You are failing to make any distinction between reserves and excess reserves, which are not the same thing. You are also, incidentally, failing to make a distinction between monetary base and reserves, which are not the same thing.
When deltasigma writes a post about excess reserves, it is inappropriate to respond with the definition and characteristics of the monetary base, or of total reserves. The poster was not talking about the monetary base or about reserves. The poster was talking, specifically, about excess reserves.
I’m not disputing the factual accuracy of what you were saying, based on the definitions you were using.
I just think you were misreading Chronos. Two people talking past each other, is all. I’m nearly certain Chronos was talking about “investments” in the sense of the government making purchases. Here is his original post:
Emphasis added.
He’s clearly using “investment” there to refer to people making decisions about government spending in the second paragraph, not the people who are purchasing bonds referred to in the first paragraph. He said the government was borrowing money to put that money into “investments”. That means the investment is the government spending, not the Treasuries that are issued. You reply:
To which both he and I reply: That isn’t relevant.
Just because you can’t measure the return on the investment for such fuzzy things is not relevant. The return exists, despite the impossibility of measurement. Which is exactly what Chronos said:
Precisely right.
Government spending has some value as an “investment” (broadly defined). I’m not saying his posts were easy to understand or anything. Just that I’m fairly confident you were misreading him. From his very first post in this thread, he was referring to government spending as the investment, with the investment made worthwhile by how cheap credit is at the present time.
Okay, I seem to have been misreading you in this case. Sorry about that.
I agree that people get passionate about this stuff. Giving the amount of suffering at stake, I think a certain amount of passion is justifiable, though not necessarily helpful with communication.
I would make one other point: Despite the possible inadvisability about passionate rhetoric, a person who uses such heated rhetoric is not necessarily incorrect. One of my least favorite arguments in the world is someone pointing out an angry newspaper columnist, and claiming that his anger means he’s not worth listening to. You didn’t do anything like that, but it’s a common fallacy in these sorts of discussions, and I figured a bit of prolepsis was in order.
Hellestal: I think enough people so far have defended Chronos such that if he wants to defend himself at this point, he should. Otherwise I think I’ll start shopping around for my own online bodyguards.
You ever get that itch you just can’t stop scratching?
A lot of us here have that itch. It’s the itch of someone else having made a simple, even completely understandable, mistake… without having admitted making that mistake. Someone is wrong on the internet. For instance, a completely understandable mistake in misreading another person’s slightly confusing post. Many of us here want to scratch that itch.
Ultimately, this has nothing to do with Chronos. It has to do with you.
You’re new here, and it’s worth figuring out what kind of person you are. I wouldn’t be bothering with this if you were a poster with an established history of intellectual cowardice. Such a poster has also appeared in this thread, but they’re not worth the effort. You’re an unknown still, which means it’s worth sounding you out. We would be satisfied – or at least, I would personally be satisfied – the itch would go away immediately, if there was an acknowledgement of error. Such a little thing, both the easiest and hardest thing in the world. Errors are permanently on record here. And when people refuse to admit their mistake – even if it’s on, yes, such a small and seemingly insignificant topic – well, that is also permanently on record. I personally can’t help thinking that if a person is unwilling to admit a small insignificant error, there’s no way in hell they’ll ever admit a big important error.
Hellestal: You want me to admit that I misunderstood. I’ve read that several times and in the context of the discussion I’m not convinced I did. That’s why I’m not going to discuss the discussion.
If you believe I don’t know what I’m talking about, that’s fine. It’s still a free country - more or less.
Your argument depends on the notion that the government needs to sell Treasuries to private investors (it doesn’t). The government can finance its debt itself. It’s doing it now.
The fact that we can do that (unlike Spain or Italy or California) is why US debt is so safe, and interest rates low. It’s ironic that the fact we don’t need to sell debt is why our debt is in so much demand, but then, lenders have always preferred to lend to those who don’t need it.
Anyway, there’s no danger of US debt going unsold. Or selling at an interest rate different than the one corresponding to the safest possible investment. The Fed controls what that interest rate is, not investors.
The government can create inflation by borrowing too much/printing too much money. It can also create unemployment by borrowing/printing too little. Since unemployment is a problem, and inflation is not, the government should be borrowing and printing more, not less.
Please explain how the fed does this. Aside from setting the fed funds rate, the only other mechanism with which I’m familiar is the FOMC and their responsibility is spelled out in their name ‘open market committee.’ They only execute trades to buy and sell securities so as to expand or shrink the money supply.
So if there are other powers the fed has directly over rates, I’m interested in learning.
The point that I was making is that it’s the Fed that controls the amount of reserves in the banking system, not commercial banks. He responded by saying that excess reserves are those above what’s required by law.
He was implying, I guess, that if the reserves are not required by law, then the banks can somehow get rid of them. They can’t.
You’re right that monetary base is also currency, but it’s bank customers who decide how much base is held as currency, not banks.
If you would, I would like a more detailed explanation for this proposition. Sure, SOME of our debt is financed by the social security trust fund and the like, but to borrow money, you don’t borrow from yourself. We sell it to private investors and foreign governments. Should those investors find out (whether immediately or over a period of years) that we are just firing up the printing presses with our currency, they will demand higher interest rates.
Which, as Chief Pendant says, will cause us to print more money causing higher interest rates and more money and, sorry babe, it’s Chinatown…
I think a lot of confusion arises from most people not understanding what the nature of the fed is and how it operates. What I often see is that people think that the fed is a branch of the govt. In fact, it is an independent body that represents both the interests of private member banks as well as the govt. Here is part of the wikipedia intro.
Emphasis added.
So when the fed buys securities such as treasury bonds, even though it does so with money denominated in USD that it creates out of nothing (ex nihilo), it’s not the same as the govt financing it’s own debt.
I admit that it’s a pretty fine distinction and in some ways could be considered a distinction without a difference, however we also have to consider the fact that nearly half of all US public debt is held by foreign investors. So even if some of the debt is ‘monetized’, that’s certainly not true for the vast bulk of it.
Oh, please. This is itself standard confusion. The Fed is as much a part of government as independent regulatory agencies and in the same way. It was created by Congress. Its Board of Directors is appointed by the President. It works by and for the government. As your Wiki link notes, the Fed does have private components, but it itself is not private. That’s standard CT nonsense all over the Internet.
The Fed is the central bank of the United States of America. There is no such thing as a private central bank in this century. Everything the Fed does is as a representative of the government.
If it makes you feel better, deltasigma, I think Hellestal’s understanding of my post is accurate to what I intended to say by it. And that’s about all the more defense I feel like bothering with, since any more would amount to just repeating things already said.
Look, people need to stop reading into what I say. Since I come from a finance background (although that’s a long story), I’m sure I have my biases. But I’m willing to examine those. So don’t pounce on me because you THINK i’ve said something untoward.
What I said was that they are independent. I referenced the wiki entry which covers everything you’ve mentioned and more. But my point was that they make their policy independently. Congress and the Executive can bitch and moan about fed policy all they like, but can’t do a damned thing about it - at least in the short run. They can change the laws, but that rises to a completely different level.
If multiple people persist in “misunderstanding” what you write, then perhaps you should check your words before posting them.
This is not snark. I have ten years’ experience in watching new posters insist they are being misread when in reality they haven’t learned how to frame their words for this peculiar medium.
I think we’re all responding completely correctly to the words you post, which is the totality of what we have to work with. You can’t win this by dismissing our comments. You’re the one who will have to adapt.
Sigh. I’m not trying to win anything. You see - perfect example of what I’m talking about. Where exactly did you read that this was my objective?
I admit I’m, ‘less than clear’ at times - and even I know I’m probably being generous there. But that’s usually the result of assuming a certain level of familiarity on the part of my reader with the subject. It’s an implicit assumption, not a conscious one and I try to compensate for that but I don’t always succeed.
So I understand the criticism and agree up to a point. However I think that you need to drop the assumption that I have some agenda here. As hard as it is to believe, I don’t.
Uhhh, OK. If the general consensus seems to be that I what post isn’t helping people understand how the financial system and economy work, I’m happy to spend my time doing other things. I haven’t invested 10 years on a forum such that I’d feel like I’d be walking away from anything.
The power the Fed has to create base money to purchase bonds is all it needs to set interest rates.
When reserves increase it puts downward pressure on all interest rates, including government debt. Banks and their customers look for ways to invest the funds. But no amount of investment reduces the amount of money created. The money only changes hands. Only the Fed can do that. The banks merely swap the funds back and forth.
Meanwhile, all that swapping chases yields down, until the Fed changes policy, or they go as low as they can go.
Treasuries are the safest most liquid investment possible, so their prices rise the most.