This is, by the way, why I think this is the best damn quote in the entire thread:
Exactly right. It’s a huge huge mistake to look at just the day of purchase, because so many interesting things happen before and after.
We might look at a news headline, The Fed bought 85 billion dollars of bonds this week, and think, eh, no big deal. They took 85 billion dollars worth of assets out of the economy, and they pumped 85 billion of cash into the economy. Perfectly offset. No big change, no change in balance sheets. Ah, but what if those very same bonds had been worth 80 billion dollars just last week? The result is both a huge change in balance sheets and a huge change in interest rates. One goes with the other. If we’re blinded by a narrow accounting or regulatory view and look only at the day of purchase, if we look at the single snapshot photograph, the banks lose one asset and gain another asset of equivalent value, and it looks like nothing happened. But if we’re looking at the moving picture, then we see clearly that Fed policy announcement and subsequent purchases have potentially made a massive change on general financial situation in the country.
The same goes for regulations. What might look forced on the day of purchase is not necessarily so.
Like I said, I might be mis-remembering some CD from a few months ago, but we might be train-wrecking on whether we call that ‘voluntary’ or not. I do seem to recall that the fed can control liquidity by requiring buyers/sellers for what they wish to sell/buy. But it’s limited to national banks (again, it’s hazy) and could be fired off if there’s shortage of either. But I won’t die on that hill.
The one issue I would take with your argument is a very basic one. It assumes that there will be a buyer/seller for what someone wishes to sell/buy. Sure, there may have always been in the past but that might not always be the case. Hell, if there was, the Fed wouldn’t have to be buying all those bonds because someone else would be doing so already. And I have no doubt at all that - if there were buyers out there for an extra 85 billion each month - the Fed would cheerfully stop what it’s doing.
While I agree that Little Nemo’s statement is worthy, the above might knock it off the pedestal.
The single mistake I see most often in the world - from clients, random people, Internet posters, politicians and (God help me) reporters - is the confusion of cash with wealth/assets.
Yes - whenever any resource needed for production becomes sufficiently rare, inflation is the result. So, for example, if software programmers re rare, wages for programmers go up.Labor is the principle resource needed for production, but there could be others. A shortage of some other thing needed for production - oil - for example, could also cause inflation.
I don’t agree with that at all. And I don’t see what that has to do with what I said above, that you quoted.
I don’t think MMT says you should inject money into the economy Wally-nilly. It says concerns over the government running out of money are misplaced, because it is the source of money. It also says, if you want a fully-functional economy, you should deficits as a normal fixture. They are not a bad thing, necessarily, but usually a good thing. And it says that there is some right amount of sovereign government debt. It says that when it’s too low, the expected result is unemployment. When it’s too high the result is inflation.
Since unemployment is too high right now, and there is little inflation, MMT suggests deficits should be higher right now. Not that they should always be higher, no matter what.
As a sort of real world comparison, the US recently recorded some of the highest deficits ever after the most recent financial panic. Europe, on the other, reacted with budget cutting. America’s situation has improved, Europe, not so much. Some parts of Europe are now experiencing 25% unemployment. A complete utter waist of the most important resource those countries have - their people.
I try not to get a dick about definitions, so my apologies if that’s where I misread you. They are market makers, and they do have responsibilities to the Fed because of that. They can’t refuse certain transactions. But I’m more likely to focus on big picture stuff, and in that sense, it’s still a market, and the Fed will end up paying market prices. This arrangement is a convenience, nice but not necessary. The market makers for Treasuries are middlemen. They can easily unload whatever they buy, or repurchase anything they’ve sold, and (normally) at a nice commission for facilitating the transactions.
But if I were undisputed king of the Fed, I would give at least some consideration to dismantling the entire primary dealer system. It’s not actually needed.
Well, it’s not just a matter of whether buyers exist. There are always potential buyers. It’s a matter of price. Do people want to buy Treasuries at a price – with its corresponding interest rate – that would be beneficial for the country? More than that, what about the expected interest rate out into the future? More than that, what about the expected amount of monetary base out into the future? More than that, what about the expected flow of existing money out into the future?
But a significant issue is that when we spend tax money, it generally gets collected within the United States and spent within the United States (foreign aid is pretty insignificant). But when we spend borrowed money, we end up eventually sending a significant portion of the money that’s collected within the United States out of the country. That’s a real asset drain in our national economy.
Well, in my work I - pretty much by definition - need to focus on the small picture (for certain values of small).
Not that I don’t agree with you about the primary dealer system. It, like so many other things, feels like a hangover from a bygone age. Something largely obsoleted by increases in technology and communications. There was a time when bonds were sold to primary dealers in person. This necessitated a limited number of such and placed a small amount of men in a position to control the price of bonds through the possibility of collusion.
These days, though, it would be E-Z for the Treasury to bring a new issue out to every Tom, Dick and Harry if they wished. There are certainly structures in place that could put those bonds out there on the market if needed.
Still, not to harp on it, but you mention ‘always potential buyers’. I admit that I still find that to include the ‘always buyers’. You’re assuming that at some point, at some level, any bond is salable. I think that during times of high economic stress that’s not necessarily true. Certainly countries like Zimbabwe found that no matter what they do, no one wants their sovereign debt and they ended up abandoning their own currency and adopting the US dollar for government transactions and allowing several other currencies to be used for day-to-day transactions.
I’m aware that the US Dollar holds a special place in world markets as a de facto reserve currency. But that’s a situation that could change in the future. Both the growing strength of other currencies and the insanity of the American political arena are bringing into question its reserve status.
Government produces roads, laws, law enforcement, courts, money, and education, in addition to defense. Are you saying none of those things create real wealth?
In addition, our economy wastes the productive potential of millions of people, completely - people who are unemployed. Even if you thought that soldiers produce too little, isn’t producing something better than producing nothing?
Respectfully, it sounds like you should either take coursework in 1) macroeconomics and 2) Money and Banking or if that’s not convenient purchase textbooks in the same. Old editions are cheap at Amazon. You appear to have a real interest in this, and might enjoy it.
Let’s see if I can remember my macro identities.
Y=C+I+G+(X-M)
S=Y-C
So:
National income = Consumption + Investment + Government + Net Exports
Savings = National Income - Consumption.
Solve:
S= I + G + (X-M)
Private savings can be mopped up by extra investment. That’s hard during a recession, but routine during economic prosperity.
Incidentally, check this one out. Set G equal to zero for simplicity and re-arrange the above:
S-I = X-M
The gap between savings and investment is equal to the trade surplus. So if we are running a trade deficit, then private investment exceeds private savings (and therefore we are receiving capital inflows from abroad). If we are buying more of their goods than we are selling them, we must be selling more of our bonds than we are buying from them.
I dunno. It’s one thing if China owns, say, Google. But if they own $3 trillion of foreign reserves denominated in foreign debt? Meh. If I owe a bank a million dollars, it’s my problem. If I owe a bank a billion dollars it’s their problem. We need to think through the additional leverage this gives China. For the moment, it does nothing: if China decided to sell their dollars, that would lead to a weakened US currency which would help the US exit its current downturn. Admittedly, if China did that during good times, a weakened US currency would be inflationary, and would prompt Fed tightening. But it would also make Chinese exports less competitive: their leverage over the US due to the promises we have made to pay off these loans in dollars is pretty modest.
Here’s a recent example. The US just threatened to default on its debt, which caused some consternation in China. So the foreign ministry issued a press release. And that’s it. Think about what a bank would do if a company started to threaten default. Then compare that to China. Faced with a serious challenge to the value of their bonds, the Chinese were pretty powerless. Again, their holdings of treasury debt are mostly their problem.
If the US borrowed funds in foreign currency, that would be a different matter. But the US government doesn’t do that.
National saving is Y - C - G. You have to subtract out government spending, too. If you include international trade, it simplifies to I + NX: national saving is the sum of investment goods created and the securities gained/lost from selling products abroad/importing products from abroad. A single country’s national saving is a mixture of real investment goods created plus paper securities gained from trade. But when we sum all countries together, the national saving of everyone together is all tangible investment goods created, real physical stuff, and the paper securities traded cancel out.
Private saving is disposable income minus consumption, (Y - T) - C. This can “simplify” to I + G + NX - T. As you say, private saving can be increased with more investment goods created. It doesn’t depend solely on government spending.
Public saving is taxes minus government spending, T - G. You get national saving by adding public and private saving, and the taxes and government cancel out, leaving again only the investment and the net exports. You were using the national saving identity, rather than splitting it into public/private pieces, and frankly I think that’s the more useful way of doing things. Splitting it into two often leads to confusion as shown in the OP.
Not that it’s very important, but, unless you’re talking about currency (which does actually leave the country) dollars owned by other countries stays in the United States. The Bank of China has an account at the Fed, where its money is deposited. It can do what it wants with that money. For example, it could use it to buy Treasury bonds. In which case, the money is transferred to the Treasury, and the Bank of China gets the bond. Or it could use it to buy a factory, in which case the money still stays here, and China gets the factory. Or China could exchange the dollars for other currencies - Euros, for example, in which case they’d own a deposit with a bank somewhere in Europe. But the US dollars still stay here. Not that it really matters “where” they are, exacty, since really they’re just bits on computers. But the money’s still in a US bank, even if it’s owned by people or institutions in other countries.
But the point is, even if China, or any country, owns too many dollars, and is simply collecting and not using them or anything (like buying US goods and services) it’s really not a problem for us, because we - meaning the US - control the amount of dollars in existence. If China wants to accumulate dollars, without using them or anything, and that’s a problem (because we’re left with too few) that’s a problem only of we willfully choose not to make more dollars (for our own use) to make up for whatever dollars China has accumulated.
I’m not talking about defaulting on the debt. I’m talking about what happens when we pay it.
Let’s say the government builds a bridge and the bridge costs ten million dollars to construct. Now if we pay for it directly, the government collects ten million dollars and uses that ten million dollars to pay for the construction.
But suppose instead, the government borrows ten million dollars to pay for the bridge. The bridge is built but the government then has to collect twelve million dollars to pay off the ten million dollar debt.
We just spent an extra two million dollars for the same bridge we could have had for ten million dollars. I can’t see any economic benefit we gained out of that. And a significant portion of that money was sent overseas so we can’t even claim the extra two million dollars ended up in America anyway.
I realize dollars are just currency. But they do have a relationship to actual wealth such as property or labor. If there was no connection then dollars would be worthless. So when China or other countries receive dollars, there’s a genuine transfer of American wealth out of the country.
If I’m understanding you correctly, you’re saying the wealth that’s actually leaving the country is relatively minor - that most of the wealth stays in the United States and just changes ownership to a non-American. That may be true but I feel that ownership does represent a flow of wealth. At some point, that non-American owner is going to want to express his wealth and that involves real property. A Chinese investor who builds a mansion in Chongqing represents an American investor who didn’t build a mansion in Houston - there was a mansion’s worth of wealth that moved from America to China at some point.
Maybe, maybe not. Don’t take this personally, but this comes up often enough that it’s something I think should at least occur to people and that is that due to inflation, a dollar you give someone in a year or 10 years isn’t the same as a dollar that you give them today. So in fact, with adjustments for inflation, that bridge may actually end up costing less than $10M if you take all of the cash flows involved and adjust them for the same base year. Granted, it’s not likely, but it’s possible.
That’s not the reason for the example though, it’s to highlight the fact that that there are certain benefits to having the bridge now rather than x years from now - i.e., however long it would take you to save the money you would need. If you had to wait, there would be a quantifiable amount of lost business, productivity, lost commerce, etc. that you could attribute directly to not having the bridge for that period of time.
So you have to agree that getting the bridge sooner is clearly a good thing with tangible benefits. If the only way that can happen is to borrow money, then the only legitimate question is if those benefits clearly outweigh the likely cost of doing so.
One last point is the fact that the federal reserve has for some time now, decided that it is not possible to have 0% inflation and in fact the current fed target is between 1-2% I believe - although I would be looking to see if Yellen doesn’t start talking about bumping that up until employment numbers start to show some real improvement. Anyway, the point is that we have an officially stated, institutionally mandated policy of low-grade inflation. So countries that borrow from us know that. And in the case of a country with a strong currency like China, that situation is going to be even worse since it would have been likely that their currency would have appreciated vis-a-vis ours anyway. Of course the Renmimbi doesn’t trade on the fx markets, but let’s skip that issue.
So why the hell does China still buy this shit? Damned if I know. Having foreign reserves for their trading interests is certainly part of it, but I have to wonder how many trillions that really requires. Probably a bigger issue is having some sense of influence. IDK.
Unless you’re arguing that for policy reasons, the Fed is paying significantly above market value, I don’t see the massive change. Certainly the value of the bonds that the Fed is buying can swing significantly in a week, but the same is true of the cash the Fed is injecting in its place.
You’re omitting the offsetting fact that borrowed money is coming in from outside the country in the first place. It comes in from foreign lenders today and gets paid out to foreign lenders later with interest. As deltasigma points out, the time value of money offsets the payment of interest, by and large, so there isn’t a net drain.
Another way to look at deltasigma’s point: Alternatively, the government could decide not to build a bridge at all and instead invest the ten million dollars, such that in a few years it has twelve million dollars. Opting to build the bridge thus costs the government twelve million dollars in the end, whether it’s built with ten million dollars of tax money today or twelve million borrowed over time. There’s no extra two million arising from one path and not the other.
Professional investors aren’t dumb. They understand all the factors like inflation, time value, and opportunity costs. So when they buy bonds they expect a future payment that will include all of these factors and be above and beyond them. Otherwise they won’t invest.
I agree that ultimately the wealth of a nation is the productivity of its people. It’s one of the reasons why I think so much hand-wringing over deficits and debts is misplaced. Unemployment is a real problem. The debt is not. Unemployment is a real problem, because unemployed people produce nothing.
I disagree that the huge problem is Americans buying a Chinese goods. I agree it’s a problem for China, maybe, but not America. If China is intent on acquiring US dollars, I see no reason not to let them. Our ability to produce dollars for them to hoard is unlimited, and cost-free. Producing electronics and toys for us, on the other hand, requires investment in real resources. Moreover, by sending all that shit to is, that means they don’t get to enjoy it themselves.
I agree making American products competitive is a great thing - in and of itself. But I don’t think that’s why we have we have trade deficit with China. China, I think, manipulates the relative value of its currency by purchasing purchasing dollars. That makes its currency cheap, and creates an international glut of Chinese currency. That yuan, in turn creates a demand for Chinese products.
There’s no reason, in other words, why we can’t both enjoy cheap Chinese products, while continuing to grow our own economy as well.
I’ve got a copy of Mankiw’s Macroeconomics, which I’ve read twice. Ive spent a lot of time reading about MMT. Some of the leaders in the field include L. Wray Randall and Stephanie Kelton, at UMKC, and Warren Mosler. I’m not pretending to be anything but an amateur, and I do appreciate the effort anyone might might make to explain something to me he thinks I might not understand. I do post these threads because I like to talk about this stuff, and because I find that talking about it helps me understand the subject better.
However, I do understand this to be a discussion board, where even people who aren’t absolute experts are allowed to post. I say that respectfully.
I am an expert, of a sort, in the actual field where I work, and sometimes I correct people (respectfully) when they’re wrong about something, and sometimes I don’t. But I don’t take the position that no one’s allowed to post about that particular field unless they know as much about it as I do. That would be sort of silly, and self-defeating, since they’d continue to post about it anyway. I say all that respectfully, and not necessarily to you in particular. Just that my preference is to talk about the subject, rather than about me.
Let me also say that MMT represents a challenge to orthodox or neo-liberal economics. Some people categorize it as heterodox or post-Keynesian. Anyway, the point is that if I’m advocating it, which I am, much of what I say will contradict what’s in orthodox academic textbooks.
To people who aren’t macro-economists, “saving” means “not spending”; or spending less than you make. Being a cheapskate, I have a tendency to squirrel away money - cash money. In my sock drawer. (Not really, but let’s pretend.) in what way does that money represent “investment” - in the macroeconomic sense (which I understand to mean spending money on things that last a long time, rather than “not spending”)?
Or, suppose I have a savings account. I understand that the classic model was that banks take those deposits and then lend them to companies so they can invest in buildings and machinery.
But that model is wrong, isn’t it? Isn’t it true that when a bank makes a loan it simple credits the account? It’s loans that create money in the first place isn’t it? I want to see if we’re on the same page here, because if it’s not commercial bank lending that creates commercial bank deposits, where do they come from?
Now suppose that many people want to save money - they want to spend less than they make (which they do).
We’re talking about net financial balances, in bank deposits or in sock drawers. Where does that money come from?
If we have a trade deficit, which we do, that’s a minus. If people are saving money, in the sense of spending less than they make, business isn’t going to invest, because people aren’t spending - there’s not enough demand to justify new investment. So what’s left?
If S= I + G + (X-M), and we set I to zero (lack of demand, because people “saving” in the sense of spending less than they earn) and there’s a trade deficit, the only way for people to save - to accumulate net financial balances - is going to be for the government to run a deficit that big enough to both make up for the trade deficit AND to satisfy the demand for savings.
Is that the solution you were looking for? Or did I miss a step?
In the case of a recession, where demand is very weak, and where foreign countries are accumulating large numbers of dollars, I’d expect the government deficit would need to be very large, for the equation to work out.