Whether “debt owed to the public” includes FRB-owned debt seems to me just a relatively unimportant definitional issue. Frankly, SSTF-owned debt, which is not treated as “public,” seems more problematic – who could be more “public” than retiring workers?
LinusK, am I correct that you are arguing primarily in defense of MMT? If so, most important is to understand what specific policies MMT’ers espouse. Do they really believe continual deficits will not lead to inflation? AFAICT, they’re happy to just kick the can down the road and cross that bridge when they come to it.
The words “debt owed to the public” or “intragovernmental debt” are no more literal than the word “football.” If one was so literal, one would argue that the NFL doesn’t play football because the players use their hands way more than their feet.
In reality, “football” has a very simple and understandable definition. Likewise, “intragovernmental debt” is simply nonmarketable securities issued for specific purposes, principally for a couple trust funds. The reason the Fed buys “debt issued to the public” is precisely because the securities are marketable. The agency of ownership of such securities does not change the legal or financial status of the security itself, no more than if a public school system bought 30 year notes as part of its investment strategy for teacher pensions.
I’m glad we could all end up on the same page on this point.
Yes, you’re correct: but I want to add a caveat. Although I’ve studied it for a few years now, I don’t consider myself an expert, and don’t presume to speak for MMT or MMTers. (There are plenty of people who know more about it than me.) I will say I agree with most or all of what they say, and that IMO, what they say makes sense, and clarifies many issues that are otherwise mysterious - unnecessarily mysterious, imo.
As far as your specific question, I think that the debt is just a number, which represents assets transferred from the government to the private sector. Those assets exactly match the “debt owed to the public”.* The debt never needs to be paid off or paid down; and as a practical matter, the U.S. should run a deficit, most of the time.
The only way in which deficits and debt are important is the effect they have on unemployment and inflation. Generally speaking, whenever there’s unnecessary unemployment, the government should deficit-spend up to whatever amount is necessary to eliminate it.
The only constraint on deficit spending is inflation. When there’s a constraint on production (for example, because of a worker-shortage) adding money or other assets to private sector wealth raises the risk of inflation. If there is unwanted inflation (and the desirable rate of inflation is debatable), then the government should raise taxes and/or cut spending in order to eliminate the unwanted inflation.
To answer your question specifically, deficits do not lead to inflation, except in the presence of full employment. And I’m happy to kick the can down the road until there’s some sign of actual inflation. So far, despite all the deficit spending, inflation has remained historically low. If or when there’s some sign of unwanted inflation, then the government should raise taxes and/or cut spending.
I don’t think there’s anything I’ve said that contradicts MMT, and I think most MMTers would agree with it.
*By “debt owed to the public” I mean to exclude debt owed to the Fed, which I’d consider not part of the public, but part of the government.
Let’s bring closure to this whole quibble. RavenMan dismissed LinusK with “Just a note to other posters: this is such pure nonsense that it isn’t even worth typing out a rebuttal. If the idea in this post confuses you, don’t worry about it, because it isn’t how anything works.” It seems the “nonsense … isn’t how anything works” is all in reference to the LinusK error: including FRB-held debt among “debt not held by the public.”
First let’s decide whether the distinction between “U.S. debt held/not_held by the public” is important. Either it is just a bookkeeping or propaganda term, or it is fundamental to a proper and practical understanding of U.S. monetary policies.
In the former case, Ravenman’s complaint was over-pedantic to put it mildly, and Ravenman seems to concede that this was the case:
It strikes me that Ravenman concedes that the distinction is pointless. While the two different watermark/boilerplate statuses of the U.S. debt aren’t technically co-fungible, an equivalence still obtains (assuming the issuing U.S. agencies, if different, have equal credit rating).
If this is the case I’d ask impartial Dopers to arbitrate. I called Ravenman’s #35 “over-pedantic.” Can we agree this is an understatement?
On the other hand, we might suppose there is an important distinction to be made between U.S. debt held by “public”, versus by Fed agencies. In this case, we must first agree on what distinction seems relevant. Let’s not get caught up by “gold tassels on flags” or fungibility disclaimers on otherwise equivalent financial instruments.
I’d prefer my common-sense distinction. SocSec-owned debt is, in effect, owed to the oncoming rush of retiring baby boomers. In practical terms it isn’t some irrelevant intra-government debt: the SocSec Admin is just a passive middleman between the FedGov’s money creation powers, and Americans of all ages, who have been covenanted retirement funds.
So, when the practical nature of the debt is considered, the SocSec debt is debt that needs to be paid. Calling it “not held by the public” can almost be viewed as a propaganda device available to Congressmen.
And contrariwise, it’s slightly weird to say that FRB-held debt is “held by the public.” The FRB can simply hold the debt, recycling at maturity. Viewed this way, “QE money” shares many or most of the attributes of ordinary fiat money. (If FRB stops buying debt, the QE money supply diminishes. Similarly U.S. Treasury fiat money is reversed by running a budget surplus, and burning the banknotes collected as taxes.
Frankly, I think LinusK deserves more praise than ridicule. He seems to draw complaints about his economic diction (though his intuition of public/private debt often seems better than the sticklers for boilerplate). The MMT which is espouses really isn’t loony – indeed it combines ideas from celestials like Keynes and Friedman. (And, central banks may be adopting MMT ideas, if only out of desperation.)
So. What precise policies do MMT’ers advocate, and are those policies likely to end in success or failure? Answers to those questions are beyond my pay grade, but it would be far far better to focus discussion there. Not on sophomoric quibbles of terminology.
(And I don’t like the facile “Increase of money supply causes inflation. Case dismissed.” Indeed, as LinusK points out, recent in vivo experiments seem to disprove this, with commentators rushing to blame that the carefully crafted MB has become a near-useless predictor.)
Go ahead and make up your own version of the United States economy all you wish. Currency is the same as stocks, humans are the same as government organizations, businesses are the same as wild giraffes. Call me “over-pedantic” when such make-believe concepts are posted here, but that still doesn’t make any of it factually correct.
No, I don’t agree FTR. If you use non-standard definitions, you need to highlight that. Open market operations do not affect the level of government debt: they merely transfer it between the public and the coffers of the Fed. If you want to say that debt owned by the Fed, the Social Security Trust Fund or a federal railroad retirement fund is best thought of as effectively retired, you need at least to state that explicitly. I personally find that sort of definition to be a little misleading, since the Fed can and does routinely sell bonds back to the private sector as well as buy them.
Ravenman: to be fair it can sometimes be useful to work with a non-standard definition. But if you do that you have to make that clear. Otherwise you are likely to be perceived as advocating falsehoods or nonsense.
The “non-idiot” reason for this is that raising taxes and cutting spending (austerity) generally has a negative effect on economic growth. People have less money to spend and unemployment increases since “cutting spending” means laying off government employees. So the immediate effects of stalled growth and unemployment are deemed to be preferable to the longer term effects of high debt.
Look at the current state of European countries that imposed austerity measures as a comparison.
Would you rather make a manageable monthly interest payment for the rest of your life or have to come up with a million dollars right now?
What makes national finances more complex than creating a household budget is that your household can’t print it’s own money to be used as legal tender for external transactions. A household also does not typically have access to natural resources or means of production that make the household inherently valuable. And a typical household does not have the fire power to prevent debt collectors from confiscating those resources.
The United States is able to ring up massive debt because we have the largest economy in the world (or possibly second largest if you count all the nations of the EU as a single economic entity). What that means is the US Dollar is accepted around the world because people always expect that there will be somewhere that the dollar will be accepted.
Which is not to say that massive debt doesn’t cause problems.
Yes, at some point, all the depositors would theoretically need to be “made whole”. However, unless there is a run on the bank, they would not need to be made whole all at once at the same time. Therefore the bank only needs to keep enough cash on hand to pay people as they need it.
If you deposit $100 in a bank and they lend out $80, the total value is still 0. The bank has a $100 liability (their promise to pay your $100 back) = $100 in assets (the lendees promise to pay back the $80 loan + $20 in cash reserves on hand). More money is created as banks loan out portions of the original loan, but ultimately the total value of the money lended out should reconcile against the amount paid back.
Where banks (and by extension the economy) runs into trouble is when a significant number of people can’t pay back their loans. The bank doesn’t have enough money to cover deposits or pay back loans and fails.
That is essentially what happened to AIG, Lehman Brothers and Bear Sterns. They purchased massive amounts of what is essentially bad mortgage loans bundled up into complex packages that made it difficult to impossible to asses the real value of those loans. When people defaulted on them, these companies were left with assets that were essentially worthless and either went out of business or required government bailouts to stay afloat.
Septimus, you’d earlier raised a question about the social security trust fund.
There have been any number of arguments about whether the trust fund “really” exists.
The MMT answer, I think, is that it does not matter.
To show why, please consider a hypothetical:
Suppose there’s a world where there’s no money. We’re going to divide the people in this world into two groups of people: group #1: producers (people who make goods and services) and group #2: non-producers (people who don’t make goods and services).
In the beginning, everybody is in group 1. Then, some people retire. When they retire, they join group 2. Assuming the people in group 2 are going to eat, live indoors, go to the doctor, etc., some of the production from group 1 has to be transferred to group 2.
That means group 1 must either (a) consume less, or (b) produce more (or both).
Pretend more people retire. Then group 1 must consume even less, produce even more, or both.
Now let’s assume everybody retires. Then everybody dies.
Now let’s bring money into the equation. Absolutely nothing changes. When some people retire, group 1 must consume less, produce more, or both. When more people retire they (group 1) must consume even less, produce even more, or both. When everybody retires, everybody dies. It doesn’t matter, when everybody retires, how many billions of dollars there are. Every single person could be a billionaire: they all still die.
Whether the government, or anybody else, sets aside pieces of paper to “pay” for retirement, makes absolutely no difference, because goods and services come from people doing work. Money produces nothing.
(As an aside, if you’ve read Robinson Crusoe, you might remember a passage where he finds a stash of gold and money, and realized it’s absolutely worthless. The reason: money doesn’t do work. It doesn’t build shelters, or catch fish, or do anything useful at all.)
To go back to the real world, suppose the government has a huge warehouse with mountains of $100 bills, set aside to pay for retirement, called the “Social Security Trust Fund.”
Now suppose the government doesn’t have a warehouse, but does have the ability to print any amount of money, whenever it wants. (Which it does.)
Why in the world would the government bother to build a warehouse, fill it with pieces of paper, and guard it for years, when it could just print the money as needed?
What difference could it possibly make?
People are incredulous, or get mad, when I say things like this (or at least, they have in the past). But it’s absolutely basic, fundamental economics.
The first sentence of the first page of Adam Smith’s “Wealth of Nations” is: The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.
He continues:
Smith was trying to debunk mercantilism when he wrote “The Wealth of Nations”. But there’s some new “ism” that’s grown up since then. I don’t know what it is, or if it has a name. But it involves a sort of fetishism of money: a belief that money has powers or abilities money doesn’t really have.
The only way to “save” for retirement (as a nation) is not to set aside pieces of paper: it’s to spend money on things that will make future generations more productive; so that the goods and services retired people will need when they retire will come from increases in productivity by the people who still work, rather than from bankrupting them.
I basically agree with this, but I’d put it in stronger terms.
It’s like we’re camping and we got up early and we’re all watching the sunrise and talking about it, then some asshole steps up and says, “You’re wrong! The sun doesn’t rise! The earth is rotating!” It might give a nice tingly feeling in the nipples to be astronomically correct, and given a different discussion, it might even be beneficial to speak from the perspective of the solar system instead of from the perspective of having two feet firmly grounded on the earth.
But you know what? Sunrise isn’t “wrong”. It makes sense. For many discussions, it’s all we need. To claim a different perspective on the world might be beneficial is one thing, but it’s something else entirely to claim that others are “wrong” for using the standard and intuitive language. That’s just unchecked ego jerking off all over the campsite.
I basically agree with this, too.
But let’s be clear. There have in fact been outright falsehoods and nonsense. We have seen the equivalent of the-moon-is-literally-made-of-cheese-and-astronauts-should-mine-it-for-nutritional-value sorts of statements. Hyperliteralism isn’t going to be helpful when some of the given statements are hyperliterally wrong.
LinusK: With respect, if you haven’t read a standard macro text, I’d recommend you do so. You can buy one used for $4 including shipping here. Old edition textbooks are preposterously cheap.
Sun rises vs earth’s rotation is fairly a matter of perspective depending on the position of th observer. There is no perspective at all that results in QE retiring government debt. I cannot figure out why some are so upset that I have asserted a verifiable fact. It’s like saying that some people may think that the Social Security Administration mints pennies: it’s not a matter of opinion, it’s just fucking wrong.
Another read won’t help. The Narrative is already ensconced.
If I was ambitious enough to run a computer simulation of central bank policy and its effect on debt sustainability, then the way to model the real debt burden of the government would be to “retire” from consideration any debt that the Fed acquired, for as long as they possessed it.
Doing this, or something mathematically equivalent to this, would be the only way to get accurate results. After expenses, the Fed remits its profits back to Treasury. Interest payments that go to the Fed, and then boomerang directly back, don’t convey any importance in broader markets. I might phrase it differently but I’d personally say there’s a legitimate perspective here.
The one that had me rolling my eyes the most was this:
This is like claiming that elephants are an unnecessary fiction. A good argument against their being a fiction is that they are real.
I’m 93% sure I know what he was trying to say. But it’s a little difficult to care about his garbled intended meaning, since his deep enthusiasm for his FreshNewPerspective on economics has led him to deny the reality of elephants.
It’s very simple. When the Fed purchases Treasuries, it creates money that it credits to whoever previously owned the Treasuries. That’s newly created money, that came from “nowhere”.
Since Treasuries represent money owed to the government, this is an example of one part of the government (the Fed) acquiring debt owed to the government. In other words, the government is buying back its own debt (with newly created money). The Fed can hold the Treasuries for as long as it wants, up to and including forever. Or, it can sell them, if it wants.
When the Fed purchases Treasuries, it reduces the amount of government debt owed to the non-government sector of the economy.
Some people refer to it as “monetizing” the debt.
When QE first started, some people predicted catastrophe. Nothing bad happened - in fact the economy improved - so they stopped talking about it.
Elephants are deeply non-fictional. They carry the heavy burden of reality.
The “conventional story” [of elephants] might be that they reproduce with pixie dust and duct tape. Such a conventional story would be, unfortunately, wrong. They reproduce by getting busy, same as other mammals. Now if I’m the amazing biologist who has found out that there’s no duct tape involved (still not certain about the pixie dust), I might want to point out that the conventional story about elephant creation is incorrect.
What I’m saying here is that there is an important difference between these sentences:
Elephants are a fiction.
The “conventional story” [of baby elephant creation] is a fiction.
There is a reason why I distinguish between those two sentences. The reason is that one sentence is true, and the other is not.
I always care about this distinction in my own posts. I don’t always care about this distinction in other people’s posts. If the context is clean, then I might not necessarily be interested in correcting the language of other people. If it’s obvious what they mean, then whatever. I can work with it. I won’t repeat their mistake if I can help it but there’s also no need to attack somewhat imprecise language from others if the deeper meaning is clear. Just a waste of time.
However. If another poster is making a giant sloppy mess with hyperliteral language as their justification, and then they can’t even manage to make literally true statements themselves, then there is obviously a gigantic messy problem. Hyperliteralism doesn’t work if it’s half-assed.
Unfortunately, I think the people are getting the leadership they deserve.
For an example, take a look at what happened recently when Michigan tried to raise money to fix its roads. Michigan roads suck. Every last Michigander, probably without exception, agrees that our roads are in horrible shape. So lawmakers put a proposal on the ballot to raise the sales tax by 1% to raise money for road repair (hoping for a permanent funding solution, not some one-off payment that will just kick the can down the road for another year.) The proposal was resoundingly crushed. I guess we want good roads, but not badly enough to actually pay for them.
If you said: “The conventional story of how banks create money is an unnecessary fiction”, then obviously I would agree with that particular sentence. I would agree because that particular sentence is true.
But what you wrote was: “Fractional reserve banking is an unnecessary fiction”. That is a very silly and very wrong sentence. No matter what dumb stories people believe about elephant procreation, the elephants themselves remain very real creatures.
There are, of course, several other errors you’ve dropped into this thread. But thankfully, at this point I doubt any other reasonable reader of the thread will be confused by what you say.
The technical distinction between “debt held by the public” and “debt not held by the public” is based on a boilerplate distinction which is largely uninteresting. As I explained earlier, SSTF-held debt is, in practical terms, more “publicly held” than FRB-held debt. To quibble that LinusK hadn’t memorized the technical distinction is to grasp at straw.
Hellestal, I ask you to reread #35. Don’t think about anything else LinusK may have posted.Examine just the two sentences quoted in #35, and indicate whether the criticism was excessive. The only error cited here was that LinusK had misremembered the technical “held by public” quibble.
Warning: This is a test. If you give an answer I consider wrong, I’ll know how much heed to give your future opinions.
It’s too bad LinusK uses terminology incorrectly, and doubly bad he posts gibberish about fractional-reserve. I would welcome a detailed discussion about MMT policies, but this thread is sidetracked.
It is amusing how often YouTube economics falls into rants blaming fractional reserve. Usually this is followed by rants comparing 2% inflation with Zimbabwe. By that time, since comic relief is all that’s left, I’m hoping the topic switches to the quadrillions of dollars the Rothschilds have squirreled away in Area 51.
