I’m not making an appeal to authority: in fact, I’m doing the opposite. I’m trying to use reason, logic, and common sense to make something sometimes seen as mysterious and difficult easier to understand. I do have a number of cites, but I don’t think you’re going to read them; and since I’m NOT trying to “appeal to authority” linking to a bunch of cites isn’t consistent with what I’m trying to do.
I mean, I’m not saying I’m not willing to do it: The Wealth of Nations is one. (The prose is bad, but the ideas are good.) Here’s another I particularly like. But I’m not going to go to the trouble of looking up and linking a bunch of cites, unless someone’s genuinely interested.
You are, I’m assuming - and tell if I’m wrong - referring to what I’m calling “real savings”. If so, I obviously agree. Better infrastructure, technologies, increased efficiency, education, and a better and more efficient justice system are a few of the things we could invest in, now, to improve - not only our lives - but the lives of our grandchildren.
Well, nobody wants you to be cantankerous. You haven’t objected to “real savings,” so I’ll continue to use that phrase. And I’ll use “monetary savings” if the context is unclear.
So, to attempt to rephrase myself: at a macro level, saying people should both “save money and reduce debt,” is ridiculous. Debt creates money, and repaying debt destroys it. If everybody paid off their debts, there would be no money left. If there’s no money, there’s no money to be saved. To put it differently: some people people must have debts, in order for other people to have money.
It’s not really misleading per se . . . however, it is at this point that the conspiracy theory hatchlings grow into little birdies and start to take flight.
Correct me if I’m wrong, but this contraction would only happen if everyone paid off their debts all at once with no new borrowers. We would have to imagine a scenario where everyone pays off their homes, cars, and credit cards and no new borrowers enter the picture. Otherwise, we have the same system we always have: most people go into debt for home and car purchases, many for smaller things, thereby expanding the money supply at each instant in time.
I understand, and I’m not trying to sound like a conspiracy nut here, but there is something fundamentally wrong with saying an entity has a liability when it owes nobody anything. When that is the case the organization has no liability.
I can’t run my business like that. I can’t have a liability on my books that someone else can’t collect.
If the Fed is prepared to offer me absolutely nothing for my $1 bill, then it does not represent a liability to it.
If more people pay off loans than take out new ones, then we see contraction. I’m sure it happens. Sometimes the Fed tries to make it happen, by raising interest rates (right? I’m no expert here!)
I realize the Fed generally only controls one interest rate, the one used between banks or something like that, but in practice it bubbles up to affect commercial and personal loans.
If I understand it correctly, that used to be the Fed’s primary tool, but during QE they also purchased assets as a way of injecting currency directly into the economy, or something like that. (Please correct/clarify!)
The fed controls more than that and has various levers and mechanism to control the flow of money, it gets fairly technical.
I’d rather have someone like Hellestal (or Hellestal himself) explain any of this though - he knows way more about economics than I ever will, and could explain it much better.
No one will understand it unless you clarify. But this is always the case.
I normally dislike referring to Fed-created money as a liability or a “debt” in a non-accounting discussion. I think that label tends to hamper understanding.
But words are used in context. If you ask an astronomer, they’ll tell you that metals make up around 25% of the mass of atoms in the universe. Hydrogen and helium take up 75% of the mass. And you might be scratching your head at that, until you realize astronomers use “metal” for any atom heavier than helium. Within the context of their typical discussions, that kind of re-definition makes sense. It’s more efficient for their regular conversations.
It’s okay for different groups to use words differently.
There is nothing inherently wrong with central bank accounting being strange. It is not a business. It’s a different species of thing today, a different evolutionary branch with some vestigial traits, and there’s no particular reason why a central bank monetary liability should mimic the liability of a typical business. It is trying to do different things. As long as we understand that, then it doesn’t matter what we call it. In the past I’ve given an idle thought to how I might change Fed accounting if given the chance, and my empty daydreams would not be an improvement. It would be different, but not better.
Both private debt and the broad stock of money collapsed. The problem was that national income dropped faster than the drop of private debt, so although people owed less money total, the debt-to-GDP ratio actually increased. The real debt burden was actually increasing even as private debt decreased.
Deflation can be a terrible thing.
The modern Fed is more likely to slow the increase of the broad money supply, or to slow its velocity, rather than deliberately (or accidentally) allow the money supply to decrease in absolute terms.
Yeah.
The conventional policy instrument is the interest rate. The fed funds rate in the US.
When the rate hit zero, they had to do something else. Rather than easing conditions with lower rates, they tried to ease conditions by increasing the quantity of base money as its own instrument. Hence quantitative easing.
That’s what Hellestal is talking about when he says that Federal Reserve liabilities (US currency and federal reserves) are “fictitious”. Central bank money isn’t redeemable for anything except… central bank money.
I get the impression a lot of folks think there’s something wrong or immoral or creepy about that. I think it’s a feature, not a bug. What it means is that the money supply is not constrained by anything real. It’s constrained only by the policy choices of the Fed. It means the Fed could - if it chose to - purchase every dollar of US debt. It means the US can never go “bankrupt”, so long as our debts are denominated in our own currency. And it means we don’t have to have unemployment, unless we choose to.
I don’t know much about the European Central Bank. I have the impression it’s legally constrained in ways the Fed is not. But if you look at the difference between what’s happened in Europe over the last 6 or so years, and the US, one place to look is at the Fed’s creation of new base money. It’s gone from about $800 billion to about $4 trillion. During that time, the unemployment rate in the US has declined from about 10% to about 5.3%. Over the same time frame, ECB base money has gone from 1.2 trillion euros to about 1.4 trillion. (Assuming I’m reading the chart right.) EU unemployment is currently about 11%.
In other words, the fact that central bank money isn’t “backed” by anything gives the central bank extraordinary power.
I see what you mean. If you define bank deposits and currency as money, depositing $100 into a bank account increases the total value of bank deposits by $100. But the currency itself still exists (somewhere inside the bank). So you’ve increased the value of bank deposits by $100, without reducing the amount of currency. I know that professional economists deal with this problem by simply defining “vault currency” as not part of the money supply.
I mean, my gut tells me money-changing-hands can’t possibly increase the money supply: and that’s all that’s really happened here. You’ve (at least temporarily) entrusted the bank with $100. In other words, by counting the $100 as an asset to both you and that bank, you’re double-counting it. But unless you simply don’t count vault currency as part of the money supply, there’s no getting around it: depositing currency in banks increases deposits, without decreasing currency. So I guess I have to go with the pros: vault currency (currency in banks) is simply not part of the money supply. I wish I could find a better answer than that. It feels like jury-rigging. But, at least at the moment, I don’t have one.
Absolutely; and a single valuable natural resouce like oil can be a curse in some ways. It can funnel investment away from slower, riskier activities like manufacturing which will ultimately make more of a long term difference to a country’s prospects. And it will inflate the currency so making such schemes less profitable.
But I was simply making the point about wealth of a nation only being a function of skills and knowledge of its citizens. That’s a factor, sure, and there are economies largely based on having an expert workforce…but there are many more factors than that.
I agree. I want to stress that I am not a conspiracy nut. I am not advocating a return to the gold standard. For the reasons I have posted in other threads, it would be absurd to return to such a standard.
The only objection I have is to refer to currency as a debt or liability to the central bank when it is absolutely no such liability. They owe me nothing for my $1 bill. Nothing at all. And that is fine. If I have a $1 bill I know that I can take it into town and buy all of the goods and services that $1 will buy. It is valuable to me even if it is not backed by anything but the full faith and credit of the government.
But since the Fed cannot claim to owe me anything, anything at all either tangible or intangible, it should not be on its books as a liability.
Well, hopefully someone will correct me if I’m wrong, but if we’re talking strictly about money savings, and not real savings, a country can’t have more of it’s own money than what it produces itself. Since money is produced through debt - making loans - a country can’t have more money than what it owes (not without bankrupting the banking sector). Even if you’re talking about “savings” as “money not spent”, one persons “savings” is someone else’s loss of income. In other words, if my income is 100k, and I spend 50k, someone, somewhere, loses 50k of income. In other words, one person’s monetary savings always comes at someone else’s expense.
Plus, there’s the problem of deciding what part of the money supply represents “savings”. Ultimately, it’s just a subjective decision of the person who owns the money, and that decision might change at any time. For example: car breaks down. Well, that money I was saving turns out not to be saved after all.
For a country to accumulate monetary savings, it must obtain them from somewhere outside itself. That means running a trade surplus. Which results in a flow of foreign currency into the country with the trade surplus.
But it’s still a zero-sum game, for the world as a whole. One country’s monetary savings must come from a trade deficit from another country. One way to do that is to keep one’s own country’s currency artificially low, so that your products are more competitive on global markets. It’s not the only way to do it, but it is - I think - part of China’s strategy, and some people say joining the euro currency zone has (intentionally or unintentionally) kept Germany’s currency lower than it would be otherwise.
Not addressed to me, but: I don’t really care whether the “liabilities” of the Fed - reserves and currency - are called “debt” or not. The important thing is that the Fed creates money when it buys debt. (For example, some people call it “monetizing” the US debt, when the Fed purchases Treasuries.) This is an extraordinary power, which allows the Fed, should it choose to, to stop financial panics in the commercial banking system. Now I understand the moral hazard involved here. If bankers feel like they can make money hand-over-fist by making or buying and selling bad or fraudulent loans, and then wait for the Fed to bail them out when shit inevitably hits the fan, that would be bad. Which is why I advocated against allowing banks that are “too big to fail” to exist. The Fed should always be able to punish banks that have been reckless, or engaged in outright fraud, to fail. At the very least, we need sufficient regulatory oversight over the big banks to prevent them from engaging in that conduct in the first place. But there’s a problem of regulatory capture on Wall Street. And it’s not an easy problem to fix, without the political will.
It’s true that the Fed has no real liability when you come to it with a $1 bill, but it’s also true that the Fed is not a for-profit business. It is part of the US government, and its “profits” are turned over to the US Treasury on a regular basis.
There’s a lot of debate about whether the Fed is, or has been, too “loose” or too “tight”. I’m on the side that says the Fed has a bias for being to tight. The fact that the Fed has quintupled its liabilities (currency and reserves) over the last several years, and the result has been more employment and historically low inflation, is, in my view, at least some empirical evidence that I’m right. Or, to put it differently, that the scare-mongering about increasing base money leading directly to Zimbabwe-style hyper-inflation, is off-base.
As more evidence (that the Fed has a bias toward being too tight): it’s constantly talking about raising interest rates, despite historically low inflation, and despite the fact that the most recent inflation number was 0%.
Yes. The Fed is the bank of banks: commercial banks use the Fed like we use B of A or Wells Fargo. Banks make transfers to and from each other every day through their accounts at the Fed. That means they need (even in the absence of regulatory controls) a certain amount of money in their Fed accounts, just to do business. Currently, they have way more (collectively) than they need, which is why interest rates are low.
Traditionally, if a bank needs money in its reserve account, it borrows the money from another bank. Of course, there’s interest attached to the loan. Banks base all their other loans (to people like you and me) off of that interest rate. (It’s called the federal funds rate: the interest banks have to pay to obtain federal funds.) Currently, banks aren’t even borrowing from each other, because they have so much more reserves than they need. The Fed, however, is paying them 0.25% interest on their excess reserves (reserves above the required minimum).
Anyway, the Fed controls the amount of reserves. It can increase them or decrease them at will. Increasing interest rates normally means selling assets for reserves. When the Fed does that, the reserves disappear. (Since the Fed is collecting back its own liability - the money it created when it purchased the assets in the first place.)
Federal reserves are like anything else: they respond to the law of supply and demand. When the Fed reduces reserves sufficiently, the “cost” of reserves goes up. The “cost” of reserves is the interest rate banks have to pay to borrow them. When the cost of reserves goes up, then banks must increase the rates they charge everyone else. Which is how - traditionally - the Fed controls interest rates.
It doesn’t have to do it that way: it could, instead, simply increase the interest rate it pays on excess reserves. If a banks could get - say 1% - for excess reserves, all the loans banks made would go up, to reflect the increase in the interest the bank can collect for NOT making the loan.
Personally, I’m not sure why the Fed is so eager to raise interest rates in the first place. To me, interest rates should only go up if there’s some sign of inflation. Given that there’s not, I think the Fed should leave them alone.
I understand what you’re saying, and I agree the Fed’s “liabilities” are not real liabilities.
I personally don’t have a dog in the fight as to what to call them, so long as they’re called something that distinguishes them from the Fed’s assets. I’m comfortable calling them liabilities, since I know the Fed can’t be made to “pay them off” in the way that, say, an ordinary bank might be forced to.
Having said that, the Fed can, and does, “pay off” its liabilities, by selling its assets. It’s just that the decision is unilateral. The Fed can choose to pay off its liabilities, but it can’t be forced to.
