted as suggesting that I did not understand that “the price at which ownership changes. I.e., the amount of goods and services for which it exchanges” (as Patrick Sullivan put it, but Scott clearly meant the same thing in his response).

    Again, it would seem to me that this critique obviously missed my point. Suggesting that the Fed’s operations set a “price of credit” that can then affect the price level (as MMT does) is in no way inconsistent with the argument that the price of money is “the amount of goods and services for which it exchanges.” The former refers to the policy variable (the price of credit), the other is about the effects (on the price of money) of altering that policy variable.

    So, let me try again, saying that “monetary policy is about price (of credit), not quantity,” what we are saying is that the EFFECTS of monetary policy on the price level emanate from the price it sets for credit, not the quantity of the monetary base that it sets. As such, to suggest we “forgot” that interest rates matter is a misinterpretation of MMT.

  74. Gravatar of Payam Sharifi Payam Sharifi
    29. July 2011 at 04:24

    Morgan,

    MMTers are first taught institutional economics, which bases itself on darwinian natural selection. We then become post keynesians and become enveloped in the MMT stuff…at heart we’re optimists.

    So what you say is actually true, which is why I wrote a paper on group selection(the most powerful selection process) and the implications of it on economic policy. Yet even MMTers that have never heard of group selection realize what you say is true to an extent, its just that we’re optimists. Hence its pointless to approach us on those grounds, other than to try and irritate us.

    Anyhow, as others have mentioned, all MMT is really trying to do is explain central bank/government operations as it actually works. The rest of the policy proposals we mention are simply the views of that particular person.

  75. Gravatar of Ron T Ron T
    29. July 2011 at 04:50

    Alex Godofsky,

    Because everyone always wants money, because money can be exchanged for stuff?

    You are totally confused, monetary policy is carried out by swaps of assets of equal value. Banks are not given the reserves for nothing, there need to present the Fed bonds or whatever of EQUAL VALUE.

  76. Gravatar of Nick Rowe Nick Rowe
    29. July 2011 at 05:06

    What Scott Fullwiler says @03:52 is the same as standard Keynesian stories of the monetary policy transmission mechanism. If an increase in the stock of money lowers interest rates then it causes prices to rise. That’s fine.

    But I would like to ask Scott F. to continue with his story. What happens next? How far do prices rise? Does that rise in prices cause the rate of interest to rise back up, if we hold the stock of money constant at its new, higher, level?

    An economist could believe in the same Keynesian transmission mechanism, but also believe that the quantity theory of money is right, when it says that the price level will eventually rise in proportion to the money supply, and interest rates will return to their original level.

  77. Gravatar of Alex Godofsky Alex Godofsky
    29. July 2011 at 05:09

    Yes, Ron, and since bonds are traded on an open market the fed knows that value and can offer precisely the right number of dollars in return for them. There is no logical reason the bank would not engage in that swap; but even if there were, it would definitely engage in that swap if the deal were sweetened by even one cent. Conclusion: the Fed absolutely can increase the quantity of reserves even when the banks don’t want to hold more.

  78. Gravatar of Nick Rowe Nick Rowe
    29. July 2011 at 05:15

    And if that is what Scott F. would say, at least approximately, then I understand better where he’s coming from, because it’s a perspective I’m familiar with and understand, even if it’s not exactly the same as mine.

  79. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 05:48

    Payam,

    You are nibbling a the edges, rather than truly answering my point.

    First let’s get terms right.

    I’m the optimist. I believe that those who beg will be given charity. I believe that those who receive pay will do what they are told to do for that pay. I don’t think anyone is dumb enough to starve themselves to death.

    You are a thief. You KNOW that in the current system – the DOMINANT system, the system currently winning:

    1. A large minority own all the hard assets.
    2. That large minority controls the government.
    3. The government controls the money supply.

    So logically we can say, the large minority that own allt he hard assets controls the money supply.

    YOU DON’T LIKE THIS FACT. MMT is motivated by a desire to end this reality.

    The average MMTer is a dirty hippie who votes Democrat.

    —–

    Payam, I’m making a bigger argument. You say government controls money. I’m beating you because you can’t explain how to keep my people from controlling government.

  80. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 06:00

    JohnH,

    The ONLY reason you respond this way…

    “I think the idea is to get an operationally realistic response, as politics and realism are (currently) more likely to be mutually exclusive, especially with respect to economics.”

    Is because you don’t like the real outcomes of today’s politics.

    Please admit this is true.

    I LOVE today’s political reality. I’m very happy to see this crisis play out as I expect. I know a large minority owns all the hard assets and have the guns and $ necessary to keep the current system (government) in place.

    The WHOLE LESSON since 1980 has been to run monetary policy and fiscal policy in ways that weaken the hand of those without hard assets.

    So before I answer you I, CHALLENGE you to answer the question I put to Payam:

    How do you keep my people (the people with hard assets) from controlling the government that has a fiat currency?

    No MMTer can answer. Not Mosler, not anyone.

    You JohnH won’t answer either. You have no answer.

  81. Gravatar of Scott Sumner Scott Sumner
    29. July 2011 at 06:39

    MTD, That’s exactly right. Right now a more expansionary monetary policy would probably lead to less base money.

    Thanks MamMoth.

    Beowolf. The issue is not whether T-bill can be spent on financial transactions, the issue is whether T-bills can be spent on the same transactions as currency. Is there much overlap? Are they close substitutes.

    Ron, You said;

    “The wrong assumption by Sumner is that the Fed commands and the banks obey (money multiplier mentality, again). If anything, it is the other way round.”

    I really wish people would comment on what I said. I never said this, nor do I believe it. Indeed I rarely even talk about banks when discussing monetary policy.

    You said;

    “So, we double the money supply – it means the banks WANTED the reserves more than the stuff they sold. Why?”

    I never said there was any increase in reserves. Again, you need to comment on what I wrote.

    JohnH, You said;

    “Not sure I understand banks increasing loans without increasing deposits. Surely if there’s any increasing lending done, there must be a borrower.”

    Loans and deposits are two different financial products. They aren’t equal in size (you can check the data.)

    A far as paying our bills by printing money, there’s a limit to that, as with any other tax (you are describing the inflation tax.) There’s a Laffer curve effect, I doubt you could raise more than 10% of GDP by printing money, on a sustained basis. At low inflation rates it’s less than 1% of GDP.

    Oliver, You said;

    “I’ll just say that loans don’t create deposits, banks create deposits. Banks make decisions on how many loans to have and how many deposits to have according to very complex criteria. Sometimes they increase loans w/o increasing deposits, and vice versa.
    Sounds like the heart of the disagreement here,”

    No it’s not the heart of the disagreement, I’d make the same argument for an economy that completely lacked a banking system, or for an economy where loans did cause deposits. Nothing in my post relies on this assumption.

    Oliver, You said;

    “Horizontal transactions (loans and their corresponding deposits, i.e. they’re always in balance!) are determined by demand for loans but limited by the banking sector’s capital buffer and risk appetite.”

    Look at a bank balance sheet, the amount of loans does not equal the amount of deposits.

    You said;

    “Right, hope I haven’t made too much of a fool of myself and at least tangetially skimmed your original question.”

    You haven’t looked like a fool at all, but you haven’t addressed my question. To address my question you need to think about how monetary policy would work in an economy without any banks.

    Scott; You said;

    “”First, the doubling of reserves or the monetary base in and of itself isn’t inflationary. We’ve also always said that if this does in fact reduce interest rates the pvt sector borrows at, then it could be inflationary. We’ve always said monetary policy ‘is about price, not quantity,’ price being the interest rate (price of the bonds, price of credit, etc.).””

    This seems to be the heart of the disagreement. If interest rates didn’t change at all, then NGDP would double. That’s because people generally want to only hold a modest fraction of their incomes in the form of non-interest bearing currency. Usually around 5%. So if the Fed doubles currency, it is not the case that the public starts walking around with 10% of NGDP in their wallets–it stays at 5%. Instead, NGDP doubles. Now if rates do fall to zero, they might hold 10% of NGDP in their wallets (or more likely as bank reserves.) But that’s not a stable equilibrium if we started from a position of normal economic activity and normal interest rates. Because zero interest rates in normal times would lead to an explosion in AD. So whereas you see the fall in interests as being a necessary condition for money to be inflationary, I don’t see it that way at all. Indeed doubling the base if much more inflationary if interest rates rise via the Fisher effect, because then velocity rises too!

    Scott, You said;

    “It would clearly-at least to me-appear that I was showing that the low interest rate resulting from a doubling of the monetary base can be inflationary according to MMT, which is what Scott suggests we “forgot.””

    My mistake, I was reacting to MMTers who told me OMPs are not inflationary, because you are simply swapping one asset for another. And NFA doesn’t change. i thought that wa sthe MMT position. But as I indicated above, I still don’t agree with your claim that monetary policy has a transmission mechanism that works through changes in interest rates.

    Nick, You said;

    “What Scott Fullwiler says @03:52 is the same as standard Keynesian stories of the monetary policy transmission mechanism. If an increase in the stock of money lowers interest rates then it causes prices to rise. That’s fine.”

    In 1938 Joan Robinson said the German hyperinflation couldn’t have been caused by easy money, because interest rates in Germany didn’t fall. I had thought the current (New) Keynesian position is that Robinson was wrong. Are you saying that’s still the Keynesian position?

    You said;

    “An economist could believe in the same Keynesian transmission mechanism, but also believe that the quantity theory of money is right, when it says that the price level will eventually rise in proportion to the money supply, and interest rates will return to their original level.”

    Yes, but if you are going to allow for the possibility that nominal interest rates reflect more than just the liquidity effect, then that opens the door to easy money actually raising nominal interest rates (If the Fisher effect outweighs the liquidity effect.) It may seem far-fetched, but I’m guessing it would not seem far-fetched to my Latin American readers. My point is that if easy money can lead to higher interest rates, then one can’t argue that interest rates are the key to the transmission mechanism. Even worse, an increase in the money stock, ceteris paribus, is inflationary even in economies lacking interest rates (say an Islamic economy.)

  82. Gravatar of Leverage Leverage
    29. July 2011 at 06:53

    Morgan, good posts. I like MMT, but I agree we are in a rooted system, so applying MMT for the good I don’t see it happening soon. MMT has been proved right: because republicans have used it to wage war (and Obama continued to do so), good for their pockets and military-industrial complex and big oil. Everyone else: fucked up.

    MMT will be maybe applied when the status quo is at danger. But the status quo has build up a narrative during last decades and all the economic thought, including monetarism and neoclassical economics (and some of the thought expressed in this blog), is a product of big money & power, as always have been. So they may well fall in contradiction and have to change the narrative, just like what happened in the 30’s-40’s, etc.

    Parts of it may be scientific and correct, but most of mainstream crapp is the product of the status quo. Economic thought that advances in the scientific process always challenges the status quo. Even Keynes did, because he saw danger of capitalism falling into communist because elites overextended theirshelves.

    Something similar could happen again, the game is rigged, but that DOES NOT mean that compromises don’t need to be done. Even in the most despotic regimes, compromises have to be done, or regimes fall apart at some point with violence (it may take decades, but eventually will fall). The ball is at elites court, if they overextend with their greed and opression, it will backfire on them. It’s as simple as that.

    We may need a depression (even if a manufactured one) or couple more of deep recessions to get there, but it can and probably will happen. So to answer your question: “How do you keep my people (the people with hard assets) from controlling the government that has a fiat currency?” With political and social struggle, it’s all about class warfare (as always has been). “When will it happen?” When the status quo is unsustainable because it’s out of social equilibrium, then there will be change or collapse and evolution to other sort of regime.

    No one can know what and when will happen, but I can assure something: this won’t stay forever the same, and things will change rather sooner than later.

  83. Gravatar of Oliver Oliver
    29. July 2011 at 07:19

    So let’s say they double the base and let rates go where ever they want.

    ………………………………………………..

    They can’t control both at the same time, right?

    ………………………………………………..

    To address my question you need to think about how monetary policy would work in an economy without any banks.

    ………………………………………………..

    To which MMTers would probably reply that, except for paper money, the monetary base never actually leaves the banking system, so the question seems rather odd. Only banks have reserve accounts.

    MMTers would probably rephrase the question to: what effect does a change (in your example, doubling) in stock of this inside money have on the overall quantity, price and velocity of outside money? And since there are various variables to consider and various channels involved that react differently to such changes, and, most importantly, at least two possible causes of that change in the first place (expansion of loans or deficit spending), the answer will usually be somewhere between ‘it depends’ and ‘hard to tell, so let’s try something else’. I think you’ve come up against a rubber MMT wall :-). What causes base money to double and under which circumstances might that plausibly happen? How do you explain the Canadian 0 reserve system? Are they doomed to eternal deflation because of it?

  84. Gravatar of Jeff Jeff
    29. July 2011 at 07:42

    This debate feels a lot like the liquidity trap one between monetarist and old-style Keynesians. The monetarists maintained that the trap did not exist. If you increased the money supply enough, people would end up holding more money than they wanted to, and their subsequent efforts to reduce their money holdings would increase spending, nominal output, and eventually, prices. The key idea was the “real balance” effect: the excess money supplied becomes a hot potato until, as Scott says, nominal output has risen enough to bring money demand back up to money supply.

    MMT’ers seem not to understand this argument. They talk as if only interest rates matter. Money matters only to the effect that it changes the price of credit. This is very much like the liquidity trap argument that says once interest rates hit the zero bound, nothing more can be done, because only interest rates matter.

    No serious monetary economist believes in liquidity traps. MMT proponents should ask themselves why, if they want to be taken seriously.

  85. Gravatar of Ron T Ron T
    29. July 2011 at 07:46

    Scott, you said

    So let’s say they double the base and let rates go where ever they want. I claim this action doubles NGDP and nearly doubles the price level.

    Then you said Ron T (…) I never said there was any increase in reserves. Again, you need to comment on what I wrote.

    How do you double the base without changing reserves? Cash demand is endogenous, it is basically constant. You cannot force cash on people like you cannot force reserves on people.

    If you want to just give them cash for free then this is a fiscal operation, not monetary.

    You need to be pricse, how do you double the base? Asset swap (monetary) or a direct transfer (fiscal) to the private sector?

    Fiscal operations indeed have much more impact than monetary operations. But you need to look at impact on AD, not “base”. Who care about “base”? Reserves cannot even be spent in the broad economy, you cannot pay with them unless the payee has an account at the Fed (banks only).

  86. Gravatar of Ron T Ron T
    29. July 2011 at 07:48

    Morgan Warstler,
    How do you keep my people (the people with hard assets) from controlling the government that has a fiat currency?

    The govt doesn’t need you for anything, so you cannot control it. They can control you, impose a tax on hard assets and you are done.

  87. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 08:15

    Ron T,

    The state and US government are not the same thing.

    The US government does what the owners of the HARD ASSETS and the GUNS say.

    Why aren’t you intellectually honest enough to admit it?

    You can’t bring yourself to look into the abyss can you?

    To much reality pissing on your dream huh?

    Sure, the state is made up of people, but the US government is the expression of the will of and exclusive and specific subset of those people: hard asset holders.

    Stop being a wuss, answer my point.

  88. Gravatar of Leverage Leverage
    29. July 2011 at 08:18

    Jeff,

    The whole notion that you can “increased the money supply enough” is delusional. Unless central banks would indeed drop money from the sky in helicopters this DOES NOT happen in the real world operationally.

    People won’t get more loans if you increase reserves (the only way CB can increase money supply). So if that’s not circulated into the economy then nothing will happen, prices won’t increase. So hard to understand this simple notion?

    So you are now left with only other option as a CB to increase “supply”: swapping one paper for an other, swapping securities (treasuries) for money. problem is that these securities were already ‘money things’, that paper was shadow money as much as treasuries are shadow money, and indeed is money for banking system (because it’s used to set reserves).

    IN THE REAL WORLD, financial system does not only use dollars as ‘money things’, there are other assets and securities that are AS LIQUID AS GOOD OLD DOLLARS. This is what some people does not get.

    So because all these movements are mostly part of the financial shenanigans machine (where it can be used to leverage and create liquidity), it won’t get circulated in the real economy (increase in wages, income, etc.) which is what will make prices rise.

  89. Gravatar of RG RG
    29. July 2011 at 08:33

    Morgan –

    Go look at your window and enjoy the summer weather. You sound like Alex Jones at infowars. I’m sure you have stockpiled your ammo, gold satchel, and cans of beans.

    I am not here to chane your mind, only point out that you need to relax. We live in a federal republic representative democracy, the least worst form of government. Your points have some validity but in my opinion are outrageously overblown.

  90. Gravatar of JohnH JohnH
    29. July 2011 at 08:55

    Morgan –

    If the layperson realized that taxes and bonds are useless for Federal revenue, that would have an impact on how they interact with politicians (and others). One step closer to being able to tell the truth about who is really in control (and if it’s the owners of hard assets and guns, it will be seen). That would put us in a better position to address control issues.

  91. Gravatar of Alex Godofsky Alex Godofsky
    29. July 2011 at 09:17

    Ron T:

    You cannot force cash on people like you cannot force reserves on people.

    You absolutely can force cash on people! You print up some dollar bills and offer to pay market price for assets they own! If that doesn’t work, you offer to pay market price + 1 cent! If I had a dollar-printing machine in my basement I could absolutely make more dollars and convince stores to accept them in return for goods. The privately held supply of dollars would then increase in a way what could not be reversed short of someone physically destroying their dollars or the Fed selling some of its assets.

  92. Gravatar of Jeff Jeff
    29. July 2011 at 09:19

    Leverage:

    The Fed buys a Treasury bond from you. It pays with a check. You deposit the check at your bank. The money supply has just increased by the amount of the bond purchased. Will you spend any of that money? Maybe you’ll just purchase some other financial asset. But in that case, whoever sold you that asset now has more money than before, so he may spend some of it. Your argument is saying that there is an infinite chain of people who are all just buying financial assets from each other, and none of that activity ever results in any real investment or spending.

    Back to your bank. It presents the check the Fed paid you with to the local Federal Reserve Bank, which increases your bank’s reserve account. The Fed is paying interest on excess reserves that is higher than the rate paid on Treasuries. So your bank is content to hold the excess reserves. In effect, it has loaned money to the Fed. And interest rates have not changed.

    If there were no interest paid on reserves, your bank would probably try to loan out its excess reserves. In that case, the interest rate would fall. If the Fed wants to hold interest rates steady, it has to sell the T-bond to keep the quantity of reserves unchanged. Doing so reduces deposits, because whoever buys the bond has to pay the Fed with a check, which reduces the buyer’s deposits. So your assertion only holds true if the Fed is targeting the interest rate and does not pay interest on reserves. But there’s nothing revolutionary in that, it’s standard monetary economics.

    You also assert that bonds are money. I invite you to
    take a T-bond on down to your grocery store and try to exchange it for a bag of potato chips. And get change.

    Finally, you keep talking about loans. But loans are not money. Loans are bank assets. Deposits are bank liabilities. Reserves and currency are liabilities of the Fed. Banks have other assets besides loans, and they have other liabilities besides deposits. Loans and deposits do not move in lockstep.

    This stuff is not rocket science, and it’s not particularly mysterious, either. It’s standard monetary economics, and SHOUTING will not change it.

  93. Gravatar of vimothy vimothy
    29. July 2011 at 09:23

    Isn’t the problem with the idea that doubling the base would automatically double the price level what Nick Rowe calls the short-side rule? If reserves are scarce, then bank lending or the supply of broad money (or whatever) is limited by reserves. If reserves are not scarce, then bank lending is limited by something else, like finding credit worthy-borrowers.

    I do not see why the number of credit worthy borrowers demanding credit would automatically double, simply because the Fed doubled the base. It strikes me that the two things should be mostly independent.

  94. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 09:51

    Sorry RG,

    You got it backwards. I represent ALL the owners of hard assets… who it just so happens, have all the guns, and are super likely to vote.

    I’m not Alex Jones. I’m not a conspiracy theorist. Consider me the voice of the “haves” speaking to you the MMTers.

    I’m the voice of the hegemony of the status quo. And you can not fiat away our control of the government, by saying “the government has fiat currency.”

    Saying that over and over doesn’t put you in charge of the Republic.

    And pssst… we’re not a Democracy, what you are seeing is proof Democracy took its stab and it gets beat… Democracy is the weaker meme.

    —–

    Ok JohnH, now let’s notice the flaw in your logic:

    “If the layperson realized that taxes and bonds are useless for Federal revenue, that would have an impact on how they interact with politicians (and others). One step closer to being able to tell the truth about who is really in control (and if it’s the owners of hard assets and guns, it will be seen). That would put us in a better position to address control issues.”

    Er, as I keep saying poor fat people with 500 channels do not riot.

    So exactly what is the mechanism by which the haves are going stand idly by and watch the have nots be rousted into revolucion!

    JohnH, the mistake MMTers make is the mistake that Progressives make – you think you can beat the bankers / the oligarchs.

    You can’t. The folks you aim to help don’t have a pot to piss in.

    But the Tea Party can beat them. Ultimately they WILL beat the banksters. Because they have the votes, money, assets, and guns – and when they seize up, the system they will support will chew up the oligarchs, it won’t empower your team.

    Look, the value of the land, the houses, the hard assets can deflate, but they will STILL BE OWNED by the same people.

    Nothing gets around who owns the hard assets.

    That’s why government and money was formed.

  95. Gravatar of Ron T Ron T
    29. July 2011 at 10:02

    Alex Godofsky,

    If you are not paying par that is fiscal policy. Reread my post. Yes, you can shower people with cash with fiscal policy, not monetary. Something Scott S doesn’t realize.

    Morgan,

    Using so many caps makes you look like a clown. Contents of your posts doesn’t help either.

    The US government does what the owners of the HARD ASSETS and the GUNS say.

    The govt has all the guns it needs. It can put a 99.99% tax on any hard assets it wants rendering them worthless – people will have to get rid of them at rock bottom pricess to pay the tax. Think of something better.

  96. Gravatar of MamMoTh MamMoTh
    29. July 2011 at 10:10

    Scott (Sumner), in your previous post concerning QTM you said there were countries running budget surpluses and high inflation. Could you point out which countries you had in mind?

  97. Gravatar of Alex Godofsky Alex Godofsky
    29. July 2011 at 10:11

    Ron T:

    So your entire point is that you disagree with how some people define a word? Wonderful. You haven’t justified, btw, the idea that people somehow won’t accept par.

  98. Gravatar of Leverage Leverage
    29. July 2011 at 10:12

    Jeff,

    “Your argument is saying that there is an infinite chain of people who are all just buying financial assets from each other, and none of that activity ever results in any real investment or spending.”

    The argument is that because treasuries (or some other assets) are as liquid as money (this is: you can get ‘real’ money for them at any time from the market), if these are not being spend in goods already is because there is not propensity to do so (to consume). Yes obviously building stocks of money can be inflationary,

    “If there were no interest paid on reserves, your bank would probably try to loan out its excess reserves.”

    Wrong, banks don’t loan reserves. Banks loan against capital (that’s the real limit), this is neither rocket science but the way. Also Banks can only loan if there is demand for loans, and if the the demand is ‘credit worthy’ (there are expectations for it to be solvent).

    “You also assert that bonds are money. I invite you to
    take a T-bond on down to your grocery store and try to exchange it for a bag of potato chips. And get change.”

    No, bonds are ‘money things’, this does not mean you can go and buy potatoes with them, but for practical purposes are like money on the financial system (now get back to the first quote: this means that if you wanted to swap these ‘money things’ for real money you could at any moment, and go and buy whatever goods you wanted).

    “Finally, you keep talking about loans. But loans are not money. Loans are bank assets. Deposits are bank liabilities. Reserves and currency are liabilities of the Fed. Banks have other assets besides loans, and they have other liabilities besides deposits. Loans and deposits do not move in lockstep”

    Credit is used to buy goods and services, it’s as good as central bank money (and for the most population, there isn’t actually difference between both things because they don’t know the difference, to them it’s all ‘dollars’ or ‘euros’). So if people uses credit and deposits to buy and sell goods, this will contribute to prices as much as central bank money (which anyway, except coins and bills, never touches the street).

    I wouldn’t shout, but this sort of high horse and superior position of not trying to even understand other position is irrational.

  99. Gravatar of RG RG
    29. July 2011 at 10:21

    Morgan –

    Haha, you made my day with that diatribe. Awesome stuff. You’re absolutely insane, but I’m not trying to change your mind. Good luck.

  100. Gravatar of MamMoTh MamMoTh
    29. July 2011 at 10:21

    Jeff, some stores will not accept a 100$ bill to sell you a bag of potato chips. Is that bill not money?

    I think your own example of what happens when someone sells his bonds shows that bonds are (nearly) money given the liquidity of the market. The process of selling your bonds could be fully automatic when you use your credit or debit card to buy your groceries.

    Loans create deposits that can be withdrawn from the banking system. So how much both move in lockstep depends on how much cash borrowers want to hold.

  101. Gravatar of Ron T Ron T
    29. July 2011 at 10:34

    Alex,

    Ron T:

    So your entire point is that you disagree with how some people define a word? Wonderful.

    SS said “MMT claims doubling monetary base won’t double prices”. I explained that it depends how you double. If you double with fiscal policy (at full employment) you might very well double prices.

    The distinction between fiscal and monetary is fundamental. For you it is just words becuase you don’t get it.

    You haven’t justified, btw, the idea that people somehow won’t accept par.

    I said they would. This is monetary policy – my scenario 1: banks want to double the loan volume, they accept par. If we are below full capacity this won’t double prices though. Scenario 2: banks undergo a flight to safety: they accept par. Prices in the broad economy are falling. We lived thru this not mere 2 years ago, yet SS already forgot?

  102. Gravatar of Ron T Ron T
    29. July 2011 at 10:37

    Alex,
    to clarify: banks accept par but only when they want to. You cannot just offer them 2T reserves at par and be sure they will swap. It is up to them. Otoh once they have made 20T of loans and ask the Fed for 2T reserves offering 2T bonds the Fed has no choice but to oblige (something Sumner doesn’t get) – becuase otherwise the payment system breaks down and we have a mother of all bank runs.

  103. Gravatar of Monetary Policy Sucks because it relies on Real Estate: Long Live MMT! « The Traders Crucible Monetary Policy Sucks because it relies on Real Estate: Long Live MMT! « The Traders Crucible
    29. July 2011 at 11:08

    […] Oddly, this was inspired by vimothy…. […]

  104. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 11:18

    RG, I’m here to please! Hippie punching isn’t a national past time for nothing!

    Which is why Ron saying this is such a classic:

    “The govt has all the guns it needs. It can put a 99.99% tax on any hard assets it wants rendering them worthless – people will have to get rid of them at rock bottom pricess to pay the tax. Think of something better.”

    Are you a TARD?

    The US military is going to attack the 40% of Americans who own everything, so dirty hippies can run Monetary Policy?

    We’re far closer to a tax revolt than you think. There’s a REASON (for you Ron) even Dems are afraid to raise them.

    Long before the MMT dirty hippies get to run police state, the Tea Party will would re-instate a poll-tax and elect Ron Paul Emperor.

  105. Gravatar of Alex Godofsky Alex Godofsky
    29. July 2011 at 11:26

    Ron T:

    If the banks are willing to buy or sell an asset for $X on the open market, it’s silly to suggest that for some reason they would refuse to buy or sell that asset to the central bank at the same price. That’s what it means for something to be the market price. You are basically accusing the entire banking system of colluding to not trade with the Fed on the same terms as they trade with each other.

    And even if the Fed does have to offer them $2T plus one penny for something with a market price of $2T doesn’t suddenly cause some categorical shift in the whole deal.

  106. Gravatar of Jim Glass Jim Glass
    29. July 2011 at 11:30

    Isn’t the problem with the idea that doubling the base would automatically double the price level what Nick Rowe calls the short-side rule?…

    I do not see why the number of credit worthy borrowers demanding credit would automatically double, simply because the Fed doubled the base. It strikes me that the two things should be mostly independent.

    Who needs more credit-worthy borrowers when a lower interest rate will get so much more from the same?

    First, at 5% interest Jeff Bezos and I sit on our butts. At 4% I buy a $200,000 second home and Jeff signs the contract on a new 500,000 sqft fullfillment plant hiring 1,200 new workers (creating a bunch more new credit-worthy borrowers) in Tennessee. Our two decisions make up for a whole lot of credit-worthy borrowers who borrow only a little bit more.

    Then don’t forget the wealth effect. A drop in the interest rate from 5% to 4% increases the value of assets by 20%, ceteris paribus. The wealth effect is estimated at around 4%. Household wealth in the US is about $50 trillion, increase it by $10 trillion and one gets a nicely signifcant increase in demand.

    But we are talking about *doubling* the money base (without IOR) and so driving the interest rate down towards zero.

    Dropping the interest rate from 5% to 1% increases the value of assets by 5x — so $50 trillion of household assets become $250 trillion. A wealth effect of 4% increases demand by $8 trillion — which is more than 50% of current GDP of $14.x trillion.

    GDP tries to rocket from $14.x trillion to over $22 trillion … except obviously the process is derailed far short of there, because real GDP and national productive capacity can’t grow at anything like that rate, and so are forced of the tracks courtesy of big-time inflation.

    (And don’t anyone object “Japan”. Anyone who can’t see the difference between this and what the BoJ has done is self-disqualified.)

  107. Gravatar of MamMoTh MamMoTh
    29. July 2011 at 11:41

    Dropping the interest rate from 5% to 1% increases the value of assets by 5x

    That’s insane.

  108. Gravatar of Ron T Ron T
    29. July 2011 at 12:34

    Morgan,
    just because you don’t get MMT there is no need to get agitated, really, LOL. Nothing you said disproves MMT, you just can’t even scratch it at your level of understanding, you are just getting more and more frustrated. Someone said: relax, seek shade if necessary.

    Alex,
    If you pay par, the banks will not collude not to swap, it just means we are in equilibrium and the quantity is constant.

    If you pay plus a penny, then this penny is fiscal policy. Sumner claimed that MMT understanding of monetary policy is flawed and went on to talk about… fiscal policy. That is sad. He doesn’t even know where one ends and the other begins.

    Anyway, if you overpay by 1 cent, you can push 2T reserves on banks they didn’t want (really: were indifferent, because you pay essantially par). Nothing will happen, precisely because they didn’t want the reserves in the first place – it means there was no new 20T in loans to create the demand for reserves, there was no flight to safety. Nothing happens, you just changed the composition of the asset side of banks’ balance sheets. And you increased the aggregate demand of the private sector by 1 cent. Yawn. So what? Hint: the prices will stay constant.

  109. Gravatar of Alex Godofsky Alex Godofsky
    29. July 2011 at 12:51

    Ron T:

    If you pay par, the banks will not collude not to swap, it just means we are in equilibrium and the quantity is constant.

    No, you’ve just increased the quantity of dollars. You have swapped dollars for things that are not dollars, so the other guy must have more than before.

    Nothing will happen, precisely because they didn’t want the reserves in the first place – it means there was no new 20T in loans to create the demand for reserves, there was no flight to safety. Nothing happens, you just changed the composition of the asset side of banks’ balance sheets. And you increased the aggregate demand of the private sector by 1 cent. Yawn. So what? Hint: the prices will stay constant.

    Except the banks had that composition of their balance sheets for a reason! They wanted it that way; they will still want it that way, and so will use those dollars to buy bonds from someone else, who will also then want to restore the composition of his balance sheet, etc. Thus everyone is trying to get back to their original composition but can’t because the total quantity of money has increased, period, and the total quantity of bonds has decreased.

    You are relying on the idea that not only are the banks indifferent to selling or buying a bond at a given price, but they are indifferent to holding dollars or bonds. You are begging the question by assuming a liquidity trap! But as Scott has pointed out dozens of times, as long as the liquidity trap is expected to end sometime in the future then people will expect that in the future they won’t be indifferent between dollars and bonds. So the increased quantity of dollars will be expected to affect future NGDP. And expected future NGDP affects current NGDP. Therefore by exchanging dollars for bonds now and promising that the exchange won’t be reversed, the central bank necessarily stimulates current NGDP.

  110. Gravatar of Peter D Peter D
    29. July 2011 at 13:07

    Alex, in your scenario the banks would swap reserves with the Fed only to try to swap right back? Why? Just for the heck of it? You cannot both assume indifference between reserves and Tsys at the point of sale (at par) and preference for reserves at exactly the same time (“Except the banks had that composition of their balance sheets for a reason!”)

  111. Gravatar of Ron T Ron T
    29. July 2011 at 13:16

    Alex,

    No, you’ve just increased the quantity of dollars..

    Look, both reserves and bonds really exist as electronic entries in Fed’s spreadsheets. One is a checking account (reserve) the other a savings account (bond). They are not fundamentally different. Except that for some stupid reason one is called “money”, “base” etc. and the other not, and one is good to satisfy the reserve requirement and the other not which confuses SS and others.

    Thus everyone is trying to get back to their original composition

    No they don’t, they preferred 2T +1c in reserves than 2T in bonds, otherwise they wouldn’t have swapped

    but can’t because the total quantity of money has increased, period, and the total quantity of bonds has decreased.

    yes they can, the Fed would give them bonds back the moment they asked. The 1 cent would be theirs to keep.

    Again, i think you are a victim of the money multiplier mindset. Reserves cause nothing, they don’t cause loans for sure and cannot be lent out. Just by tricking banks into reserves by overpaying 1c won’t cause a thing. As I have shown the prices will stay constant.

    You can trick the economy to take out 20T of loans by creating demand (hint: fiscal policy), but SS works hard to persuade you the monetary policy is the only way to go, throwing in confusion between fiscal and monetary to boot.

  112. Gravatar of Alex Godofsky Alex Godofsky
    29. July 2011 at 13:50

    yes they can, the Fed would give them bonds back the moment they asked. The 1 cent would be theirs to keep.

    Um, why? Why would the Fed sell the bonds? The entire premise is that the Fed decided it wanted to increase the money supply. Even if you think some specific Fed would, in fact, sell the bonds back, it’s easy enough to imagine a Fed that wouldn’t.

    Again, i think you are a victim of the money multiplier mindset.

    I don’t think so, since I’ve never studied macro and I only have a basic idea of what the money multipler is. I’m looking at this purely through the lens of the QTM. I don’t care about loans, etc. and am not treating the banks as any different from a private individual who has some portfolio of stocks, bonds, cash, etc.

    Just by tricking banks into reserves by overpaying 1c won’t cause a thing.

    If the banks don’t actually want the reserves, and they do want to hold bonds (revealed preference: before the Fed used that penny to bribe them, they preferred holding those 2T bonds to 2T cash – otherwise they would have sold the bonds to some other individual), why wouldn’t they try to exchange the reserves for bonds now and just keep the penny? You are suddenly assuming that they are indifferent between the two cases. How do you justify that assumption?

  113. Gravatar of Alex Godofsky Alex Godofsky
    29. July 2011 at 13:57

    Look, both reserves and bonds really exist as electronic entries in Fed’s spreadsheets. One is a checking account (reserve) the other a savings account (bond). They are not fundamentally different. Except that for some stupid reason one is called “money”, “base” etc. and the other not, and one is good to satisfy the reserve requirement and the other not which confuses SS and others.

    Except they are fundamentally difference because one of them never pays interest and is the medium of account. Bonds have only one price, the interest rate, where dollars have n prices, where n is the number of goods and assets available for purchase.

  114. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 14:31

    Ron,

    MMT isn’t hard. Print money, buy stuff/hire people, tax it back.

    You say government has a monopoly on money, so it can do this.

    And you know why my argument pees in your Cheerios: in the US, government and money are both tools of people who have hard assets.

    As in PROPERTY RIGHTS is the cause of government.

    If government doesn’t serve those with property, if money doesn’t serve those with property…. neither system will stand in the US.

    —-

    GUNS = PRIVATE PROPERTY: I’d urge you to spend some time looking at what happened when the USSR fell.

    It was no different than during the settling of the Old West. The little guys with hard assets, hired big guys with guns to stand around protecting their stuff, stores, etc.

    Today, our political-economy reality is STILL gun and private property based.

    REVOLUCION! IS NOT AN ISSUE: China worries about unrest from the have-nots, and will for some time…. but in the US, that’s not a concern.

    Unrest here, now stems clearly from the encroachment on lives of the have asset holders in the Republic. The guys with hard assets, the Tea Party, run the show.

    —-

    Ron T, governments fall. Our has lasted as long as it has because of limited government and private property supported by guns.

    The fact is you haven’t made a single argument against mine.

    You parrot and you wave off, what you don’t do is give a clear and convincing explanation of how the government run by and for property holders is going to suddenly turn on them, and why?

  115. Gravatar of Ron T Ron T
    29. July 2011 at 14:39

    Alex,

    I’m looking at this purely through the lens of the QTM.

    Ok, QTM is wrong for a ton of reasons. It is really not at all helpful for thinking about output and prices.
    http://blogs.forbes.com/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
    http://neweconomicperspectives.blogspot.com/2011/07/two-theories-of-prices.html

    Think about it, how come can one cent make a difference in the economy just by swapping one asset into another? If something is too good to be true it usually is.

    Except they are fundamentally difference because one of them never pays interest and is the medium of account. Bonds have only one price, the interest rate, where dollars have n prices, where n is the number of goods and assets available for purchase.

    Is your checking account fundamentally different than a savings account? Does the savings account have one price and the checking account n prices?

    If the banks don’t actually want the reserves, and they do want to hold bonds , why wouldn’t they try to exchange the reserves for bonds now and just keep the penny?

    if they got 1c each time they did this, sure they would be doing this like crazy. This is fiscal policy. So? I am not following.

    I took your assumption that for banks 2T reserves = 2 T bonds, and 2T reserves +1c > 2T bonds. These portfolio compositions are marginally different. One has more “money” according to the standard definition, because standard definition is idiotic and treats bonds as non money. In practice these portfolios are equivalent and easily switched between.

    “Money” being reserves cannot really be spent outside the banking system: you can only pay with this “money” to an entity that has an account at the Fed (banks only) so banks use this for interbank settlements. But you are mistaken thinking that more of this “money” means more demand for cars or potatoes.

  116. Gravatar of Ron T Ron T
    29. July 2011 at 14:42

    Morgan,

    you should really try an easier forum, what you write is gibberish, sorry. There is no logical connection between what you write and what is being discussed here. You are right that I haven’t made an argument against yours because I have no idea what you are talking about. It is like a child trying to inject itself into an adult conversation. Maybe have an adult translate the stuff you want to say into English so that you can get more traction?

  117. Gravatar of Jim Glass Jim Glass
    29. July 2011 at 14:43

    “Dropping the interest rate from 5% to 1% increases the value of assets by 5x”

    “That’s insane”.

    Dude, the capitalized value of a stream of income = Income/interest rate.

    If a bond, building, whatever, pays $1,000 per year and the interest rate is 5%, the present value of that is $20,000. That’s what one would pay to buy it or demand to sell it. I.e.: At 5% interest it takes an investment of $20,000 to earn $1,000 per year from it.

    If a bond, building, whatever, pays $1,000 per year and the interest rate is 1% … hmmm …. what is $1000/0.01? At 1% interest it takes an investmment of … how much? … to earn $1,000 per year from it?

    Your incredulousness at this rather simple and very basic fact means … what? … we’ve gone past the limits of MMTs instruction of its students in reality-based finance?

  118. Gravatar of spark spark
    29. July 2011 at 15:05

    Morgan Warstler said:

    “….Payam, I’m making a bigger argument. You say government controls money. I’m beating you because you can’t explain how to keep my people from controlling government…..”

    I know one way to make it harder for your people to control government: teach the populace how the system actually works, so that they can’t be manipulated and terrorized by bogus analogies between household spending and government money operations.

    Right now we’ve got “MMT for the elites and Austrian economics for the rest of us”.

  119. Gravatar of MamMoTh MamMoTh
    29. July 2011 at 15:06

    Jim: Your incredulousness at this rather simple and very basic fact means … what?

    It means you’ve got the interest rate – price relationship backwards. And that I hope to do business with you.

  120. Gravatar of Jim Glass Jim Glass
    29. July 2011 at 15:19

    It means you’ve got the interest rate – price relationship backwards

    So you’d say, for instance, that the home price boom-bubble was caused by interest rates being driven too *high*. I haven’t seen even any MMTer make this claim yet.

    Please, do expand on this….

  121. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 15:38

    Ron, yawn. You get it, don’t like it, and have no response.

    MMTers willingly talk about the jump from barter to currency.

    Mine is a far better argument against you.

    Those with hard assets hold power. Money and Government are both conceptions built to serve them.

    Try and tell your MMT story with those assumptions.

    If you can’t then you must argue convincingly that government will and could work against their interests.

    The REALITY is a small number of people are unemployed, and no one cares enough to topple the system to come to your aid.

  122. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 15:49

    spark! atta-boy!

    way to prove my point to Ron.

    See Ron, spark gets it!

    “I know one way to make it harder for your people to control government: teach the populace how the system actually works, so that they can’t be manipulated and terrorized by bogus analogies between household spending and government money operations.”

    See how average spark is?

    1. spark’s “populace” do not vote.
    2. so beyond teaching them MMT, you are going to have to get them registered and going to those polls.
    3. and then you’ve got to RAISE MONEY to donate to politicians who currently represent the interests of HARS ASSET HOLDERS.
    4. and then there’s gerrymandering which puts all those who have no hard assets into highly concentrated urban districts.
    5. and then there’s the Congressman quite happy to represent those concentrated areas that don’t want to see gerrymandering end.

    And that’s not even talking about the guns!

    See Ronnie, so far I’ve here two stupid responses to me:

    1. The government will turn its army on the asset holders.

    2. You losers are going to educate the bottom half and turn them into active voters.

    —–

    So forgive me if I feel like no one has answered my point.

  123. Gravatar of MamMoTh MamMoTh
    29. July 2011 at 15:54

    No Jim, I am saying the interest rate determines the interest payment out of the principal, not that interest rates determine the principal out of the interest.

    But I am willing to buy from you any bond at 5% and sell it to you for 49 times its price when interest rates are at 1% any time. That’s a deal for you.

  124. Gravatar of MamMoTh MamMoTh
    29. July 2011 at 15:56

    Sorry I meant 4.9 times its price. That’s the bargain.

  125. Gravatar of Lee Kelly Lee Kelly
    29. July 2011 at 16:09

    Alex,

    I intend to research MMT some, but I think Nick is right: MMTers are mistaking accounting identities for equilibrium conditions. They just assume monetary equilibrium and proceed from there.

    I tried repeatedly to get an MMTer to acknowledge the possibility of an excess demand for money. One of them did. His response was that prices should fall. So my question was: why is it that an increase in the real supply of money would work but not an increase in the nominal supply of money. I received no answer to that question.

    One of the troubles is that MMTers, like Austrians, have a short-list of “wrong stuff everyone else believes,” and they assume everyone disagrees with them because of something on that list, whether it’s naive assumptions about the money multiplier or assuming that banks are not capital constrained.

    I might be wrong, of course, and that’s why I intend to look into some more, but this is my current impression.

  126. Gravatar of Jim Glass Jim Glass
    29. July 2011 at 16:25

    No Jim, I am saying the interest rate determines the interest payment out of the principal, not that interest rates determine the principal out of the interest.

    Which translates into the changing market price of a capital asset resulting from a change in the interest rate … how?

    It seems rather obscure compared the 101 formula of income/interest rate.

    To keep things instead perfectly clear, let’s refer to the first bond price calculator produced by Google. Let’s say:

    Par value and redemption value: $1,000
    Maturity: 100 years from now (as perpetual is not an option)
    Annual rate: 5%
    Market Yield: 5%

    PRICE: $1,000, not surprisingly.

    Now we reduce the market yield to 1%

    PRICE: $3,521, which is rather more than 3.5 times the original.

    Now if you still think “That’s insane”, and “you’ve got the interest rate – price relationship backwards” regarding the notion that declining interest rates increase asset values … hey, I’m at least as eager to do business with you as you are with me. Let’s get together soon.

    Just make sure that you and your like-minded friends stay the heck away from my country’s central bank!

  127. Gravatar of Ron T Ron T
    29. July 2011 at 16:27

    Gib-ber-rish, as always.

    Govt doesn’t control the money supply, politics has nothing to do with it.

  128. Gravatar of Jim Glass Jim Glass
    29. July 2011 at 17:14

    It means you’ve got the interest rate – price relationship backwards. And that I hope to do business with you … I am willing to buy from you any bond at 5% and sell it to you for 49 times its price when interest rates are at 1% any time. That’s a deal for you … Sorry I meant 4.9 times its price. That’s the bargain.

    Let me get this straight because the description of the deal you offer is unclear. The gist is…

    1) You will own a $1,000 face-value perpetual bond (a consul or some such) paying 5% interest on its face value, $50.

    2) At a time when the market yield on such bonds is 1%, so that by the simple formula for the present value of a perpetuity, (all of PV=A/i, or PV=50/0.01) the value of the bond is $5,000, you will sell it to me for $4,900.

    Only one?

  129. Gravatar of Scott Sumner Scott Sumner
    29. July 2011 at 17:56

    Oliver, You said;

    “To which MMTers would probably reply that, except for paper money, the monetary base never actually leaves the banking system, so the question seems rather odd. Only banks have reserve accounts.”

    Except for paper money? During normal times more than 90% of the base is currency. If there were no reserve requirements it would be close 99%. The base basically is paper money (prior to 2008.)

    You said;

    “MMTers would probably rephrase the question to: what effect does a change (in your example, doubling) in stock of this inside money”

    I never even discussed inside money—people need to respond to what I actually wrote. I’m talking about outside money.

    Jeff, You said;

    “No serious monetary economist believes in liquidity traps. MMT proponents should ask themselves why, if they want to be taken seriously.”

    All the serious economists that I know acknowledge that a permanent increase in the base is inflationary, even at the zero bound.

    Ron, Of course you can force people to accept cash (collectively), but not individually. That’s the fallacy of composition, and it lies at the very heart of all monetary theory. You asked:

    “You need to be precise, how do you double the base? Asset swap (monetary) or a direct transfer (fiscal) to the private sector?”

    Suppose they want to increase cash but not reserves. Just go into the bond market, buy bonds at the going rate, or a tad higher if necessary, and then pay in cash. If the person getting the cash doesn’t want it, tell him to get rid of it by spending on goods, services or assets.
    This is monetary economics 101, not as taught by MMTers, but as taught by everyone else. It’s also known as the hot potato effect.

    vimothy, Doubling the base has nothing to do with banks, borrowers, reserves, lending, etc. It doesn’t require any additional lending at all. It just requires people to prefer to hold a fairly stable ratio of cash to income/expenditure. That’s the only assumption. It works in economies that don’t even have banking systems.

    Mammoth, I meant in real terms. During the great inflation of 1965-81 the US ran budget surpluses in real terms at times. Someone could investigate the developing world when they had high inflation, I’m sure you’d find budget surpluses in some cases. In recent decades the country with the lowest budget deficits of any in the Western world was Australia. They didn’t have high inflation, but their inflation was higher than that of all the other developed economies, if I’m not mistaken. Japan has the biggest national debt, or close to it, and they’ve had deflation since around 1993. Deficits do not explain inflation. Our inflation came down sharply, just as the Reagan deficit got much bigger. Ditto for our deflation in 2009, just as the Obama deficit exploded.

    I’m afraid I don’t have the data for developing countries in front of me. I’m sure someone can find examples of high inflation during real surpluses. Keep in mind that almost every country in the world had high inflation in the period from 1965-81. LBJ raised taxes in 1968, expecting to slow inflation. He dramatically reduced the deficit, but not inflation.

  130. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 18:20

    “Govt doesn’t control the money supply,”

    Finally you say something honest!

  131. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 18:26

    “Ron, Of course you can force people to accept cash (collectively), but not individually. That’s the fallacy of composition, and it lies at the very heart of all monetary theory.”

    No Scott, the MMTer says “well, they are going to have to pay government, back cash when I tax them on their property etc. so of course they will accept it.”

    Ron doesn’t want to discuss what happens when people defend their hard assets with guns, refuse to be taxed, and hire even more Republicans to congress.

    That’s “politics” not economics.

    ROFL.

  132. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 18:28

    I feel like Rodney Dangerfield in “Back to School” listening to the Business professor yammer about setting up a fictional business.

  133. Gravatar of Ron T Ron T
    29. July 2011 at 18:35

    Just go into the bond market, buy bonds at the going rate, or a tad higher if necessary, and then pay in cash. If the person getting the cash doesn’t want it, tell him to get rid of it by spending on goods, services or assets.
    This is monetary economics 101

    No, that is not economics, that is advocating a dictatorship. People hold bonds for a reason. Your idea to solve the crisis is to coerce people into spending. I thought economics is about incentives not about commanding people around. Why sell bonds at all and pretend that were doing “economics” here? Just tell people to spend, if not – labor camp.

  134. Gravatar of Fed Up Fed Up
    29. July 2011 at 18:52

    “That’s the flaw with MMT; it’s not net financial assets that matters, it’s currency.”

    “The whole point of my Quantity Theory of Money post (and especially the Canadian/Australian comparison) was to smoke out their views of currency and the price level.”

    IMO, it is the amount of medium of exchange that matters. What would it take for you to consider that?

    Take QTM. Now use medium of exchange for M, don’t assume V is constant, and junk the other assumptions.

    “I find it hard to believe that you could cut rates from 5% to 0% in a healthy economy without triggering an explosion of AD, especially if the economy was already experiencing normal levels of NGDP, normal growth in NGDP, and normal unemployment levels.”

    That depends if entities using various assumptions about “wages”, “prices”, and “interest rates” decide to start borrowing, the banks have enough capital, and the banks lend. If so, the amount of medium of exchange rises.

    “The MMTers like to talk about cases where large base injections did coincide with near zero rates””The US in 1932 or 2009, Japan in the late 1990s and early 2000s. But those were all economies that were severely depressed and/or suffering deflation.”

    Did these economies go from mostly supply constrained to mostly demand constrained without it being unnatural?

    What happened to the amount of medium of exchange in those cases without more gov’t debt?

    “Hence an attempt to set interest rates far below their correct level in savings/investment terms (the Wicksellian natural rate), would trigger an explosion in AD, and much higher inflation.”

    Any reason the Wicksellian natural rate can’t go negative?

  135. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 19:33

    “No, that is not economics, that is advocating a dictatorship. People hold bonds for a reason. Your idea to solve the crisis is to coerce people into spending. I thought economics is about incentives not about commanding people around. Why sell bonds at all and pretend that were doing “economics” here? Just tell people to spend, if not – labor camp.”

    Ron, I REALLY think you should take some time and noodle what a hypocrite you are.

    First, what Scott means is that the Fed goes and buys bonds, if no one wants to sell, they just keep offering to pay more for them.

    UNLIKE YOU, he’s not forcing anyone to do anything… he just mis-typed, he means that once someone has finally taken the new increased bid the Fed put out, that guy has cash, and he’ll go buy some other instrument, causing another person who was going to buy it, to find another one – hot potato.

    Whereas, you are the DICKTATOR, who wants to print money to overpay the unemployed, buy the shit no one else wants, and then when there is too much money in the economy – raise taxes by fiat on hard assets until you have pulled it back in.

    Ron, MMT is for a bunch of dirty hippies who wish they ran the world with the force of government. I’ve SEEN you, you are all dirty hippies.

    ——

    Please watch this MOSLER VIDEO:

    http://www.youtube.com/watch?v=IieZHLTExws&feature=related#t=5m50s

    Let me be clear, Mosler is a deluded con artist, and right at 6:10 he actually VERBALLY STUMBLES and fucks up his own story line.

    We are not taxed because the government wants to not cause inflation.

    He says OUTLOUD we are taxed because the government wants to CONTROL THE BUYING OF SHIT in the store.

    Oh-noes, without taxes, the government won’t have anything to buy!!!!

    You dumb ass follower of a half-wit tard.

    Dirty hippies do not get to be dictators.

    In your version of things nothing can stop the government from buying the entire store and handing out the goods as it sees fit.

    The government and its officials must prove continuously to the hard asset holders that they serve their interests over those who do not have hard assets.

    And YOUR MOTIVATION is to place the government at the top of the food chain.

    Listen to Mosler stumble.

    Man, I’ll tell you what the Euro must drive you bastards crazy. Governments not able to print money!!!

    rofl.

  136. Gravatar of JohnH JohnH
    29. July 2011 at 20:20

    Morgan –

    So basically you’re offering us a choice between rapacious disconnected-papertowel walking-bizarre individual who would sell you down the river for more guns and hard assets “A” and rapacious disconnected papertowel-walking bizarre individual who would sell you down the river for more guns and hard assets “B”.

    Really, after all, we should have left Enron alone. AIG, victims of Goldman who really didn’t do anything wrong, as it turns out. The Company Town? Look, we really did those guys wrong and we probably owe them a lot of money now, if they will forgive us in the first place.

    Middle class, let your house slide like an oyster down the throat of “A” or “B”, because you dirty hippies ripped off the money to buy it in the first place. Vote Now.

  137. Gravatar of Payam Sharifi Payam Sharifi
    29. July 2011 at 20:21

    Morgan, you want a market dictatorship(ie you are a modern day follower of Hayek to the T, who explicitly states that democracy is bad), and then you think that the looting and theft by the upper classes(ie modern finance) on the middle and lower classes is justified…that once they have the money, its theirs. Give me one good reason why anyone should take you seriously? If I didn’t have my profs reading over this blog I would have already been at war with you here, so keep your idiotic mouth shut. You by correlation(and you have admitted as much anyway) don’t give a shit about getting the economy to function correctly, as Keynes famously said was the purpose of economics. So again, we don’t give a shit about anything you’re saying.

  138. Gravatar of JohnH JohnH
    29. July 2011 at 21:05

    Payam –

    So, am I mistaken in finding that a fiat money issuer such as the US gov’t, really has no need for taxes or selling bonds for the purpose of collecting revenue to spend?

  139. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 21:12

    JohnH,

    Wrong. I’m not offering you a choice. You have NO choice.

    There’s nothing you can do, except DANCE – work your ass off and hope you find something everyone else thinks is worth buying from you.

    Something tells me deep, deep down – that’s WHY you found Mosler. Real life isn’t working out for you, huh?

    —-

    Payam,

    I’m reading over this blog. And unless you are going by a handle, I might call your professors and ruin their week for ruining your mind.

    Listen up kiddo, I am against the oligarchs. There are three players:

    1. The A power – the 30-40% of Americans who will spend part of their earning lifetime in the top 10% (maybe count the top 25%). They will BUY HARD ASSETS. They will OWN SHIT.

    2. The B power – the oligarchs.

    3. The C power – everyone else.

    Your dumb as is angry is too stupid, too young, too inexperienced, to understand that the Tea Party is the A power.

    They aren’t weak and sniveling. They aren’t “Seniors.”

    They are bedrock of the every community in this country, and WHEN the system reflects their will, everything runs smoothly.

    What we are baring witness too right now, is what happens when the C power spend too much time promoting the interests of the B power. Through regulation, swiss cheese tax policy, bail-outs, we have a finally gotten to a point where the folks that matter are going to fix everything.

    And you probably won’t like it, because NONE of it means more free shit for the C power.

    We’re going to use states rights, force the blue states into competing with red states, and all of it to drain the DC swamp.

    Payam, there is no other option. Only a certain kind of person matters: own shit, defend it yourself, be willing to die, work non-stop, and distrust eggheads.

    You cannot get where you want to get from here.

    Now shut up, or I’m calling your teachers.

  140. Gravatar of Payam Sharifi Payam Sharifi
    29. July 2011 at 21:27

    Taxes regulate aggregate demand and gives value to the currency(people need it to pay their taxes), that is the MMT assumption. Read more in Moslers book, skip the foreward/prologue and your answer is in the first part:

    http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

  141. Gravatar of Morgan Warstler Morgan Warstler
    29. July 2011 at 22:07

    Mosler couldn’t wash my jock strap.

    I tell you what reality is… taxes keep going down because the government is less and less able to convince their OWNERS to given them money.

    Payam, listen to me carefully… there was a brief time 1913-1980 where those who had nothing were ousted up and used to under the guise of “Democracy” to try and “tax the rich.”

    Even today Obama is terrified of taxing anyone making less than $250K.

    Government is weak, it is a stuck pig – its practitioners are now suffering a thousand indignities. Are you not paying attention???

    SINCE 1980, the rules you speak of have been FLAGRANTLY DISREGARDED and my side is so good at it – you sound like a fool saying people need currency to pay taxes.

    Payam, only 50% of this country pay taxes, and they are the only 50% who count.

    Notice a theme here?

  142. Gravatar of JohnH JohnH
    29. July 2011 at 22:21

    Payam –

    I understand the MMT point of view on that. I guess my question is does it survive outside the MMT point of view? It seems it would.

  143. Gravatar of Jeff Jeff
    29. July 2011 at 22:38

    Wow. I never appreciated Morgan until this series of comments. He’s actually managed to smoke out some of the MMT’ers as leftist loons. Morgan may be nuts, but he’s crazy like a fox.

    MMT says government bonds and money are the same thing. With the highest peacetime deficit in history (as a percentage of GDP), why hasn’t aggregate demand exploded, either here or in Japan? And how is that the U.S. economy didn’t crash and burn a decade ago when we were running surpluses?

    Bonds are not money. Bonds, if they’re safe, are a better store of value than money is. This is not news to anyone. MMT’ers seem to think that pointing out that bonds can substitute for money as a store of value means that bonds and money are such close substitutes that any distinction between them is silly. They point to the repo markets and say, look, people use bonds as collateral to get liquidity. But what is actually going on is that people are using bonds as collateral to borrow money. Why do they bother if bonds are money?

    As Nick Rowe keeps pointing out, money is the medium of exchange and the unit of account. Bonds are neither. Because money is the medium of exchange, there is no single market for it. Every market exchanges something for money, or the reverse. Because money is the unit of account, it has no independent price that can change to equilibrate money supply and money demand. When there is an excess demand for money, there is no “price of money” that can quickly change to move us up along the demand curve. Instead, the nominal prices of everything have to fall until the real money supply matches money demand. This is likely to be a slow and painful process. Alternatively, you can shift the money demand curve to the left by increasing interest rates. But if you were already on the IS curve, raising interest rates may cause a recession.

    Finally, a plea to stop using the word “liquidity”. Careless use of it sows confusion. I’ve never seen a liquidity. Have you?

    When you mean money, use the word “money”. If you mean short term bonds, say “short term bonds”. Using the word “liquid” as an adjective to mean “easily bought and sold with low transactions costs” is OK. So referring to high quality commercial paper or short-term Treasuries as “liquid paper” is fine. I know it’s not incorrect to describe a man seeking to replace illiquid assets in his portfolio with more liquid ones as being “in search of liquidity”. But it would still be better to tell us precisely what he seeks to add and subtract from his portfolio.

    Being more precise about just what financial instruments are being discussed would make a lot of discussions clearer.

  144. Gravatar of Jim Glass Jim Glass
    29. July 2011 at 23:50

    Matt Franko writes:

    Jim,

    Checked your house value lately? Resp,

    Yup. Up more than 12X since I bought it in 1989, just at the peak before the last real estate bubble burst. And it hasn’t dropped a dollar in value during this whole business since 2007, only gone up some more.

    Moved into it as a big old wreck of a rental in Chelsea, Manhattan, some years before that. That was then a run-down, ex-industrial, low-income area bordered by the Village and, Theater District, and within walking distance of the uptown and downtown business districts. Since then they’ve all converged into it, and with a big new recreational/film/TV production complex built on the river edge, everything olde becomes hot and new again. Harrison Ford bought a place right across the street, Susan Sarandon lives down the block. Best investment I’ll ever make!

    Though what it has to do with the historical relationship between base money and inflation that I mentioned in my comment you responded to, I don’t know.

    Perhaps you were thinking that if my house was far underwater in Atlantis Vegas I’d be thinking, “All that new base money sure didn’t help my home’s value”? Nah, that would be just as irrelvant.

    What is relevant is that during the last half of 2008 *deflation* occurred at an 8% annual rate — not seen since the very bad days of the Great Derpression. Then the Fed announced it was going stop that deflation and reverse it back to inflation with monetary policy. In the last three months of 2008 it rocketed the money base up — and prices three months later turned from going down to up just as planned!

    I’m interested in the MMT take on this empirical episode:

    1) It didn’t happen, because it is impossible?

    2) Random coincidence?

  145. Gravatar of Winslow R. Winslow R.
    30. July 2011 at 00:26

    Perhaps (some) monetarists believe fed purchases of treasury securities with cash changes the quantity of savings desires? As treasury securities are purchased with cash, there is no increase in the desire to save cash, so savings desires have been reduced. This reduction in savings desires results in changes in the price level.

    I believe that a reduction in savings desires can lead to an increase in the price level and believe that view is consistent with MMT. I’ve not seen evidence that fed purchases of treasury securities reduces saving desires. I have seen evidence that Fed purchases of treasury securities does reduce cash-flow to the private sector, likely increasing saving desires.

  146. Gravatar of W. Peden W. Peden
    30. July 2011 at 00:53

    Ron T,

    “Govt doesn’t control the money supply, politics has nothing to do with it.”

    Except that the mechanism by which they do (via the Fed) has been explained in some detail in this thread. And MMTers, including Mosler (who is apparently a big deal in the MMT world) have been unable to refute this account of the transmission mechanism.

  147. Gravatar of vimothy vimothy
    30. July 2011 at 02:52

    Hi Scott,

    I can see that nominal income doubles in the counterfactual case without banks–assuming demand for cash doesn’t change.

    But I don’t understand why this result holds in the case with banks. You say that its about cash/income ratios, but when you bring banks into the picture, you allow people to adjust their cash holdings whenever and however they like, simply by depositing excess cash in their account when they have too much, or converting their deposit balances into cash when they have too little. As far as the end user is concerned, there is no change to the cash-money supply function.

    If the Fed doubles the base, in the case with banks, my holdings of cash don’t double pari passu. Nothing at all happens to them, at least as a first order effect, as far as I can see.

  148. Gravatar of W. Peden W. Peden
    30. July 2011 at 03:28

    Vimothy,

    What about the banks’ demand for cash? It’s not like the notes & coin you put in a deposit are stored in a vault!

    The banks typically have a low demand for cash, because it accrues no interest. It’s a profit-harming asset to keep. On the other hand, if the monetary base starts to accrue in value- say because of deflation or the central bank paying interest on reserves- the demand to hold cash changes dramatically.

    Introducing banks into the story makes things a bit more complex, but it doesn’t change the fundamental process of balance-effects that connects central bank policy with the real economy.

  149. Gravatar of vimothy vimothy
    30. July 2011 at 03:49

    W. Peden,

    I agree. Banks want to economise on their holdings of reserves, which is why excess reserves were zero pre-crisis. But what I don’t understand is the causal link between the creation of a large excess reserve position and a pari passu increase in nominal income.

    I understand the link in a no-bank case. Consumers want to get rid of the excess cash, and so aggregate demand increases when they attempt to do so. But in the case with banks, consumers don’t have more cash than they want; their holdings are entirely demand determined. So what I don’t understand is why the price of potato chips, hair cuts, bus rides, and so on, increases when banks have more reserves than they want.

  150. Gravatar of JohnH JohnH
    30. July 2011 at 06:20

    vimothy –

    I think that’s a tough one to nail down. There are other factors affecting price that one or the other school embraces or ignores as suits their purpose. I noticed at the depth of the recession that folks were snapping up the lowest priced groceries on the shelf, even while the price was dropping on the premium brands. Now, let’s throw another monkey wrench in by raising the price of oil. Add in a good helping of fear (a mix of rational and otherwise). Now dial up the level of reserves with something like QE and wait for consumers to queue up for loans. Well, we got some refis, but…

    In the meantime, irrational fear finally bottoms out, the consumers that are left over start buying again prices start going up. All the while, oil is going up too.

    Lots of factors; hard to make an general statement about it that takes them all into account as they’re changing so much. Does an increase in bank reserves cause an increase in consumer spending, leading to higher prices? I suppose it depends on what products the bank might offer as a result and what consumer sentiment is.

  151. Gravatar of W. Peden W. Peden
    30. July 2011 at 08:03

    Vimothy,

    The point I was making is that people putting their currency into banks doesn’t eliminate it from the system. It just moves on the hot potato; now banks have to get rid of that cash somehow.

    So the banks buy financial assets to offload that cash. They can buy these assets from two categories of seller: banks; and non-bank holders of financial assets, like pension funds. If banks buy from other banks, then the hot potato of cash stays in the financial system and now there are new banks with excess cash holdings to offload. If the banks buy from non-banks, then they also want to offload that cash for something with appreciating value: stocks, property, bonds or whatever. The holders of THESE assets now need to get rid of that cash.

    This process will go on until (if) the cash holdings of the entire economy are in equilibrium i.e. the holdings of cash match the demand to hold cash. In the intervening period, the prices of assets goes up. This boosts expenditures (through a wealth effect) and more importantly increases the nominal wealth of asset holders, boosting the creditworthiness of the non-bank public.

    This creditworthiness makes banks more willing to lend to the public, which boosts the supply of broad money by increasing the volume of deposits. The volume of deposits forms the bulk of the broad money supply. The broad money supply has therefore increased and people’s nominal wealth has increased.

    So we now have a situation where Jill the hairdresser can buy her bus ride to the supermarket and buy some potato chips. And that is how the banks having more reserves than they want increases the price of potato chips (whatever they may be!).

    Since we don’t like in a hydraulic world, even the EXPECTATION of a central bank boosting the cash holdings of banks by buying assets from them will begin this process. Hence QE2 was having effects on the US economy even in Q3 2010, before it began, because of its effects on expectations.

    And that is also why MMT is bunk.

  152. Gravatar of Ron T Ron T
    30. July 2011 at 09:10

    W Peden,

    If you force cash on people by fiscal policy – by simply giving them cash, this will definitely boost spending. Fiscal policy works – a trivial statement.

    Forcing cash on people by an asset swap (monetary policy) cannot work – because Fed accommodates desires of the private sector to swap assets anyway.

    Sumner was proven that his idea of increasing cash holdings is based on lacking basic understand of the workings of the banking system – 2 years ago. http://www.themoneyillusion.com/?p=5893

    If a “monetary economist” cannot accommodate the banking system in his models then he is no monetary economist.

  153. Gravatar of Jim Glass Jim Glass
    30. July 2011 at 10:47

    vimothy writes:

    I agree. Banks want to economise on their holdings of reserves, which is why excess reserves were zero pre-crisis.

    Right. Now where did all those would-be excess reserves go?

    I understand the link in a no-bank case. Consumers want to get rid of the excess cash, and so aggregate demand increases when they attempt to do so.

    Right.

    But in the case with banks, consumers don’t have more cash than they want; their holdings are entirely demand determined. So what I don’t understand is why the price of potato chips, hair cuts, bus rides, and so on, increases when banks have more reserves than they want.

    You’ve locked youself in a straight-jacket by assuming the thing to be proven.

    “their holdings are entirely demand determined”

    But that doesn’t meen the quantity demanded of them doesn’t change!

    The law of supply and demand: for any *fixed* level of demand the *quantity* demanded *varies* by price. (Any change in the actual level of demand changes the quanity demanded further).

    The price of loaned funds is the interest rate. We’ve seen that if the interest rate falls, ceteris paribus, quantity demanded for loan funds increases (people buy more cars, appliances and houses) and dollar wealth increases (due to PV=A/i) to the extent that with a drop in rates from 5% to 1% it *quintuples* — which translates into a darn whole lot more dollar spending.

    Scott Fullwiler himself has said so in this thread…

    “We’ve also always said that if this does in fact reduce interest rates the pvt sector borrows at, then it could be inflationary.”

    OK, that’s settled.

    So now the claim must be: The Central Bank can’t reduce interest rates.

    But *why* can’t it? By supply and demand, if the supply of loanable funds increases and the demand for them remains fixed, the interest rate will *fall*. QED.

    OK, so now the claim must be: The Central Bank can’t increase loanable funds, because it if could then it could lower interest rates.

    But *why* can’t it? Surely it can increase the reserves available. And where did all those excess reserve go to, during all the pre-crisis years (no IOR) that you correctly said the banks were economising on in your comment above?

    Now run the “real world test” that MMTers claim to believe is so important:

    Can you or anyone else name a single case in the real world where a central bank tried to reduce interest rates and *failed*? (Other than by creating an offsetting inflation effect — which supposed to be equally impossible.)

    The MMT argument requires one of two things:

    (1) the law of supply and demand isn’t true — quantity demanded remains fixed *in spite of* of price changes and changes in supply; or

    (2) the Central Bank can’t increase the supply of loanable funds.

    Either one of these claims requires a much better explanation than I’ve ever seen.

    Anybody who could *really* prove either one would get the first MMT Nobel!

  154. Gravatar of Scott Sumner Scott Sumner
    30. July 2011 at 10:58

    RonT, You said;

    “No, that is not economics, that is advocating a dictatorship. People hold bonds for a reason. Your idea to solve the crisis is to coerce people into spending.”

    Nobody is being forced to do anything, it’s all entirely voluntary. You must have misunderstood my argument.

    I also don’t understand why you express surprise. My view is the standard view of OMPs. You act like it’s some novel theory. For better or worse MMT is the novel theory, until it gets accepted.

    Fed up, Sure you can use the medium of exchange instead of the base, but it merely adds complexity to the model, and doesn’t add value.

    You said;

    “Any reason the Wicksellian natural rate can’t go negative?”

    But this is precisely the point; adding money to the system obviously isn’t going to lower the Wicksellian equilibrium rate, everyone accepts that. So sure, the Wicksellian equilibrium rate can go negative, BUT FOR REASONS OTHER THAN MONETARY INJECTIONS.

    Payam, Actually, it’s not clear people need currency to pay their taxes. But let’s say you are right. People need currency to buy lots of other things. Why don’t those other transactions uses give currency value?

    Jeff, Yes, cash and bonds are very different.

    Winslow, Maybe, but it seems like the MMTers keep shifting the goal posts. First they tell me that simply swapping cash for bonds does nothing, as it leaves NFA unchanged. Then they say it might have an effect, even within the MMT model.

    Vimothy, You said;

    “But I don’t understand why this result holds in the case with banks. You say that its about cash/income ratios, but when you bring banks into the picture, you allow people to adjust their cash holdings whenever and however they like, simply by depositing excess cash in their account when they have too much, or converting their deposit balances into cash when they have too little. As far as the end user is concerned, there is no change to the cash-money supply function”

    Good question. And I want to be very careful in my answer. First of all, my answer assumes positive market interest rates, but no interest on reserves. Like back in 2005 or 1995 or 1985. At zero market rates it’s much more complicated. At positive interest rates then banks are in the same position as the public. They also don’t want to hold cash (actually reserves) that earns no interest, when other safe assets are available.

    Now here’s where the fallacy of composition comes in. As individuals, we can always get rid of excess cash we don’t want. Even w/o banks I could use the cash to buy a bond at the local post office. But if everyone is holding more cash that they want, collectively they can’t all get rid of it. Assume banks are part of the “everybody.” In that case everyone trying to get rid of it will tend to reduce its value, causing NGDP and inflation to rise.

    Analogy: After the 1974 oil shock there were lots of gas guzzlers people didn’t want, but too new to junk. They tried to sell them, and individually they could sell them. But collectively they couldn’t get rid of them, so the value of gas guzzlers fell to a new equilibrium. When the value of cash falls because there’s too much, it’s called inflation. This isn’t my pet theory, it’s the core of (non-MMT) mainstream monetary economics. It’s what most differentiates mainstream monetary from the MMT view.

    MMTers often complain that they can understand the theory, why can’t I? But I’m not sure they understand the alternative (mainstream) theory. It’s just possible I’m having trouble because I’m seeing gaps and inconsistencies and flaws that the average MMTer is overlooking, when reading the various MMT papers.

  155. Gravatar of W. Peden W. Peden
    30. July 2011 at 11:04

    Ron T,

    “Forcing cash on people by an asset swap (monetary policy) cannot work – because Fed accommodates desires of the private sector to swap assets anyway.”

    Except I’ve explained exactly how it does work: the Fed buys assets, it changes cash balances, and to cut a long story short it determines NGDP.

    “If you force cash on people by fiscal policy – by simply giving them cash, this will definitely boost spending. Fiscal policy works – a trivial statement.”

    Fiscal policy works if monetary policy is passive. If you look at the period of, say, 1972-2011 in the UK, however, it is clear that, when there is an active monetary policy (whether it is money supply targeting, exchange rate targeting or inflation targeting) fiscal policy has no consistent relation with NGDP. In other words, fiscal policy does not work in a modern monetary system.

    And that is also why MMT is bunk.

  156. Gravatar of dilletaunted dilletaunted
    30. July 2011 at 11:11

    “Fiscal policy works if monetary policy is passive.”

    entirely depends what you mean by fiscal policy here. i think most mmt’ers are not fans of ad hoc keynesian style spending programs. so if there actually can be something akin to ‘fed neutralization’ in the face of big gov’t spending programs, not sure why they’d care. but there’s nothing stopping the gov’t from giving everyone jobs at the min wage right now, and nothing the fed can do to stop them

    what’s partially ‘bunk’ here is new Keynesianism, then?

  157. Gravatar of W. Peden W. Peden
    30. July 2011 at 11:22

    dilletaunted,

    “nothing the fed can do to stop them”

    The Fed can’t stop them giving people the jobs; they can stop it from having any effect on AD by offsetting its effects with tighter monetary policy.

    “what’s partially ‘bunk’ here is new Keynesianism, then?”

    IIRC, New Keynesians recognise that fiscal policy is impotent under non-passive monetary policy regimes.

  158. Gravatar of MamMoTh MamMoTh
    30. July 2011 at 11:52

    Scott, Mammoth, I meant in real terms. During the great inflation of 1965-81 the US ran budget surpluses in real terms at times.

    This might be a silly question but what do you mean by in real terms? Aren’t inflation and budget surpluses nominal?

    In pretty much all the cases of persistent high inflation I am aware of (e.g. latin american countries), they were associated with budget deficits. This is not to say that I would find surprising the fact a country runs a budget surplus but has low inflation, nor that a country will not lower inflation (enough) by just running a budget surplus.

    So my real question should be, did any country experience a significant rise in inflation when running a budget surplus that could not be attributed to a supply shock?

  159. Gravatar of Winslow R. Winslow R.
    30. July 2011 at 12:45

    “First they tell me that simply swapping cash for bonds does nothing, as it leaves NFA unchanged. Then they say it might have an effect, even within the MMT model.”

    Perhaps based on your request that MMT comment on non-real world model where bonds are exchanged for cash rather than reserves?

    You would see reserves as less inflationary than cash even if there is no IOR being paid, right?

  160. Gravatar of MamMoTh MamMoTh
    30. July 2011 at 12:50

    It is not clear to me where this thread is heading to. Too many side issues are addressed instead of the main one.

    In my view, MMT does not deny there is a link between the money supply and the price level. The main argument is about causation and transmission mechanisms.

    Scott’s example where the a 0 is added to the currency will obviously multiply the price level by 10. But this is considered a fiscal operation by MMTers, that is an injection of net financial assets (NFAs). Moreover, the government will spend and tax 10 times more, so the rise in the price level is consistent with saying that the government as the monopolist supplier of the currency sets the price level one way or another.

    Now if the monetary base was doubled today, with all the extra money given to me, I can assure you I will only spend a few millions a year for the rest of my life, which will only represent a drop in the ocean of the economy so prices will not double. You might not trust my word, but clearly as a thought experiment it shows that doubling the monetary base will not necessarily double the price level, which is also consistent with MMT.

    So at this level MMT sems to explain better the price level than the QTM to me.

  161. Gravatar of morgan warstler morgan warstler
    30. July 2011 at 12:52

    Scott you are being coy… just admit I have accurately captured the motivations of MMT…

    I have PROVEN it I don’t even have to read it… i use their base statement and deduce their answers before they say them.

    I have caught mosler stumbling verbally and proving what they are really about.

    You owe me the nod I don’t needanything more than knowing motives to analyze the argument.

  162. Gravatar of MamMoTh MamMoTh
    30. July 2011 at 13:24

    Scott, MMT argues that monetary operations conducted by the Fed do not change the amount of NFAs (cash, reserves and Treasury securities) of the non-government sector, only the composition of its portfolio. In that sense QEs are no different than any other OMO.

    MMT argues that the consequence of lowering interest rates is ambiguous. On the one hand it might increase borrowing which is expansionary, but on the other hand it removes income from the economy which is contractionary. But their main point is that what could be expansionary is the lower interest rates not the asset swap itself.

    From what I’ve been reading a crucial point is what is the difference between bonds and currency? MMTers argue they are pretty much the same for all practical purposes, whilst you consider them as being different enough so the dynamics of the non-government sector will depend on the composition of its portfolio of NFAs. Is there a way to settle this issue? I am afraid not.

  163. Gravatar of W. Peden W. Peden
    30. July 2011 at 13:43

    MamMoTh,

    “MMTers argue they are pretty much the same for all practical purposes, whilst you consider them as being different enough so the dynamics of the non-government sector will depend on the composition of its portfolio of NFAs.”

    And here is the problem: they’re very, very different. The transmission mechanism I described begins from the Fed swapping cash for assets and ends with the determination of NGDP. The fact that QE doesn’t add to the quantity of assets is irrelevant.

    So the lines of causation is M0 > nominal wealth > broad money > NGDP.

  164. Gravatar of MamMoTh MamMoTh
    30. July 2011 at 13:58

    W. Peden, well I would say there are very, very similar, especially at very low interest rates. But the question is not what you or I believe but how we could settle it.

    Do you see any difference between bonds and reserves that are paid the same interest as bonds?

  165. Gravatar of Jim Glass Jim Glass
    30. July 2011 at 14:42

    From what I’ve been reading a crucial point is what is the difference between bonds and currency? MMTers argue they are pretty much the same for all practical purposes, whilst you consider them as being different … Is there a way to settle this issue?

    Of course there is: Look and see.

    Do you carry bonds in your wallet? Can you make retail purchases with them? Are they a medium of exhange? Are prices set in them?…

    Does currency pay interest? Does currency come in different maturities? Does the market value of currency change with the interest rate (our friend PV=a/i, again) with “currency price calculators” used to figure out by how much? Do you secure investments of different terms with currency of matching maturities?…

    “The same for all practical purposes?” Hello? Count ’em up, for *how many* of the above do you say they are they “the same”?

    Now let’s stick to being reality-oriented here.

    I am afraid not.

    Oh, well, I guess if you don’t see any “practical purpose” differences between currency and bonds listed above, then this is a philosophical conumdrum that may never be resolved. 🙂

    And this ties right back into our earlier conumdrum. For us to do business together as we’ve both said we desire to do, you know, we don’t have to wait until the bond rate goes up to 5% then down to 1% — how long will that probably take? But we can effectively make the same deal right now.

    A few years back the Treasury issued 8.75% $1,000 bonds maturing in 2020 — and since then the market rate has dropped by 4 points, just like from 5% to 1%. You go buy some of those bonds and you can sell them to me right now (the same way you promised to sell those theoretical 5% bonds after the market rate dropped 4 points) for, oh, say $1,300 each. Think of the profit you’ll make on each $1,000 bond!

    Hey, trading currency *for* bonds. That’s a difference between them right there!

  166. Gravatar of MamMoTh MamMoTh
    30. July 2011 at 15:15

    Jim, I do see some differences between bonds and currency, more than MMTers do in general. However, those differences you pointed out are irrelevant. I don’t carry cash with me either, only my debit card. 500 euro banknotes are not accepted in most shops. Prices are set in the unit of account, so is the price of my bank account and my bonds. Bonds carry interests, so does my savings account from which I can directly pay my groceries with my debit card.

    (And remember our deal is you have to repurchase from me any asset I buy from you at market price when interest rate is 5% for 4.9 times the price I paid you. That includes your house.)

  167. Gravatar of W. Peden W. Peden
    30. July 2011 at 15:18

    “well I would say there are very, very similar, especially at very low interest rates.”

    Similar, but not the same. Like diamonds and sand.

    “Do you see any difference between bonds and reserves that are paid the same interest as bonds?”

    Do you mean like reserves accruing interest at the central bank?

  168. Gravatar of Jim Glass Jim Glass
    30. July 2011 at 15:20

    Do you see any difference between bonds and reserves that are paid the same interest as bonds?

    When in late 2008 the Fed pumped out a great mass of reserves paying IOR, what promptly happened to the movement of the price level?

    In the real world, can you point to any instance of the same thing happening in respose to a big issuance (or sale by the Fed) of bonds?

    If the Fed’s merely “changing the composition of the portfolio” by buying bonds and pumping out IOR bearing reserves had a significant and rapid impact on the movement of the price level, might one suspect that the changing composition of the portfolio actually matters for price level movements?

  169. Gravatar of W. Peden W. Peden
    30. July 2011 at 15:21

    Also, if there is inflation, then buying (say) index-linked bonds with cash is a pretty obvious thing to do. Let’s say inflation is at 5%; you’re a bank; the central bank buys some assets from you with cash. What do you do with that cash? Use it as insulation?

  170. Gravatar of Jim Glass Jim Glass
    30. July 2011 at 15:23

    I’m going to repeat my earlier question to the MMTers out there that hasn’t drawn any answer yet, because I am sincere in getting the MMT explanation of this…
    ~~~~~~~

    During the last half of 2008 *deflation* hit at an 8% annual rate “” as not seen since three years of that produced 25% deflation during the worst period of the Great Depression.

    Right after prices started down the Fed announced it was going stop that deflation and reverse it back to inflation with monetary policy. In the last three months of 2008 it rocketed the money base up “” and in February of 2009 prices turned from going down to up, just as the Fed had announced it intended and planned. All perfectly in accord with standard textbook monetary policy analysis.

    I’m interested in the MMT take on this empirical episode:

    1) It didn’t happen, because it is impossible?

    2) Random coincidence?

    3) Other?

  171. Gravatar of MamMoTh MamMoTh
    30. July 2011 at 15:41

    What do you do with that cash? Use it as insulation?

    Yes. You can also repay down your debt, loan it, pay taxes, invest it abroad.

  172. Gravatar of Jim Glass Jim Glass
    30. July 2011 at 16:05

    Jim, I do see some differences between bonds and currency, more than MMTers do in general. However, those differences you pointed out are irrelevant.

    Really? You can secure liabilities arising on a set date date with currency of matching maturity? Such securing is a pretty significant thing in the world of finance.

    You can invest in 20-year currency that pays more interest than 5-year currency?

    You can hope to get a capital gain on an investment in currency if interest rates go down? (Albeit at risk of loss if interest rates go up?)

    I don’t carry cash with me either, only my debit card.

    Does your debit card draw on a bond? Newspaper purchase by round of beers? Does it offer you “cash back” or “bond back” with purchases?

    500 euro banknotes are not accepted in most shops.

    If you make anything like a 500-euro purchase I bet they are. But are bonds accepted as currency-equivalent in any shops? Even when buying a Mercedes?

    Prices are set in the unit of account,

    That would be: the local currency.

    so is the price of my bank account and my bonds.

    Exactly: The price of a bond is set in currency — that’s a pretty major distinction, eh? Imagine a bond priced in terms of itself. (It would be currency!)

    Bonds carry interest

    Currency doesn’t.

    so does my savings account from which I can directly pay my groceries with my debit card.

    You mean: When you give up possesson of your currency *so others can use it* you receive compensation from the others in the form of interest. Since you can get the currency back easily from a savings account you get a low rate of interest, and since you give up your currency for the full term of a bond it pays you more interest.

    You’d do better here saying “a savings account is like a bond” than saying currency is.

    Methinks the differences between currency and not-currency are plain before your eyes, but you are squinting hard so as not to see ’em so clearly.

  173. Gravatar of Jim Glass Jim Glass
    30. July 2011 at 16:18

    (And remember our deal is you have to repurchase from me any asset I buy from you … That includes your house)

    What??? When did “any bond” become my house??

    Are you aspiring to be a mortgage broker specializing in teaser-rate deals? 🙂

    Fortunately, as an informed consumer, I read the fine print of all deals and keep a copy to cut-and-paste when someone tries to steal my home…

    ~~~~ quote ~~~~

    It means you’ve got the interest rate – price relationship backwards. And that I hope to do business with you … I am willing to buy from you any bond at 5% and sell it to you for 49 times its price when interest rates are at 1% any time. That’s a deal for you … Sorry I meant 4.9 times its price. That’s the bargain.

    Let me get this straight because the description of the deal you offer is unclear. The gist is…

    1) You will own a $1,000 face-value perpetual bond (a consul or some such) paying 5% interest on its face value, $50.

    2) At a time when the market yield on such bonds is 1%, so that by the simple formula for the present value of a perpetuity (all of PV=A/i, or PV=50/0.01) the value of the bond is $5,000, you will sell it to me for $4,900.

    Only one?

    ~~~~~ end ~~~~~

  174. Gravatar of MamMoTh MamMoTh
    30. July 2011 at 16:44

    One thing is the unit of account, another is the money thing currency, deposits, bonds. Currency carry a 0% interest rate. As an instantly redeemable bond.

    Yes, MMT considers bonds functionally a savings account at the Fed.

    The only thing that prevents me from debiting directly from my bonds account is logistics. Banks have not implemented that possibility but I see no reason why it wouldn’t be possible.

    Isn’t your house an asset? Were you referring only to bonds? I’ll sell you as many perpetual bonds as bonds with a given maturity under the repurchasing agreement. I chose the denominations.

  175. Gravatar of Morgan Warstler Morgan Warstler
    30. July 2011 at 16:59

    W & Jim,

    This is all well and good, but I’d really like your gut instinct.

    WHY do you think these MMTers believe what they believe?

    What is their end game?

    Are they driven by a desired end? If so what is it?

    I’m fascinated that you keep having the discussion without concerning yourselves with what these guys are after.

  176. Gravatar of Jim Glass Jim Glass
    30. July 2011 at 22:57

    Morgan Warstler writes:

    W, Jim,… WHY do you think these MMTers believe what they believe? What is their end game? Are they driven by a desired end? If so what is it? I’m fascinated that you keep having the discussion without concerning yourselves with what these guys are after.

    Well, speaking for myself, at the simplest level, I really enjoy the Monty Python-like logic they so often produce. “Yes, yes, OK, true, the differences between money versus bonds and other assets do include A, B, C … ZX, ZY, ZZ. But **other than that** what have the Romans ever done what’s the difference between my ’86 Chrysler on blocks in the yard and ‘money’, being that I could sell it tomorrow for money, I mean in practical terms?”

    Also, I’ve known these people since the mid-1990s on usenet, long before they called themselves “MMTers”, almost from their beginning. Sort of like running into the crowd in the parking lot after the Last Supper, when they were still showing the effects of a few drinks.

    Knowing the founders personally like that — *do* remember Mosler, their big man back then at their founding dinner, telling how he had to patiently instruct Larry Summers on the Paradox of Thrift(!) — doesn’t let me wonder like Nick Rowe if their premises can be expressed in IS/LM terms. Instead I think of them more like, well, … you’d think of Scientology if you’d been in the bar with L. Ron Hubbard when he was knocking down shots and came out with “Hey, I bet I could start a new religion!”

    As to their “end game”, I don’t think they have any at all. What they get out of MMT is what Mosler gets from talking about how he’s had to stoop to instruct Larry Summers (and the Finance Minister of Italy, and several other such high-and-mighties) on the ABCs of econ. They get to pose as experts on econ — in a world where it is both an ever more important subject and ever more talkied about socially — *without* actually bothering to study any mainstream econ, much less any of the difficult bits.

    Which of course logically compels them to believe *all* mainstream econ is wrong, Nobelists are wrong, Finance Ministers and Central Bankers don’t know what they are doing, all the textbooks are wrong and should be abandoned (“their authors don’t know we aren’t on the gold standard!”) etc. Because if the Nobelists and textbooks professionals were right — well, they’d just be plain uneducated ignorant and not know what the heck they are talking about! So all the experts must be wrong. QED.

    (I mean, their reaction to the concept that textbooks and professionals might actually possess some real knowledge and expertise was pretty well expressed in this comment when it gets to the astute “BLAH, BLAH, BLAH”, part.)

    Ergo, right here we get single comments from MMTers saying the like of: “All economists are idiots … I bet you don’t even know that the federal reserve doesn’t actually even have a printing press!” ROTFL! I mean, how can one not enjoy such? 🙂

    The ability to feel and display intellectual superiority like that is the “end game” for 90% of them, I believe. Nothing more.

    But this is not at all unique. All the Usenet sci.**** groups had sects like this, as I mentioned in an earlier comment. Thus the Usenet Crank Index. The sociology of such groups is interesting.

    For sci.econ the proto-MMTers were the least of ’em, believe me. The worst were the Georgists. Oh, god, the Georgists! Hope they never find their way here.

    PS: I note my simple three-time request for an MMT explanation of the monetary-price level events of Q3 2008 through Q1 2009 remains unanswered. Oh, well.

  177. Gravatar of Morgan Warstler Morgan Warstler
    30. July 2011 at 23:22

    Jim, spoken like a true egghead navel gazing economist!

    And I LIKE you.

    Thanks for your reasoned response and the time you took for me.

    But dude, honestly, nobody really wants to pretend to be an economist. Costanza wanted to pretend to be an architect.

    If you got 100 of these fools together and took their picture, if you ran their background checks, if you looked at the other college classes they chose to take, at the non-brands they chose to buy, the music they listen to….

    On a Claritas demographic report, they would skew greatly towards dirty hippie. Meaning you could find them in certain zip codes – since humans move towards similar humans, and those zip codes would be full of dirty hippies.

    I mean that literally.

    Ok, let me trouble you one more tie, if you are willing:

    I think each of them, all of them, are basically driven by a desire to control the world / economy as if kings. They start there, and Mosler attracts those few ugly souls – and they are too dumb to think critically.

    Ultimately, they are each personally currently losing, or expect to lose, or don’t want to have to work to win, and don’t care what they have to do to topple the system, but they are retarded… so like Tom Cruise they join a cult.

  178. Gravatar of W. Peden W. Peden
    31. July 2011 at 00:23

    “Yes. You can also repay down your debt, loan it, pay taxes, invest it abroad.”

    1. Banks don’t generally pay their debts in cash, but if they do, then there’s now a creditor with excess cash.

    2. Banks don’t loan out their cash reserves.

    3. Banks don’t pay taxes in cash, but if they did, now the government has excess cash and it REALLY doesn’t like to hold onto cash.

    4. Banks don’t generally invest cash overseas.

    So you’ve not actually answered the key question: what does a bank do when it obtains cash from the Fed when the Fed buys a financial asset from the bank?

  179. Gravatar of W. Peden W. Peden
    31. July 2011 at 00:25

    “WHY do you think these MMTers believe what they believe?

    What is their end game?

    Are they driven by a desired end? If so what is it?”

    It would be very convenient for everyone if MMT WAS true. But it’s an erroneous account of how a modern economy works.

    My key interest in debating with them is that correcting their errors is a good way of clarifying the role of money in a modern economy.

  180. Gravatar of Jim Glass Jim Glass
    31. July 2011 at 00:52

    Jim, spoken like a true egghead navel gazing economist!

    Laywer, not economist, lowest of the low, I qualify to aspire to be a politician someday.

    Have some graduate level economics to facilitate billable hours on subjects like taxes, finance, regulation.

    Law & Economics, a toxic brew. (Ask Coase.)

  181. Gravatar of vimothy vimothy
    31. July 2011 at 02:11

    Scott,

    Understand that we’re taking the pre-interest on reserves regime as the baseline case. (Although actually I’m in the UK where we don’t have reserve requirements in the same way that you do in the US, and the central bank pays interest on reserves as a matter of course, the idea being that this reduces the seigniorage profits accruing to the government).

    And I think I understand the dynamic in a case without banks, where the total stock of cash is the total stock of outside money, which is the total stock of money full stop. This world is well described by something like P=M/L(i,Y), and it’s easy to see that if the central bank doubles M, since individuals can rid themselves of cash but as a group can only pass it around at a higher velocity, something will have to give to return the system to equilibrium, and that something will be the price level.

    But when you add banks it gets more confusing. What happens to the other aggregates when the central bank injects some outside money? Cash held by the public doesn’t change. As far as I can see, cash held by the public is completely independent from the quantity of reserves held by the banking system and from any change to that quantity (i.e. OMO). I don’t see that the supply of liquid bank liabilities would expand at the same rate as the supply of reserves because when banks create inside money, they want to be paid back. In other words, the central bank can set the stock of outside money wherever it likes, but how inside money responds depends on the availability of credit-worthy borrowers””and there may be other factors.

    So it’s the link between the OMO and the rise in consumer prices that confuses me. I do see that, whether we’re talking about people and no banks or about people and banks, they’re as unable to rid themselves of the new outside money the central bank injects in either case. But in the case with banks the relationship between outside money and the price level seems much more blurry and I don’t understand why if the banks have more reserves than they want to hold, this necessarily affects the price of canned goods, haircuts, Xboxes, and so on, although I can see that it might affect the price of assets.

  182. Gravatar of W. Peden W. Peden
    31. July 2011 at 02:32

    Vimothy,

    “I can see that it might affect the price of assets.”

    Then you concede everything to monetarism. See my post yesterday at 8:03.

  183. Gravatar of Jeff Jeff
    31. July 2011 at 03:41

    @Jim Glass,

    Wait a minute, now. I kind of like Henry George! He got a lot of mileage out of the insight that the supply of land is fixed, so taxes on it do not change the quantity supplied.

    Unfortunately, the supply of land is no longer fixed, now that we effectively manipulate it by zoning.

  184. Gravatar of vimothy vimothy
    31. July 2011 at 03:56

    Jim Glass,

    I’m afraid you rather baffled me with your comment!

    W. Peden,

    I don’t see that you have established that doubling the base moves nominal income pari passu in a set-up with banks. Doubling the base raises asset prices since it lowers the policy rate, sure. There is a wealth effect on consumer spending (from asset holders), sure. But the 1-for-1 change to prices? I don’t see how you go from “asset holders have higher nominal wealth”, to “nominal aggregate income doubles”. Why does it double?

    With regard to the actual OMO, I’m not sure your story is quite right either. The banks hold a portfolio of liquid assets to meet their obligations to their depositors. Since reserve balances pay no interest (in general), banks would like these balances to be as small as possible. If the central bank forces them to hold more of their liquid assets as reserves than they want, then the policy rate comes down as they pass the “hot potato” between themselves””the banks don’t simply turn around, take the reserves and go out and buy some MBS. Reserves only leave the banking system when the central bank withdraws them, or when they are converted into cash for the public. Otherwise, normal monetary policy could not work. If the banks could just pass off any unwanted reserve balances to pension funds, the central bank would not be able to control a target interest rate. Or maybe I’m just misunderstanding you.

  185. Gravatar of Greg Greg
    31. July 2011 at 04:55

    Peden

    “The point I was making is that people putting their currency into banks doesn’t eliminate it from the system. It just moves on the hot potato; now banks have to get rid of that cash somehow.”

    They dont HAVE to get rid of it in fact they dont even lend the cash that I deposit into their bank. A bank can have a million in deposits yet still make a trillion dollar loan providing the loan seeking customer is worthy of such a loan.

    “This process will go on until (if) the cash holdings of the entire economy are in equilibrium i.e. the holdings of cash match the demand to hold cash. In the intervening period, the prices of assets goes up. This boosts expenditures (through a wealth effect) and more importantly increases the nominal wealth of asset holders, boosting the creditworthiness of the non-bank public.”

    This NEVER reaches equilibrium as you describe equilibrium. It is actually always in equilibrium. This doesnt mean that everyone has the amount of cash they desire (most people desire more than they currently have) but because all transactions are two sided AND voluntary it is balanced.

    “This creditworthiness makes banks more willing to lend to the public, which boosts the supply of broad money by increasing the volume of deposits. The volume of deposits forms the bulk of the broad money supply. The broad money supply has therefore increased and people’s nominal wealth has increased.”

    A bank will NOT allow me to use my stock portfolio in an assessment of my credit worthiness, they do look at my land value if seeking mortgage. Banks are always as willing to lend as ever, thats their job. My INCME determines my credit worthiness, not the value of my stock holding or any other asset. A govt bond can certainly be used as collateral since it is essentially money.

    “So we now have a situation where Jill the hairdresser can buy her bus ride to the supermarket and buy some potato chips. And that is how the banks having more reserves than they want increases the price of potato chips (whatever they may be!).”

    Only if JIll borrows which is why monetary policy sucks. It requires people to use the credit system, enriching banksters.

    “And that is also why MMT is bunk”

    Keep saying that. You’re going to look like more of a fool in a little bit.

  186. Gravatar of W. Peden W. Peden
    31. July 2011 at 05:01

    Vimothy,

    “But the 1-for-1 change to prices? I don’t see how you go from “asset holders have higher nominal wealth”, to “nominal aggregate income doubles”. Why does it double?”

    It doubles, ceteris paribus, because that increase in nominal wealth increases the creditworthiness of the non-bank public, which is the basis of the expansion of M, which is one half of the equation of nominal income (M*V).

    As I said, once you concede that QE affects asset prices, you concede everything to monetarism. This is because the increase in asset prices increases the nominal wealth of the public and thereby enables the creation of broad money through fractional reserve banking. The money supply becomes exogenous. MMT becomes bunk.

    “If the banks could just pass off any unwanted reserve balances to pension funds, the central bank would not be able to control a target interest rate. Or maybe I’m just misunderstanding you.”

    Banks can get cash out of the system (otherwise how would they acquire non-balance sheet capital like derivatives?) but in doing so they (with a few intermediate steps) change the creditworthiness of the public, which is central to the monetary process.

  187. Gravatar of W. Peden W. Peden
    31. July 2011 at 05:04

    Changing asset prices and thereby nominal wealth also increases the willingness of the public to borrow at higher interest rates, now that I think about it.

  188. Gravatar of Oliver Oliver
    31. July 2011 at 05:22

    Scott

    Except for paper money? During normal times more than 90% of the base is currency. If there were no reserve requirements it would be close 99%. The base basically is paper money (prior to 2008.)

    ………………………………………………………………………………………………………

    Point taken. Serves me right for taking on a professor of economics :-).

    ……………………………………………………………………………………………………

    Vimothy

    And I think I understand the dynamic in a case without banks, where the total stock of cash is the total stock of outside money, which is the total stock of money full stop. This world is well described by something like P=M/L(i,Y), and it’s easy to see that if the central bank doubles M, since individuals can rid themselves of cash but as a group can only pass it around at a higher velocity, something will have to give to return the system to equilibrium, and that something will be the price level.

    ………………………………………………………………………………………………………

    I don’t see that you have established that doubling the base moves nominal income pari passu in a set-up with banks. Doubling the base raises asset prices since it lowers the policy rate, sure. There is a wealth effect on consumer spending (from asset holders), sure. But the 1-for-1 change to prices? I don’t see how you go from “asset holders have higher nominal wealth”, to “nominal aggregate income doubles”. Why does it double?

    ………………………………………………………………………………………………………

    Why is the case with banks different to that without banks, if the operation in both cases essentially involves buying government debt from private holders at market prices? Why does it matter whether these are exchanged for cash or deposits? These holders are asset holders of the exact same type, no matter whether there are banks or not. They want to save, i.e. hoard financial assets, preferably safe ones that pay at least some amount of interest. But obviously they are happy to part with them, otherwise they would not have sold them.

    I think it’s good to discuss what asset holders eventually end up doing with their new cash, and I think no MMTer would disagree, that, particularly with scares of hyperinflation and such making the rounds, asset price volatility and flight in and back out of other assets such as gold or foreign currencies or commodities is pretty much congruent with what we’ve been seeing. But the claim that such a move could somehow trigger cunsumption to rise to the degree that price levels of goods and services would double, is completely unrealistic imo. People do not consume their way out of economic uncertainty.

  189. Gravatar of Diatome Diatome
    31. July 2011 at 07:10

    Interesting discussion, but it is distressing that MMTers (1st generation) comments bounce off everyone rather then get incorporated or rejected. I suppose it is this language barrier, I hope S. Summers meets with the MMTers for a few days and hash out their differences in good faith and it doesn’t turn into ego protecting by anyone as that could jeopardize everything.

    Some of the comments need responding to:
    I’ve never seen MMTers put forth a model of inflation as you want. I suspect this is because inflation is an extraordinary complex phenomenon. For example they hold that QE is non-inflationary because buying treasuries held by the public and swapping them with reserves is not going to allow suppliers to raise their prices. Except psychologically some people will be afraid this will be inflationary, so they’ll hedge against it from buying commodities, futures, FX and actually cause the inflation they fear. Or it could be that oil producers are reducing output and the higher costs are passed on to the consumer. It could be the state lost the ability to enforce taxes. It could be industries are becoming more monopolistic. Could be everyone is taking out loans and buying investment properties! The list of possible causes can get really really long. Inflation is always and everywhere distributional phenomenon. Saying it is just a monetary phenomenon is akin to saying tsunamis are a water phenomenon.

    Scott F mentioned in his last comment that it is potentially consistent with MMT that a doubling in the monetary base is inflationary, but he needs more info to come to that conclusion. The key is to look at flows. Idle potential spenders can’t cause inflation regardless of the size of their bank account or ability to borrow. I know monetarists maintain that money is neutral in the long run, but they can’t define the long run, or even what monetary aggregate it is dependent on.

    To MMTers: Would raising taxes be potentially inflationary if the producers could pass on the additional costs?

  190. Gravatar of Scott Sumner Scott Sumner
    31. July 2011 at 07:20

    Mammoth, The real deficit is the real change in the national debt held by the public.

    I know that inflation rose around 1968-69 despite a contractionary fiscal policy (I believe a real surplus.)

    I’m sure there are cases where inflation rose during budget surpluses, because statistical studies show inflation is often unrelated to the deficit, if follows monetary policy. I don’t have the numbers for the developing world with me, but I’m sure one could find examples of inflation rising during surpluses. I answer 100 comments a day, and don’t have time to dig through the data, maybe someone else could.

    Winslow:

    “You would see reserves as less inflationary than cash even if there is no IOR being paid, right?”

    Wrong, Banks don’t want to hold lots of reserves when rates are positive.

    Mammoth, You said;

    “Now if the monetary base was doubled today, with all the extra money given to me, I can assure you I will only spend a few millions a year for the rest of my life, which will only represent a drop in the ocean of the economy so prices will not double. You might not trust my word, but clearly as a thought experiment it shows that doubling the monetary base will not necessarily double the price level, which is also consistent with MMT.”

    You’d hold three trillion in cash? Where would you put all the money?

    You said;

    “From what I’ve been reading a crucial point is what is the difference between bonds and currency? MMTers argue they are pretty much the same for all practical purposes,”

    I can’t even imagine how someone could say this. I don’t even regard them as close substitutes. Never once in my life have I thought to myself, “hmmm, currency or bonds today?” And I don’t think I’m atypical.

    Vimothy, You said;

    “But when you add banks it gets more confusing. What happens to the other aggregates when the central bank injects some outside money? Cash held by the public doesn’t change.”

    This is factually inaccurate. During normal times 90% of the new base money goes into cash.

  191. Gravatar of vimothy vimothy
    31. July 2011 at 08:13

    During normal times 90% of the base money *is* cash. But an OMO changes the stock of reserves held by the banks, not the stock of cash held by the public.

  192. Gravatar of Oliver Oliver
    31. July 2011 at 09:06

    Never once in my life have I thought to myself, “hmmm, currency or bonds today?” And I don’t think I’m atypical.

    The cash people carry around with themselves and that which they keep in checking accounts at banks cannot really be considered savings imo. It is highly liquid, ‘petty’ cash kept for every day transactions. But that which is set aside for old age, illness and such, will probably contain a mix of government bonds, currency as well as other things. One point that MMT makes, is that these ‘other things’ will have risk, other than inflation, attached to them whereas bonds and currency, by virtue of representing the same entity (the state), will be considered similarly risky, at least under the conditions of free floating, non convertible fiat, and especially so at low interest rates. So, savings in currency and in bonds are considered very close substitutes for all practical purposes. And the decision how much of one’s income is kept as ‘petty cash’ and how much is put aside as savings is not (positively) correlated with the availablity of government bonds, but will depend on expectations about the future, which includes real growth, i.e. investment opportunities as well as inflation.

  193. Gravatar of Greg Greg
    31. July 2011 at 12:31

    “I can’t even imagine how someone could say this. I don’t even regard them as close substitutes. Never once in my life have I thought to myself, “hmmm, currency or bonds today?” And I don’t think I’m atypical.”

    Thats totally the wrong question. People who have enough extra money to be holding bonds do not need the money they put in bonds for consumption. Thats why they are buying bonds. No one is suggesting that a bond can be used for immediate consumption the way cash can, but a 100,000 dollar bond will be worth $100,000 to the holder of the bond at maturity (unlike a stock you purchased for $100,000) so a bank would take it as collateral for a 100,000 loan in a heart beat. What is your obsession with cash?

    If I buy a $100000 govt bond at 3% for ten years it will be worth over its lifetime $130,000, guaranteed. If I sell it after 3 years, the new holder of the bond is guaranteed 100,000 plus interest for seven years. It will never be worth less than $100,000 because it IS $100,000. The stock might be worthless.

  194. Gravatar of Winslow R. Winslow R.
    31. July 2011 at 15:50

    “Wrong, Banks don’t want to hold lots of reserves when rates are positive.”

    Why would rates be positive? When banks have lots of reserves rates fall to zero. If IOR is positive, why wouldn’t banks want to hold reserves?

    “Never once in my life have I thought to myself, “hmmm, currency or bonds today?” And I don’t think I’m atypical.”

    Not a saver? Active savers, especially now, ask that question everyday.

    Joe public doesn’t need to ask the question because he spends every dollar he has in his pocket. Not everyone is Joe public, especially savers.

  195. Gravatar of Winslow R. Winslow R.
    31. July 2011 at 16:21

    I’m having a really hard time understanding why you think reserves are as inflationary as cash.

    Do you understand that excess reserves are composed of cash the public doesn’t want to hold in their pockets? If the public wanted cash they would withdraw their deposits. They don’t, hence excess reserves.

    Do you understand that banks aren’t going to spend those excess reserves?

    Do you understand that banks don’t need those excess reserves to make loans?

    Do you understand that excess reserves hurt bank profits when they could be holding higher interest paying bonds instead?

  196. Gravatar of vimothy vimothy
    1. August 2011 at 07:22

    Oliver,

    It’s different because in the case without banks, when you double the base, you double the money supply in toto. In the case with banks, the money supply is a lot harder to define, and when you double the base, you only increase one possible component of it””that of bank reserves””and this is not a component that can be used in your local department store to purchase consumption goods. Consequently, it’s not clear to me why doubling the base should double consumer prices. The amount of notes and coin held by the public is not directly affected by any OMP. The base-money supply function (if you will) that the public face is completely elastic””so that whenever they want to trade their deposit balances for notes and coin, they get them at par. Nothing the CB does when conducting monetary policy changes that, as far as I can see.

    Some commenters (e.g. W. Peden) are claiming that when you double the base, the money supply doubles automatically. People used to believe in a money multiplier whereby when the central banks adds reserves, the money supply (meaning bank deposits, etc) responds according to the product of the injection and some constant quantity (i.e. the multiplier). Most people, including central bankers, have abandoned this view of the money supply responding mechanically and deterministically to changes in the stock of reserves, and therefore, most central banks also abandoned the use of monetary aggregates as policy targets. At least, this is what I was taught in my (mainstream) monetary economics modules. The implication of W. Peden’s argument, that if you believe QE raises asset prices, then “you concede everything to the monetarists”, is obviously that all the staff at the major central banks are monetarists, since it was they who designed and implemented QE. But this is false. As far as I know the idea that QE raises asset prices is consistent with the cashless NK model, which also has a determinate price level. It would be pretty weird if it were not, given that this is the predominant model used at central banks.

    For one NK take on QE see here for example:
    canucksanonymous.blogspot.com/2011/07/how-do-fed-asset-purchases-help.html

  197. Gravatar of Scott Sumner Scott Sumner
    1. August 2011 at 09:15

    vimothy, During normal times over 90% of the growth in the base is currency–which means OMPs are mostly adding currency.

    Oliver; You said;

    “The cash people carry around with themselves and that which they keep in checking accounts at banks cannot really be considered savings imo. It is highly liquid, ‘petty’ cash kept for every day transactions. But that which is set aside for old age, illness and such, will probably contain a mix of government bonds, currency as well as other things.”

    This proves my point. Checking account balances are not currency. Neither are saving bonds. Currency is held for entirely different reasons that bonds.

    You said;

    “And the decision how much of one’s income is kept as ‘petty cash’ and how much is put aside as savings is not (positively) correlated with the availability of government bonds, but will depend on expectations about the future, which includes real growth, i.e. investment opportunities as well as inflation.”

    Precisely–which is the key assumption behind the QTM. Our demand for cash doesn’t demand on how many bonds are out there (as the MMTers claim.)

    Greg, I have no idea what your comment has to do with the question of whether cash and bonds are close substitutes.

    Winslow, You can’t keep waving your hands and assuming interest rates falling to zero is the way out the the MMT’s flaws. Interest rates almost never fall to zero, unless the economy is very weak and inflation is low. Suppose we had 15% trend inflation and 18% nominal interest rates. Now the Fed suddenly adds a huge amount of reserves. Are you really claiming interest rates fall to zero? And then what? You’d be massively out of equilibrium.

    You said;

    “Do you understand that banks don’t need those excess reserves to make loans?

    Do you understand that excess reserves hurt bank profits when they could be holding higher interest paying bonds instead?”

    Of course I understand that, if you don’t think so then you aren’t following my argument.

    Again, zero interest rates are not the norm. You can’t just assume interest rates would fall to zero, anytime the Fed injected more reserves than banks wanted to hold at positive rates. THE PRICE LEVEL CAN ALSO ADJUST.

  198. Gravatar of Oliver Oliver
    1. August 2011 at 12:16

    Precisely-which is the key assumption behind the QTM. Our demand for cash doesn’t depend (?) on how many bonds are out there (as the MMTers claim.)

    I don’t think they do, but I’ll let them answer that question personally.

  199. Gravatar of vimothy vimothy
    1. August 2011 at 13:49

    Scott,

    Yes, but that doesn’t prove that the growth in notes and coin held by the public isn’t independent from growth in reserves, or the base (since reserves are a subset of the base), as a result of open market operations.

    In the UK, over time cash held by the public is growing in absolute terms but falling as a proportion of GDP, in a very linear fashion. I don’t see how you explain that trend with OMO.

  200. Gravatar of ssumner ssumner
    1. August 2011 at 17:45

    Vimothy, First of all, cash isn’t even falling as a share of GDP over here. But as long as it is rising in absolute terms, you need OMPs to put it into circulation.

    In America reserves were becoming a smaller and smaller share of the monetary base until 2008.

  201. Gravatar of vimothy vimothy
    1. August 2011 at 20:26

    Sure, but that isn’t the same as OMO causing cash held by the public to rise (or fall). The central bank has no way of causing the public to hold more or less cash–because the banks give ’em whatever they want, whenever they want. As far as the public is concerned, the supply of cash is always perfectly elastic.

  202. Gravatar of Greg Greg
    2. August 2011 at 17:31

    Bonds and deposits are close substitutes ( a bond can be turned into a deposit with little effort, like switching money between a savings and a checking account) and deposits and cash are close substitutes.

    I turned $25,000 of savings bonds into cash before maturity with ease just a few years ago.

  203. Gravatar of ssumner ssumner
    13. August 2011 at 11:35

    vimothy, The Fed determines the base, but during normal times that’s over 90% cash. So as a practical matter they exert very close control over the total of cash in ciculation.

    Greg. I can turn silver into cash in a heartbeat, that doesn’t mean cash and bars of silver are close substitutes. People don’t go shopping with bonds. People can’t evade taxes with bonds. There’s a reason people want to hold cash.

  204. Gravatar of jake jake
    6. November 2011 at 10:42

    Fed can set interest rates exactly by offering interest on reserves, this set the floor. And it can set the top end by lending at that rate. The market can only influence the rate between the top and bottom. You won’t lend your money for less than you earn on interest and you won’t borrow for any more than the fed is offering.

  205. Gravatar of Scott Sumner Scott Sumner
    10. November 2011 at 20:42

    Jake, Yes, but why do something so stupid? Targeting interest rates leaves you helpless when they hit zero and more stimulus is needed.

  206. Gravatar of imtheknife imtheknife
    8. May 2012 at 06:27

    “MMTers forgot that the nominal interest rate is the price of credit, not money. The Fed can’t determine that rate, it reflects the forces of saving supply and investment demand.”

    Mr. Sumner- This is flat-out wrong. SUPPLY in this sense has nothing to do with the availability of something that is *created from nothing* rather than produced using inputs. Credit money (bank credit, loans, etc) is *created from nothing* by private banks, and destroyed when repaid (with interest retained, of course). Savings do not form the ‘supply’ from which loans are issued, and here’s a Fed paper that proves it:

    http://www.newyorkfed.org/markets/omo/omo2005.pdf

    The key passage excerpted here for convenience:

    “To influence the federal funds rate, the Desk conducts open market operations to align the supply of balances held by depository institutions at the Federal Reserve””or Fed balances””with banks’ demand to hold balances consistent with the funds rate around the target. Each morning, the Desk considers whether open market operations are needed based on estimates of the supply of and demand for Fed balances.

    The average level of Fed balances that banks demand over a two-week reserve maintenance period consistent with the funds rate remaining around the target is in large part determined by requirements to hold Fed balances, with only a small level of additional, or excess, balances typically demanded. The federal funds rate can move above the target rate if Fed balances fall so low that some banks have difficulty finding sufficient funds to cover required balance deficiencies or potential overdrafts in their Fed accounts. Conversely, the federal funds rate can fall below the target rate if Fed balances are so high that some banks risk ending a maintenance period holding undesired excess balances. From time to time when the funds rate deviates from the target, despite reserve levels being in line with requirements, the Desk may increase or decrease the supply of reserves accordingly.

    Depository institutions may average their holdings of Fed balances over the days within a maintenance period to meet requirements, which gives them considerable leeway in day-to-day account management. This flexibility can absorb some volatility in the funds rate that might otherwise develop when reserve supply and demand are misaligned.”

    Since there is a two-week window, banks need not have the appropriate reserves BEFORE lending or issuing credit, THEREFORE credit money does not ‘come from savings’ as the myth suggests.

    Further, this is where we derive the notion that ‘loans create deposits, deposits do not create loans’.

    One neat thing about MMT is that we have all this stuff called ‘evidence’ that actually supports our position, and not ONCE have we been properly academically challenged, because THEY KNOW WE’RE RIGHT. The academic realm of economics is tightly controlled through the fake ‘Nobel Prize for Economics’ which is, as I’m sure you know, issued by the Swiss central bank (Riksbank), who seems intent on making sure nobody respectable questions the power of the status quo (and that nobody who questions it can become respectable by way of a fake Nobel prize held over the heads of virtually the entire field). Would we (the public) know Krugman without his prize? Of course not, he was effectively vetted by ‘earning’ that award.

    Fortunately, it seems the internet may prove a useful medium for circumventing this control of information.

    Lietaer has some interesting comments on the subject in a few videos of recent lectures. I’ll leave the googling to those who care.

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