The ironies keep piling up

Ryan Avent asks a pretty good question:

And if you think the Fed can’t raise inflation, then it would still seem to make sense to urge the Fed to buy as much government debt as it possibly can. If one could entirely monetise the debt with no inflationary consequences, why not do it?

Ben Bernanke should be praised for his effort to inject more transparency into Fed operations.  This has actually made his life much more difficult, as compared to the more dictatorial approach of Volcker/Greenspan.  For instance, Bernanke keeps insisting that the Fed is never really out of ammo.  I know that some people think he’s lying, but he also passionately believed that as an academic.  And he’s very smart. And it’s obviously true.  So why should I assume he’s lying in saying something that’s true, and that he unquestionably used to actually believe?

Nevertheless, the transparency has put him in an awkward position.  The Fed’s newly transparent forecasts make it quite clear that we will fall short of almost anyone’s definition of a desirable level of demand growth over the next few years.  And yet the Fed holds back from doing more.  Reporters are beginning to probe this inconsistency at press conferences.  He answers the queries the only way he can—mysterious “costs and risks” of aggressive unconventional stimulus.  That basically means that if they bought up a large chunk of the national debt, they might later have to sell it at a loss.

Does Bernanke actually believe these costs and risks are more important than millions of unemployed?  Based on his work on Japan as an academic, almost certainly not.  But other people at the Fed certainly do worry about this, and he must speak for the entire Fed at the press conferences.  What else could he say?

While revising my Depression manuscript (which is finally back at the publisher, thank God!) I was reminded of a similar problem in the Great Depression.  This is New York Fed President Harrison in 1932 testifying in front of Congress (in the days when Congressmen did understand monetary policy, indeed he’s being questioned by Congressman Goldsborough who has an excellent discussion of the distinction between temporary and permanent currency injections at the zero bound, an idea rediscovered by Krugman in 1998.)

HARRISON:  [W]e have bought since the crash in the stock market approximately $800,000,000 to $850,000,000 of additional government securities . . . [H]owever, when after all the huge withdrawals of currency for hoarding purposes . . . we had in the system a relatively small proportion of free gold . . . [W]hile I would have liked to proceed further and faster last year, I was adverse to doing so till we had the protection of the Glass Steagall bill. . . . Perhaps we could have gone a little faster without clogging the banks by giving them too much excess reserve.  [from Hetzel’s new book, p. 42.]

Harrison is sort of like Bernanke, someone who got more cautious as he got closer to power.  That’s a very Bernanke-like statement.  We did a lot.  Perhaps we should have done a bit more.  But there were costs and risks (of gold outflows.)  And of course we know exactly what Bernanke thinks of Fed behavior in the Depression, it was disgracefully timid.  They needed “Rooseveltian resolve.”

Here I discuss Richard Timberlake’s excellent analysis of the gold problem:

In fact, Timberlake (1993, p. 272) pointed out that “In the true sense of Walter Bagehot’s prescriptions, all the Fed banks’ gold was excess.”  Meltzer (2003, p 276) makes a similar point and also observes that the Fed was well aware of the techniques used by the Bank of England during the nineteenth century to protect its gold holdings during a panic.[1]  And it’s hard to argue with Timberlake’s maxim (p. 273) that “A proper central bank does not fail because it loses all its gold in a banking crisis.  It only fails if it does not.”  It is difficult to imagine a more shocking indictment ofU.S. monetary policy than the fact that on the day FDR took theU.S. off the gold standard it still held over 37 percent of the world’s monetary gold stock.

[1] Meltzer (p. 276) points out that the Bank of England “had suspended the gold reserve requirement and relaxed restrictions on eligible paper for discount” during panics.

That’s from my manuscript.  Here’s how I’d translate that.  If a murderous maniac is trying to rape your wife, there is no shame in shooting at him and failing to stop him.  What would be shameful is if you failed to stop him and still had unfired bullets in your revolver.  The US still had the world’s largest gold reserves in 1933 when they threw in the towel and devalued.  Just think of the irony.  They were so cautious in monetary stimulus that NGDP fell in half and therefore we eventually abandoned the gold standard.  And why were they so cautious?  They were afraid of running out of ammo . . . I mean gold.  And when they finally gave up in 1933 we discovered that the Fed had been so timid that we still had far more gold than any other country on Earth!  I’m quite certain that Bernanke agrees with Timberlake and me . . . about 1933.

I bet you’re thinking that it doesn’t get any more ironic than that.  Unfortunately it does.  The Fed’s not worried about gold outflows, they’re worried about losses on their portfolio of securities.  And can you blame them?  It’s not like Fed profits in recent years have more than doubled, soaring to the highest levels ever earned by any corporation in the history of the universe.  Oh wait .  .  .

And 2011 profits were about the same as 2010 profits.  That’s triple the amount Apple earned in 2011.  Two hundred billion dollars in 3 years!  Folks, that’s a huge, gigantic, vast, enormous, mammoth, tremendous, titanic, humongous, immense, colossal, gargantuan, stupendous amount of money.   Yes, they might lose some money in the future if rates rise.  But consider:

1.  Any losses from faster NGDP growth would be more than offset by gains to the Treasury.  When you are in a Great Depression you don’t worry about gold outflows.  And when you are in a Great Recession you sure as hell don’t worry about the possible (though unlikely) need for future accounting transfers within the Federal government.

2.  According to the EMH, expected gains or losses from future purchases of securities are roughly zero, as sellers of T-bond’s will price them based on the expected effect of any stimulus the Fed happens to announce.

3.  Given the announcement effect, it’s unlikely that the Fed would actually have to buy all that much if they sincerely went for faster NGDP growth, level targeting.  In other words, the Fed’s current (ultra-cautious) path is actually the riskiest, the one associated with the largest demand for base money.

To summarize, the costs and risks argument isn’t just weak, it’s laughably weak, especially when set against the scale of the (now global) AD crisis.  But the Fed has been forced to make this pathetic argument because of three factors:

1.  Bernanke’s decision to promote transparency.

2.  Bernanke’s obviously reluctance to start lying, and claim they are out of ammo.  That would be wrong and would make him look like a complete fool, as he wouldn’t be able to provide any concrete facts that would explain why he had abandoned his previous academic view.

3.  Bernanke’s reluctance to tell Congress;  “We have no AD problem; we are right where we want to be folks.”

Bernanke’s in a box with no way out.  And the screws are only going to get tighter and tighter over time.

PS.  And remember that the press corps still hasn’t asked him about his 2003 claim that money and interest rates are unreliable policy indicators, and that only NGDP growth and inflation provide a reliable indicator of the stance of policy.  And that those two indicators (averaged) show the tightest money since Herbert Hoover over the past 4 years, when high unemployment would call for easy money (dual mandate.)  He still hasn’t been asked that question!  The box is only going to get hotter.

PPS.  I still like Bernanke, I hope the two new Board members will show some initiative and encourage him to follow his instincts.


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153 Responses to “The ironies keep piling up”

  1. Gravatar of Phil Phil
    4. July 2012 at 06:47

    I am skeptical of your emh argument. If there is a player big enough to move the markets buying for a reason other than profit, then that is almost the definition of an inefficiency. I think we are already seeing this in the flight to safety, where many banks need to hold repo-able collateral, and the current lack of trust has driven the prices of safe assets to the point where it is in conceivable that they could be profitable. Ironically it is probably the lack of sufficient money-like securities in the shadow banking sector that is driving the Feds profits by creating a premium for safe bonds.

    One way of thinking about it is to say that when the cdo valuations collapsed, about one trillion of triple a securities that had previously been indistinguishable from money suddenly ceased to be liquid. Since that was used as collateral to grease interbank lending, the demand for new collateral in shadow banking (or just cash) is driving bonds sky high. Basically it was a contraction in the money supply.

    ——

    A different point, if QE is effective at the lower bound, surely it is effective at any federal funds rate? If so, the fed can keep ngdp on track regardless aof the interest rates? Is that correct?

    If it is correct it surely follows that the fed can simultaneously control both the path of aggregate demand, and the level of debt in the economy. It seems causal to me that lower interest rates lead to more debt, and that this is unnecessary under ngdp, if you are prepared to engage in QE at any funds rate.

    It seems to me that since, in many cases, debt is treated like money, then high levels of debt leave the money supply vulnerable to large contractions due to relatively small changes in the valuation of said debts. This is surely a systemic risk.

  2. Gravatar of ssumner ssumner
    4. July 2012 at 07:25

    Phil, You may be right about the EMH (although I’m not convinced), but it wouldn’t matter as there are lots of other reasons the Fed shouldn’t care about risk.

    You said;

    “A different point, if QE is effective at the lower bound, surely it is effective at any federal funds rate? If so, the fed can keep ngdp on track regardless aof the interest rates? Is that correct?
    If it is correct it surely follows that the fed can simultaneously control both the path of aggregate demand, and the level of debt in the economy. It seems causal to me that lower interest rates lead to more debt, and that this is unnecessary under ngdp, if you are prepared to engage in QE at any funds rate.”

    QE that is expected to be permanent is always effective, when it’s expected to be temporary it’s never very effective.
    The Fed can only hit one variable with monetary policy. If we want to reduce debt (and we should) we should eliminate all the subsidies for debt. The eliminate the higher tax rate on equity. The home interest deduction, the subsidies built into FDIC and TBTF, etc.

  3. Gravatar of TallDave TallDave
    4. July 2012 at 07:38

    Good piece, that graph is fascinating.

    My dad worked at the Fed for about 20 years, I got the sense it was a very cautious culture. But really, aren’t situations like today’s exactly why we have a Fed in the first place? We bought the gun, the intruder’s in the house, but we’re too scared to take the safety off — somebody might get hurt!

  4. Gravatar of Negation of Ideology Negation of Ideology
    4. July 2012 at 08:09

    I agree it makes no difference if the Fed takes a loss in a single year for the first time in history, and the Treasury makes an equivalent gain. But if for political reasons it is a problem, the Fed could simply sell some of its gold. The Fed lists $11 Billion in gold as an asset, but that’s at the official price of $42.22 per Troy ounce. At current prices that’s somewhere around $418 Billion, or over $400 Billion in unrealized gains.

  5. Gravatar of Bernanke Failed In The 90s. That’s Why He Fails Today | feed on my links Bernanke Failed In The 90s. That’s Why He Fails Today | feed on my links
    4. July 2012 at 08:27

    […] is Scott Sumner: Bernanke keeps insisting that the Fed is never really out of ammo.  I know that some people think […]

  6. Gravatar of Steve Steve
    4. July 2012 at 08:31

    I thought the “costs and risks” included several other areas:

    * The ‘cost’ that commodity prices go up, as many economists don’t understand that commodities have their own supply and demand curves.

    * The ‘risk’ that easier money allows the government to finance itself when it ‘should’ be undergoing forced austerity (think BIS).

    * The ‘risk’ that QE blows new bubbles, creating mal-investments feared by the regional FOMC Austrians.

    * The ‘cost’ that the Euro would strengthen despite pan-European recession, thus forcing Europe to do monetary stimulus, too.

    Not that I agree with any of these ‘costs and risks’, just that the Fed losing money isn’t the only one they are worried about.

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    4. July 2012 at 08:51

    You quote Harrison saying in 1932;

    ‘I was adverse to doing so till we had the protection of the Glass Steagall bill. . . . ‘

    Whatever he means by ‘protection’ he didn’t get it in ’32. Glass-Steagall of that year didn’t become law. Several of its provisions were incorporated into the Banking Act of 1933 though.

  8. Gravatar of D.Gibson D.Gibson
    4. July 2012 at 09:54

    I don’t understand the risk of the Fed “owning” things. I hear the argument about bubbles and hyperinflation (all wasted on me). So what if the Fed buys every bit of govt. debt? We don’t care about opportunity costs. We don’t care about selling, ever. The Fed should be like the Chevy Chase character in Caddyshack with lots of uncashed checks laying about. Print some money and toss the Tbills in a box and forget ’em. What am I missing???

  9. Gravatar of Major_Freedom Major_Freedom
    4. July 2012 at 10:11

    Ben Bernanke should be praised for his effort to inject more transparency into Fed operations. This has actually made his life much more difficult, as compared to the more dictatorial approach of Volcker/Greenspan….I know that some people think he’s lying, but he also passionately believed that as an academic. And he’s very smart. And it’s obviously true. So why should I assume he’s lying in saying something that’s true, and that he unquestionably used to actually believe?

    Neither Ben Bernanke, nor any other Fed economist, knows how much money should be created, nor how much spending should take place over a period of time. They all operate external to the market process of respect for private property and voluntary exchange subject to profit and loss. There is no profit and loss inherent in the process of a government enforced privileged institution printing any sum of money it wants, the costs of which are incurred by others.

    The refutation of socialism on the basis that socialism lacks a price system for the means of production, is no less applicable to communist central banking in an otherwise capitalist economy. There is no constancy based model or arbitrary rule of money printing that can increase the effectiveness of the market process itself that is not based on constancy.

    For instance, Bernanke keeps insisting that the Fed is never really out of ammo.

    You can get how inflationists view the economy. They view it as an enemy that needs to be shot at.

    The last thing the economy needs is to be shot at.

    Nevertheless, the transparency has put him in an awkward position. The Fed’s newly transparent forecasts make it quite clear that we will fall short of almost anyone’s definition of a desirable level of demand growth over the next few years. And yet the Fed holds back from doing more. Reporters are beginning to probe this inconsistency at press conferences. He answers the queries the only way he can””mysterious “costs and risks” of aggressive unconventional stimulus. That basically means that if they bought up a large chunk of the national debt, they might later have to sell it at a loss.

    The Fed’s forecasts have been falsified so many times that their forecasts should be regarded as worthless. They literally have no clue. Scientific predictions based on constancy in relations are inapplicable in the sphere of human action. The very methodology of the Fed’s economists, of forming hypotheses, of collecting data, of testing the hypotheses, of making predictions, presupposes non-constancy in the Fed economists themselves, since the methodology is (supposedly) one of learning, and learning implies unpredictable change.

    Their usage of scientific predictions based on constancy in relations, is a “huge, gigantic, vast, enormous, mammoth, tremendous, titanic, humongous, immense, colossal, gargantuan, stupendous” self-contradiction, and yet Sumner is wanting everyone to still trust their forecasts.

    Is it really that surprising that Fed economists, like Bernanke, who utilize self-contradictory methods, have been wrong about virtually everything they say? Google “Bernanke was wrong”. It is literally absurd to believe this man has any understanding of what he is doing. Anyone can do what he does and print money for his friends. There is no there, there.

    Nobody is smart enough to predict their own future learning path before they learn it. Nobody is capable of running the Fed. Every Fed economist can only create as much money as the market process would have otherwise created, by pure chance only. 5% NGDP targeting is the latest in a long string of absurdities based on the fallacious assumption of constancy in relations in human action.

    Why do you still cowtow and praise Bernanke’s “instincts”? Is it because he’s in control of the money printing press, and you can’t get the subjective communist program you want unless you lick his boots while pretending to “criticize” him for…being too nice?

    Will you start to “really” criticize him when it is clear his days at the Fed are numbered, after which you’ll lick the boots of the next Fed chairman? Where’s the integrity?

    Does Bernanke actually believe these costs and risks are more important than millions of unemployed?

    You fallaciously presume that there are millions of unemployed because of not enough money printing, when it is precisely too much money printing in the past that led these workers going into physically unsustainable lines the prolongation of which could only, as Hayek well knew, be maintained through acceleration of inflation, and eventual destruction of the currency.

    You quite expectedly stay as far away from even contemplating the possibility of funny money distorting economic calculation, because you know it will blow up your entire error-infested worldview.

    The millions of unemployed can get back to work if their wage rates FALL. But they won’t fall when there is a Fed promising inflation and promising lower real wages, and when there is a Treasury promising 99 week paid holidays, and when there is an Executive promising to throw into a cage any employer and employee who dares work for less than the state’s price floor.

    You are ignoring all these problems and you’re invoking the crank theory that inflation cures all, that the reason people are on 99 week paid vacations is not because of the paid vacation, but because Bernanke isn’t devaluing their paid vacation money by enough to coax them into the labor force.

    If employment can be temporarily boosted by printing money, it won’t be sustainable employment. It will be the kind of employment promoted during the 2000s boom, when millions of workers accepted job offers in particular stages of production that would never have been offered in the first place had the monetary system been a free market monetary system, where investors and consumers were not misled by funny money, such that the job offers are in stages of production that are actually sustainable.

    Central bank money printing has no grounding in the market process, but rather the arbitrary decrees of Fed bureaucrats who utilize a self-contradictory methodology, and who don’t understand human action is not based on constancy but lack of constancy, i.e. change.

    Anyone who says the present unemployment situation is a problem of not enough money printing is a crank, plain and simple.

    Based on his work on Japan as an academic, almost certainly not. But other people at the Fed certainly do worry about this, and he must speak for the entire Fed at the press conferences. What else could he say?

    Where is the profit and loss information that would enable him to say whether or not his actions generated a gain or a loss? Oh that’s right. Nowhere. What else are non-market participants supposed to say other than indirect, evasive, hand waving demagoguery?

    Harrison is sort of like Bernanke, someone who got more cautious as he got closer to power. That’s a very Bernanke-like statement. We did a lot. Perhaps we should have done a bit more. But there were costs and risks (of gold outflows.) And of course we know exactly what Bernanke thinks of Fed behavior in the Depression, it was disgracefully timid.

    Yes, the Fed was “disgracefully timid”. Timid is when graphs go parabolic like this.

    If the Fed prints, and the problems get worse, then to the dogmatic fiat bug it’s not a falsification of Fed printing efficacy. No, in Keynesian-like logic: If they print, and the problems go away, then inflation works. If they print, and the problems get worse, then inflation still works, it just wasn’t enough.

    And monetarists want to claim their beliefs are falsifiable? That’s rich.

    The Federal Reserve System was not “timid” during the 1920s, a period that you fallaciously claimed on many occasions was not inflationary.

    As Hans F. Sennholz noted:

    “In 1924, after a sharp decline in business, the Reserve banks suddenly created some $500 million in new credit, which led to a bank credit expansion of over $4 billion in less than one year.”

    and

    “The Federal Reserve System launched a further burst of inflation in 1927, the result being that total currency outside banks plus demand and time deposits in the United States increased from $44.51 billion at the end of June 1924, to $55.17 billion in 1929. The volume of farm and urban mortgages expanded from $16.8 billion in 1921 to $27.1 billion in 1929. Similar increases occurred in industrial, financial, and state and local government indebtedness. This expansion of money and credit was accompanied by rapidly rising real-estate and stock prices. Prices for industrial securities, according to Standard & Poor’s common stock index, rose from 59.4 in June of 1922 to 195.2 in September of 1929. Railroad stock climbed from 189.2 to 446.0, while public utilities rose from 82.0 to 375.1”

    All this inflation is almost universally ignored by the various political strategist Monetarist and Keynesian types.

    They needed “Rooseveltian resolve.”

    They needed the resolve of a President who modeled his own policies after the fascist Benito Mussolini?

    Of course I always knew NGDP targeting is nothing but a nationalist socialist (fascist) banking policy, so it’s not surprising to see political strategist monetarists having an affinity to FDR. Birds of a feather I guess…

    [1] Meltzer (p. 276) points out that the Bank of England “had suspended the gold reserve requirement and relaxed restrictions on eligible paper for discount” during panics.

    The Bank of England attempted to reinstate the pre-war parity, despite the fact that they inflated so much as to make that pre-war parity an unjustified one. They were bleeding gold. So along to the rescue came the British influenced Fed in 1924, to stem the gold outflow from Britain. This wasn’t a problem of gold. That is a problem of states being untrustworthy. Claims that the problem was the gold standard is academic fraud.

    If a murderous maniac is trying to rape your wife, there is no shame in shooting at him and failing to stop him. What would be shameful is if you failed to stop him and still had unfired bullets in your revolver.

    The Fed is the murderous maniac rapist in your analogy. The Fed isn’t fighting evil boogeymen in the market who inexplicably put masses of people out of work. They are fighting against unhampered economic calculation, and shooting at innocent market participants who cannot coordinate their behavior precisely because the communication mechanism of the price system is constantly being shot at by Fed bullets.

    You perceive the Fed as some sort of savior, when in reality it is the cause of the problem you incorrectly perceive as being caused by “lack of demand.”

    The US still had the world’s largest gold reserves in 1933 when they threw in the towel and devalued. Just think of the irony. They were so cautious in monetary stimulus that NGDP fell in half and therefore we eventually abandoned the gold standard.

    That “therefore” is an epic non-sequitur. NGDP fell in half, “therefore” the FDR signed a law that made civilian gold ownership illegal?

    What, has every other flotsam and jetsam explanation already been thrown at the wall without sticking, that we’re now in la la land of blaming the abandonment of gold on “NGDP falling in half”?

    NGDP fell in 1920, after years of inflation to finance WW1, but the Treasury and Fed “feel asleep at the wheel”, and market participants were relatively free to adapt and calculate in accordance with the new monetary conditions, and pretty soon the depression was history. In fact, the recovery was so quick, that hardly anyone even knows about it.

    The classic gold standard was abandoned by the state because the state is an inherently corrupt, violence backed institution that could not restrain itself. The people ignorantly trusted the state, and the statesmen reneged on that promise because they had the ability to initiate force with impunity. They abandoned gold because their Treasury and their central banking system couldn’t restrain themselves from printing money, in a context of Hoover’s and FDR’s disastrous interventionist policies that prevented the price system from doing its job. The 1930s was a period of rapidly advancing central planning. As Cole and O’Hanian noted, it was government intervention that made the crash of 1929 into a prolonged depression.

    It was not because “the Fed didn’t print enough.”

    And why were they so cautious? They were afraid of running out of ammo . . . I mean gold. And when they finally gave up in 1933 we discovered that the Fed had been so timid that we still had far more gold than any other country on Earth! I’m quite certain that Bernanke agrees with Timberlake and me . . . about 1933.

    Again with the shooting analogy. Do all Monetarists/Keynesians view the market as something to be attacked until it is weakened to such a degree that the state, rather than consumers, dictate what is to be produced, where, and when?

    I bet you’re thinking that it doesn’t get any more ironic than that. Unfortunately it does. The Fed’s not worried about gold outflows, they’re worried about losses on their portfolio of securities. And can you blame them? It’s not like Fed profits in recent years have more than doubled, soaring to the highest levels ever earned by any corporation in the history of the universe. Oh wait . . .

    And 2011 profits were about the same as 2010 profits. That’s triple the amount Apple earned in 2011. Two hundred billion dollars in 3 years! Folks, that’s a huge, gigantic, vast, enormous, mammoth, tremendous, titanic, humongous, immense, colossal, gargantuan, stupendous amount of money. Yes, they might lose some money in the future if rates rise.

    Haha, you just made an argument that monetary policy has been loose, nay, the loosest it has ever been in the history of the universe, during 2010 and 2011.

    With such incredibly high rates of profit, it requires incredibly high rates of “investment”, i.e. money printing.

    But it’s still not enough, right? NGDP has only been rising at 4-5% for two years instead of an unnamed let’s keep it to ourselves number of years.

    Maybe if they print a bajillion giggitywillion more dollars, THEN all our problems will go away…

    1. Any losses from faster NGDP growth would be more than offset by gains to the Treasury. When you are in a Great Depression you don’t worry about gold outflows. And when you are in a Great Recession you sure as hell don’t worry about the possible (though unlikely) need for future accounting transfers within the Federal government.

    Yay gains to the Treasury! “Small government” Sumner at work, folks. We can shrink government by creating more gains to the Treasury.

    2. According to the EMH, expected gains or losses from future purchases of securities are roughly zero, as sellers of T-bond’s will price them based on the expected effect of any stimulus the Fed happens to announce.

    Haha, you just contradicted yourself. Back when you defended treasury purchases as a means for NGDP targeting, you said the prices the Fed pays for securities are “free market prices.” Now that you’re defending EMH, you say the prices the Fed pays for securities will be a function of the Fed’s printing itself, which of course is not a free market process at all, and hence not free market prices.

    Too funny.

    3. Given the announcement effect, it’s unlikely that the Fed would actually have to buy all that much if they sincerely went for faster NGDP growth, level targeting. In other words, the Fed’s current (ultra-cautious) path is actually the riskiest, the one associated with the largest demand for base money.

    Ultra cautious? NGDP has been rising 4-5% since 2010. How is that “ultra cautious”? Ultra cautious would be letting NGDP fall to whatever level the market process puts it devoid of Fed intervention.

    Wasn’t the Fed originally supposed to only be the lender of last resort? Why are you and so many other socialist minded political strategists insinuating that the Fed should be printer and lender of first resort?

    The Fed controls the supply of base money. There is no “demand” for base money apart from the supply of base money that exists and being held at any given time.

    If the Fed’s current purchases have not been sufficient in raising NGDP to your arbitrary desired level, then it is likely the Fed would have to purchase even more to raise NGDP to your arbitrary desired level.

    The announcement effect can’t get businesses who lack the inflation money in the present and won’t receive it for a while, to spend more money before the “announcement” of higher inflation is made good for their revenues.

    More inflation will just distort the price system even more, and throw millions more people into physically unsustainable stages of production.

    Inflation doesn’t just affect “aggregate” prices, “aggregate” spending, “aggregate” demand, and (temporary) “aggregate” employment. It affects relative prices, relative spending, relative demand, and relative employment.

    That is what NGDP targeting fails to delineate, and it is a BIG problem.

    To summarize, the costs and risks argument isn’t just weak, it’s laughably weak, especially when set against the scale of the (now global) AD crisis.

    The costs and risks argument doesn’t just apply to the Fed, in fact it is not even Fed centered. The costs and risks argument concerns the market. The costs and risks of inflation on the market is what is going over your head. You can only conceive of costs and risks of deviating away from the absurd 5% arbitrary target. That’s it. There is nothing else in your toolkit that can enable you to discern costs and risks of inflation.

    You completely ignore the detrimental effects of inflation on:

    1. Economic calculation;

    2. Capital formation;

    3. Size and scope of government activity (no, you can’t say Australia has NGDP targeting and Australia’s government is small so that means NGDP targeting will make the US government small. I’ll leave it to you to figure out why);

    4. Psychology of entrepreneurs;

    …and many more.

    There is no “AD crisis.” There is a crisis in economics where too many political strategists believe there is an “AD crisis.” There is a crisis of global government intervention into the price system. There is a crisis of flawed methodology in macro-economics. There is a crisis of socialist ideology underlying central bank advocacy.

    There is a crisis of pompous ignoramuses with pretensions to knowledge masquerading as enlightened chosen ones who actually believe themselves having the intellectual wherewithal to plan the money and spending for an entire population of millions of individuals. This blog is a crisis. The acolytes who use this blog for knowledge acquisition is a crisis.

    There is no crisis of individuals choosing for themselves how much of their existing cash balances to hold for some time and how much to hold for a longer time. Let individuals decide for themselves how much they spend, and thus what level NGDP is at.

    Hayek recommended against nations targeting money and thus spending. He recommended country level NGDP fluctuations in a world market.

    Why are you so against the market process of money and spending?

    Bernanke’s in a box with no way out. And the screws are only going to get tighter and tighter over time.

    Every Fed chairman is in a box. None of them can connect their actions to profit and loss.

    PS. And remember that the press corps still hasn’t asked him about his 2003 claim that money and interest rates are unreliable policy indicators, and that only NGDP growth and inflation provide a reliable indicator of the stance of policy.

    NGDP growth and inflation are two different things. You can’t just lump them in together as if they’re inter-changeable. If NGDP growth is the “indicator”, then that is independent of price inflation, since price inflation will fluctuate according to supply. If price inflation is the “indicator”, then that is independent of NGDP, since NGDP will fluctuate according to demand.

    And that those two indicators (averaged) show the tightest money since Herbert Hoover over the past 4 years, when high unemployment would call for easy money (dual mandate.)

    Price inflation doesn’t increase unemployment. The 1970s falsified that myth.

    Price inflation has averaged 2.5% since 2000. It has averaged over 3% since 1970.

    Long term price inflation, the Fed’s ACTUAL mandate, is therefore slightly above target. They have failed on the side of too much price inflation over the long term, and they failed on the side of not enough employment. To get back to their mandate, they have to reduce current price inflation even more and thus reduce the extent of price system distortion, which will help the employment situation.

    As always, you have things exactly backwards. LOW inflation helps employment, and we have had long term above mandate price inflation.

  10. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. July 2012 at 13:25

    Ryan Avent:
    “And if you think the Fed can’t raise inflation, then it would still seem to make sense to urge the Fed to buy as much government debt as it possibly can. If one could entirely monetise the debt with no inflationary consequences, why not do it?”

    Interestingly someone posed a similar question to Stephen Williamson yesterday:

    JSR:
    “Just a couple of questions here:

    1) If you don’t believe QE (in any size) will increase the price level, do you think the Fed could (in theory) buy back all 15 trillion or so of US debt? At that point couldn’t they sell it to the Treasury for cash without any inflationary impact? That doesn’t seem realistic, but if it were, wouldn’t it be a good thing to do?

    2) If you do believe the above action would result in increased inflation expectations, then doesn’t that imply that QE would accomplish it’s goals through the expectations channel?”

    Stephen Williamson:
    “So we turn the remainder of the outstanding federal government debt into reserve accounts at the Fed. Why do you think that makes a difference?”

    http://newmonetarism.blogspot.com/2012/07/reply-to-sumners-reply.html

    It get’s a little more ridiculous after that.

  11. Gravatar of Bonnie Bonnie
    4. July 2012 at 13:37

    “I still like Bernanke, I hope the two new Board members will show some initiative and encourage him to follow his instincts.”

    After reading recent speeches/reports available on the BIS website, I prefer Krugman’s FedBorg description of Bernanke. Comparing that material to Bernanke’s public statements over the last few years I wondered whether I was witnessing an episode of the Stepford Fed because they all use practically the same words and phrases to convey the same tortured logic. It’s a spooky echo that leads me to wonder just who is running the Fed; on the surface it doesn’t appear to be Bernanke.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. July 2012 at 13:45

    “Any losses from faster NGDP growth would be more than offset by gains to the Treasury. When you are in a Great Depression you don’t worry about gold outflows. And when you are in a Great Recession you sure as hell don’t worry about the possible (though unlikely) need for future accounting transfers within the Federal government.”

    Why are we even worrying about this? We’re not even talking about gold, we’re talking about fiat currency. As Paul de Grauwe noted about the ECB a couple of days ago:

    “It is surprising that the ECB attaches such an importance to having sufficient equity. In fact, this insistence is based on a fundamental misunderstanding of the nature of central banking. The central bank creates its own IOUs. As a result it does not need equity at all to support its activities. Central banks can live without equity because they cannot default. The only support a central bank needs is the political support of the sovereign that guarantees the legal tender nature of the money issued by the central bank. This political support does not need any equity stake of the sovereign. In fact it is quite ludicrous to believe that governments that can, and sometimes do, default are needed to provide the capital of an institution that cannot default. Yet, this is what the ECB seems to have convinced the outside world.”

    http://www.voxeu.org/article/why-eu-summit-decisions-may-destabilise-government-bond-markets

    Can’t Bernanke just write an IOU to himself?

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. July 2012 at 13:57

    I also notice that Ryan Avent links approvingly to the very same paper we were discussing yesterday, Scott:

    INNOCENT BYSTANDERS?
    MONETARY POLICY AND INEQUALITY IN THE U.S.
    -Olivier Coibion et al.

    Abstract:
    “We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.”

    http://emlab.berkeley.edu/~ygorodni/CGKS_inequality.pdf

    On pages 20-21 it notes:

    “Second, these results suggest that the response of income inequality would likely be even more pronounced if the top 1% of the income distribution were included. This is because the source of income for the top 1% is quite different from that of other groups. The CBO (2011) reports that the top 1% received only 40-50% of their total non-capital gain income from labor earnings between 1980 and 2007 while financial income and business income accounted for approximately 30% and 20% respectively. Because financial income rises persistently while business income declines only briefly after contractionary monetary shocks, and because their labor earnings are likely to rise at least as much as the 90th percentile, one can reasonably speculate that the total income of the top 1% would rise by more than most of the households in the CEX. Thus, our results likely provide a lower bound on the effects of monetary policy shocks on income inequality.”

  14. Gravatar of TallDave TallDave
    4. July 2012 at 15:35

    I agree it makes no difference if the Fed takes a loss in a single year for the first time in history,

    The notion of what Fed “losses” mean seems a bit murky anyway. As Mark says, it’s all just fiat currency — it’s not as though we were on a gold standard and the gold was stolen.

  15. Gravatar of David Pearson David Pearson
    4. July 2012 at 16:21

    Mark Sadowski,
    A central bank can be insolvent but never illiquid. However, when the central bank operates with negative net worth, it must issue reserves to cover losses. Such a central bank loses control over the money supply: it can target inflation, or it can issue reserves to cover losses, but it cannot do both.

    The purchase of Treasuries by a central bank simply transfers duration risk from private agents to taxpayers. On the margin, this creates either: 1) a contingent tax liability in the form of recapitalization; or 2) a contingent currency liability in the form of inflation.

    Scott’s point that a Fed long duration position offsets Treasury’s short position is interesting. Its like saying if my Grandmother always wants a long TIPS position, and I decide to run out and short TIPS in her name, then she should be happy because I just neutralized her risk.

  16. Gravatar of Mike Sax Mike Sax
    4. July 2012 at 16:50

    Mark I can certainly believe contractionary monetary policy hurts those with modest income. They start at a goodt time-1980. Volcker’s disinflation was about as contractionary as it gets and it did hurt the nonrich a lot-11.3% unemployment, etc.

  17. Gravatar of Paul Andrews Paul Andrews
    4. July 2012 at 17:04

    Scott,

    R. Avent said: “And if you think the Fed can’t raise inflation, then it would still seem to make sense to urge the Fed to buy as much government debt as it possibly can. If one could entirely monetise the debt with no inflationary consequences, why not do it?”

    It would still be debt. Fed reserves are debts from the Fed to commercial banks.

    The difference would be that the Government would be borrowing at zero percent for its deficit spending, competing for resources with a private sector that must borrow at much higher rates. This is a massively inefficient way to run an economy, and in fact would be equivalent to a non-central-bank regime, where the government creates fiat money at will to pay for its purchases.

    One of the main purposes of having a central bank is to try to ensure that the government is competing with the private sector for investment on a level playing field.

    If the government borrows at zero, and everyone else borrows at 4, 5, 6+, what do you think the outcome will be?

    It’s not just about inflation.

  18. Gravatar of DonG DonG
    4. July 2012 at 19:00

    Paul A said, “It would still be debt. Fed reserves are debts from the Fed to commercial banks.”

    Paul, It is debt in a different direction. Fed buying govt. securities in money that Congress owes to the Fed. The Fed doesn’t care, if it gets paid back. However, reserves are deposits by banks and do care to be paid back.

    David P, QE is not related in insolvency. The central bank is *buying* things with new money. New money that doesn’t need to be payed back.

  19. Gravatar of ssumner ssumner
    4. July 2012 at 19:03

    Talldave, Good analogy.

    Negation. Good point about gold assets. I fear you might be right about the politics, but it’s really insane if you think about it. In the 1930s we basically let the Nazis take power because the VSPs cared more about the mystique of gold than about millions of unemployed. Now the fear is a possible accounting gimmick transfering some assets from the Treasury to the Fed. And we have to suffer for that?

    Steve, I guarantee that those aren’t the costs and risks that Bernanke was worried about. I don’t doubt others do, but they are crazy.

    Patrick, There were several Glass-Steagall bills, one did pass in Feb. 1932. The banking one came later–1933 I think.

    D. Gibson, They worry that they might have to sell in the future to prevent hyperinflation.

    Mark, Hmmm, that doesn’t sound promising. As I recall Williamson thinks the Fed can still use negative IOR to target inflation, so if QE doesn’t work, why not do that?

    Bonnie, Well he’s certainly doesn’t have dictatorial control.

    Mark, Without capital you might reach a point where you can’t reduce the money supply. You’d have nothing to sell. In reality, that would be very unlikely to occur, as the base will probably never fall much below a trillion dollars in the future. That’s a big cushion.

    Mark, Why in the world would financial income rise after a contractionary monetary policy? Aren’t all the savers now complaining about too low interest rates?

    David, I sort of agree, although as I said above the Fed doesn’t lose control of inflation until it’s new equity position falls below about negative one trillion.

    Also, I’m not saying the gains and losses balance out, I’m saying an expansionary monetary policy produces an order of magnitude bigger gain to the Treasury, than loss to the Fed.

    Paul, That was a reductio ad absurdum argument, Both Ryan and myself favor a monetary regime that would quickly result in much higher interest rates. The near zero rates are a product of the very low level of NGDP since 2008.

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. July 2012 at 20:21

    Scott,
    “Aren’t all the savers now complaining about too low interest rates?”

    Aren’t savers always complaining? And what is it that they really want except higher real rates, right?

  21. Gravatar of Paul Andrews Paul Andrews
    4. July 2012 at 22:12

    Scott,

    R. Avent said: “And if you think the Fed can’t raise inflation, then it would still seem to make sense to urge the Fed to buy as much government debt as it possibly can. If one could entirely monetise the debt with no inflationary consequences, why not do it?”

    I said: “It would still be debt. Fed reserves are debts from the Fed to commercial banks. The difference would be that the Government would be borrowing at zero percent for its deficit spending, competing for resources with a private sector that must borrow at much higher rates. This is a massively inefficient way to run an economy, and in fact would be equivalent to a non-central-bank regime, where the government creates fiat money at will to pay for its purchases. One of the main purposes of having a central bank is to try to ensure that the government is competing with the private sector for investment on a level playing field. If the government borrows at zero, and everyone else borrows at 4, 5, 6+, what do you think the outcome will be? It’s not just about inflation.”

    You: “That was a reductio ad absurdum argument, Both Ryan and myself favor a monetary regime that would quickly result in much higher interest rates. The near zero rates are a product of the very low level of NGDP since 2008.”

    Ryan is saying that if you believe the Fed cannot induce inflation, then you should have no argument against monetization of all the debt.

    What I am saying is that this is not necessarily the case. There are compelling reasons not to monetize, even if you ignore the inflation argument.

  22. Gravatar of Paul Andrews Paul Andrews
    4. July 2012 at 23:01

    DonG,

    I said: “I said: “It would still be debt. Fed reserves are debts from the Fed to commercial banks.””

    You said: “Paul, It is debt in a different direction. Fed buying govt. securities in money that Congress owes to the Fed. The Fed doesn’t care, if it gets paid back. However, reserves are deposits by banks and do care to be paid back.”

    When the Fed purchases a treasury security from a private entity, this is the effect on the Fed’s balance sheet:

    Asset: +Security (treasury owes Fed)
    Liability: +Reserves (Fed owes private entity)

    If you view the Government and Fed as the “Government Sector”, the Government Sector still owes the debt to the private entity, in the form of reserves instead of securities.

    Actually, you’ve made me think this through a little more. Given that the Fed is paying IOR, the government sector is not getting the money at 0%, which negates to a small degree my argument above to Scott. I think this is a good thing compared to no IOR, but still a significant distortion compared to uninfluenced market rates.

  23. Gravatar of Bob Roddis Bob Roddis
    4. July 2012 at 23:36

    MF: You are amazing. As you know, I am always fascinated by the bizarre non-engagement of our ideas by our opponents. These last few posts just might be the weirdest yet.

  24. Gravatar of Max Max
    5. July 2012 at 00:33

    David,
    “Such a central bank loses control over the money supply: it can target inflation, or it can issue reserves to cover losses, but it cannot do both.”

    Sure it can, it just needs to pay interest on reserves, as most central banks are now doing.

  25. Gravatar of Max Max
    5. July 2012 at 00:55

    TallDave,
    “The notion of what Fed “losses” mean seems a bit murky anyway.”

    Very simple: Fed profits = reduced public debt, Fed losses = increased public debt.

  26. Gravatar of Major_Freedom Major_Freedom
    5. July 2012 at 01:32

    Bob Roddis:

    MF: You are amazing. As you know, I am always fascinated by the bizarre non-engagement of our ideas by our opponents. These last few posts just might be the weirdest yet.

    Over the last couple of weeks or so on this blog, an interesting phenomenon has occurred. There has developed an uncanny, yet rather amusing, kind of unofficial blacklisting of my posts. Sumner has encouraged it.

    I guess they are just getting sick and tired of having their fallacious claims refuted over, and over, and over again. They’ve hit their limit.

    The sad thing about it all is that I learned that nobody, perhaps with the exception of one or two posters, seemed even intellectually capable of delving into the more sophisticated concepts. The discourse on this blog is extremely superficial. Only on the rare occasion was anyone even courageous enough to go into philosophical fundamentals of economic science, which is vital if one is going to approach economic science without contradiction. And even when there was discussions on it, the quality was piss poor, and often made by jaw drop.

    I learned again just how resilient the human species really is. Here are dozens of posters the majority of whom adhere to principles that are directly contrary to reality, and yet they’re all able to dress themselves in the morning. They could have totally upside down epistemologies, and yet continue on as if they were true.

    ———

    Back to the unofficial blacklisting. It’s actually quite liberating. It’s like I can say anything, and nobody will dare touch any of it.

    You’re right. It truly is fascinating to watch our intellectual opponents avoid engaging our ideas. It’s got to be a record setting cognitive dissonance in economics.

    I recently became convinced that the problem of their ignorance isn’t one of bad communication on my part. I felt horrible for thinking it at the time, but I am now convinced that the problem is that they are just intellectually incapable of grasping the deep complexity and incredible nuance inherent in praxeology and teleology. The best they can do is dance around the concepts and mention them, but never showing any evidence that they “get it.”

    I think the reason for this is that these concepts appear to conflict with years of ideological, political, and philosophical brainwashing they want through during their intellectual “development.” So their minds are not receptive to the ideas even when they are presented with them. I imagine in their minds it’s “Nope nope nope nope nope nope” over and over and over again. Then it’s post rationalization of trying to find an excuse not to believe any of what they initially knee jerked against.

    ———–

    It is truly breathtaking to witness Richard Rorty’s self-contradictory philosophy actually finding a believer, who then bases his entire set of arguments and ideas off of it, and then expect to make non-contradictory arguments.

    ———–

    I promised to “go away” as soon as Sumner becomes a champion/advocate of total decentralization of money, abolition of the Fed, and a free market in money production. So far there’s been nothing but crickets.

  27. Gravatar of RebelEconomist RebelEconomist
    5. July 2012 at 01:46

    No; Ryan Avent’s question is rhetorical. I don’t think there are many people who think that the Fed cannot raise inflation if that is its sole objective. The problem is of course is whether that puts them on a one-way street to something worse – either hyperinflation or a reversal of asset purchases that returns the economy to its original position or worse.

    And Mark Sadowski, Paul De Grauwe’s argument is more of the same. Even if depletion of a central bank’s capital does not matter for monetary policy reasons because its government sponsor(s) can be trusted not to exploit the resulting potential dependence of the central bank (doubtful), it matters because a surplus of assets over liabilities generally means a distribution to the central bank shareholders. And they do complain when they don’t get one: http://www.reuters.com/article/2011/11/21/snb-dividend-cantons-idUSL5E7ML06Z20111121

    Basically, De Grauwe’s argument is just another in the never-ending series of attempts to pick Germany’s pockets, since Germany is the largest shareholder of the ECB and by far the largest which is unlikely to require the ECB to buy its debt. One can’t help but wonder whether the PIIGS, French and in this case, the Belgians, redeployed half the ingenuity which they apply in devising ways to make the Germans pay to more productive purposes, there would not be a eurozone crisis at all.

    I have learned that, when a commentator says that they are “surprised” that some argument should be made, or suggest that it shows a “misunderstanding”, it suggests that they know that their case does not stand on its own merits. We seem to be in an era when scientific objectivity in economics has collapsed.

  28. Gravatar of Mike Sax Mike Sax
    5. July 2012 at 02:20

    C’mon Major you and I both know that you and Bob Roddis are one and the same.

  29. Gravatar of OhMy OhMy
    5. July 2012 at 06:48

    That monetization doesn’t cause inflation has been showed by MMT long time ago, there indeed is no reason to issue debt.
    Google “what if the government just prints money” by Fullwiler.

    Major Freedom: Shorten your posts and you will get some traction, MMT debates Bob Roddis regularly, his posts are short and can be argued with.

  30. Gravatar of Mike Sax Mike Sax
    5. July 2012 at 07:35

    Ok OhMy-so Roddis does exist. Thanks for the confirmation.

  31. Gravatar of Major_Freedom Major_Freedom
    5. July 2012 at 09:33

    OhMy:

    That monetization doesn’t cause inflation has been showed by MMT long time ago, there indeed is no reason to issue debt.

    In the paper you referred to, he wrote:

    “Finally, that the non-bank private sector is holding Treasuries rather than deposits in Figure 3 does not somehow constrain its spending. Rather, just as current holders of deposits could choose to convert their new wealth to time deposits instead of spending, individuals holding Treasuries (which are essentially time deposits at the Fed) could opt alternatively to leverage their wealth (and Treasuries happen to be highly valuable as loan collateral). Indeed, whether holding deposits or Treasuries, with greater net wealth and net income flows provided by a government deficit, the non-government sector might logically be more likely to spend than without the deficit while also appearing more creditworthy to banks (who again themselves are never constrained by the quantity of reserve balances or deposits in the amount of lending or money creation they can engage in). In any event, in the presence of a government deficit, spending by the non-government sector is in no plausible way constrained by the fact that it currently might be holding Treasuries instead of deposits.”

    This is flawed.

    Fullwiler equivocates deposit financed “spending”, which in terms of property rights is absolute and not contingent, with debt financed “spending”, which in terms of property rights is not absolute and very much contingent.

    There is a difference between spending money out of one’s existing cash balance, and finding a lender to loan you money such that you spend money out of a loan. For one thing, one has more liquidity in the former than the latter. They have instant purchasing power. They don’t have instant purchasing power with a treasury.

    But more importantly, if the choice is between owning $1000 in cash and no debt to others, and owning a $1000 treasury and owing $1000 in debt to others (and thus owning $1000 in cash), one will be more cash constrained in the latter than the former, because the interest one pays on the debt will almost certainly exceed the interest one receives on the treasury. One cannot just consume out of the loan the way one can consume out of a deposit. If one consumes out of the loan, then one will have nothing to show for it once the NET principle and interest become due for them (principle and interest on debt that exceeds the principle and interest on treasury). One will have to reduce their cash at that time. However, if one instead consumes out of a $1000 deposit, then one will still have nothing to show for it, but one won’t have to pay back any NET principle or interest and thus one’s overall cash will be higher.

    Most importantly of all, there is an additional risk associated with owning a treasury as compared to owning cash. The price of the treasury in terms of money might fall. The price of money measured in terms of money cannot fall, as money is of course always identical with itself. Of course there are complications to this, in that owning a deposit may be more risky than owning a treasury (if there are questions of a bank’s solvency, but for those who have less than $250,000 cash – the majority of those in the non-bank private sector – their cash is insured).

    ——–

    He concludes:

    “In sum, whether or not a deficit is accompanied by bond sales is irrelevant for understanding the potential inflationary effects of the deficit. Under normal Fed operating procedures in place until fall 2008, the operational function of bond sales was to support the interest rate target, not to “finance” a deficit. A government bond sale does not somehow reduce funds available for non-government agents to borrow as presumed in the loanable funds market approach, while the absence of a bond sale does not somehow mean there is a greater amount of liquid financial assets, income, or “funds available” for borrowing or spending than without the bond sale. Instead, a government deficit always adds to the non-government sector’s net financial wealth whether or not a bond sale occurs. Both the Treasury’s bond sales and the Fed’s operations affect only the relative quantities of securities, reserve balances, and currency held by the non-government sector; the total sum of these is set by the outstanding government debt. With or without bond sales, it is the non-government sector’s decision to spend or save that matters in regard to the potential inflationary impact of a given government deficit. Indeed, to be more precise, a deficit accompanied by bond sales is actually the MORE potentially inflationary option, as the net financial assets created by the deficit will be increased still further when additional debt service is paid.”

    The statement “A government bond sale does not somehow reduce funds available for non-government agents to borrow” is not quite right. Only if a government bond sale is accompanied by monetary inflation, can one say that a government bond sale does not reduce funds available for the private sector (BTW, it’s interesting how Fullwiler views people as either government or non-government, as if the standard is the government and everyone else not in government are some kind of outsiders). But even then, the inflation must enter the market by way of the government acquiring something of tangible value from the private sector (or if by straight up transfer payments, then some in the private sector who did not produce to earn that money, will acquire something of tangible value from others in the private sector), so in real terms, there are fewer real resources available to the productive side of private sector, and that reduces everyone’s standard of living.

    MMT, like all monetary crank theories, completely overlooks the real side of the economy, and how goods and services are actually produced, and instead focuses entirely on dollars and dollar flows. While the nominal accounting of MMT is more or less correct (I say more or less because MMTers tend to butcher the English language to such a degree that their accounting statements when taken at face value cannot be considered correct, but when translated into more common economics parlance, it’s what most economists knew was the case all along.

  32. Gravatar of Major_Freedom Major_Freedom
    5. July 2012 at 09:38

    OhMy:

    Major Freedom: Shorten your posts and you will get some traction, MMT debates Bob Roddis regularly, his posts are short and can be argued with.

    I am not actually interested in my posts getting immediate “traction” from necessarily shallow thinkers, who can only deal with short, incomplete, easy to misunderstand posts that require wasteful back and forth of “Oh no, I didn’t mean that, I meant this…”.

  33. Gravatar of OhMy OhMy
    5. July 2012 at 12:55

    Major Freedom,

    The distinction between a fiscal transfer and a loan in terms of net worth effect and spending propensity is obvious to MMT.

    MMT also knows that real resources can be limited and are the constraint. Neoclassical econ argues that the govt borrowing crowds out *monetary* resources, while opposite is the case (govt deficit injects assets into the economy, be it bonds or reserves). One has to worry about real constraints, but these mostly matter at full employment. So this is mostly a theoretical worry. Output rose 100x times since the onset of the industrial revolution and we never hit real resources limit, despite multiple predictions. The present crisis also obviously has monetary roots, not some real resources constraints. Btw, Fullwiler’s mechanism (fiscal injection) doesn’t need any transfer of anything from the private sector to the govt, it is just a gift, like a SS check o unemployment benefit, say.

  34. Gravatar of Morgan Warstler Morgan Warstler
    5. July 2012 at 18:08

    ROMFFL!!!!

    “If a murderous maniac is trying to rape your wife”

    The maniac is Obama, and the hegemony is firing every bullet to stop him.

    Scott, money isn’t a social good, and the Fed is not democratic institution.

    The fact that you don’t have the balls to ADMIT it, and instead just lalalalalala pretend it is meant for everyone equally, ASSUME it is, INSIST it is…

    Well dude, it leaves you rooting for Obama, because if Obama loses, then mon frere, your book is dedicated to moi!

    Oh wouldn’t it be loverly.

  35. Gravatar of ssumner ssumner
    5. July 2012 at 18:22

    Mark, That’s my point, real rates are low right now.

    Paul, You assumed that his policy would lead to zero rates, that’s what I am denying. And even if rates were zero on t-debt, I don’t see how that hurts the private sector, they could also borrow at low rates.

  36. Gravatar of Bob Roddis Bob Roddis
    5. July 2012 at 20:27

    MF:

    I found my old yellowed copy of Hazlitt’s “Economics in One Lesson” that I bought in 1974 at age 23 and my scribbled notes from back then. I recall comprehending the concept of Cantillon Effects in about 90 seconds and immediately understanding that the operative mechanism of money dilution is theft of purchasing power from the powerless. I fail to see how these concepts are particularly difficult to understand.

    http://www.flickr.com/photos/bob_roddis/6983691614/in/photostream/

    However, the “debate” continues to take the same format.

    http://www.flickr.com/photos/bob_roddis/4774791015/in/photostream/

  37. Gravatar of Bob Roddis Bob Roddis
    5. July 2012 at 21:02

    Major Freedom: Shorten your posts and you will get some traction, MMT debates Bob Roddis regularly, his posts are short and can be argued with.

    Such success I have. The chief Mike Norman blogger, Tom Hickey, responded to my post by endorsing the labor theory of value. OH MY!

    http://tinyurl.com/cvfjtz2

  38. Gravatar of Major_Freedom Major_Freedom
    5. July 2012 at 22:10

    OhMy:

    The distinction between a fiscal transfer and a loan in terms of net worth effect and spending propensity is obvious to MMT.

    Fiscal transfer? You mean a trade of goods for money?

    MMT also knows that real resources can be limited and are the constraint.

    MMT does not know that real resource production is impaired by state monopoly over money production.

    Neoclassical econ argues that the govt borrowing crowds out *monetary* resources, while opposite is the case (govt deficit injects assets into the economy, be it bonds or reserves).

    As expected, you’re only focusing on after effect, the final equilibrium, the final state of rest, whatever you want to call it. This follows from the fact that MMT accounting equations are not dynamic. They are sterile and rigid. MMT does not consider the market process.

    Government borrowing does indeed crowd out “monetary resources”. You can only see how it does if you don’t narrowly focus on the final state of rest, of the private sector ending up with more money after the inflation financed borrowing. You have you look at the process involved, from A to B.

    Any dollar the government borrows from the private sector is a dollar that the government takes ownership over and therefore excludes the private sector from borrowing that same dollar at that same time.

    You can’t just ignore this process and say “The private sector ends up with another dollar after all is said and done.”

    You can’t do this for the same reason I can’t say “The private sector ends up with every dollar I steal from people, because after I steal the money, I go out and spend it on myself, and so those dollars end up right back in the ‘Non-Major_Freedom sector.’ So you can’t say I am reducing anyone’s ability to spend. There is no net loss.”

    I can’t say that because I would be ignoring the process in going from

    A. Dollars owned in the non-Major_Freedom sector, to

    B. Dollars owned in the non-Major_Freedom sector.

    In between A and B, I am reducing people’s ability to spend, and acquiring real resources for myself.

    The same principle exists with government borrowing. Every dollar the government borrows from the private sector is a dollar that those in the private sector did not borrow at that time, to invest, or to consume. No, the dollar went to the government sector and the government then spent the money, acquiring real resources for itself, or through transfer payments, enabling others to acquire real resources for themselves.

    Yes, after the government spends the dollar, the private sector ends up with another dollar, but this doesn’t mean that the government didn’t monetarily crowd out the private sector AT THE TIME IT BORROWED the dollar.

    If I have control over a dollar, through either borrowing or earning or whatever, then you and everyone else are excluded at that time from controlling that dollar. If I spend that dollar, through either consumption or investment, then you and everyone else are excluded at that time from spending that dollar.

    You can’t ignore the fact that money is exchanged over time, and you can’t pretend that the private sector having control over a particular dollar is somehow the final state of rest where we are to judge whether or not there is crowding out.

    If I robbed people every day, and spent the money, then I too could make it look like I am not crowding out anybody, by simply focusing only on the times that others have the money instead of me.

    But if one looks at the processes involved, then you cannot pull the wool over people’s eyes and tell them that because they end up with a dollar in accordance with your flawed equilibrium treatment, that somehow there was no crowding out that took place.

    One has to worry about real constraints, but these mostly matter at full employment. So this is mostly a theoretical worry.

    Real resource constraints always matter, ESPECIALLY at less than full employment, for it is precisely these times that unhampered economic calculation becomes most needed. Yet in our society, the state does the exact opposite. During times of less than full employment, the state increases its printing and spending of money, and thus hampers economic calculation.

    Output rose 100x times since the onset of the industrial revolution and we never hit real resources limit, despite multiple predictions.

    Output didn’t rise because of inflation or state control over money. Output rose DESPITE inflation and state control over money. The industrial revolution took place under a gold standard that was of course periodically interfered with by the state. For example the Revolutionary war, the war of 1812, the Civil war, and both World Wars, were all financed by governmental paper currency. The panic of 1819 was the result of the inflation to finance the war of 1812, the panic of 1873 was the result of inflation to finance the Civil war, and the depression of 1920 was the result of inflation to finance WW1.

    The present crisis also obviously has monetary roots, not some real resources constraints.

    Economic scarcity is ubiquitous. It is economic scarcity that is the reason why the problems associated with monetary inflation by the state, are crystalized in the real side of the economy, and why printing trillions of dollars won’t make people wealthier unless there is real production.

    Btw, Fullwiler’s mechanism (fiscal injection) doesn’t need any transfer of anything from the private sector to the govt, it is just a gift, like a SS check o unemployment benefit, say.

    There is no such thing as a free lunch. The costs of these “gifts” MUST fall on somebody.

    And I don’t see how “fiscal injection”, which is just another way of saying the government spends money, is somehow “Fullwiler’s” as if he owns the concept. It predates his life by centuries.

  39. Gravatar of Major_Freedom Major_Freedom
    5. July 2012 at 22:23

    Roddis:

    I found my old yellowed copy of Hazlitt’s “Economics in One Lesson” that I bought in 1974 at age 23 and my scribbled notes from back then. I recall comprehending the concept of Cantillon Effects in about 90 seconds and immediately understanding that the operative mechanism of money dilution is theft of purchasing power from the powerless. I fail to see how these concepts are particularly difficult to understand.

    They are not difficult to understand, they are just psychologically, intellectually and emotionally VERY uncomfortable for those ideologues who advocate and/or apologize for central banks and refuse to even consider a free market in money production, as if a free market in money production is a “heresy” that only dogmatists would consider.

    There is some major cognitive dissonance. I hear endless fallacious justifications such as “The IRS steals way more! You should worry about them instead of yammering over a meager 2-3% a year!”. And my personal favorite, “For all intents and purposes (i.e. “Please stop talking about this”), we can just assume away Cantillon Effects (i.e. “I cannot otherwise advance inflation as a solution”), since there are many, many institutions that the Fed sends money to (i.e. “22 primary dealer institutions out of a population of 300,000,000 Americans is definitely elitist, but I have to believe it’s a lot of people, to make me feel better and to shut you up about it”).

    Such success I have. The chief Mike Norman blogger, Tom Hickey, responded to my post by endorsing the labor theory of value. OH MY!

    Of course he would. Hickey is a closeted communist. It bleeds through his esoteric ramblings.

  40. Gravatar of Major_Freedom Major_Freedom
    5. July 2012 at 22:31

    Mike Sax:

    Ok OhMy-so Roddis does exist. Thanks for the confirmation.

    You didn’t even ask for a confirmation. You just accused me of being Roddis and then someone corrected you.

    You’re so scared. It’s like you cannot even fathom many people having vastly different convictions that you, that you believe it’s all one boogeyman.

  41. Gravatar of Benjamin Cole Benjamin Cole
    6. July 2012 at 02:26

    I have been posing that question for months: Why not buy and retire Treasuries, if there are no ill consequences? This could be a once-in-a-lifetime opportunity to deleverage the nation.

    If a businessman were running the federal government, he would seize this opportunity with both hands….

  42. Gravatar of Benjamin Cole Benjamin Cole
    6. July 2012 at 02:40

    BTW, Scott Sumner’s observation that being cautious (in financial markets) is sometimes the most dangerous course is one that ought be chiseled into granite somewhere.

    I can remember when buying “safe” US Treasuries (into the 1970s) brought losses to investors. Not buying a house a couple of years ago was riskier than buying a house.

  43. Gravatar of anon anon
    6. July 2012 at 03:20

    Benjamin Cole, there is no appreciable difference between retiring Treasuries, vs. keeping them on the Fed balance sheet and just rolling them over indefinitely. But the latter choice is institutionally easier, plus the Fed might actually need to sell these assets, even under NGDP level targeting if velocity increased unexpectedly.

  44. Gravatar of Bob Roddis Bob Roddis
    6. July 2012 at 04:27

    I’m going to make an attempt at explaining “crowding out” with simple language and cartoons.

    Suppose an inventor is seeking investors for his cancer curing machine but the return on the investment is not guaranteed. On the other hand, the USA government (as the biggest gas guzzler on the planet) wants to borrow money to buy gasoline to fuel its helicopters so that it can murder Iraqi civilians and it can guarantee a return because it can seize assets of its citizens for repayment. In bad times, investors are going to choose the safe “investment”.

    http://www.youtube.com/watch?v=5rXPrfnU3G0

    The resources that went to Iraq are not available for the inventor. Those resources cannot exist or be utilized in two places at the same time.

    http://www.flickr.com/photos/bob_roddis/4163003939/in/set-72157623413687847/

  45. Gravatar of OhMy OhMy
    6. July 2012 at 04:58

    Bob Roddis,

    Wrong. The government “borrows” the money it just created and sent into the economy.
    Google “what if the government just prints money” by Fullwiler.

    This “borrowing” has only one function: erase (not really borrow, because they are not stored) the new reserves that were created in the banking system and replace them with bonds. Why? Because extra reserves push the interbank interest *down* (not up), and the CB would lose control over its policy instrument: the interest rate.

    So unless *real* resources are a problem (eg. at full employment: if the govt project attracts workers, the other project can’t), both projects can be financed. There is never any crowding out when government runs a deficit, ever.

  46. Gravatar of OhMy OhMy
    6. July 2012 at 05:05

    MF,

    My above comment is also for you: you don’t understand what the process of borrowing looks like. Writing the word process in italics doesn’t change this fact. There is no monetary crowding out. The process is simply a series of balance sheet operations, it can be studied and then you see that indeed the net worth of the private sector goes up.

    Again, fiscal transfers don’t involve a transfer of goods, what do you send to the govt when you get an unemployment check or a food stamp?

    MMT is not afraid of Roddis, he uses emotions to argue which shows that his arguments are weak. He wants them to be true, that is all.

  47. Gravatar of Paul Andrews Paul Andrews
    6. July 2012 at 05:31

    OhMy,

    You said: “it can be studied and then you see that indeed the net worth of the private sector goes up.”

    This is a myth. The “net financial assets” (MMT term) of the private sector goes up. This is nothing like net worth. Actually MMT types usually use the word “surplus”, which is miselading in itself. “Net worth” is even more misleading.

    MMTers often use this turn of phrase to try to show that government deficits are not the problem that many think they are.

    It is seductive because people like to think that our problems are not real, and because it is true if you define “surplus” in a very restrictive way, rather than the way most people think of as a surplus.

    A surplus, in the usual way of thinking, means extra stuff that we made that we can keep for later. For instance, productive investment in capital, inventory that we can sell in the coming months, seed that we can plant later etc.

    This is not the “surplus” referred to by MMT proponents.

    What they mean by “surplus” is “an increase in the amount of net financial liabilities owed to the private sector”. They are referring to a nominal dollar amount of debt. Sometimes they say “Net Financial Assets” or “Savings”, but they are referring to the same thing – just the amount of money owed by the government to private parties.

    Of course, the only surplus that is important for an economy to have is a real surplus of real assets, not a nominal dollar amount of government debt.

    MMT proponents misuse language in this way to fool the unsuspecting.

  48. Gravatar of Paul Andrews Paul Andrews
    6. July 2012 at 05:40

    Scott,

    R. Avent said: “And if you think the Fed can’t raise inflation, then it would still seem to make sense to urge the Fed to buy as much government debt as it possibly can. If one could entirely monetise the debt with no inflationary consequences, why not do it?”

    I said: “It would still be debt. Fed reserves are debts from the Fed to commercial banks. The difference would be that the Government would be borrowing at zero percent for its deficit spending, competing for resources with a private sector that must borrow at much higher rates. This is a massively inefficient way to run an economy, and in fact would be equivalent to a non-central-bank regime, where the government creates fiat money at will to pay for its purchases. One of the main purposes of having a central bank is to try to ensure that the government is competing with the private sector for investment on a level playing field. If the government borrows at zero, and everyone else borrows at 4, 5, 6+, what do you think the outcome will be? It’s not just about inflation.”

    You: “That was a reductio ad absurdum argument, Both Ryan and myself favor a monetary regime that would quickly result in much higher interest rates. The near zero rates are a product of the very low level of NGDP since 2008.”

    Me: “Ryan is saying that if you believe the Fed cannot induce inflation, then you should have no argument against monetization of all the debt. What I am saying is that this is not necessarily the case. There are compelling reasons not to monetize, even if you ignore the inflation argument.”

    Me (in response to DonG): “Actually, you’ve made me think this through a little more. Given that the Fed is paying IOR, the government sector is not getting the money at 0%, which negates to a small degree my argument above to Scott. I think this is a good thing compared to no IOR, but still a significant distortion compared to uninfluenced market rates.”

    You: “You assumed that his policy would lead to zero rates, that’s what I am denying. And even if rates were zero on t-debt, I don’t see how that hurts the private sector, they could also borrow at low rates.”

    I think that if the IOR is lower than the market rate for short-term government debt, then it’s fairly clear that monetisation allows the government to access funds at a lower rate than a free market would provide. Therefore this is a distortion, and favours government investment over private investment. The fact that IOR is not zero at present simply makes this a little less bad.

    The word “also” in your last sentence is inappropriate. Zero does not equal low. The fact that the private sector can borrow at “low” rates is irrelevant. What matters is that the government can, essentially by force, borrow at lower rates than a free market would provide, and therefore has greater command over limited resources than it otherwise would have.

  49. Gravatar of Mike Sax Mike Sax
    6. July 2012 at 06:02

    “found my old yellowed copy of Hazlitt’s “Economics in One Lesson” that I bought in 1974 at age 23 and my scribbled notes from back then. I recall comprehending the concept of Cantillon Effects in about 90 seconds and immediately understanding that the operative mechanism of money dilution is theft of purchasing power from the powerless. I fail to see how these concepts are particularly difficult to understand”

    Bob that you understood it in 90 seconds underscores why Hazlit is held in such low regard

  50. Gravatar of OhMy OhMy
    6. July 2012 at 06:03

    Paul Andrews,

    MMT talks about Net *financial* assets. It is obvious to everybody that it is talking about money and not real stuff, the same way when you talk about a government “deficit” everybody knows you talk about monetary deficit, and not oxygen deficit or a food deficit. So what are you talking about?

    You say it is a “myth” that net worth goes up? Please consult the definition. Net worth = assets – liabilities. In fiscal transfer the private sector gets more assets by D and has the same amount of liabilities, so change(net worth)=D, it is not rocket science and even less it is a myth.

  51. Gravatar of Bob Roddis Bob Roddis
    6. July 2012 at 06:16

    What they mean by “surplus” is “an increase in the amount of net financial liabilities owed to the private sector”. They are referring to a nominal dollar amount of debt. Sometimes they say “Net Financial Assets” or “Savings”, but they are referring to the same thing – just the amount of money owed by the government to private parties.

    The ultimate source of which, of course, is other private parties. So the new “net financial asset” nets out to zero. And, of course, there’s still the same amount of stuff in the universe (or probably less due to government interference) but the claims upon that same old stuff are now owned by different parties.

    It’s just shiftin’ snd stealin’, a massive criminal enterprise and a hoax designed so average people can’t “follow the money”.

  52. Gravatar of Bob Roddis Bob Roddis
    6. July 2012 at 06:21

    Bob that you understood it in 90 seconds underscores why Hazlit is held in such low regard

    Wow. That was sure substantive. In fact, I’ve never met a non-Austrian who understood Cantillon Effects. How can they hold him low regard if they do not understand Cantillon Effects or deny that they exist? I miss your point.

  53. Gravatar of Mike Sax Mike Sax
    6. July 2012 at 06:23

    “A surplus, in the usual way of thinking, means extra stuff that we made that we can keep for later. For instance, productive investment in capital, inventory that we can sell in the coming months, seed that we can plant later etc.”

    “This is not the “surplus” referred to by MMT proponents.”

    “What they mean by “surplus” is “an increase in the amount of net financial liabilities owed to the private sector”. They are referring to a nominal dollar amount of debt. Sometimes they say “Net Financial Assets” or “Savings”, but they are referring to the same thing – just the amount of money owed by the government to private parties.”

    “Of course, the only surplus that is important for an economy to have is a real surplus of real assets, not a nominal dollar amount of government debt”.

    “MMT proponents misuse language in this way to fool the unsuspecting.”

    Paul I think your muddying the issue by using the word “surplus” in various different ways. The debate that you’re referring to is what a government surplus amounts to-ie, when it’s more than balanced it’s budget.

    This has nothing to do with “extra stuff we can keep for later.”

  54. Gravatar of Bob Roddis Bob Roddis
    6. July 2012 at 06:24

    This “borrowing” has only one function: erase (not really borrow, because they are not stored) the new reserves that were created in the banking system and replace them with bonds. Why? Because extra reserves push the interbank interest *down* (not up), and the CB would lose control over its policy instrument: the interest rate.

    This artificial distortion of what the interest rates would be without this unnecessary and damaging interference is the source the our economic problems. But you knew that, right?

  55. Gravatar of Mike Sax Mike Sax
    6. July 2012 at 06:34

    Bob I wasn’t trying to make a substantive point-though there is nothing hard about understanding Cantillion effects-they’re mostly a red herring of course.

    But you seem so proud of yourself that you understood it in 90 seconds-that shows that the understanding you get from Hazlitt is kind of the same as what you get from getting a college degree out of a cracker jack box.

    The worry about Cantillion effects is a red herring. Do you object to increases in the money supply via the capital account? If not then they can’t be abolished no matter how Rothbaridan you very well may be. If not why do these Cantillion effects matter?

  56. Gravatar of Bob Roddis Bob Roddis
    6. July 2012 at 07:04

    By “capital account” I assume you mean this:

    Capital account =

    Change in foreign ownership of domestic assets
    – Change in domestic ownership of foreign assets

    Once we’ve gotten rid of the central bank and everyone in the galaxy is using commodity money, I don’t think I care much who owns what. Does that answer your question?

    By Cantillon Effects I mean the central bank increasing the fiat funny money supply which must benefit the first-receivers over everyone else. That results in theft of purchasing power which does not seem to bother or register with immoral Keynesians and monetarists. That operative functionality and the brain-dead response to the outrageous theft is what I am referring to. A foreign funny money bank can induce the same result.

  57. Gravatar of Major_Freedom Major_Freedom
    6. July 2012 at 07:07

    Mike Sax:

    Bob that you understood it in 90 seconds underscores why Hazlit is held in such low regard

    and then

    Bob I wasn’t trying to make a substantive point-though there is nothing hard about understanding Cantillion effects-they’re mostly a red herring of course.

    Notwithstanding the ad populum, notice the double standard. Hazlitt is allegedly held in low regard for making the Cantillon Effect easy to understand. But Mike believes the Cantillon Effect is easy to understand.

    Should we take it then that we should hold whoever Mike learned the Cantillon Effect from in low regard as well?

    But you seem so proud of yourself that you understood it in 90 seconds-that shows that the understanding you get from Hazlitt is kind of the same as what you get from getting a college degree out of a cracker jack box.

    You seem so adamant in pulling down others for understanding something that eludes you. Insulting the author, insulting the reader’s education, and insisting that anyone who understands a really easy to understand concept in a relatively short amount of time somehow implies a superficial understanding of that concept, is nothing but a display of incredible low self-esteem.

    I understood the effect very quickly as well. I just imagined myself getting a dollar from a printing press and spending it before everyone else (which is implied in me spending it). It was pretty obvious pretty soon that my spending of the dollar is not the same thing as 250,000,000 people spending that same dollar at that same time.

    The worry about Cantillion effects is a red herring. Do you object to increases in the money supply via the capital account? If not then they can’t be abolished no matter how Rothbaridan you very well may be. If not why do these Cantillion effects matter?

    The Cantillon Effect is not a red herring. It is intimately tied up with the distorting effect of inflation on the price system, and thus with the cause of the business cycle, which is a very important and very real phenomena.

    You are obviously conflating your inability to understand a concept, with that concept being unimportant. There’s a word for that…some might call it solipsism.

  58. Gravatar of OhMy OhMy
    6. July 2012 at 07:25

    Bob Roddis

    What they mean by “surplus” is “an increase in the amount of net financial liabilities owed to the private sector”. They are referring to a nominal dollar amount of debt. Sometimes they say “Net Financial Assets” or “Savings”, but they are referring to the same thing – just the amount of money owed by the government to private parties.

    The ultimate source of which, of course, is other private parties.

    Of course not. http://tinyurl.com/3pmseq8 That is the point of fiat money. It doesn’t come from anywhere. By issuing money the government doesn’t owe you anything other than:

    * it will replace it upon receipt with… identical money.
    * it will accept it as a payment of taxes

    Both of those obligations are easy to fulfill and do not come from anyone’s assets.

    This artificial distortion of what the interest rates would be without this unnecessary and damaging interference is the source the our economic problems. But you knew that, right?

    Yes I knew that. The government is a monopoly supplier of money and like any monopolist it sets the price: the interest rate. The interest rate is not market determined. Money is a public monopoly, our representatives set the price. That is the present system.

  59. Gravatar of Bob Roddis Bob Roddis
    6. July 2012 at 07:31

    The government is a monopoly supplier of money and like any monopolist it sets the price: the interest rate. The interest rate is not market determined. Money is a public monopoly, our representatives set the price. That is the present system.

    Right. It’s illegal, unconstitutional and the source of the boom/bust cycle, among its other many faults. I know that. I miss your point.

  60. Gravatar of OhMy OhMy
    6. July 2012 at 07:59

    Bob,

    Right. It’s illegal, unconstitutional

    Huh? The Fed is the creature of Congress, Congress decides what is used as tax and as currency.

    You miss my point?

    My point is that you don’t know what you are talking about when you say that the government repays the debt with some private party’s assets. It simply does not, it repays with something it creates ex nihilo. The government debt is not a burden to anybody. It should be as big or small as it takes for the price stability (yes) and maximal output. Insolvency or default are not an issue. Price stability and output are an issue. If you use a stupid monetary system (based on rocks or beads), there is *another* dimension: solvency. And then you cannot achieve price stability and maximal output, therefore that system is suboptimal.

  61. Gravatar of ssumner ssumner
    6. July 2012 at 08:03

    This is what it’s come too! My comment section is a debate between MMTers and MFers!

    Paul, You said;

    “I think that if the IOR is lower than the market rate for short-term government debt, then it’s fairly clear that monetisation allows the government to access funds at a lower rate than a free market would provide. Therefore this is a distortion,”

    No, the government always borrows at slightly lower rates, regardless of whether the level of rates is high or low.

  62. Gravatar of Bob Roddis Bob Roddis
    6. July 2012 at 08:04

    Congress has the power to “coin money” and determine its value. A “dollar” means a Spanish Milled Dollar. The specific power to “emit bills of credit”, present in the Articles of Confederation, was specifically struck from draft language of the Constitution. That means no paper money. Further, Congress does not have the power to create a separate organization to determine the value of money or to emit bills of credit.

  63. Gravatar of dwb dwb
    6. July 2012 at 08:22

    This is what it’s come too! My comment section is a debate between MMTers and MFers!

    i view that as an excellent indication. generally people comment when they disagree (selection bias). So, if the worst thing that people can come up with is some silly MMT or MF argument that is easily rebutted 1000 different ways, then i view that as excellent.

  64. Gravatar of Mike Sax Mike Sax
    6. July 2012 at 08:42

    OhMy do you write your own blog? If not where do you get a lot of your info, intellectual resources as it were?

  65. Gravatar of RJ RJ
    6. July 2012 at 10:56

    Missed the boat by a few, but I have to comment.

    “I recently became convinced that the problem of their ignorance isn’t one of bad communication on my part. I felt horrible for thinking it at the time, but I am now convinced that the problem is that they are just intellectually incapable of grasping the deep complexity and incredible nuance inherent in praxeology and teleology.”

    PRICELESS. “the mean people are ignoring me….they must not understand what i’m saying!” priceless.

  66. Gravatar of Major_Freedom Major_Freedom
    6. July 2012 at 10:56

    OhMy:

    Of course not. http://tinyurl.com/3pmseq8 That is the point of fiat money. It doesn’t come from anywhere. By issuing money the government doesn’t owe you anything other than:

    * it will replace it upon receipt with… identical money.

    * it will accept it as a payment of taxes

    Both of those obligations are easy to fulfill and do not come from anyone’s assets.

    You are ignoring the wealth transfer effects of such money “issuing.”

    Yes, the dollars that I own are not reduced. But the purchasing power of them certainly are.

    This cost is always incurred by the private sector, specifically those who receive the newly “issued” money last.

    “This artificial distortion of what the interest rates would be without this unnecessary and damaging interference is the source the our economic problems. But you knew that, right?”

    Yes I knew that. The government is a monopoly supplier of money and like any monopolist it sets the price: the interest rate. The interest rate is not market determined. Money is a public monopoly, our representatives set the price. That is the present system.

    DEAL WITH IT YOU SERFS!

    Huh? The Fed is the creature of Congress, Congress decides what is used as tax and as currency.

    The Constitution does not give any explicit power to the feds in deciding money, or in granting a monopoly of fiat money.

    My point is that you don’t know what you are talking about when you say that the government repays the debt with some private party’s assets. It simply does not, it repays with something it creates ex nihilo.

    The COSTS of which fall on others, the effects of which is a reduction in their purchasing power and thus a reduction in the assets that they can acquire.

    The government debt is not a burden to anybody.

    Are you insane? Government debt is a burden on those who are taxed in order to pay the lenders, and it is a burden on everyone to the extent that money the government borrows is money that is not invested in the production of real wealth at that time.

    It should be as big or small as it takes for the price stability (yes) and maximal output.

    Prices should not be stable. The volatility of prices should be a function of marginal utility valuations of individual market participants. It should be as high or as low as the unhampered price system makes them.

    The desire for price stability is derived from superstition.

    Insolvency or default are not an issue. Price stability and output are an issue. If you use a stupid monetary system (based on rocks or beads), there is *another* dimension: solvency. And then you cannot achieve price stability and maximal output, therefore that system is suboptimal.

    Introducing fiat money and credit expansion produces the business cycle and widespread unemployment. That is suboptimal.

    Solvency is not an issue with a free market money standard.

    ——-

    ssumner:

    This is what it’s come too! My comment section is a debate between MMTers and MFers!

    You’re very welcome. Instead of an echo chamber, there is now a plurality of views.

    ——

    dwb:

    i view that as an excellent indication. generally people comment when they disagree (selection bias). So, if the worst thing that people can come up with is some silly MMT or MF argument that is easily rebutted 1000 different ways, then i view that as excellent.

    How can you possibly rebute my arguments 1000 different ways when you don’t even understand my arguments?

    That’s quite funny you believe they have been rebutted, considering how MF arguments have easily rebutted your monetarist beliefs 1000 different ways.

    In which dimension are you rebutting? It’s not this one.

  67. Gravatar of OhMy OhMy
    6. July 2012 at 10:57

    Mike Sax,

    I don’t write, I read :) Standard stuff:

    New Economic Perspectives (they have a great MMT Primer), Billy Blog, Mosler, Pragcap, Mike Norman for links. I read some of Levy Institute working papers, mostly by Wray and Fullwiler, Tcherneva’s articles, I read Wray’s book.

    Bob,
    Yes, Treasury issues coins (it could even issue a trillion in a coin), and the creature of Congress, the Fed, issues reserves and paper money. The creation of the Fed by Congress is not against the law, because the law is written by… Congress.

    Scott Sumner,
    Thanks for hosting! You should set a comment length limit like Krugman, then we could reach the end of MF’s comments!

  68. Gravatar of Major_Freedom Major_Freedom
    6. July 2012 at 11:00

    RJ:

    “I recently became convinced that the problem of their ignorance isn’t one of bad communication on my part. I felt horrible for thinking it at the time, but I am now convinced that the problem is that they are just intellectually incapable of grasping the deep complexity and incredible nuance inherent in praxeology and teleology.”

    PRICELESS. “the mean people are ignoring me….they must not understand what i’m saying!” priceless.

    Except I didn’t say that the lack of understanding is founded on their ignoring me.

    Thanks for being an example that lends credence to my point I guess?

  69. Gravatar of OhMy OhMy
    6. July 2012 at 11:03

    MF,

    You are ignoring the wealth transfer effects of such money “issuing.”

    No. I realize that they exist. Who controls money controls wealth.

    Yes, the dollars that I own are not reduced. But the purchasing power of them certainly are.

    Con certainly. Correlation deficits-inflation is… negative. Check for yourself. Weak but negative. So more money, less inflation, weird huh? Because you ignore that in certain situations the more money *the more stuff gets produced*.

    This cost is always incurred by the private sector, specifically those who receive the newly “issued” money last..

    Yes, recipients gain directly. But non recipients also gain if the issuance prevents the economy from collapsing 40%. I am not telling you to ignore redistribution, it exists.

    The Constitution does not give any explicit power to the feds in deciding money, or in granting a monopoly of fiat money.

    The Constitution is not the only legal document, I doubt it regulates trade or gives right to drive cars, and yet we do that.

  70. Gravatar of Major_Freedom Major_Freedom
    6. July 2012 at 11:03

    Mike Sax:

    Yes, Treasury issues coins (it could even issue a trillion in a coin), and the creature of Congress, the Fed, issues reserves and paper money. The creation of the Fed by Congress is not against the law, because the law is written by… Congress.

    Congress can and does violate the Constitution. The Constitution was not written by the founders with the notion of “Whatever the Congress wants to do, they have the Constitutional authority to do it” in mind.

    Congrats on displaying a deep ignorance about the history of the country you live in. Economics, history, what’s next?

  71. Gravatar of OhMy OhMy
    6. July 2012 at 11:11

    MF,

    You change the subject. I *describe* reality (or try). The Fed issues money, the public collects it. How does it work? What happens to interest rates and output. And you detour and make it into a legal issue. “Fed is illegal”! What do I know, maybe so, who cares? Make it legal then, do nth amendment to the Constiution, laws are man-made and have to serve man. Instead of winning the argument that gold standard is better you try to *impose* it by law. You may succeed, yet still you convinced nobody that it is a better system.

  72. Gravatar of Major_Freedom Major_Freedom
    6. July 2012 at 11:26

    OhMy:

    You are ignoring the wealth transfer effects of such money “issuing.”

    No. I realize that they exist. Who controls money controls wealth.

    These costs are what are being referred to when Roddis said the private sector pays for it. You responded with “No, they don’t”, as if the context was owned dollars and assets and whether they are confiscated from their owners or not.

    “Yes, the dollars that I own are not reduced. But the purchasing power of them certainly are.”

    Con certainly. Correlation deficits-inflation is… negative. Check for yourself. Weak but negative. So more money, less inflation, weird huh? Because you ignore that in certain situations the more money *the more stuff gets produced*.

    Outstanding. More money = less price inflation.

    Maybe you should rethink your premises if you arrive at such a ridiculous conclusion.

    You cannot reason causality from correlations. If you see a negative correlation between deficits and price inflation, you cannot infer that higher deficits cause lower price inflation, and that lower deficits cause higher price inflation.

    In “certain situations”, the more money, the more stuff gets produced? Nice epic contingency. By that logic, I could say “in certain situations”, me shooting at a person’s head can cure them of their epilepsy, if I hit their brain at juuuuuuust the right angle, velocity, and moment in time. It’s possible, so you can’t say my shooting at people’s heads is certainly wrong!

    Whatever truth there is to the claim that more money production is associated with more real goods production, it cannot at all be inferred from this that introducing a state that operates outside the market process of profit and loss, can know a scientific rule that can tell them how to print money in ways that maximizes production, i.e. to mimic the money supply that the free market process would have generated.

    There is no substitute for the free market process. It cannot be replicated by state bureaucrats sitting in ivory towers. And even if they did produce the same quantity of paper dollars as would exist in a free market standard that uses paper notes as transferable claims to commodities, there is still the fact that equal quantities of paper notes cannot be regarded as having equal effects when they are issued by different parties (central banks and private money producers, respectively).

    “This cost is always incurred by the private sector, specifically those who receive the newly “issued” money last..”

    Yes, recipients gain directly. But non recipients also gain if the issuance prevents the economy from collapsing 40%.

    It is precisely the issuance of money in the past that made “the economy” susceptible to “collapse” in the first place.

    “I am not telling you to ignore redistribution, it exists.”

    I am telling you that the reason redistribution effects are being brought up and considered important by myself and others, is not just about some people gaining at the expense of others. It’s the effect this paper money issuance has on economic calculation. People are not all knowing wizards who can know what percentage of a particular demand is market driven and what percentage is paper money driven, nor what percentage of interest rates is market driven and what percentage is paper money driven, nor can they know what percentage of assets expanded in an industry is market driven and what percentage is paper money driven.

    There is only one set of nominal demands, prices, and interest rates.

    The lack of observable unhampered market driven demand, price, and interest rates is the source of booms and busts. It is tied up with the Cantillon effect, in that when new money enters the loan market first, say, it affects the activity of lenders and hence it affects interest rates. As a result, investors cannot know what the market driven interest rates really are, and yet it is the market driven rates that WOULD enable investors and consumers to coordinate their behavior.

    “The Constitution does not give any explicit power to the feds in deciding money, or in granting a monopoly of fiat money.”

    The Constitution is not the only legal document, I doubt it regulates trade or gives right to drive cars, and yet we do that.

    Outstanding.

    The Constitution is a document that concerns what the federal government can and cannot do. It is not a document that grants rights to the people. The Constitution grants powers to the feds, whereby all other rights reside with individuals all along. If the Constitution does not enumerate a power for the feds to prevent you from driving a car, then the right to drive a car rests with the individuals. It is not “granted” to them by the feds.

  73. Gravatar of Major_Freedom Major_Freedom
    6. July 2012 at 11:33

    OhMy:

    You change the subject.

    What? How?

    I *describe* reality (or try). The Fed issues money, the public collects it. How does it work? What happens to interest rates and output. And you detour and make it into a legal issue.

    We’re not debating on what exists. Everyone here knows the Fed exists. Everyone here knows the Fed creates money. Everyone here knows the Fed controls key interest rates.

    This was never a debate on what exists.

    Roddis mentioned the Fed is illegal, and you challenged that claim and said no, it’s legal because it was created by Congress. Now you’re saying I changed the subject? I was just following your and Roddis’ disagreement.

    “Fed is illegal”! What do I know, maybe so, who cares?

    Yes, who cares if the Nazis did what they did? It was legal according to Nazi law.

    Make it legal then, do nth amendment to the Constiution, laws are man-made and have to serve man.

    Make it legal? How about enforcing the law and abolishing the Fed?

    Or should we just make legal whatever increase in government power takes place?

    Are you a sheep or are you an agent of power?

    Instead of winning the argument that gold standard is better you try to *impose* it by law. You may succeed, yet still you convinced nobody that it is a better system.

    I do not seek to impose gold on anyone, through laws or any other mechanism. What are you talking about?

    What is with this false dichotomy of inferring that to be against central banking, means one has to be in favor of state imposition of gold?

    Are you not able to think outside the statist box and consider a free market in money that isn’t controlled by the state at all? Or does that make you fluster like it would make an old woman in 1950s Russia fluster at the thought of private potato production?

  74. Gravatar of OhMy OhMy
    6. July 2012 at 11:42

    MF,

    These costs are what are being referred to when Roddis said the private sector pays for it. You responded with “No, they don’t”, as if the context was owned dollars and assets and whether they are confiscated from their owners or not.

    Because they don’t pay. If there is no redistribution nobody pays.

    Outstanding. More money = less price inflation.

    Maybe you should rethink your premises if you arrive at such a ridiculous conclusion.

    There is nothing to rethink. These are FACTS. I said *check* for yourself, go to FRED database and check. The correlation is negative. So much for the private sector “paying for the issuance”. They would pay big time if the Fed *didn’t* issue money – the economy of 2008 with the stock of money from 1795 could not exist. No redistribution and everybody eating bark, great!

    You are right it was me who changed the subject on legality. I simply don’t know enough. What I argue is that we *need* money creation, so the Fed is not “Nazis”. If it is illegal, the law is stupid and we should make it legal. You never proved how money creation is bad. I say it is good.

    Are you not able to think outside the statist box and consider a free market in money that isn’t controlled by the state at all?

    Sorry, I cannot, my bad. Please describe the “free market for money”. Who has the right of issuance and who enforces this right?

  75. Gravatar of Major_Freedom Major_Freedom
    6. July 2012 at 12:21

    OhMy:

    Because they don’t pay. If there is no redistribution nobody pays.

    They do pay. They pay in purchasing power, a redistribution of wealth.

    There is nothing to rethink. These are FACTS.

    The fact of a correlation does not imply fact of causation.

    The reason there is a negative correlation between deficits and price inflation is because the Treasury tends to engage in more deficit spending during a recession, when price inflation tends to fall, and they tend to reduce deficit spending during booms, when price inflation tends to rise, as a matter of subjective policy prescriptions.

    One cannot infer from this “This means lower deficits bring about higher price inflation, and higher deficits bring about lower price inflation!”

    I said *check* for yourself, go to FRED database and check. The correlation is negative. So much for the private sector “paying for the issuance”.

    Two things.

    One, as I said, a negative correlation does not mean the private sector is not paying the costs of deficits.

    Two, and more importantly, the lower price inflation during high deficits does not mean that those in the private sector who receive the new money last are somehow not paying for the issuance in real terms. The lower prices that exist are not BECAUSE of the higher deficit. If the deficit were higher still, then the costs would be greater than it otherwise would be at the time.

    You cannot say that because price inflation is lower now than it was in the past during lower deficits, that somehow higher deficits incur less of a cost than lower deficits.

    The last receivers in the private sector are ALWAYS incurring the costs of deficits, when they are high or low, and when price inflation is high or low.

    They would pay big time if the Fed *didn’t* issue money – the economy of 2008 with the stock of money from 1795 could not exist. No redistribution and everybody eating bark, great!

    If the Fed didn’t issue money, then the money that has already been issued can still be used. But I am not saying the Fed should stop issuing money. I am saying the Fed should stop issuing money AND for the monopoly privilege to be lifted, so that money production can carry on in the market.

    I don’t know how much money should be printed, but I know that the inflation from the Fed can rarely if ever be the right rate, and only by pure luck, because they do not operate according to profit and loss as do producers of goods and services in the market.

    Nobody is advocating for the Fed monopoly to be maintained and then the Fed destroyed all paper notes, such that people are legally barred from using money.

    If the Fed stopped issuing paper money, then people own’t use bark, they’ll almost certainly use precious metals.

    You are right it was me who changed the subject on legality. I simply don’t know enough. What I argue is that we *need* money creation, so the Fed is not “Nazis”. If it is illegal, the law is stupid and we should make it legal. You never proved how money creation is bad. I say it is good.

    Wrong again. Yes, we “need” money creation. But we don’t need money creation from the Fed. They don’t know how much to produce because they are not constrained to the market test of profit and loss. It is not good enough to merely claim that the Fed exists.

    We also need food, clothing, shelter, and medicine. Does that mean that central planners should monopolize the production of these as well? They’re more important than money after all.

    There is a difference between the Fed monopolizing money production, and the Fed or anyone, you or Sumner, knowing how much money the Fed should produce.

    “Are you not able to think outside the statist box and consider a free market in money that isn’t controlled by the state at all?”

    Sorry, I cannot, my bad. Please describe the “free market for money”. Who has the right of issuance and who enforces this right?

    You could read this relatively short book from Hayek, which is a proposal and analysis of a free market in money production.

    Then you can Google “Free market in money” and get over 150,000 hits.

  76. Gravatar of Bob Roddis Bob Roddis
    6. July 2012 at 14:22

    They would pay big time if the Fed *didn’t* issue money – the economy of 2008 with the stock of money from 1795 could not exist. No redistribution and everybody eating bark, great!

    Let’s cut to the chase. There is no basis in fact, history or theory for the unfounded assertion that the market fails and/or that it needs a shot of fiat funny-money to get it moving or spinning or whatever mechanical device the Keynesians and monetarists think it resembles. The “market” and “the economy” are not machines. The market is simply all human beings trading and exchanging goods and services with each other with fiat funny money impairing their economic calculation.

    In Daniel Kuehn’s marvelous paper, he thinks he is disproving Austrian School analysis of the 1920 depression. Instead, he unintentionally proves that it was the Fed’s funding of WWI that caused the artificial boom. The first big post-Fed recession was the result of the government’s First World Slaughterfest boom followed by the post-slaughterfest bust. There’s nothing in his article about a “free market” having a “structural” or other inherent problem causing unemployment.

    2. The austerity depression of 1920-21

    During World War I federal expenditures ballooned and although the new income tax was able to partially finance the war effort, most of the financing was done through federal borrowing and by the highly accommodating monetary policy of the Federal Reserve. The role of the Federal Reserve at this time was expressed unambiguously by the New York Federal Reserve Bank Governor Benjamin Strong, who told a Congressional committee in 1921 that ‘I feel that I, or the bank at least, was their [the Treasury’s] agent and servant in those matters’ and further added that the wartime inflation caused by the low interest rates maintained by the bank were ‘inevitable, unescapable, and necessary’ for prosecuting the war (Strong, 1930).

    However, after the war ended the deficit spending of the Wilson administration and the expansionary policy of the Federal Reserve were sharply curtailed to bring a halt to the inflation. By November 1919 the Wilson administration balanced the federal budget, slashing monthly expenditures by almost 75% in a matter of months.4 The New York Federal Reserve Bank raised the discount rate by 244 basis points over the course of eight months, with other Reserve System banks following suit. Shortly after these austerity measures were taken, the 1920-21 depression was under way. Postwar industrial production in the USA peaked in January 1920 as the economy moved into a major depression, with production levels dropping by 32.5% by March 1921.5 This loss in output is second only to the Great Depression in American economic history (Romer, 1999), although its duration was considerably shorter. Declines in output were matched by precipitous drops in employment and the price level. The proximate cause of the 1920-21 depression was a deliberate fiscal and monetary retrenchment following World War I.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1591030

    Britain went off the gold standard in WWI. This allows governments to fund slaughterfests without actually having to tax resources from the public in real time as such taxation might arouse the rabble against the slaughterfest. It was Churchill’s foolish attempt to reestablish a gold standard at the pre-war par that contributed to the Great Depression along with fractional reserve banking which artificially bid up prices to unsustainable levels.

    The unfounded assertion that these problems were caused by “the gold standard” and/or “the free market” and/or laissez faire is academic fraud.

    Our legal system is based upon the English common law including our institutions of private property and contract. Keynesianism and monetarism are a back-door sneak attack upon private property and contract. Since the market does not fail, there is no basis for the imposition of fiat funny-money on a society. It itself is the cause of our economic disasters.

  77. Gravatar of Bob Roddis Bob Roddis
    6. July 2012 at 14:35

    I’m always amazed at people who are so proud of their deep and profound ignorance. In February 2011, The American Economic Review (specifically Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow) named its top 20 articles of the last 100 years. Included therein was:

    Hayek, F. A. 1945. “The Use of Knowledge in Society.” American Economic Review, 35(4): 519-30.

    http://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.101.1.1

    “Knowledge in society” is the core concept of Austrian School thought. You guys haven’t a clue as to even the subject matter of the Austrian School, but, my goodness, you are just so proud of your ignorance.

    So, go ahead. Call The American Economic Review a fringe publication.

  78. Gravatar of Paul Andrews Paul Andrews
    6. July 2012 at 16:16

    Scott,

    R. Avent said: “And if you think the Fed can’t raise inflation, then it would still seem to make sense to urge the Fed to buy as much government debt as it possibly can. If one could entirely monetise the debt with no inflationary consequences, why not do it?”

    I said: “It would still be debt. Fed reserves are debts from the Fed to commercial banks. The difference would be that the Government would be borrowing at zero percent for its deficit spending, competing for resources with a private sector that must borrow at much higher rates. This is a massively inefficient way to run an economy, and in fact would be equivalent to a non-central-bank regime, where the government creates fiat money at will to pay for its purchases. One of the main purposes of having a central bank is to try to ensure that the government is competing with the private sector for investment on a level playing field. If the government borrows at zero, and everyone else borrows at 4, 5, 6+, what do you think the outcome will be? It’s not just about inflation.”

    You: “That was a reductio ad absurdum argument, Both Ryan and myself favor a monetary regime that would quickly result in much higher interest rates. The near zero rates are a product of the very low level of NGDP since 2008.”

    Me: “Ryan is saying that if you believe the Fed cannot induce inflation, then you should have no argument against monetization of all the debt. What I am saying is that this is not necessarily the case. There are compelling reasons not to monetize, even if you ignore the inflation argument.”

    Me (in response to DonG): “Actually, you’ve made me think this through a little more. Given that the Fed is paying IOR, the government sector is not getting the money at 0%, which negates to a small degree my argument above to Scott. I think this is a good thing compared to no IOR, but still a significant distortion compared to uninfluenced market rates.”

    You: “You assumed that his policy would lead to zero rates, that’s what I am denying. And even if rates were zero on t-debt, I don’t see how that hurts the private sector, they could also borrow at low rates.”

    Me: “I think that if the IOR is lower than the market rate for short-term government debt, then it’s fairly clear that monetisation allows the government to access funds at a lower rate than a free market would provide. Therefore this is a distortion, and favours government investment over private investment. The fact that IOR is not zero at present simply makes this a little less bad. The word “also” in your last sentence is inappropriate. Zero does not equal low. The fact that the private sector can borrow at “low” rates is irrelevant. What matters is that the government can, essentially by force, borrow at lower rates than a free market would provide, and therefore has greater command over limited resources than it otherwise would have.

    You: “No, the government always borrows at slightly lower rates, regardless of whether the level of rates is high or low.”

    Yes the government always borrows at slightly lower rates than the private sector. I am not saying otherwise. What I am saying is that when the Fed monetises, the government borrows at lower rates than they would if the Fed had not monetised – i.e. the difference between the government rate and the private rate is increased.

  79. Gravatar of Paul Andrews Paul Andrews
    6. July 2012 at 16:29

    OhMy,

    You said: “it can be studied and then you see that indeed the net worth of the private sector goes up.”

    I said: ” This is a myth. The “net financial assets” (MMT term) of the private sector goes up. This is nothing like net worth. Actually MMT types usually use the word “surplus”, which is miselading in itself. “Net worth” is even more misleading. MMTers often use this turn of phrase to try to show that government deficits are not the problem that many think they are. It is seductive because people like to think that our problems are not real, and because it is true if you define “surplus” in a very restrictive way, rather than the way most people think of as a surplus. A surplus, in the usual way of thinking, means extra stuff that we made that we can keep for later. For instance, productive investment in capital, inventory that we can sell in the coming months, seed that we can plant later etc. This is not the “surplus” referred to by MMT proponents. What they mean by “surplus” is “an increase in the amount of net financial liabilities owed to the private sector”. They are referring to a nominal dollar amount of debt. Sometimes they say “Net Financial Assets” or “Savings”, but they are referring to the same thing – just the amount of money owed by the government to private parties. Of course, the only surplus that is important for an economy to have is a real surplus of real assets, not a nominal dollar amount of government debt. MMT proponents misuse language in this way to fool the unsuspecting.”

    You: “MMT talks about Net *financial* assets. It is obvious to everybody that it is talking about money and not real stuff, the same way when you talk about a government “deficit” everybody knows you talk about monetary deficit, and not oxygen deficit or a food deficit. So what are you talking about? You say it is a “myth” that net worth goes up? Please consult the definition. Net worth = assets – liabilities. In fiscal transfer the private sector gets more assets by D and has the same amount of liabilities, so change(net worth)=D, it is not rocket science and even less it is a myth.”

    Your original statement referred to net worth. As you rightly say, net worth = assets – liabilities. Assets includes financial claims on others plus real property, such as stocks, physical capital and the like, adjusted for inflation.

    MMT’s “net financial assets” is only “nominal financial claims on others” – “nominal liabilities”. It does not include real property such as stocks and physical capital.

    The two are not the same, in fact they are very far apart.

  80. Gravatar of Paul Andrews Paul Andrews
    6. July 2012 at 16:38

    OhMy,

    “Scott Sumner,
    Thanks for hosting! You should set a comment length limit like Krugman, then we could reach the end of MF’s comments!”

    Scott is light-years ahead of Krugman in this regard. In fact I would say Scott leads the way across the entire economic blogosphere for acceptance of divergent viewpoints and for providing responses.

    By contrast, Krugman’s blog at NY Times is heavily censored (around 50% of my comments get through), and comments take a long time to be posted, which makes it hard to have a rational debate. Also I’ve never seen him respond to a comment.

    Scott you may be tempted to impose restrictions, but I really think that would be a bad move. Your blog as it is makes a fine contribution to the free exchange of ideas. I think it is a wonderful achievement, and will provide a rich source of material for historians of the future.

    Cafe Hayek used to have a vibrant commenting community but they put a stop to all comments, and I really think the site is much poorer for it.

  81. Gravatar of Paul Andrews Paul Andrews
    6. July 2012 at 16:47

    Mike Sax:

    You said: “Paul I think your muddying the issue by using the word “surplus” in various different ways. The debate that you’re referring to is what a government surplus amounts to-ie, when it’s more than balanced it’s budget. This has nothing to do with “extra stuff we can keep for later.””

    See my response to OhMy above.

    It is very important to understand what real world phenomena people are referring to by certain words and phrases, if we are to understand one another, and if we are to approach a good understanding of the world.

    We are not referring to a government surplus, we are referring to a private surplus. This has everything to do with the extra stuff we keep for later – i.e. real assets such as houses, improved land, companies, inventory, grain stores, crops, gold, oil, intellectual property, knowledge etc. None of these things are included in MMT’s “Net financial assets”, which it misleadingly refers to as “private sector surplus” in its attempts to get you to believe that government deficits are needed for the private sector to attain a surplus.

  82. Gravatar of ssumner ssumner
    6. July 2012 at 17:51

    Paul, You said;

    “I am not saying otherwise. What I am saying is that when the Fed monetises, the government borrows at lower rates than they would if the Fed had not monetised – i.e. the difference between the government rate and the private rate is increased.”

    I don’t agree, I think rates go up when the Fed monetizes debt.

  83. Gravatar of OhMy OhMy
    6. July 2012 at 18:00

    Ssumner,

    I don’t agree, I think rates go up when the Fed monetizes debt.

    It is exactly the opposite. Now banks want to get rid of reserves that don’t pay interest, so the overnight rate drops to zero, unless the CB pays interest on reserves. THAT is the reason governments sell bonds at all: to help the CB defend a nonzero interest rate.

  84. Gravatar of RonT RonT
    6. July 2012 at 18:04

    Paul Andrews,

    My critical comments on Krugman’s site appear all the time, and I had a feeling he responded to some of them, albeit not the most snarky ones. I never had anything that failed to show up.

  85. Gravatar of OhMy OhMy
    6. July 2012 at 18:09

    Paul Andrews,

    Assets go up and net worth goes up, period. Unless you want to argue that when the private sector receives financial assets from the government its real assets automatically evaporate, which is nonsense.

  86. Gravatar of Paul Andrews Paul Andrews
    6. July 2012 at 23:15

    OhMy,

    You said: “it can be studied and then you see that indeed the net worth of the private sector goes up.”

    I said: “ This is a myth. The “net financial assets” (MMT term) of the private sector goes up. This is nothing like net worth. Actually MMT types usually use the word “surplus”, which is miselading in itself. “Net worth” is even more misleading. MMTers often use this turn of phrase to try to show that government deficits are not the problem that many think they are. It is seductive because people like to think that our problems are not real, and because it is true if you define “surplus” in a very restrictive way, rather than the way most people think of as a surplus. A surplus, in the usual way of thinking, means extra stuff that we made that we can keep for later. For instance, productive investment in capital, inventory that we can sell in the coming months, seed that we can plant later etc. This is not the “surplus” referred to by MMT proponents. What they mean by “surplus” is “an increase in the amount of net financial liabilities owed to the private sector”. They are referring to a nominal dollar amount of debt. Sometimes they say “Net Financial Assets” or “Savings”, but they are referring to the same thing – just the amount of money owed by the government to private parties. Of course, the only surplus that is important for an economy to have is a real surplus of real assets, not a nominal dollar amount of government debt. MMT proponents misuse language in this way to fool the unsuspecting.”

    You: “MMT talks about Net *financial* assets. It is obvious to everybody that it is talking about money and not real stuff, the same way when you talk about a government “deficit” everybody knows you talk about monetary deficit, and not oxygen deficit or a food deficit. So what are you talking about? You say it is a “myth” that net worth goes up? Please consult the definition. Net worth = assets – liabilities. In fiscal transfer the private sector gets more assets by D and has the same amount of liabilities, so change(net worth)=D, it is not rocket science and even less it is a myth.”

    Me: “Your original statement referred to net worth. As you rightly say, net worth = assets – liabilities. Assets includes financial claims on others plus real property, such as stocks, physical capital and the like, adjusted for inflation. MMT’s “net financial assets” is only “nominal financial claims on others” – “nominal liabilities”. It does not include real property such as stocks and physical capital. The two are not the same, in fact they are very far apart.”

    You: “Assets go up and net worth goes up, period. Unless you want to argue that when the private sector receives financial assets from the government its real assets automatically evaporate, which is nonsense.”

    Nominal financial claims of some private parties on government go up. Claims of private parties on government are claims of private parties on taxpayers – i.e. on other private parties, so net nominal financial claims of all private parties does not change. There is no direct effect on net worth.

    There is a negative indirect effect on net worth due to the distortions introduced into the private economy – i.e. reductions in future private real surpluses.

  87. Gravatar of Paul Andrews Paul Andrews
    6. July 2012 at 23:19

    Scott,

    R. Avent said: “And if you think the Fed can’t raise inflation, then it would still seem to make sense to urge the Fed to buy as much government debt as it possibly can. If one could entirely monetise the debt with no inflationary consequences, why not do it?”

    I said: “It would still be debt. Fed reserves are debts from the Fed to commercial banks. The difference would be that the Government would be borrowing at zero percent for its deficit spending, competing for resources with a private sector that must borrow at much higher rates. This is a massively inefficient way to run an economy, and in fact would be equivalent to a non-central-bank regime, where the government creates fiat money at will to pay for its purchases. One of the main purposes of having a central bank is to try to ensure that the government is competing with the private sector for investment on a level playing field. If the government borrows at zero, and everyone else borrows at 4, 5, 6+, what do you think the outcome will be? It’s not just about inflation.”

    You: “That was a reductio ad absurdum argument, Both Ryan and myself favor a monetary regime that would quickly result in much higher interest rates. The near zero rates are a product of the very low level of NGDP since 2008.”

    Me: “Ryan is saying that if you believe the Fed cannot induce inflation, then you should have no argument against monetization of all the debt. What I am saying is that this is not necessarily the case. There are compelling reasons not to monetize, even if you ignore the inflation argument.”

    Me (in response to DonG): “Actually, you’ve made me think this through a little more. Given that the Fed is paying IOR, the government sector is not getting the money at 0%, which negates to a small degree my argument above to Scott. I think this is a good thing compared to no IOR, but still a significant distortion compared to uninfluenced market rates.”

    You: “You assumed that his policy would lead to zero rates, that’s what I am denying. And even if rates were zero on t-debt, I don’t see how that hurts the private sector, they could also borrow at low rates.”

    Me: “I think that if the IOR is lower than the market rate for short-term government debt, then it’s fairly clear that monetisation allows the government to access funds at a lower rate than a free market would provide. Therefore this is a distortion, and favours government investment over private investment. The fact that IOR is not zero at present simply makes this a little less bad. The word “also” in your last sentence is inappropriate. Zero does not equal low. The fact that the private sector can borrow at “low” rates is irrelevant. What matters is that the government can, essentially by force, borrow at lower rates than a free market would provide, and therefore has greater command over limited resources than it otherwise would have.

    You: “No, the government always borrows at slightly lower rates, regardless of whether the level of rates is high or low.”

    Me: “Yes the government always borrows at slightly lower rates than the private sector. I am not saying otherwise. What I am saying is that when the Fed monetises, the government borrows at lower rates than they would if the Fed had not monetised – i.e. the difference between the government rate and the private rate is increased.”

    You: “I don’t agree, I think rates go up when the Fed monetizes debt.”

    I am talking about the monetized debt itself. I assume you agree that the government sector pays the IOR rate on monetized debt, and that this is a fixed rate set by the Fed?

  88. Gravatar of Becky Hargrove Becky Hargrove
    7. July 2012 at 05:42

    Scott,
    I wanted to suggest a context for your comments section that you might not have considered. For several years I have searched online for ongoing public formats that deal with long term economic solutions. To be sure there are seemingly more blogs than one can count, but for whatever reason the primary blog that shows up in such a google search is yours. And the main alternative of course in long term economic solutions (google searches)is Ron Paul! (for what that’s worth) In due time, hopefully this will change and there will be more public forums for structural and social evolution which are widely recognized.

  89. Gravatar of ssumner ssumner
    7. July 2012 at 08:05

    OhMy, So the Latin American countries that monetized debts in the 1970s and 1980s and ended up with hyperinflation didn’t have high interest rates? That’s news to me.

    Paul, I don’t follow. If the Fed is paying interest on reserves then obviously it’s not monetizing debt. It’s debtitizing debt.

    Bonnie, I hope so.

  90. Gravatar of OhMy OhMy
    7. July 2012 at 13:11

    Ssumner,
    Hyperinflation causes high interet rates, not monetization. And monetization (composition of the government IOUs held by the public: bonds or resevres) doesn’t cause hyperinflation, so your assumption that monetization causes high interest rates is false.

    Follow the balance sheet operations and you will see that monetization has no bearing on inflation (keep in mind that reserves don’t cause banks to lend, having creditworthy customers and ample capital (even if stored in bonds) does).

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1731625

    Paul Andrews,

    Wrong, taxpayers are not the source of money, the government is. Eg. the government never paid back the debt incurred by Abraham Lincoln, so those fiscal injections directly increased the net worth of those people back then. The government does NOT spend taxpayer money,
    http://www.youtube.com/watch?v=Rb-Qim8sukk

    taxpayer money is shredded upon receipt, because the government doesn’t need to store it. So your argument is false.

  91. Gravatar of Mark A. Sadowski Mark A. Sadowski
    7. July 2012 at 15:37

    Scott,
    “This is what it’s come too! My comment section is a debate between MMTers and MFers!”

    Yes, the only thing they seemingly have in common is their absolute certainty that you are wrong. Even the title of the post is meta-ironic.

  92. Gravatar of Paul Andrews Paul Andrews
    7. July 2012 at 23:46

    Scott,

    R. Avent said: “And if you think the Fed can’t raise inflation, then it would still seem to make sense to urge the Fed to buy as much government debt as it possibly can. If one could entirely monetise the debt with no inflationary consequences, why not do it?”

    I said: “It would still be debt. Fed reserves are debts from the Fed to commercial banks. The difference would be that the Government would be borrowing at zero percent for its deficit spending, competing for resources with a private sector that must borrow at much higher rates. This is a massively inefficient way to run an economy, and in fact would be equivalent to a non-central-bank regime, where the government creates fiat money at will to pay for its purchases. One of the main purposes of having a central bank is to try to ensure that the government is competing with the private sector for investment on a level playing field. If the government borrows at zero, and everyone else borrows at 4, 5, 6+, what do you think the outcome will be? It’s not just about inflation.”

    You: “That was a reductio ad absurdum argument, Both Ryan and myself favor a monetary regime that would quickly result in much higher interest rates. The near zero rates are a product of the very low level of NGDP since 2008.”

    Me: “Ryan is saying that if you believe the Fed cannot induce inflation, then you should have no argument against monetization of all the debt. What I am saying is that this is not necessarily the case. There are compelling reasons not to monetize, even if you ignore the inflation argument.”

    Me (in response to DonG): “Actually, you’ve made me think this through a little more. Given that the Fed is paying IOR, the government sector is not getting the money at 0%, which negates to a small degree my argument above to Scott. I think this is a good thing compared to no IOR, but still a significant distortion compared to uninfluenced market rates.”

    You: “You assumed that his policy would lead to zero rates, that’s what I am denying. And even if rates were zero on t-debt, I don’t see how that hurts the private sector, they could also borrow at low rates.”

    Me: “I think that if the IOR is lower than the market rate for short-term government debt, then it’s fairly clear that monetisation allows the government to access funds at a lower rate than a free market would provide. Therefore this is a distortion, and favours government investment over private investment. The fact that IOR is not zero at present simply makes this a little less bad. The word “also” in your last sentence is inappropriate. Zero does not equal low. The fact that the private sector can borrow at “low” rates is irrelevant. What matters is that the government can, essentially by force, borrow at lower rates than a free market would provide, and therefore has greater command over limited resources than it otherwise would have.

    You: “No, the government always borrows at slightly lower rates, regardless of whether the level of rates is high or low.”

    Me: “Yes the government always borrows at slightly lower rates than the private sector. I am not saying otherwise. What I am saying is that when the Fed monetises, the government borrows at lower rates than they would if the Fed had not monetised – i.e. the difference between the government rate and the private rate is increased.”

    You: “I don’t agree, I think rates go up when the Fed monetizes debt.”

    Me: “I am talking about the monetized debt itself. I assume you agree that the government sector pays the IOR rate on monetized debt, and that this is a fixed rate set by the Fed?”

    You: “I don’t follow. If the Fed is paying interest on reserves then obviously it’s not monetizing debt. It’s debtitizing debt.”

    Happy to call it “debtitizing debt” if you prefer. What I am pointing out is that the interest rate on Reserves (debt of the Fed) is fixed by the Fed. Do you agree with this?

  93. Gravatar of Paul Andrews Paul Andrews
    7. July 2012 at 23:59

    OhMy,

    You said: “it can be studied and then you see that indeed the net worth of the private sector goes up.”

    I said: “ This is a myth. The “net financial assets” (MMT term) of the private sector goes up. This is nothing like net worth. Actually MMT types usually use the word “surplus”, which is miselading in itself. “Net worth” is even more misleading. MMTers often use this turn of phrase to try to show that government deficits are not the problem that many think they are. It is seductive because people like to think that our problems are not real, and because it is true if you define “surplus” in a very restrictive way, rather than the way most people think of as a surplus. A surplus, in the usual way of thinking, means extra stuff that we made that we can keep for later. For instance, productive investment in capital, inventory that we can sell in the coming months, seed that we can plant later etc. This is not the “surplus” referred to by MMT proponents. What they mean by “surplus” is “an increase in the amount of net financial liabilities owed to the private sector”. They are referring to a nominal dollar amount of debt. Sometimes they say “Net Financial Assets” or “Savings”, but they are referring to the same thing – just the amount of money owed by the government to private parties. Of course, the only surplus that is important for an economy to have is a real surplus of real assets, not a nominal dollar amount of government debt. MMT proponents misuse language in this way to fool the unsuspecting.”

    You: “MMT talks about Net *financial* assets. It is obvious to everybody that it is talking about money and not real stuff, the same way when you talk about a government “deficit” everybody knows you talk about monetary deficit, and not oxygen deficit or a food deficit. So what are you talking about? You say it is a “myth” that net worth goes up? Please consult the definition. Net worth = assets – liabilities. In fiscal transfer the private sector gets more assets by D and has the same amount of liabilities, so change(net worth)=D, it is not rocket science and even less it is a myth.”

    Me: “Your original statement referred to net worth. As you rightly say, net worth = assets – liabilities. Assets includes financial claims on others plus real property, such as stocks, physical capital and the like, adjusted for inflation. MMT’s “net financial assets” is only “nominal financial claims on others” – “nominal liabilities”. It does not include real property such as stocks and physical capital. The two are not the same, in fact they are very far apart.”

    You: “Assets go up and net worth goes up, period. Unless you want to argue that when the private sector receives financial assets from the government its real assets automatically evaporate, which is nonsense.”

    Me: “Nominal financial claims of some private parties on government go up. Claims of private parties on government are claims of private parties on taxpayers – i.e. on other private parties, so net nominal financial claims of all private parties does not change. There is no direct effect on net worth. There is a negative indirect effect on net worth due to the distortions introduced into the private economy – i.e. reductions in future private real surpluses.”

    You: “Wrong, taxpayers are not the source of money, the government is. Eg. the government never paid back the debt incurred by Abraham Lincoln, so those fiscal injections directly increased the net worth of those people back then. The government does NOT spend taxpayer money,
    http://www.youtube.com/watch?v=Rb-Qim8sukk taxpayer money is shredded upon receipt, because the government doesn’t need to store it. So your argument is false.”

    Every time a dollar is injected it raises the chances of future measures to rein in inflation.

    Future measures to rein in inflation must be either a) taxation, or b) issuance of interest-paying government bonds to the private sector, or both.

    Both a) and b) are paid for by taxpayers.

    If inflation is not reined in that is also paid for by taxpayers, in sacrificed real goods and services.

    If you were right, countries could become wealthy merely by printing money. Unsurprisingly, this is yet to happen in all of human history.

  94. Gravatar of OhMy OhMy
    8. July 2012 at 13:41

    Paul Andrews,

    Every time a dollar is injected it raises the chances of future measures to rein in inflation.

    Not every time. Only at full employment and beyond (AD>full employment AD). Imagine that since the times of Lincoln the govt spending was always such that AD<full employment AD, then NONE of those dollars implied future taxes to rein inflation, all of them were needed to sustain more population/bigger economy. The moment the govt spends, the net north of the private sector rises, dollar for dollar. You are right that the government has the right to take this money back later with taxes, but then it will be reflected as a lower net worth due to taxes *in the future*, not now.

    One could put your argument on its head and say:
    "Every time a dollar is taxed it raises the chances of future measures to support aggregate demand with fiscal stimulus.” So maybe we shouldn’t count taxes as lowering net worth? Of course this would be nonsense.

    If inflation is not reined in that is also paid for by taxpayers, in sacrificed real goods and services.

    True. But see this: you spend government money in the presence of demand gap and thus you increase the amount of *real* goods produced and consumed. And you tax when spending> full capacity and doing this you keep the AD=full capacity, so your taxing *does not reduce the amount of real goods produced and consumed*. See? Free lunch, thanks to fiat money. You can increase production of real goods at a time with demand gap and you don’t decrease it when you tax only as much to go back to full capacity demand, not below.

    If you were right, countries could become wealthy merely by printing money. Unsurprisingly, this is yet to happen in all of human history.”
    They can become wealthy by printing. Nominally. And they have. Compare 1776 America and now. But we both know that what counts is real GDP. Printing money helps here too, but you simply never print beyond full capacity.

  95. Gravatar of Paul Andrews Paul Andrews
    9. July 2012 at 01:25

    OhMy,

    In any situation, including the ones you mention, every printed dollar takes you closer to the situation where inflation occurs, and therefore increases the chance of future measures to rein it in.

    I don’t believe that AD is a useful concept without consideration of the heterogeneity of supply and demand, so we won’t get far debating in those terms. “Full employment AD” is an even less useful concept.

    To suggest that we compare 1776 America to now, and put the success achieved since then down to printing of greenbacks is not really going to help you convince many people.

  96. Gravatar of OhMy OhMy
    9. July 2012 at 05:07

    Paul Andrews,

    In simple terms: accounting doesn’t count what coulda woulda happen. Even if it brings you closer to inflation, you cannot assume what some government 150 years from now will do. You add assets, net worth goes up, you subtract it goes down, very simple. This is all nominal accounting, there is no place for assumptions or models here.

    Can higher net worth lead to lower real GDP? Yes, enough to print 100 trillions and distribute. Net worth up. Real GDP due to inflationary mayhem – probably down. But accounting is unchanged. You tend to mix nominal and real. You argue that Lincoln deficits didn’t increase net worth in 1860s although to this day this money has not been taxed back. You don’t need AD to see that this doesn’t make sense.

  97. Gravatar of ssumner ssumner
    9. July 2012 at 12:27

    OhMy, Life’s too short to try to explain things to MMTers.

    Paul, I agree the Fed sets the IOR.

  98. Gravatar of OhMy OhMy
    9. July 2012 at 12:34

    Ssumner,

    I know, I know. I saw you try a couple of times only to show that you don’t know squat about banking.

  99. Gravatar of Major_Freedom Major_Freedom
    9. July 2012 at 12:46

    OhMy:

    Sumner knows more about banking than any MMTer.

    You guys are completely clueless.

  100. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 13:00

    “Sumner knows more about banking than any MMTer.”

    “You guys are completely clueless”

    Major now you’re trying to ingratiate yourself. LOL

    What is is that in your mind that Sumner knows about banking-ie, agrees with you-that MMTers don’t.

    This ought to be good

  101. Gravatar of OhMy OhMy
    9. July 2012 at 15:14

    MF,

    Thanks I got a chuckle.

    SS knows less about banking than some random MMT sympathisers that actually work at banks. Read this and laugh:

    http://www.themoneyillusion.com/?p=5893

  102. Gravatar of OhMy OhMy
    9. July 2012 at 15:14

    MF,

    Thanks I got a chuckle.

    SS knows less about banking than some random MMT sympathisers that actually work at banks. Read this and laugh (action is in the comments):

    http://www.themoneyillusion.com/?p=5893

  103. Gravatar of OhMy OhMy
    9. July 2012 at 15:14

    MF,

    Thanks I got a chuckle.

    SS knows less about banking than some random MMT sympathisers that actually work at banks. Read this and laugh (action is in the comments):

    http://www.themoneyillusion.com/?p=5893

  104. Gravatar of OhMy OhMy
    9. July 2012 at 15:14

    MF,

    Thanks I got a chuckle.

    SS knows less about banking than some random MMT sympathisers that actually work at banks. Read this and laugh (action is in the comments):

    http://www.themoneyillusion.com/?p=5893

  105. Gravatar of OhMy OhMy
    9. July 2012 at 15:16

    Ooops, sorry for repeated comments. I tried to reedit after hitting submit but didn’t hit submit 4x in any case.

  106. Gravatar of Major_Freedom Major_Freedom
    9. July 2012 at 17:42

    Mike Sax:

    Major now you’re trying to ingratiate yourself. LOL

    You wish. If you want to believe that being better than completely clueless is a compliment, then I’m afraid you are a little confused on what it means to flatter someone, and what it means to be sardonic.

    What is is that in your mind that Sumner knows about banking-ie, agrees with you-that MMTers don’t.

    I am more interested in what in reality Sumner knows about banking that MMTers don’t.

    ———

    OhMy:

    SS knows less about banking than some random MMT sympathisers that actually work at banks. Read this and laugh (action is in the comments):

    Haha, “MMT sympathizers.” Way to reverse spoil the well. I might as well declare victory for flat Earth theory after some flat Earth “sympathizers” made an economics argument that refuted another’s economics argument.

    That banks expand credit and are operationally capital constrained, (but, as I have argued elsewhere but won’t get into here unless you want to discuss it, they are functionally reserve constrained, as without an increase of reserves by the Fed, at some point credit expanding banks will find that they lack the reserves to satisfy withdrawal and transfer requests, thus preventing any further credit expansion)**, is not in any way an MMT argument.

    I was talking about MMT economists talking about banking and Sumner talking about banking. Not MMT “sympathizers”, straw manning Sumner. How in the world is “If I go to a bank, get a $10,000 loan, and withdraw it in cash, then the bank has “lent reserves.”” an incorrect statement?

    ————-

    ** This statement from poster Turd Ferguson is related to the point I put in brackets:

    “Let’s assume that the bank didn’t have the 10K in reserve balances to convert into vault cash. Then what? Is the bank somehow unable to make the loan and then cover your withdrawal? No. The bank buys the vault cash from the Fed and receives an overdraft to its reserve account, which it clears by the end of the day, probably through the fed funds market or other money markets.

    That italicized part is not possible as a long run solution in a world where the Fed never increased reserves and yet banks kept expanding credit. This is because at some point, credit expanding banks will not be able to satisfy withdrawal and transfer requests. Credit expanding banks will cut back on their overnight lending, and cash starved banks will increase their demand for overnight funds. The overnight loan market interest rate will then have nowhere to go but up. It will be impossible then for banks to rely on the overnight fed funds market forever, without the Fed increasing reserves.

    The capital requirement constraint is an operational constraint. Economically speaking however, the constraint in the long run is actually reserves. Without further reserves, banks issuing new credit ex nihilo will eventually find that their withdrawal and transfer requests exceed the money they have on hand. This is precisely why the Fed was created in the first place. To increase bank reserves so that banks can expand credit together in unison in the long run.

    Neither anon or that other fool zanon understand this, because they can’t distinguish between operational habits, and economic necessity.

  107. Gravatar of Mike Sax Mike Sax
    9. July 2012 at 17:57

    “am more interested in what in reality Sumner knows about banking that MMTers don’t”

    That’s what I asked you (Not a) Major Genius-not

  108. Gravatar of OhMy OhMy
    9. July 2012 at 18:03

    MF,

    Sumner’s argument hinged on banks pushing cash onto customers. MMT-ers showed him that cash stock is demand determined, just like any central banker would tell you. So yes, SS didn’t know what he was talking about. Tried to defend the money multiplier with an idiotic mechanism and lost badly. But guess what, he didn’t learn anything since then and still thinks negative IOR is a great expansionary idea. Go figure.

    Btw: so MMT sympathizers know more than MMT economists??? Why would they sympathize then? With people that they think know less than themselves? LOL.

  109. Gravatar of Major_Freedom Major_Freedom
    9. July 2012 at 18:10

    OhMy:

    In simple terms: accounting doesn’t count what coulda woulda happen. Even if it brings you closer to inflation, you cannot assume what some government 150 years from now will do. You add assets, net worth goes up, you subtract it goes down, very simple. This is all nominal accounting, there is no place for assumptions or models here.

    Can higher net worth lead to lower real GDP? Yes, enough to print 100 trillions and distribute. Net worth up. Real GDP due to inflationary mayhem – probably down. But accounting is unchanged.

    Now keep going with that idea of inflation leading to a reduction in real GDP, and instead of only admitting that “incredibly high super duper inflation” leads to a reduction in real GDP, learn that any inflation from the central bank whatsoever misleads investors due to such inflation altering interest rates and demands, and thus making market driven interest rates and demands unobservable. Learn that inflation distorts economic calculation.

    Then you will learn that even “low price inflation” can blow up unsustainable economies, which you can call bubbles, booms, or whatever.

    Wrong, taxpayers are not the source of money, the government is. Eg. the government never paid back the debt incurred by Abraham Lincoln, so those fiscal injections directly increased the net worth of those people back then.

    You are, as all MMTers are prone to do, completely ignoring the law of opportunity costs. “Fiscal injections” do not increase the net worth of individuals IN REAL TERMS, which are the only terms that truly matter to people. Sure, individuals will END UP with more money, but you are ignoring the process of getting from here to there.

    You can’t just look at the times the people have the new money, and say “Hey look, people have more net worth because of the government’s deficits.”

    You have to consider what took place over time such that the people have more money when you temporarily consider their “balances”. Deficits are composed of two major parts, direct transfer payments (subsidies, or what MMTers call “capital investment” haha), and spending that goes towards the government’s own benefit (government’s consumption).

    The first component, subsidies, the act of subsidizing a firm with printed money, is not an increase in the supply of real goods. It only increases some people’s cash balances, and devalues everyone else’s cash balances. If giving some people free money increased the supply of goods, then Zimbabwe and Weimar would have been the most wealthy economies ever. If I gave you free money, that action doesn’t create a single new capital good. If giving someone free money allows them to produce more than they could in the free market where money is earned, then that represents a net loss, for the simple fact that real resources are being redirected away from their more valued use, to the less valued use this person’s production represents. Think of me printing money to keep in operation your fake dog poop making factory.

    The second component, government consumption, also does not increase the supply of real goods. If I printed and spent money in your store, and increased my own consumption, that action also does not produce a single new good. I would only be consuming at your expense and at the expense of everyone else who trades in those paper notes. I have more real wealth and consume it, and you and everyone else now have devalued paper notes and have less to consume from the open market. Hardly an increase in anyone’s standard of living. Even if you then used that money later on, the costs are already sunk.

  110. Gravatar of Major_Freedom Major_Freedom
    9. July 2012 at 18:21

    OhMy:

    Sumner’s argument hinged on banks pushing cash onto customers.

    Bullshit. Banks don’t have to “push” money on anyone if the choice is between idle cash, and lending at 0.0000001%.

    MMT-ers showed him

    They are not MMTers…

    that cash stock is demand determined, just like any central banker would tell you.

    The cash stock is NOT “demand determined.” The cash stock is whatever the state printed. Once that cash is created, then it doesn’t matter if people reduce or increase their cash preference. It can only change hands after that, and the total cash will remain the same.

    The error you’re making here is the fallacy of composition. Just because one person can demand more cash and increase his cash balance, it doesn’t mean everyone can do so together, apart from the state printing more cash.

    If everyone tried to increase their cash balance say, then it will have the effect of reducing asset prices denominated in dollars. It won’t increase the cash supply. Not unless the government prints more of it.

    So yes, SS didn’t know what he was talking about.

    Huh? Where?

    Tried to defend the money multiplier with an idiotic mechanism and lost badly.

    I didn’t see any money muliplier invoked. Sumner at the very outset accepted that loans can be created from nothing, apart from lending reserves.

    But guess what, he didn’t learn anything since then and still thinks negative IOR is a great expansionary idea. Go figure.

    It is precisely you people that need to learn how banking works. You’re utterly clueless because you can’t reason correctly with the accounting tautologies you have in mind. You are fallaciously seeing causation where there isn’t any all over the place. It’s your a priori theory used to interpret the MMT equations that is leading you astray.

    As for whether or not negative IOR is a way to coax banks into lending those reserves, while I am against the idea as a matter policy, I think is obviously true. Imagine you having a cash balance of $1000, held by me in your trust, and I forced you to pay me $50 each year I hold onto your cash, unless you loan it out. I can’t see you refusing to loan it out and waiting for your own cash to dwindle to zero eventually. I see you searching out for borrowers who are willing to pay you positive interest.

    Nobody said that banks ONLY lend from reserves. This straw man is simply hilarious.

    Btw: so MMT sympathizers know more than MMT economists??? Why would they sympathize then? With people that they think know less than themselves? LOL.

    Why do MMT sympathizers ask rhetorical questions instead of making positive arguments? Is the lack of knowledge so insufficient that chest thumping and “LOL’s” are you fool’s only recourse?

  111. Gravatar of Major_Freedom Major_Freedom
    9. July 2012 at 18:30

    Mike Sax:

    “am more interested in what in reality Sumner knows about banking that MMTers don’t”

    That’s what I asked you (Not a) Major Genius-not

    In your childish usage of these “nots”, you inadvertently set up a double negative, which logically makes it a positive, which means thanks for the compliment.

    And that is not what you asked. You asked what “in my mind” Sumner knows about banking-ie, agrees with you-that MMTers don’t. Thanks in part to you, we have ample evidence that what is in people’s minds is not necessarily what is the case in reality.

    To answer the question you seem to be asking, I don’t even know where to begin. A good start is the post I spoke about above, where MMTers don’t even know the economics of bank reserves.

  112. Gravatar of OhMy OhMy
    10. July 2012 at 05:01

    Mayor Freedom,

    Sumner’s argument hinged on banks pushing cash onto customers.

    Bullshit. Banks don’t have to “push” money on anyone if the choice is between idle cash, and lending at 0.0000001%.

    Banks do *not* lend reserves, sigh…

    Negative IOR is a tax on banks, exactly like you describe below. Taxes are contractionary, always.

    MMT-ers showed him

    They are not MMTers…

    You realize it is even worse, right?


    The cash stock is NOT “demand determined.” The cash stock is whatever the state printed.

    The Fed surely has a lot more printed than the public can demand. Like Dutch dikes, the cash reserves are definitely prepared to cope with 1-in-1000 years swing in demand for cash, so the demand for cash could triple in a weak and the Fed would cope: it would truck the cash to banks.

    The Fed is in charge of not letting solvent banks fail, that is its main mandate. Economists forget it every day and cook up models where the Fed’s influence is exerted by withholding cash or reserves, but as anon and zanon show at that thread it would mean the total collapse of the whole banking system – exactly what the Fed is in charge of not letting happen.

    So yes, the stock of cash is demand determined. Whatever the public demands, gets trucked in (this is only bound by the amount of deposits the public has and can convert to cash).

    The error you’re making here is the fallacy of composition. Just because one person can demand more cash and increase his cash balance, it doesn’t mean everyone can do so together, apart from the state printing more cash.

    It is exactly Sumner that makes the fallacy of composition mistake there. Say one guy goes haywire and withdraws his mortgage in cash but the house seller *deposits the money back into the banking system*, the bank gets rid of cash and demands reserves which are free to store, the Fed sends a truck and poof: not a week after the cash-only loan the cash is back at the Fed.

    As for whether or not negative IOR is a way to coax banks into lending those reserves, while I am against the idea as a matter policy, I think is obviously true. Imagine you having a cash balance of $1000, held by me in your trust, and I forced you to pay me $50 each year I hold onto your cash, unless you loan it out.

    This is obviously false. As you show above, negative IOR is simply a tax on banks: every day they send a check to the Fed and the money is gone. And as every practitioner will tell you banks already *make every loan they think is profitable*. They don’t need higher taxes to start doing that. So depleting their capital/reserves makes them only less capable to make those loans, which is contractionary, case closed.

    In other words the brilliant idea is to raise taxes. This is actually pretty typical for the mainstream: they tend to think that if there is downturn in the economy their theoretical models depict as always in the efficient equilibrium, it can only be because people don’t “try enough” and we have to whip them, tax them more, punish them for saving and in other various ways influence their choices although the economists think at the same time that “markets know best” etc, so a bunch of contradictory ideas.

    There is also persistent mixing between stuff that HAS TO happen and a model. Bank system reserves HAVE to deplete as a whole in negative IOR scenario. On the other hand that banks will “try harder” is only something that *MIGHT* happen. In this way when a mainstream economist thinks he is being smart and sophisticated, he is cramming assumptions into his conclusions and confusing himself in the process.
    The same was on display in what Paul Andrews was saying: when the govt runs a deficit, the wallets of the private sector fatten FOR SURE. They can make more transactions FOR SURE. They can afford more stuff FOR SURE. On the other hand he mixed in some kind of Ricardian equivalence: that people will think that *MAYBE* the govt will tax away this money in 150 years, so MAYBE let’s not spend it. The hilarious byproduct of his theorizing is that if the govt increased spending at full capacity and the tax increases would be imminent, his model predicts no inflation: nobody would touch and spend the money since the govt is about to tax is away. MMT on the other hand says this: people will have more money in their wallets: they will spend it (“hey, maybe the govt will tax somebody else? Or tax it in 10 years?”), and there will be inflation. So MMT is careful to distinguish effects that HAVE TO happen (like *nominal* effects in balance sheets), from models: effects that MIGHT happen (like more nominal net worth leading to actually lower real worth, which is possible in an inflationary scenario). The same with sectoral balances: the sum of surpluses of the 3 sectors HAS TO sum up to zero, if your model/scenario requires something else to work, it won’t work, no matter what.

    I work at a small hedge fund. We do not need higher taxes “try harder”, we already try to close every profitable transaction, every single one. If you tax the economy more, *maybe* we will try harder, but what will happen *for sure* is that our customers will have less money and will be harder to come by. Hint: that is bad.

    I can’t see you refusing to loan it out and waiting for your own cash to dwindle to zero eventually. I see you searching out for borrowers who are willing to pay you positive interest.

    They *already* search out all good creditworthy borrowers they can find, read the practitioners like anon and zanon. You will just seep away the bank’s capital.

    Nobody said that banks ONLY lend from reserves. This straw man is simply hilarious.

    There is no straw man, the argument is that taking away bank’s capital make it more constrained. Amount of reserves per se in unimportant, as the Fed will always provide a solvent bank with reserves, what matter is that there is less capital in the banking system as a whole. Banking is less profitable as a whole, so it will have a harder time attracting more capital. etc.

  113. Gravatar of OhMy OhMy
    10. July 2012 at 05:04

    MF,

    some formatting got mixed up in one part:

    As for whether or not negative IOR is a way to coax banks into lending those reserves, while I am against the idea as a matter policy, I think is obviously true. Imagine you having a cash balance of $1000, held by me in your trust, and I forced you to pay me $50 each year I hold onto your cash, unless you loan it out.

    This is obviously false. As you show above, negative IOR is simply a tax on banks: every day they send a check to the Fed and the money is gone. And as every practitioner will tell you banks already *make every loan they think is profitable*. They don’t need higher taxes to start doing that. So depleting their capital/reserves makes them only less capable to make those loans, which is contractionary, case closed.

    In other words the brilliant idea is to raise taxes. This is actually pretty typical for the mainstream: they tend to think that if there is downturn in the economy their theoretical models depict as always in the efficient equilibrium, it can only be because people don’t “try enough” and we have to whip them, tax them more, punish them for saving and in other various ways influence their choices although the economists think at the same time that “markets know best” etc, so a bunch of contradictory ideas.

    There is also persistent mixing between stuff that HAS TO happen and a model. Bank system reserves HAVE to deplete as a whole in negative IOR scenario. On the other hand that banks will “try harder” is only something that *MIGHT* happen. In this way when a mainstream economist thinks he is being smart and sophisticated, he is cramming assumptions into his conclusions and confusing himself in the process.
    The same was on display in what Paul Andrews was saying: when the govt runs a deficit, the wallets of the private sector fatten FOR SURE. They can make more transactions FOR SURE. They can afford more stuff FOR SURE. On the other hand he mixed in some kind of Ricardian equivalence: that people will think that *MAYBE* the govt will tax away this money in 150 years, so MAYBE let’s not spend it. The hilarious byproduct of his theorizing is that if the govt increased spending at full capacity and the tax increases would be imminent, his model predicts no inflation: nobody would touch and spend the money since the govt is about to tax is away. MMT on the other hand says this: people will have more money in their wallets: they will spend it (“hey, maybe the govt will tax somebody else? Or tax it in 10 years?”), and there will be inflation. So MMT is careful to distinguish effects that HAVE TO happen (like *nominal* effects in balance sheets), from models: effects that MIGHT happen (like more nominal net worth leading to actually lower real worth, which is possible in an inflationary scenario). The same with sectoral balances: the sum of surpluses of the 3 sectors HAS TO sum up to zero, if your model/scenario requires something else to work, it won’t work, no matter what.

    I work at a small hedge fund. We do not need higher taxes “try harder”, we already try to close every profitable transaction, every single one. If you tax the economy more, *maybe* we will try harder, but what will happen *for sure* is that our customers will have less money and will be harder to come by. Hint: that is bad.

  114. Gravatar of Mike Sax Mike Sax
    10. July 2012 at 05:27

    “he didn’t learn anything since then and still thinks negative IOR is a great expansionary idea. Go figure.”

    Actually, Oh My, the irony is that they just did something like this in Europe last week-took off the interest on reserves and the markets thought it was a snoozefest. And his answer is that the reason it didn’t lead to any excitement is the markets said “sure you took off IOR but your heart wasn’t in it”

  115. Gravatar of OhMy OhMy
    10. July 2012 at 05:53

    Mike Sax,

    Yep, this is not science, because nothing is ever falsifiable. If it doesn’t work, they “didn’t try enough”, or “the voice of the Central Bank chairman shook” and the confidence got deflated, or some similar nonsense.

  116. Gravatar of Major_Freedom Major_Freedom
    10. July 2012 at 06:40

    Mike Sax:

    Yep, this is not science, because nothing is ever falsifiable.

    You mean that is not positivist science.

    The positivist proposition that knowledge about reality can only be acquired through testing falsifiable propositions, contradicts itself, for that proposition itself is not falsifiable, and yet it is supposedly telling us something true about reality, namely, that nothing can be known except through testing falsifiable hypotheses.

    The irony in your babbling on about falsificationism, is that you hold MANY non-falsifiable propositions as true.

  117. Gravatar of OhMy OhMy
    10. July 2012 at 06:53

    MF,

    “You mean that is not positivist science.

    The positivist proposition that knowledge about reality can only be acquired through testing falsifiable propositions, contradicts itself, for that proposition itself is not falsifiable”

    It is falsifiable. Every non positivist theory cooked up in an armchair failed. Only experiment-guided sciences have succeeded. See Aristotle’s Physica. Impressive stuff, work of a genius, has ruled physics for 2000 years and yet it was all wrong. Galileo had a hard time to fight it although every experiment falsified it. (Same with mainstream econ). Our brains didn’t evolve to be logical, they evolved to help us survive on the savanna, we are crap at “logically” figuring out how the world works. If not for observations we would NEVER figure out that time is not uniform, that different observers measure different time, that space bends and that electrons are in many places at the same time. This stuff defies the mind, and yet it is true. We only stumbled upon this stuff because experimental observations written up as Maxwell equations could only be consistently interpreted with these assumptions, and they were subsequently measured.

    Praxeology is alluring but it won’t work, we are to dumb to figure out how stuff “has to work logically”.

  118. Gravatar of Mike Sax Mike Sax
    10. July 2012 at 07:04

    “The positivist proposition that knowledge about reality can only be acquired through testing falsifiable propositions, contradicts itself, for that proposition itself is not falsifiable, and yet it is supposedly telling us something true about reality, namely, that nothing can be known except through testing falsifiable hypotheses.”

    Clever sophistry Major. So you basically don’t hold yourself to the standard of falsifiable evidence but hold those you oppose to the very same standard. Clever trick but transparent

    Is your claim that there is no such thing as falsifiable propositions or that they for-basically specious-reasons don’t apply to economics?

  119. Gravatar of Major_Freedom Major_Freedom
    10. July 2012 at 07:34

    OhMy:

    Sumner’s argument hinged on banks pushing cash onto customers.

    Bullshit. Banks don’t have to “push” money on anyone if the choice is between idle cash, and lending at 0.0000001%.

    Banks do *not* lend reserves, sigh…

    Yes, they do. It’s not all they do, but they do do it. Sigh…

    If you’ve ever taken out a loan and withdrawn it in cash, that is a bank lending its reserves.

    Nobody is claiming banks ONLY lend their reserves, such that their lending is “reserve constrained” operationally.

    Functionally however, as I explained above, credit expanding banks are reserve constrained in the long run.

    Negative IOR is a tax on banks, exactly like you describe below. Taxes are contractionary, always.

    You’re ignoring the whole argument. Taxes on reserves is only contractionary if the banks do not lend them. But taxes on reserves is being argued as an incentive for the banks to lend those reserves. Again, I don’t agree with it as policy, and I am skeptical of it even working, but you have to get the argument right if you’re going to critique it.

    MMT-ers showed him

    The claim that banks do not lend reserves is false.

    The cash stock is NOT “demand determined.” The cash stock is whatever the state printed.

    The Fed surely has a lot more printed than the public can demand.

    Nonsense. Every dollar the Fed prints is accepted by “the public” and ends up in someone’s cash account.

    Like Dutch dikes, the cash reserves are definitely prepared to cope with 1-in-1000 years swing in demand for cash, so the demand for cash could triple in a weak and the Fed would cope: it would truck the cash to banks.

    That is just banks taking possession of the cash they already own. They aren’t demanding more cash. They are merely demanding to take possession of the cash they already demanded by owning it.

    The Fed is in charge of not letting solvent banks fail, that is its main mandate.

    Haha, solvent banks cannot fail. Banks that fail are by definition insolvent.

    Economists forget it every day and cook up models where the Fed’s influence is exerted by withholding cash or reserves, but as anon and zanon show at that thread it would mean the total collapse of the whole banking system – exactly what the Fed is in charge of not letting happen.

    So banks are reserve constrained then?

    So yes, the stock of cash is demand determined.

    No, it isn’t. It is determined by the Fed’s creation of them.

    Whatever the public demands, gets trucked in (this is only bound by the amount of deposits the public has and can convert to cash).

    You mean whatever the public wants to take physical possession of regarding their own cash property, cash is trucked in.

    “The error you’re making here is the fallacy of composition. Just because one person can demand more cash and increase his cash balance, it doesn’t mean everyone can do so together, apart from the state printing more cash.”

    It is exactly Sumner that makes the fallacy of composition mistake there.

    Where? I didn’t see it.

    Say one guy goes haywire and withdraws his mortgage in cash but the house seller *deposits the money back into the banking system*, the bank gets rid of cash and demands reserves which are free to store, the Fed sends a truck and poof: not a week after the cash-only loan the cash is back at the Fed.

    How in the hell can a borrower withdraw HIS mortgage “in cash”? The lender owns the mortgage. The lender owns the future cash flows. The borrower SPENT the money on the house, which means the SELLER received the money. The borrower cannot withdraw the seller’s money.

    Do you mean suppose the guy paid for the house in cash? If the guy pays for the house in cash, and the seller deposits the cash back into the bank, and the bank sends the cash to the Fed in exchange for a claim to that cash (reserve account), then so what? What does this have to do with anything?

    As you show above, negative IOR is simply a tax on banks: every day they send a check to the Fed and the money is gone.

    This is false. If the individual bank HOLDS onto their reserves and does not lend them out, yes, they pay the Fed interest. Yes, if another bank that RECEIVES the money after being lent holds onto the money, then yes, they pay the Fed interest.

    This is why negative IOR will continually put pressure on any bank that receives reserves from another bank after being loaned, to again loan it out.

    You say this is “contractionary”, but that isn’t the case if the principles being continually loaned out exceed the interest the individual banks pay the Fed for the short time they hold onto the reserves. In other words, the money that is released in this way is greater than the money going to the Fed. Imagine a bank having $100 billion in reserves just sitting at the Fed. Now suppose the Fed charges that bank 5% interest every year the bank holds that money at the Fed. Suppose the bank then lends the money at 10%. Well, it doesn’t take a rocket scientist to know that the $100 billion that the bank just lent, and is now going towards investment or consumption spending, will far exceed any of the interest being paid for all the times subsequent banks hold onto the money in the chain. Even if the second bank in the chain holds onto that $100 billion for the entire year, there was $100 billion additional money spending, but only $5 billion going to the Fed in interest, which is a net increase of $95 billion addition to nominal spending that year.

    And as every practitioner will tell you banks already *make every loan they think is profitable*. They don’t need higher taxes to start doing that. So depleting their capital/reserves makes them only less capable to make those loans, which is contractionary, case closed.

    False. Again, for the millionth time, nobody is claiming that banks ONLY lend reserves, or that they CAN’T expand credit. Yes, the banks’ cash will decline by a cumulative $5 billion in my example, but $95 billion was put into the spending stream. The negative IOR is designed to increase AD. If banks are taxed 5% on their reserves, and the money goes to the Fed, then the Fed can “re-cash” the banks by purchasing treasuries USING the interest charged prior.

    In other words the brilliant idea is to raise taxes.

    The idea is to raise AD. The argument is that if the banks aren’t lending those reserves anyway, it’s no loss to their profitability if that cash is charged interest.

    The irony here is that you are treating reserves as capital, as if taxing reserves will hamper the bank’s ability to expand loans, as if banks are reserve constrained!

    The argument (which again I don’t agree with for policy reasons) is that if banks are going to not lend their reserves, given that they aren’t lending enough through regular credit expansion to boost AD sufficiently, then it is not a loss to the banks if the Fed effectively threatens to reduce those reserve balances unless their lent.

    This is actually pretty typical for the mainstream: they tend to think that if there is downturn in the economy their theoretical models depict as always in the efficient equilibrium, it can only be because people don’t “try enough” and we have to whip them, tax them more, punish them for saving and in other various ways influence their choices although the economists think at the same time that “markets know best” etc, so a bunch of contradictory ideas.

    I agree with your sentiment, but you’re not getting the IOR argument correctly. You are mistaken.

    There is also persistent mixing between stuff that HAS TO happen and a model. Bank system reserves HAVE to deplete as a whole in negative IOR scenario. On the other hand that banks will “try harder” is only something that *MIGHT* happen. In this way when a mainstream economist thinks he is being smart and sophisticated, he is cramming assumptions into his conclusions and confusing himself in the process.

    Yes, they will deplete as a whole. But the quantity of loans has increased, all else equal. The aim is a higher AD. If banks are not reserve constrained, then why are you worried about slowly dwindling reserves, which won’t even dwindle anyway because the Fed will just purchase more treasuries thus re-reserving the banks in the long run?

    The same was on display in what Paul Andrews was saying: when the govt runs a deficit, the wallets of the private sector fatten FOR SURE. They can make more transactions FOR SURE. They can afford more stuff FOR SURE.

    You’re assuming that the very process of deficit spending doesn’t shrink the supply of goods from what it otherwise would have been. You’re just sloppily focusing on an arbitrary state of rest in the chain, that is, when the private sector has the money. But HOW did the private sector get that money, and did it affect goods production? THAT is what MMTers are not asking. They are ignoring the processes and only focusing on what their accounting equations can only tell them, which is states of rest, or equilibria.

    On the other hand he mixed in some kind of Ricardian equivalence: that people will think that *MAYBE* the govt will tax away this money in 150 years, so MAYBE let’s not spend it. The hilarious byproduct of his theorizing is that if the govt increased spending at full capacity and the tax increases would be imminent, his model predicts no inflation: nobody would touch and spend the money since the govt is about to tax is away. MMT on the other hand says this: people will have more money in their wallets: they will spend it (“hey, maybe the govt will tax somebody else? Or tax it in 10 years?”), and there will be inflation. So MMT is careful to distinguish effects that HAVE TO happen (like *nominal* effects in balance sheets), from models: effects that MIGHT happen (like more nominal net worth leading to actually lower real worth, which is possible in an inflationary scenario). The same with sectoral balances: the sum of surpluses of the 3 sectors HAS TO sum up to zero, if your model/scenario requires something else to work, it won’t work, no matter what.

    150 years? Please. I don’t accept Ricardian equivalence and even I know you’re exaggerating.

    MMT is not saying anything original by saying money printing “at full capacity” will make prices rise over time, if the demand for money doesn’t rise of course.

    I work at a small hedge fund. We do not need higher taxes “try harder”, we already try to close every profitable transaction, every single one. If you tax the economy more, *maybe* we will try harder, but what will happen *for sure* is that our customers will have less money and will be harder to come by. Hint: that is bad.

    OK, so you’re not working at a bank sitting on trillions of dollars of reserves. So this doesn’t apply to you.

    “I can’t see you refusing to loan it out and waiting for your own cash to dwindle to zero eventually. I see you searching out for borrowers who are willing to pay you positive interest.”

    They *already* search out all good creditworthy borrowers they can find, read the practitioners like anon and zanon.

    anon and zanon don’t have the faintest clue how the economics of reserves work. And neither do you it seems.

    Yes, banks are “already” searching out all good creditworthy borrowers they can find, but that is GIVEN the conditional that they are making loans ex nihilo and not lending reserves. If negative IOR is implemented, then a NEW set of conditionals will arise. You cannot assume the same conditionals will remain.

    You will just seep away the bank’s capital.

    Haha, you again just implicitly claimed that banks are reserve constrained. Reserves are capital? The argument that banks are not reserve constrained but rather capital constrained, presupposes reserves is not capital and capital is not reserves.

    Now you’re saying taxing reserves is taxing the constraint of bank lending? Do you have any clue of this blatant contradiction you’re invoking here?

    “Nobody said that banks ONLY lend from reserves. This straw man is simply hilarious.”

    There is no straw man, the argument is that taking away bank’s capital make it more constrained.

    There is a straw man, because you keep making the claim “Banks don’t lend reserves! They are not reserve constrained!” As if the people you are addressing are saying banks only lend reserves.

    If your argument is now that negative IOR is taking away the banks capital and thus “make it more constrained”, then you are again arguing that banks are reserve constrained, which contradicts your entire worldview that banks are not reserve constrained.

    Amount of reserves per se in unimportant, as the Fed will always provide a solvent bank with reserves, what matter is that there is less capital in the banking system as a whole.

    You’re incredibly confused. You’re confused because you are trying to reconcile two contradictory positions you hold in your mind. One, you believe banks are not reserve constrained. Two, you believe taxing reserves is taxing capital and thus constrains the banks from lending. Well lordy bagordy, you’ll never reconcile those.

    Now you’re saying reserves “per se” are unimportant? What the heck does that mean? I know what per se means, but what the heck do you mean? If reserves “per se” are unimportant (oops, that was you trying to say banks are not reserve constrained), then who cares if reserves dwindle slightly? The goal is to get those reserves lent.

    If you cannot provide an explanation for why taxing reserves will not lead to more lending of those reserves, then you have to concede already.

    Banking is less profitable as a whole, so it will have a harder time attracting more capital. etc.

    How can taxing reserves reduce bank profits? Idle reserves don’t earn interest profits. Banks that lend those reserves will, presumably, earn interest on those loans that are higher than the negative IOR tax rate. How can you say it will reduce bank profitability? You’re probably conflating bank profits and bank cash balances, with “private sector profits” and “private sector bank balances.”

  120. Gravatar of Mike Sax Mike Sax
    10. July 2012 at 08:43

    “If you cannot provide an explanation for why taxing reserves will not lead to more lending of those reserves, then you have to concede already.”

    Major within the MMT framework that isn’t hard to do. As bank deposits are not restrained by reserves that’s why it won’t lead to more lending out reserves-the banks don’t lend out reserves.

    Just like inflationistas have been promising galloping inflation for four years to no avail. Why? Because you misintrepret an increase in the monetary base as having anything to do with inflation. In fact Sumner himself here is more right than you as he doesn’t claim that a bloated base means easy money.

    The best part is that some of these inflationistas have put their money where their mouth is and lost a bundle-Pimco’s Bill Gross, that know it all Jim Rogers with all those predictiosn of a “frothing Treasury bubble.”

  121. Gravatar of Mike Sax Mike Sax
    10. July 2012 at 08:48

    Actually Major let me give another “explanation for why taxing reserves will not lead to more lending of those reserves”

    Europe took off IOR last week and nothing happened.

  122. Gravatar of OhMy OhMy
    10. July 2012 at 17:22

    MF,

    Banks do *not* lend reserves, sigh…

    Yes, they do. It’s not all they do, but they do do it. Sigh…

    If you’ve ever taken out a loan and withdrawn it in cash, that is a bank lending its reserves.

    Yes, nut NOBODY takes out loans in cash. Even if, the recipient deposits it BACK into banks. Demand for cash is stable, banks cannot influence it. New lending doesn’t decrease the amount of reserves in the system.

    Functionally however, as I explained above, credit expanding banks are reserve constrained in the long run.

    Not the case. As long as they have bonds or any other capital that the Fed will accept, they can lend beyond their reserve position – and borrow reserves later, or sell bonds and get them. That is why I said reserves “per se” don’t matter.

    Negative IOR is a tax on banks, exactly like you describe below. Taxes are contractionary, always.

    You’re ignoring the whole argument. Taxes on reserves is only contractionary if the banks do not lend them.

    First of all: banks do not lend them, because nobody withdraws loans in cash to sit on it. That was ridiculed by anon and zanon, but apparently you didn’t get it. No wonder you think Sumner gets banking. EVEN IF someone took out a loan in cash, they SPEND the money and the recipient is sane as a rule and PUTS THE MONEY IN A BANK – reserves are back in the banking system. Banks cannot help it, the Fed cannot help it.

    Besides, even if banks really loaned out cash, by taxing reserves they HAVE LESS CASH TO LOAN OUT, great expansionary mechanism. I said before: they already try to loan as much as profitable, tax or no tax, so how is the tax helping here? You never addressed that.


    The cash stock is NOT “demand determined.” The cash stock is whatever the state printed.

    I tell you there are trillions sitting in Fed voults all over the country in case the demand for cash changes. The Fed will not let that even bankrupt all the solvent banks just because they store capital in bonds and reserves and not cash.

    The Fed surely has a lot more printed than the public can demand.

    Nonsense. Every dollar the Fed prints is accepted by “the public” and ends up in someone’s cash account.

    Seriously? So a swing in demand for cash by $1000 means bank runs all over the country, because the Fed is short this 1000 dollars and ATMs are dry?

    Like Dutch dikes, the cash reserves are definitely prepared to cope with 1-in-1000 years swing in demand for cash, so the demand for cash could triple in a weak and the Fed would cope: it would truck the cash to banks.

    That is just banks taking possession of the cash they already own.

    No, they own reserves for now, or bonds. Once depositors demand cash, they have to sell bonds and get cash.

    The Fed is in charge of not letting solvent banks fail, that is its main mandate.

    Haha, solvent banks cannot fail. Banks that fail are by definition insolvent.

    Not in your world. Once they demand for cash increases the Fed is out of money, at least as you picture it.

    It is exactly Sumner that makes the fallacy of composition mistake there.

    Where? I didn’t see it.

    He misses that the loan withdrawn in cash is back in the banking system within days and cash is converted back to reserves.

    How in the hell can a borrower withdraw HIS mortgage “in cash”? The lender owns the mortgage. The lender owns the future cash flows. The borrower SPENT the money on the house, which means the SELLER received the money. The borrower cannot withdraw the seller’s money.

    The borrower signs the mortgage and withdraws in cash. That was the idiotic Sumner scenario. The point is that this cash is handed over to the seller of the house who converts to a deposit in no time.

    Do you mean suppose the guy paid for the house in cash? If the guy pays for the house in cash, and the seller deposits the cash back into the bank, and the bank sends the cash to the Fed in exchange for a claim to that cash (reserve account), then so what? What does this have to do with anything?

    It proves that cash stock is demand determined.

    As you show above, negative IOR is simply a tax on banks: every day they send a check to the Fed and the money is gone.

    This is false. If the individual bank HOLDS onto their reserves and does not lend them out, yes, they pay the Fed interest. Yes, if another bank that RECEIVES the money after being lent holds onto the money, then yes, they pay the Fed interest.

    BAnk lending doesn’t decrease the amount of reserves in the system, they do not trickle out unless miraculously the public at the same time increases its appetite for cash, which is an assumption you totally pulled out of your a**. So SOME banks will pay the tax, because unless the Fed swaps the reserves for bonds, the banks cannot get rid of them, no way. So as a system, they pay more taxes, unavoidable.

    This is why negative IOR will continually put pressure on any bank that receives reserves from another bank after being loaned, to again loan it out.

    The bank cannot loan out reserves, as it cannot force the borrower to withdraw in cash. Think of the banking system as a whole: if the amount of cash the public wants to hold is constant, then the amount of reserves is constant and SOME bank pays the tax. It is true that they would try to get rid of reserves among them, so the interest rate would be bid down to ZERO. THAT IS WHY the Fed pays interest on resevres, to support the rate.

    And as every practitioner will tell you banks already *make every loan they think is profitable*. They don’t need higher taxes to start doing that. So depleting their capital/reserves makes them only less capable to make those loans, which is contractionary, case closed.

    False. Again, for the millionth time, nobody is claiming that banks ONLY lend reserves, or that they CAN’T expand credit.

    Even if they lent out 100% in reserves, they already do the best they can, so this argument fails twice.

    In other words the brilliant idea is to raise taxes.

    The idea is to raise AD.

    Yeah, by raising taxes: it will never work. Besides even if it did, the idea is to get more lending and get the private sector more in debt, which is a dumb idea, even if it worked.

    The irony here is that you are treating reserves as capital, as if taxing reserves will hamper the bank’s ability to expand loans, as if banks are reserve constrained!

    take 2 banks. Both have 100 liabilities and 200 assets, so both have 100 in capital.

    Bank A: assets: 180 reserves, 20 bonds.

    Bank B: 20 reserves, 180 bonds.

    Both banks are equally capable to make loans, because bank B can sell its bonds to the Fed if need be, and the Fed will always accept them, otherwise first the interbank rate would skyrocket and then some solvent bank (no necessarily B) would go bankrupt. So ain’t happening.

  123. Gravatar of dwb dwb
    10. July 2012 at 17:58

    is it too much to ask that the MMT and internet austrians annihilate each other. heh

  124. Gravatar of Major_Freedom Major_Freedom
    10. July 2012 at 19:10

    OhMy:

    Yes, nut NOBODY takes out loans in cash. Even if, the recipient deposits it BACK into banks. Demand for cash is stable, banks cannot influence it. New lending doesn’t decrease the amount of reserves in the system.

    It doesn’t matter if the recipients deposit the money back into banks. The point was that it was lent, and presumably will be lent again if negative IOR continues. The lending itself is the desired goal.

    “Functionally however, as I explained above, credit expanding banks are reserve constrained in the long run.”

    Not the case. As long as they have bonds or any other capital that the Fed will accept, they can lend beyond their reserve position – and borrow reserves later, or sell bonds and get them. That is why I said reserves “per se” don’t matter.

    You are ignoring the fact that the value of the capital itself depends on continued credit expansion. If we assume the Fed ceases increasing reserves, then at some point because banks cannot lend any more on the basis of what I already argued above, capital prices cannot increase in price.

    Negative IOR is a tax on banks, exactly like you describe below. Taxes are contractionary, always.

    They are not contractionary to AD, which is the actual goal.

    $100 billion lent and $5 billion in IOR paid is expansionary to NGDP.

    “You’re ignoring the whole argument. Taxes on reserves is only contractionary if the banks do not lend them.”

    First of all: banks do not lend them, because nobody withdraws loans in cash to sit on it.

    It is not necessary that cash be withdrawn, that was just an example. Second, yes, banks do lend reserves. They don’t ONLY lend reserves.

    That was ridiculed by anon and zanon, but apparently you didn’t get it.

    They are utterly confused. Their “ridicule” is completely misguided.

    No wonder you think Sumner gets banking.

    I only said he understands banking better than MMTers, and considering anon and zanon’s comments, and your comments, my claim has not yet been falsified.

    EVEN IF someone took out a loan in cash, they SPEND the money and the recipient is sane as a rule and PUTS THE MONEY IN A BANK – reserves are back in the banking system. Banks cannot help it, the Fed cannot help it.

    IT DOESN’T MATTER IF THE LOAN IS REDEPOSITED. THE GOAL IS NOT TO GET THE MONEY OUT OF THE BANKS AND KEEP IT OUT OF THE BANKS.

    THE GOAL IS TO GET THE BANKS TO LEND THEM.

    Even if the money ends back up in the banks, the fact that it was lent IS THE DESIRED GOAL.

    Besides, even if banks really loaned out cash, by taxing reserves they HAVE LESS CASH TO LOAN OUT, great expansionary mechanism.

    YOU JUST ADMITTED BANKS LOAN RESERVES YOU TURKEY.

    I said before: they already try to loan as much as profitable, tax or no tax, so how is the tax helping here? You never addressed that.

    I already said banks loan according to the given conditions. A tax on reserves will CHANGE those conditions, and thus you cannot assume optimal lending before will be the same optimal lending after.

    “The cash stock is NOT “demand determined.” The cash stock is whatever the state printed.”

    I tell you there are trillions sitting in Fed voults all over the country in case the demand for cash changes.

    THAT MONEY IS ALREADY OWNED. The demand for that cash IS the fact that it is owned and held by its owners, rather than being lent or spent!

    Taking physical possession of this property is not in any way an increase in demand for money.

    The Fed will not let that even bankrupt all the solvent banks just because they store capital in bonds and reserves and not cash.

    Again you contradict yourself and say that banks are reserve constrained.

    The Fed surely has a lot more printed than the public can demand.

    IT’S ALREADY DEMANDED by the fact that it is owned and held by its owners.

    “Nonsense. Every dollar the Fed prints is accepted by “the public” and ends up in someone’s cash account.”

    Seriously? So a swing in demand for cash by $1000 means bank runs all over the country, because the Fed is short this 1000 dollars and ATMs are dry?

    Demand for cash is already there. You’re talking about taking physical possession of what is already owned and hence demanded.

    “That is just banks taking possession of the cash they already own.”

    No, they own reserves for now, or bonds. Once depositors demand cash, they have to sell bonds and get cash.

    The reserves are equivalent claims to cash. If banks take possession of cash from the Fed, their reserve balance decreases.

    “Haha, solvent banks cannot fail. Banks that fail are by definition insolvent.”

    Not in your world.

    Not in any world. Bankruptcy implies insolvency.

    Once they demand for cash increases the Fed is out of money, at least as you picture it.

    The cash is already demanded by virtue of being owned.

    “Where? I didn’t see it.”

    He misses that the loan withdrawn in cash is back in the banking system within days and cash is converted back to reserves.

    That is no a fallacy of composition.

    And it doesn’t matter if a loan is redeposited. The fact that it was lent was the goal.

    Your problem is that you can’t think outside the MMT box. All you see are cash balances, and you only see “expansionary” events when the total cash or money in the private sector increases.

    But the expansionary aspect actually referred to is AD, and more loans increase AD, all else equal.

    “How in the hell can a borrower withdraw HIS mortgage “in cash”? The lender owns the mortgage. The lender owns the future cash flows. The borrower SPENT the money on the house, which means the SELLER received the money. The borrower cannot withdraw the seller’s money.”

    The borrower signs the mortgage and withdraws in cash. That was the idiotic Sumner scenario. The point is that this cash is handed over to the seller of the house who converts to a deposit in no time.

    And? You still haven’t refuted Sumner’s argument that more loans will increase AD.

    “Do you mean suppose the guy paid for the house in cash? If the guy pays for the house in cash, and the seller deposits the cash back into the bank, and the bank sends the cash to the Fed in exchange for a claim to that cash (reserve account), then so what? What does this have to do with anything?”

    It proves that cash stock is demand determined.

    No, the cash stock is determined by how much the state prints.

    “This is false. If the individual bank HOLDS onto their reserves and does not lend them out, yes, they pay the Fed interest. Yes, if another bank that RECEIVES the money after being lent holds onto the money, then yes, they pay the Fed interest.”

    BAnk lending doesn’t decrease the amount of reserves in the system, they do not trickle out unless miraculously the public at the same time increases its appetite for cash, which is an assumption you totally pulled out of your a**.

    I DIDN’T CLAIM IT WOULD INCREASE RESERVES. The argument is that it will increase LOANS, and hence add to AD.

    So SOME banks will pay the tax, because unless the Fed swaps the reserves for bonds, the banks cannot get rid of them, no way. So as a system, they pay more taxes, unavoidable.

    This is not a concern if the goal is to increase loans.

    “This is why negative IOR will continually put pressure on any bank that receives reserves from another bank after being loaned, to again loan it out.”

    The bank cannot loan out reserves, as it cannot force the borrower to withdraw in cash.

    It’s not necessary that the loan be withdrawn in cash. That was an example.

    Think of the banking system as a whole: if the amount of cash the public wants to hold is constant, then the amount of reserves is constant and SOME bank pays the tax. It is true that they would try to get rid of reserves among them, so the interest rate would be bid down to ZERO. THAT IS WHY the Fed pays interest on resevres, to support the rate.

    The goal is not to increase money in this case. The goal is to increase lending.

    And as every practitioner will tell you banks already *make every loan they think is profitable*. They don’t need higher taxes to start doing that. So depleting their capital/reserves makes them only less capable to make those loans, which is contractionary, case closed.

    False. The lending today is contingent on the facts today. If the facts change, so will lending.

    “False. Again, for the millionth time, nobody is claiming that banks ONLY lend reserves, or that they CAN’T expand credit.”

    Even if they lent out 100% in reserves, they already do the best they can, so this argument fails twice.

    No, this is false. A tax on reserves would change the bank’s decision criteria.

    “The idea is to raise AD.”

    Yeah, by raising taxes: it will never work.

    You are confused. More taxes can only reduce AD if the taxes fall on transactions. But a tax on reserves is not a tax on transations. It is a tax on idle money. But because the tax on the idle money is accompanied by more lending of those reserves, the affect on AD is positive. It is not contractionary to SPENDING.

    Imagine you holding $100 trillion in a vault for years and years. It isn’t used in transactions and so whatever the existing AD happens to be, it isn’t a function of this vault cash.

    Now, suppose I start to reduce your cash 5% a year. It won’t do diddly squat to AD. Now suppose I will only take 5% per year if you don’t lend it. Can you not see how your lending that cash will add to AD, despite the fact that I am taking some of the money?

    Your error is that you believe all cash balances in the private sector are being used in transactions. But idle reserve money is not being used in transactions, so taxing them cannot reduce AD, and taxing them unless they are loaned DEFINITELY cannot decrease AD.

    Besides even if it did, the idea is to get more lending and get the private sector more in debt, which is a dumb idea, even if it worked.

    FINALLY! You finally admitted Sumner’s logic of negative IOR is correct.

    I also disagree with taxing reserves as a matter of policy, because I agree with you that more debt is a stupid idea. But Sumner is ONLY talking about how AD can increase.

    ——-

    Since you finally conceded the point, I’m done. The rest of your post is not important.

  125. Gravatar of Major_Freedom Major_Freedom
    10. July 2012 at 19:27

    dwb:

    is it too much to ask that the MMT and internet austrians annihilate each other. heh

    It’s always amusing to read internet [fill in the blank]s saying “internet Austrians”, as if you’re not on the internet.

  126. Gravatar of Major_Freedom Major_Freedom
    10. July 2012 at 19:35

    Mike Sax:

    “If you cannot provide an explanation for why taxing reserves will not lead to more lending of those reserves, then you have to concede already.”

    Major within the MMT framework that isn’t hard to do. As bank deposits are not restrained by reserves that’s why it won’t lead to more lending out reserves-the banks don’t lend out reserves.

    Yes, they do. They don’t necessarily lend out of reserves when they increase, nor do they only lend reserves, but they do lend reserves.

    Just like inflationistas have been promising galloping inflation for four years to no avail.

    Where have inflationistas been promising such “galloping inflation”, and what does that even mean?

    Why? Because you misintrepret an increase in the monetary base as having anything to do with inflation.

    You misunderstand my position. I never said an increase in the money supply necessarily leads to more spending and more price inflation. I always held that the demand for money for holding is a factor that has to be taken into account.

    You’re straw manning me.

    In fact Sumner himself here is more right than you as he doesn’t claim that a bloated base means easy money.

    “easy” presupposes a standard of reference. If the standard is monetary base, then of course it’s easy money. If the standard is aggregate money supply, then it would depend on the extent of credit expansion/contraction.

    Again, you’re straw manning me.

    The best part is that some of these inflationistas have put their money where their mouth is and lost a bundle-Pimco’s Bill Gross, that know it all Jim Rogers with all those predictiosn of a “frothing Treasury bubble.”

    I agree treasuries are in a bubble. You cannot claim that this theory has been falsified.

    And deflationistas have lost money too, because the stock market was goosed.

  127. Gravatar of Mike Sax Mike Sax
    10. July 2012 at 20:10

    “Where have inflationistas been promising such “galloping inflation”, and what does that even mean?”

    Major your level of obtuseness greatly handicaps any attempt at conversation with you. I mentioned a couple of market participants-commodity trader Jim Rogers and Pimco bond king Bill Gross.

    If you really have not heard anyone screaming about inflation then you must live under an even bigger rock than I had presumed.

    For just one of examples that are too numerous to count check today’s Wall Street Journal piece by Alan Meltzer. Often the inflationsitas-what we call inflation alarmists as you cant figure it out for yourself-use terms like “galloping inlfation” and coming “stagflation”

    If the terms don’t ring a bell try googling it. I’ve seen you make a big hue and a cry with endless stats from the St. Louis Fed to point out that the monetary base has grown-as if that wasn’t obvious.

    If you claim the theory of the treasries bubble hasn’t been falsified then your basically claiming there are no falsifiable arugments.

    By all means, short treauries like Gross and Rogers did. Ironically Rogers agrees with you-he lost a bundle but that’s not “falsification.”

    Gross however has had enough and has cried uncle. He’s admitting the treasdury bubble has been falsified.

    I have no problem with it though-please let me be the one on the opposite side of you if you decided to put your money where your big mouth is.

  128. Gravatar of Major_Freedom Major_Freedom
    10. July 2012 at 20:28

    Mike Sax:

    “Where have inflationistas been promising such “galloping inflation”, and what does that even mean?”

    Major your level of obtuseness greatly handicaps any attempt at conversation with you. I mentioned a couple of market participants-commodity trader Jim Rogers and Pimco bond king Bill Gross.

    I asked where inflationistas have been promising “galloping inflation.” Merely telling me names is not sufficient. I need statements.

    If you really have not heard anyone screaming about inflation then you must live under an even bigger rock than I had presumed.

    I did not claim I have heard nobody screaming about inflation. I asked you about what you asserted.

    For just one of examples that are too numerous to count check today’s Wall Street Journal piece by Alan Meltzer.

    What does that article have to do with this?

    Often the inflationsitas-what we call inflation alarmists as you cant figure it out for yourself

    I know what inflationistas mean. Why are you presuming I didn’t? I didn’t even say anything regarding that term so you have no evidence to make your claim justified.

    -use terms like “galloping inlfation” and coming “stagflation”

    Where?

    If the terms don’t ring a bell try googling it. I’ve seen you make a big hue and a cry with endless stats from the St. Louis Fed to point out that the monetary base has grown-as if that wasn’t obvious.

    I was asking about your claim.

    If you claim the theory of the treasries bubble hasn’t been falsified then your basically claiming there are no falsifiable arugments.

    Not true. A theory that has not been falsified does not imply there are no such thing as falsifiable statements. You’re out of your mind.

    By all means, short treauries like Gross and Rogers did. Ironically Rogers agrees with you-he lost a bundle but that’s not “falsification.”

    Where are you getting that Rogers lost a ton of money?

    Gross however has had enough and has cried uncle. He’s admitting the treasdury bubble has been falsified.

    Where did he say that? If he did, then that’s his opinion, which I think is wrong.

    I have no problem with it though-please let me be the one on the opposite side of you if you decided to put your money where your big mouth is.

    Hahaha, as if you know anything about investing.

  129. Gravatar of Mike Sax Mike Sax
    10. July 2012 at 20:44

    “Where are you getting that Rogers lost a ton of money?”

    See Major this is what I mean by obtuse. If you deny it fine. It’s a matter of public record. You can check for yourself. It was at CNBC and he was interviewd. Again you argue over the silliest things. I don’t need to spoon feed you.

    It’s not Gross’ opinon he lost millions of dollars that’s fact. He’s had enough I guess that’s an “opinion” though much more logical than yours about the coming tresury bubble.

    If anyone is out of his mind it’s you. Talk about a glass house. If you don’t think the treasury bubble has been falsified your even doubly out of your mind than was already apparent.

    If you say there are falsifable claims try making one that you admit is such. Let’s have a time limit on this Treasury buubble poppping. If it happens in 50 years that doesn’t count-like Keynes said ‘in the long run we are all dead.’ Give me some kind of near future time frame and I’ll take the other side of the trade. I asssure you I know all I need to know to trade against someone as deluded as you with your Treasury bubble

  130. Gravatar of Major_Freedom Major_Freedom
    10. July 2012 at 21:20

    Mike Sax:

    “Where are you getting that Rogers lost a ton of money?”

    See Major this is what I mean by obtuse.

    You mean your utter lack of documentation evidence is my fault?

    If you deny it fine.

    I am not denying anything. I am asking you where are you getting that Rogers lost a bundle of money.

    It’s a matter of public record. You can check for yourself.

    Where?

    It was at CNBC and he was interviewd. Again you argue over the silliest things. I don’t need to spoon feed you.

    He said he lost a bundle of money on CNBC? Which interview?

    It’s not Gross’ opinon he lost millions of dollars that’s fact.

    Where?

    He’s had enough I guess that’s an “opinion” though much more logical than yours about the coming tresury bubble.

    I didn’t say it was coming. I said it is here.

    If anyone is out of his mind it’s you.

    No U.

    Talk about a glass house.

    How’s that?

    If you don’t think the treasury bubble has been falsified your even doubly out of your mind than was already apparent.

    That’s not a valid rebuttal.

    If you say there are falsifable claims try making one that you admit is such.

    I already did. The hypothesis that the treasury market is in a bubble is falsifiable.

    Let’s have a time limit on this Treasury buubble poppping. If it happens in 50 years that doesn’t count-like Keynes said ‘in the long run we are all dead.’ Give me some kind of near future time frame and I’ll take the other side of the trade.

    Hahaha, as if you know about investing.

    OK, how about 49 years? Still too long? 30? 20? 10? What is the LONGEST timespan you are willing to go?

    I asssure you I know all I need to know to trade against someone as deluded as you with your Treasury bubble

    I don’t believe you.

  131. Gravatar of Mike Sax Mike Sax
    10. July 2012 at 21:40

    You don’t have to believe me Major. Again, if you’re right then you should stand to make a lot of money.

    If you meet someone that doesn’t know what he’s doing why argue with him? Rather get in the trade. A hustler pretends he doesn’t know what he’s doing and then he beats you. You’re trying to claim that I don’t know what I’m doing but say I do. There’s really no point in that. I certainly am not vain enough to care about your opinon. If you don’t want to believe it then lets trade. If I’m so silly as to hustle myself why are you arguing with me?

    Note that I’m not arguing with you. So your saying the Treasury bubble has popped? Of course not. So you’re saying what we have is a bubble that has not yet popped.

    But that is not falisfiable yet. It logically could be a bubble or maybe its not. Either possiblity is logical. That rates are historically low is not proof they are going to rise dramatically in the short run.

    When it pops then you’ll have proven it. How about the bubble would have to pop soon for you to win. It’s been predicted for four years and many have lost money in it. I know, you’re going to ask me “where?” like a mental patient. I don’t know maybe Mars-near your home or is it Pluto?

    I would say two years is about the time you have left to prove it. Or maybe until we have fully recovered which I imagine will be within two years or so. So how about 2014?

  132. Gravatar of OhMy OhMy
    11. July 2012 at 04:33

    MF,

    Fact: If a bank wants to get rid of reserves (and they do every day) they sell them thus bidding the rate down to zero, not start making imprudent loans which is the mechanism you count on. It has never been observed in practice, OTOH the downward pressure on the interbank rate in presence of extra reserves happens each time. So no, banks do not make loans to get rid of reserves.

    EVEN IF someone took out a loan in cash, they SPEND the money and the recipient is sane as a rule and PUTS THE MONEY IN A BANK – reserves are back in the banking system. Banks cannot help it, the Fed cannot help it.

    Besides, even if banks really loaned out cash, by taxing reserves they HAVE LESS CASH TO LOAN OUT, great expansionary mechanism.

    YOU JUST ADMITTED BANKS LOAN RESERVES YOU TURKEY

    Yep. Saying “X is not true, besides if X were true Y is still not true” means “X is true!”.

    And you believe in the power of human logic to understand the world… It is actually self-consistent in a quirky kind of way.

    Thanks to you I got to understand why Austrians are Austrians.

    Mike Sax,
    I will be checking out here, maybe you could enjoy this fruitless discussion. Here is a post that might interest you on what banks actually lend out:
    http://www.interfluidity.com/v2/3402.html

  133. Gravatar of Mike Sax Mike Sax
    11. July 2012 at 05:48

    Oh My I agree it is fruitless trying to reason with the Major. I do it for comic relire now and again. I have read Steve in the past and will again.

    I will check out the link

  134. Gravatar of Mike Sax Mike Sax
    11. July 2012 at 05:49

    What he fails to get Oh My is that part of intelligence is the ability to reason in a concise and civil mannter-especially the concise part he has no talent for.

  135. Gravatar of Major_Freedom Major_Freedom
    11. July 2012 at 06:46

    Mike Sax:

    You don’t have to believe me Major. Again, if you’re right then you should stand to make a lot of money.

    No, I mean I don’t believe your claim you know anything about investing.

    Nobody who knows anything about investing will plead to another “Please let me go the opposite side of you if you decided to put your money where your mouth is”, as if your trade is contingent on my trade. You don’t have to wait for me. They have clearing houses where you can go long or short treasuries with other random investors.

    If you meet someone that doesn’t know what he’s doing why argue with him? Rather get in the trade. A hustler pretends he doesn’t know what he’s doing and then he beats you. You’re trying to claim that I don’t know what I’m doing but say I do. There’s really no point in that. I certainly am not vain enough to care about your opinon. If you don’t want to believe it then lets trade. If I’m so silly as to hustle myself why are you arguing with me?

    You see that? “Rather get in the trade.” “Let’s trade.”

    No, we won’t be trading directly with each other if you go long and I go short!

    This is what I am talking about when I said I don’t believe you.

    So your saying the Treasury bubble has popped? Of course not. So you’re saying what we have is a bubble that has not yet popped.

    That’s right.

    But that is not falisfiable yet.

    You are so confused. No, Mike, falsifiable propositions don’t become falsifiable only after the event once it is historical. It IS a falsifiable hypothesis that there is a (I actually think a bond) bubble. To say “hey, that proposition isn’t falsifiable….yet!!!” displays ignorance on an even deeper level.

    It logically could be a bubble or maybe its not.

    Wow. That’s what makes it a falsifiable hypothesis in the first place! In principle falsifiable statements are statements the truth and falsehood of which (or more accurately the confirmation and falsification of which, as there is no absolute apodictic knowledge possible in positivism) are not on the face of it illogical.

    With respect to the bond bubble hypothesis, like you said it would be logical if the hypothesis were confirmed and it would be logical if it were falsified.

    I have therefore made a (partially) falsifiable statement. It is incomplete. There still needs to be a time limit associated with it.

    That rates are historically low is not proof they are going to rise dramatically in the short run.

    Of course not.

    When it pops then you’ll have proven it.

    Yeah, and Sumner will have said I didn’t prove anything, that it was not knowledge or skill or anything having to do with market mispricing. That I just got lucky.

    How about the bubble would have to pop soon for you to win. It’s been predicted for four years and many have lost money in it. I know, you’re going to ask me “where?” like a mental patient. I don’t know maybe Mars-near your home or is it Pluto?

    Where? Which people? How much did they lose? You still haven’t backed up your claim with any documentation evidence.

    I would say two years is about the time you have left to prove it. Or maybe until we have fully recovered which I imagine will be within two years or so. So how about 2014?

    Why not 5? Or 10? If you say two years is maximum, and I think it might pop later on, say 5 years, then would my statement of “Bubble will burst in 5 years” be not falsifiable today, and that if keep quiet for 3 years, after which I then say “Bubble will burst in 2 years”, then my statement would be falsifiable?

    Does that make any sense to you? It doesn’t make sense to me. Both should be falsifiable. This is why I actually asked you what is the longest you’re willing to go. It was to lead you into choosing a definite time horizon, which I hope you can see, is completely arbitrary. You really just pulled 2 years out of thin air. Now, I admit, I too would be pulling a time horizon out of thin air if I selected 5 years, or any other time horizon. Since this is the case, I cannot see any justification in picking ANY time horizon. Any one would be as arbitrary as any other.

    I do not know when (what I think is) the bond bubble will burst. My thinking there is a bubble is a function of what happened in the past where choices and actions are documented. But the bursting of it is contingent upon future human choices, which I cannot predict scientifically since knowledge and actions are fundamentally not constant. I can only guess, and each guess is as good or bad as any other.

    I will leave it up to you to decide for yourself, if sufficient time has passed going forward such that my claim has been falsified or confirmed. Everyone will have a different time horizon beyond which they are not willing to go in keeping this statement as falsifiable. I am just saying here and now, right at this instant, bonds are in a bubble. There are no certain money making implications from this, and I am a rather conservative investor.

  136. Gravatar of Major_Freedom Major_Freedom
    11. July 2012 at 06:58

    OhMy:

    Fact: If a bank wants to get rid of reserves (and they do every day) they sell them thus bidding the rate down to zero, not start making imprudent loans which is the mechanism you count on.

    The overnight market, the fed funds market, is a market of lending and borrowing reserves, not “selling” reserves.

    You are simply making a value judgment when you say that the loans that would result from negative IOR would be “imprudent.” You are still not getting the argument.

    It has never been observed in practice

    It happens in practise all the time.

    OTOH the downward pressure on the interbank rate in presence of extra reserves happens each time. So no, banks do not make loans to get rid of reserves.

    You just contradicted yourself. The interbank RATE you speak of is LENDING and BORROWING reserves. “Getting rid of reserves” in the overnight market is done through lending them, not selling them.

    Moreover, the reserves banks lend to each other, can ALSO, but not exclusively, be lent to non-bank borrowers.

    YOU JUST ADMITTED BANKS LOAN RESERVES YOU TURKEY

    Yep. Saying “X is not true, besides if X were true Y is still not true” means “X is true!”.

    Haha, no. When I said you admitted banks loan reserves, it was the implication of you admitting banks are reserve constrained, because your “Y” statement, the “even if banks really loaned out cash, by taxing reserves they HAVE LESS CASH TO LOAN OUT” statement, is a non-contingent argument. There is no if there. If you admit that banks would have less money to loan out if they had less reserves, then the implication of that is not only are banks reserve constrained (which contradicts your initial claim that they are not), it also means you admitted banks loan out reserves!

    By saying to me “You can’t tax their reserves, MF! Whatever else you said, which I think is wrong, for THIS you have to believe me! Less reserves will constrain banks! They’ll have less to loan out!”

    I didn’t force you to say that last sentence there. You said it on your own.

    And you believe in the power of human logic to understand the world… It is actually self-consistent in a quirky kind of way.

    My logic isn’t that bad, I do make mistakes, but this is not one of those times. I just got you to admit banks lend reserves, indirectly.

    Thanks to you I got to understand why Austrians are Austrians.

    Yeah, we’re relentless.

  137. Gravatar of Major_Freedom Major_Freedom
    11. July 2012 at 07:02

    Mike Sax:

    I will be checking out here, maybe you could enjoy this fruitless discussion. Here is a post that might interest you on what banks actually lend out:
    http://www.interfluidity.com/v2/3402.html

    Crude analysis. Not one mention of reserves.

    Oh My I agree it is fruitless trying to reason with the Major. I do it for comic relire now and again. I have read Steve in the past and will again.

    You define “fruitless” as “I can’t get him to agree with me”.

    What he fails to get Oh My is that part of intelligence is the ability to reason in a concise and civil mannter-especially the concise part he has no talent for.

    No, that’s not intelligence. That’s superficiality.

  138. Gravatar of Mike Sax Mike Sax
    11. July 2012 at 07:18

    Nope, Major it isn’t superficialtiy which shows your limitations. Intelligence means being able to pracice an economy of words. You have an inability to do so.

    I’m not after agreement but an intelligent conversation. When you simply deny facts like that Jim Rogers lost his shirt shorting treasuries as did Bill Gross and asnwer “where?” it’s not an intelligent conversation.

  139. Gravatar of Mike Sax Mike Sax
    11. July 2012 at 07:22

    Major, you can be concise and civil without necessarily always agreeing. But there’s nothing intelligent about facilely disagreeing for the sake of or even arguing against basic facts.

  140. Gravatar of Major_Freedom Major_Freedom
    11. July 2012 at 08:07

    Mike Sax:

    Major, you can be concise and civil without necessarily always agreeing. But there’s nothing intelligent about facilely disagreeing for the sake of or even arguing against basic facts.

    You’re in no position to lecture anyone on debating. You’re not a judge.

    And you haven’t even shown how I am arguing “against basic facts.” That empty and puerile antagonism is precisely why you’re in no position to lecture anyone.

  141. Gravatar of Major_Freedom Major_Freedom
    11. July 2012 at 08:11

    Mike Sax:

    it isn’t superficialtiy which shows your limitations. Intelligence means being able to pracice an economy of words. You have an inability to do so.

    Nope. Actual intelligence means to realize when long explanations are called for, and when short explanations are called for. Unintelligent behavior is trying to put everything into superficial soundbites.

    Complex topics require long, complex discussions. You are unable to think of complex phenomena, so you believe no complex discussions are ever warranted.

    I’m not after agreement but an intelligent conversation.

    No, you’re after agreement, specifically, agreement that you know what you’re talking about.

    When you simply deny facts like that Jim Rogers lost his shirt shorting treasuries as did Bill Gross and asnwer “where?” it’s not an intelligent conversation.

    Again, I didn’t deny Rogers lost money. The fact that you continue to straw man me shows your lack of intelligence.

    I asked you to show evidence Rogers lost a bundle of money, and after three requests, you have still not shown it.

  142. Gravatar of dtoh dtoh
    12. July 2012 at 03:28

    Scott,
    It’s not possible for the Fed to lose money on asset purchases! I’ve been thinking about this. How can the Fed lose money on purchases of Treasuries? With a ZLB, the FED will never pay more for Treasury securities than the nominal future cash stream from that security (i.e. they will never buy Treasuries at a negative nominal yield). So unless the Treasury defaults, the Fed can always hold the securities until maturity and get back a nominal return which is at least equal to what they paid for them.

    In the absence of IOR, theoretically the Fed might have to pay slightly above par or the nominal value of the future cash stream for Treasury securities with coupons (i.e. at slightly negative yield), in order to induce the seller to take cash (M0), but with the Fed paying IOR, this won’t happen and the Fed will never be buying Treasury securities at a price which is above the nominal value of the future cash stream.

    It’s also theoretically possible that the FED might do all OMP with longer term Treasuries and that in the future if the Fed needs to tighten and sell the long term securities prior to maturity they would lose money. But in practice Fed holdings are so heavily weighted with Tbills and repos, that any loss on longer bonds would be miniscule relative to the overall size of the Fed portfolio.

    So the Fed can’t lose money on its Treasury holdings. It’s simply not possible. People who suggest this is a risk simply haven’t thought this out.

  143. Gravatar of Max Max
    12. July 2012 at 05:04

    The Fed can lose money very easily. It can buy t-bills yielding 0.01% and pay 0.25% on reserves. Crazy, you say? Impossible, you say? IT IS DOING THIS!

    As for long term bonds, the Fed can lose if short term rates increase. Of course the Fed control the short term rates, but we like to them of them as endogenous, right?

  144. Gravatar of Dtoh Dtoh
    12. July 2012 at 06:23

    Totally different. They are not losing money on their holdings, which are yielding a positive return. They are losing money because they decided to give banks a free handout of 25bp on their reserves. Has nothing to do with their Treasury portfolio.

    As to your other point, as I noted they could easily lose money on specific long holdings, but their portfolio is so dominated by short duration assets it would have virtually no impact overall.

  145. Gravatar of dwb dwb
    12. July 2012 at 06:31

    @ Max:

    “The Fed can lose money very easily….As for long term bonds, the Fed can lose if short term rates increase”

    this is a utter nonsense. If the Fed buys long term bonds, the “interest income” is turned back over to the Treasury and is essentially an avoided cost.

    Suppose for example it buys the 10-year 1.75% 5/2022 for 102.343 (at a 1.5% yield).

    Every year (roughly) the Fed “loses” .25% on the price but gains 1.75% in coupon income, the net of which is returned to the treasury. The treasury has avoided paying interest (net, the Fed has payed .25% on the associated reserves and turns over 1.25% in income, assuming the reserves were not converted to cash).

  146. Gravatar of Max Max
    12. July 2012 at 07:23

    dwb,
    “Every year (roughly) the Fed “loses” .25% on the price but gains 1.75% in coupon income, the net of which is returned to the treasury.”

    Only for as long as the short rate remains 0.25%. The 0.25% is an overnight rate, not a 10 year rate.

  147. Gravatar of dwb dwb
    12. July 2012 at 08:52

    @ Max:

    “Only for as long as the short rate remains 0.25%. The 0.25% is an overnight rate, not a 10 year rate.”

    The Fed plans to pare down the balance sheet well before before they raise rates. The Fed can choose when to sell the bonds and raise interest on reserve deposits.

  148. Gravatar of Max Max
    12. July 2012 at 10:51

    dwb, the Fed can’t easily fool the bond market. If the market figures that rates are headed up, bond prices will reflect that. The Fed can’t sidestep a loss by selling the bonds.

  149. Gravatar of Major_Freedom Major_Freedom
    12. July 2012 at 11:43

    Max is right, but regardless of who is right, the Fed can never “lose money.”

    It cannot “lose” what it did not own prior. The dollars they create are out of thin air. If they create 100 dollars and buy 100 dollars worth of securities, and then sell the securities later on for 90, then it is wrong to say they lost 10. They gained the securities for a time, and then they gained 90 dollars. Their initial 100 was not prior property. They just acquired 100 dollars worth of securities at no cost to themselves.

    Imagine I acquire securities from you in exchange for me blinking at you two times. Then, when I sell the security back to you, you give me one blink. Yes, I “paid” two blinks, and I only received one blink in return later on, but I did not incur any loss.

    The Fed can create $10 trillion and buy $10 trillion worth of securities, then resell them later on for $1.00, and they would still get a net gain of $1.00, because none of the initial $10 trillion came out of anyone’s pockets.

  150. Gravatar of dwb dwb
    12. July 2012 at 11:49

    @max,
    you are still missing the point. The fed controls interest on reserves and short term rates. interest rates are largely a function of expected inflation, which the fed controls too. Nominal rates are not going to shoot up 100 bps overnight, #1. Moreover, you have to look at the consolidated treasury+fed balance sheet – any interest income or loss at the Fed is just a reduction (or addition) to treasury interest expense (and in a higher rate environment, the treasury is likely still issuing debt, except in my dream world where they are running surpluses, in which case they could just retire the debt the fed owns).

    its like saying IBM lost money on stock buybacks because the stock went down. its silly and beside the point.

  151. Gravatar of Major_Freedom Major_Freedom
    12. July 2012 at 12:47

    dwb:

    interest rates are largely a function of expected inflation, which the fed controls too.

    Yesterday’s 10 year treasury auction had a low yield of 1.459%.

    Today’s 30 year treasury auction had a low yield of 2.436%.

    Would you say these yields are “largely a function of inflation expectations”?

  152. Gravatar of Max Max
    12. July 2012 at 13:53

    dwb, yes the Fed dictates the short rates. But if it uses its policy instrument as it should, then it’s as if the rate is endogenous (determined by the target the Fed is trying to hit). At least over long periods of time.

    So then the question is, what target is consistent with an average bank rate under 1.5% for the next 10 years? 2% inflation and low unemployment? I don’t think so. More like a “lost decade”.

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    26. February 2017 at 03:30

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